DIRTT Environmental Solutions Ltd. today announced its financial results for the three and nine months ended September 30, 2020. (All financial information is presented in U.S. dollars, unless otherwise stated). Revenue for the third quarter of 2020 was $46.2 million compared to $65.4 million reported in the third quarter of 2019. In the third quarter of 2020, we experienced project delays or deferrals due mainly to the economic and social impacts of the COVID-19 pandemic along with the residual effects of disruption in sales activity levels stemming from the transitional state of our commercial function as we implement our strategic plan.
Correspondingly, gross profit for the third quarter of 2020 declined to $16.2 million from $24.9 million in the prior year period. Gross profit margin decreased to 35.1% of revenue in the third quarter from 38.1% in the prior year period, but up from 27.6% and 33.7% respectively in the first and second quarters of 2020.
Gross profit for the third quarter was impacted by the decline in revenues and the impact of fixed costs on lower revenues offset by a $0.5 million timber provision reversal. This reversal is a result further analysis of building code requirements for the specific projects sold, the validation of an in-situ remediation solution, and related discussions with our affected customers thereby significantly reducing the prior estimated liability.
Adjusted Gross Profit Margin in the third quarter decreased to 39.3% from 41.8% in the prior year period.
“We continued to make substantial progress in implementing key elements of our strategic plan during the third quarter,” stated CEO Kevin O’Meara. “Preparation is underway for the launch of the next phase of our Make Space for PossibilitiesTMstrategic marketing campaign, which is driving brand awareness and engagement. We continued to onboard our new partners, reinstituted in-person tours at our New York City and Calgary DIRTT Experience Centers (DXC), introduced a highly effective virtual tour, and will soon reopen our newly renovated Chicago DXC.
“In addition to delivering modestly positive adjusted EBITDA and increases to our cash balances during the quarter, our third quarter revenue of $46.2 million slighted exceeded each of the first two quarters of the year. This increase was supported by three larger projects in our healthcare vertical, one of which was in response to COVID-19. Further demonstrating our capabilities to innovate and execute rapidly on COVID-19 driven project needs, we have developed four freestanding kiosks for COVID-19 testing and vaccinations that we are now marketing across all our verticals.”
Mr. O’Meara concluded, “While we have made great strides in implementing the many commercial execution, manufacturing excellence and innovation initiatives we detailed in DIRTT’s strategic plan a year ago, the COVID-19 pandemic has significantly reduced commercial construction activity in North America. Consequently, 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 capabilities. Despite our view that Q4 and the first half of 2021 could be challenging, our strong balance sheet and enhanced organization will enable us to continue executing on our strategic plan and positioning DIRTT for growth over the long term.”
Sales and marketing expenses decreased to $6.9 million for the third quarter of 2020 from $8.6 million in the prior year period. The decline was caused primarily by a reduction in commission expense on lower revenue; lower travel, meals and entertainment expenses due to restriction on travel as a result of COVID-19; as well as continued attention to cost discipline. The decline was partially offset by $0.3 million of increased salaries and wages expense. Included in sales and marketing expenses in the prior year period were $0.7 million of consulting costs related to our sales and marketing plan that did not recur in 2020. As economies re-open, we anticipate travel and entertainment expenses to increase over current levels, the timing and amount of which, however, are indeterminate.
General and administrative expenses decreased to $6.9 million for the third quarter of 2020 from $7.3 million for the prior year period. The decrease reflects expense reductions partially offset by a $0.5 million increase in professional fees.
Operations support expenses decreased to $2.3 million in the second quarter of 2020 from $2.4 million for the prior year period.
Technology and development expenses of $2.0 million for the third quarter of 2020 compared to $1.7 million in the prior year period.
Net loss for the third quarter was $2.1 million or $(0.02) net loss per share compared to net income of $5.8 million or $0.07 net income per share for the third quarter of 2019. The decrease was a result of changes in gross profit and operating expenses as described above, a $0.7 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 entity’s sales and profitability caused by the pandemic.
Adjusted EBITDA and Adjusted EBITDA Margin for the three months ended September 30, 2020 decreased to $0.9 million or 1.8% from $7.9 million and 12.0% in the same period of 2019. This reflects a $9.1 million decrease in Adjusted Gross Profit and $0.4 million of increased professional fees and consulting costs in 2020. These reductions in Adjusted EBITDA were partially offset by reduced commissions on lower revenues and decreased spending on travel, meals and entertainment, including tradeshows due to COVID-19 related reductions as well as cost reduction initiatives. In 2019 we incurred $0.7 million of consulting costs incurred for our sales and marketing plan and $1.4 million of costs related to the listing of the Company’s common shares on Nasdaq in 2019 and recorded a $1.3 million recovery of a legal claims provision, none of which reoccurred in 2020.