INSCAPE Corporation (TSX: INQ) Q3 2021 earnings call dated Mar. 05, 2021
Eric Ehgoetz — Chief Executive Officer
Jon Szczur — Chief Financial Officer
Greetings, and welcome to the Inscape Q3 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, March 5th, 2021.
I would now like to turn the conference over to Eric Ehgoetz, Chief Executive Officer. Please go ahead.
Eric Ehgoetz — Chief Executive Officer
Thank you. Good morning, everyone. Welcome to the third quarter fiscal 2021 Investor Update Call. I am joined today by Jon Szczur, our CFO. I will provide my perspective as CEO on our Q3 fiscal 2021 financial results, which ended on January 31st, followed by Jon who will provide more details and insights on our Q3 performance.
Third quarter fiscal year 2021 represented our highest quarterly revenue to date in this fiscal year, while in the midst of the COVID-19 pandemic. Management worked tirelessly during the quarter to position the business with an appropriate foundation for growth and profitability once the economy moves to a post pandemic environment. Despite reporting a nine month year-to-date net loss of $1.4 million, we would note that this includes $1.4 million of inventory write-downs during the fiscal year, reflecting management’s efforts to properly manage inventory levels and working capital.
Since the beginning of the fiscal year, management has reduced inventory by $2.2 million and is actively monitoring optimal inventory levels and mix. During the quarter, the Company also successfully executed the preparation of our furniture plant for a new capital equipment arriving in Q4, which will materially improve its efficiency and also executed on the move of our Walls factory to a new location with an appropriate footprint designed to lower overheads.
Both of these actions will begin to be reflected in our results in our fourth quarter. Management also implemented a number of initiatives designed to improve the Company’s sales pipeline and reach. Furthermore, we continue to focus on rapid payback initiatives and adoption of new technologies to improve the operations of the business for the eventual return of a more normal economic environment.
We remain extremely thankful to all of our employees who have continued to exhibit their commitment and dedication to the Company as well as our dealer partners and valued customers whom we all strive to serve. We are beginning to feel some optimism that the rollout of vaccines in both the U.S. and Canada over the spring and summer will allow us all to begin to return to a more normal operating environment and that the actions the Company has taken to date and will continue to take over the next two quarters will impact the Company’s results positively in the future.
I now turn the presentation over to Jon Szczur, our CFO, to provide more detailed financial information.
Jon Szczur — Chief Financial Officer
Thank you, Eric. Good morning. Following this presentation, we will open the lines and be pleased to answer your questions. Before I begin, let me preface my remarks with the caution that during the course of this conference call, we will be presenting forward-looking information regarding future events, plans, and future financial performance of the Company. We caution you that this — that such information is subject to a number of risks and uncertainties. Actual events or results may differ materially from the conclusions, forecasts or projections made.
Certain material factors and assumptions were applied in drawing the conclusions or making the forecasts or projections. Additional information about the risk factors and assumptions are contained in our fiscal 2020 annual report and our quarterly MD&A, both of which are available on SEDAR website or from us here at Inscape. We disclaim any intention or obligation to update or revise any forward-looking information whether as a result of new information, future events or otherwise.
Adjusted net income or loss before taxes, EBITDA, and adjusted EBITDA are non-GAAP measures, which do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. The press release we issued yesterday contains a reconciliation of GAAP net loss income before taxes to the adjusted net loss income before taxes, EBITDA and adjusted EBITDA.
I will begin by discussing key aspects of our results from operations, cash flow and U.S. currency hedge position. The third quarter of fiscal year 2021 ended with a net loss of $1 million or $0.07 per share compared with a net income of $0.1 million or $0.01 per share for the same quarter of last year. The net results of both quarters included certain unrealized non-cash expenses and one-time items that have been — that have had significant impact on the net loss income per GAAP.
With the exclusion of these items, the third quarter of fiscal 2021 had an adjusted net loss before taxes of $2.2 million compared with an adjusted net loss before taxes of $1.6 million in the same quarter of the previous year. As at January 31st, 2021 inventory was $3.7 million, a decrease of $2.2 million compared with $6 million last year. There were $0.3 million of inventory write downs in the third quarter, which resulted in lower margins and net income as well as lower EBITDA and adjusted EBITDA.
The nine-month period of fiscal year 2021 ended with a net loss of $1.4 million or $0.10 per share compared with a net loss of $0.2 million or $0.01 per share for the same quarter of last year. Net results of both periods include certain unrealized non-cash expenses and one-time items that have significant impact on the net loss income per GAAP.
With the exclusion of these items, the nine month period of fiscal year 2021 had an adjusted net loss before taxes of $8 million compared with an adjusted net loss before taxes of $2.9 million in the same period of the previous year. There were $1.4 million of inventory write downs in the nine month period, which resulted in lower margins and net income as well as lower EBITDA and adjusted EBITDA.
In response to COVID-19 pandemic, the Company applied for and receive grants from the Canadian government under the Canadian emergency wage subsidy program. Year-to-date, the Company received $2.3 million, of which $0.8 million was received in the current quarter. Subsequent to the end of the quarter, Inscape applied for and received additional government funding of $1.4 million or CAD1.8 million under the Paycheck Protection Program.
In addition, the first tranche of government funding of $1.3 million or CAD1.8 million received on April 17th 2020 was forgiven on February 20th, 2021. Sales for the three and nine months ended January 31st, 2021 were 33.1% and 50.9% lower than the same periods of the previous year due to the economic impact of COVID-19 pandemic, which resulted in lower furniture sales of 21.2% and 48.6% and lower Wall sales of 62.6% and 57.1% respectively.
