Dynatronics Corporation (NASDAQ:DYNT)
Q2 2013 Earnings Call
February 13, 2013, 03:00 pm ET
Kelvyn Cullimore - Chairman, President & CEO
This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation and we would like to welcome to you our investor conference call reporting the outcome of our second fiscal quarter ended December 31st and I would like to start off as usual by reading the Safe Harbor statement. The purpose of today's conference call is to discuss financial results for the quarter ended December 31, 2012.
Before we begin, as a reminder, during the course of this conference call management may make forward-looking statements regarding future events or the future financial performance of the company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements.
We caution you that any such statements should be considered in conjunction with the disclosures including specific risk factors and financial data contained in the company's most recent filings with the SEC including its most recent annual report on Form 10-K. Today, I will update you on our results for the second quarter ended December 31, 2012. Following my presentation, we will open up the line for any questions and answers.
Well, we have relatively good news to report today and we are thrilled to report that profits for the second quarter virtually tripled when compared to the same quarter last year. Pretax profit was up from $72,179 in the second quarter last year to over $200,000 in the second quarter of this year. At the same time, net income was up from $46,334 to $140,983. The actual percentage improvement of net income was better than the percentage improvement on pretax profit, because during the quarter we were able to book some additional research and development tax credits which enhanced the net profit number to a greater percentage this year.
The main reasons for the increase for the second quarter are reflected by the austerity program we introduced back in the fourth quarter of fiscal 2012 when we announced that we would be working to cut about $750,000 in annual expenses. In this particular quarter, our SG&A expenses were down $121,000 and for the six months they were down $357,000. The R&D expense for the quarter was down $139,000 and for the six months was down $228,000. So combined, expenses overall were down $260,000 for the quarter and $585,000 for the six month period. So the pace that we are on with that austerity program will show over $1 million in annual expense reductions compared to the $750,000 that we targeted. So we are on-track to achieve our goal of those cost reductions.
With pretax profits up $128,000 and overall expenses being down $260,000, obviously we generated less gross margin in the quarter than we did the prior quarter. The gross margin percentages were about equivalent with 38.7% for the recent quarter compared to 38.8% for the same quarter last year. The main difference came with sales declining about 3.3% compared to the prior year; that 3.3% decline in sales resulted in about $114,000 less in gross profit for the quarter compared to last year. So if you take $260,000, less in expenses, offset that with $114,000 less in margin and $128,000 more in pretax profits, the lease reconciliation difference of about 18,000 which is a reflection of some one-time income items last year.
So we're anxious to reverse the trend of declining sales and we believe the results of this quarter show that we're on track to do that. Sales decline 3.3% but that compares to sales declines in the last quarter ending on September 30 of 9.9%. And if you go back and take the average sales decline from January through September, it's been about an average of 8% so for the quarter to be down 3.3% shows a real bending of the slope of declining sales in a positive direction.
This is attributable directly to the new products that we introduced in the last year, particularly of the Solaris Plus and Quad7 products and which we reported in this quarter, which were not available during the comparative quarter last year.
Sales of our proprietary manufactured products continue to show improvements over the prior year. We believe a key strategy in overcoming market hesitancy to invest in capital equipment in a sluggish economy like we're in, is introduction of new attractive products. They became a catalyst to moving the inertia of demand in a positive direction.
To be a little more specific, demand for the new products have pushed sales of these manufactured proprietary products up by 12% quarter-over-quarter with January actually saw an 26% increase.
Regrettably, that’s offset by lagging demand for the non-manufactured products that we distribute, particularly capital equipment. A year ago, we did lose a large customer that went bankrupt that was buying anywhere from $50,000 to $75,000 a month in supply products and we did have a vendor again ready that pulled their line from our distribution channel and they were doing anywhere from $75,000 to $100,000 a month in sales.
So those two factors alone explain the majority of the diminished sales in that category. The good news is that sales of our more profitable proprietary products continue to rise while the decline in sales we are experiencing are primarily lower margins distributed items.
We expect the starting in the next quarter Q3 