Gross profit margin for the three and nine months ended January 31st, 2021 decreased by 2.3 percentage points and 6.6 percentage points respectively over the same periods last year as a result of lower sales volumes due to COVID-19. In addition, for the three and nine months ended January 31st, 2021, excess inventory totaling $0.3 million and $1.4 million respectively, relating to discontinued product lines and obsolescence were written off during the periods. The Company continues to identify initiatives to achieve cost efficiencies and improved margins as sales levels return to normal.
However, we wish to note that gross profit margins without the effects of these excess inventory write-offs would have been 25.6% and 25.5% for the three and nine months ended January 31st, 2021 respectively. SG&A for the three and nine months ended January 31st, 2021 were 41.8% and 48.5% of sales compared to 34.8% and 32.3% for the same periods of last year.
Despite the perception of higher ratio percentages, the $1.2 million and $5.2 million actual decrease in SG&A expenses resulted from workforce reductions, decrease in marketing initiatives and lower selling, travel and entertainment expenses. Collectively, these actions are largely the results of measures adopted by management to manage costs during COVID-19.
In the current fiscal, lower sales volumes impacted the overall higher SG&A to sales ratio. In accordance with IFRS requirements, deferred tax benefits related to tax loss carryforwards were not recognized in the consolidated financial statements in the third quarter of fiscal 2021.
Basic and diluted losses per share for the current quarter was $0.07 per share compared to earnings of $0.01 per share for the same quarter of last year. For the nine months, the basic and diluted losses per share was $0.10 per share compared to a loss of $0.01 per share for the same quarter of last year. The basic earnings per share calculations are based on a weighted average number of shares outstanding of 14.4 million.
The third quarter of the current fiscal year ended with cash outflow from operations of $0.5 million compared to an outflow of $0.7 million for the same quarter last year. This is largely attributable to the current quarter’s net loss of $1 million due to low sales levels. Net decrease in working capital was $0.5 million in the current quarter compared to a net decrease of $3.4 million in the third quarter of last year. Prior year’s $3.4 million decrease resulted primarily from the settlement of accounts payable.
Net increase in investing activities was related to cash proceeds of $0.3 million received from the disposal of capital assets during the current quarter. The prior year included $4.4 million of proceeds from the sale and leaseback of its Falconer plant and sale of the DC Rollform business.
Net cash outflow for financial activities of $0.4 million related to the repayment of principal portion of lease liabilities. The nine month period ended with cash outflow from operations of $2.6 million compare to the same period last year’s outflow of $0.6 million, primarily due to the recognition of unrealized gains on derivative contracts as the Canadian dollar revalued against the U.S. dollar.
Net increase in working capital was $0.1 million in the current year compared to a net decrease of $3.7 million for the same period last year. Prior year’s $3.7 million decrease resulted primarily of higher accounts payable settlements. Net cash outflow for our investing activities of $0.5 million compare to a net cash outflow of $3.9 [Phonetic] million in the prior year. The current year cash outflow included the first tranche of a major retooling investment into the laser machinery. The prior year’s cash inflow of $3.9 million from investing activities consisted of $4.4 million proceeds from the sale and leaseback of the Falconer plant and the sale of the DC Rollform business.
Net cash outflow for financing activities of $1.4 million related to the repayment of the principal portion of lease liabilities. The Company has amended its credit agreement with its bankers as of January 27th, 2021. The amended agreement provides for a demand revolving operating credit limit of $3 million, a provision for contingent credit limit for foreign exchange contracts of $5 million U.S., and a revised set of financial covenants.
The agreement is secured by the Company’s property based on its accounts receivable and inventory or our borrowing base. As at January 31st, 2021, the Company had cash of $1.2 million with borrowing capacity of $3 million versus $2.7 million in cash with borrowing capacity of $4.4 million at the end of third quarter of the last fiscal year. In the prior quarter, second quarter of fiscal 2021, the balance was $2.5 million in cash and a borrowing base of $3.2 million.
At quarter-end, the Company had no borrowings and was in full compliance of the required covenants. The relative increase in the current Canadian dollar against the U.S. dollar resulted a net unrealized gains on derivatives and foreign exchange of $0.2 million and $0.1 million for the three and nine months of fiscal 2021 respectively.
As at January 31st, the Company had six outstanding hedge contracts to be settled over the next 16 months ended May 2022. These contracts have total notional values of $20.5 million to $30.2 million U.S. Depending on the Canadian-U.S. dollar spot rate on the settlement date of each contract, the Company can sell U.S. dollars at rates ranging from 1.27 to 1.4. During the quarter, the Company entered into new forward contracts with a nominal value of $13.0 million U.S to $20.8 million U.S.
Inscape Corporation intends to release its full fourth quarter financial results later than we have historically done as a precautionary measure to allow for more time due to COVID-19. The Company is anticipating releasing its entire fourth quarter results after the close of business on Thursday, July 15th, 2021.
This concludes the financial review of Inscape’s third quarter of fiscal 2021 Results. We will now open the lines for your questions.
Questions and Answers:
Thank you. [Operator Instructions] There seems to be no questions at this time.
Eric Ehgoetz — Chief Executive Officer
All right. With that being the case, we just like to thank everybody for attending the call and we’ll look forward to speaking with you again at the end of Q4 with our fiscal year-end results. Thank you very much everyone.
[Operator Closing Remarks]
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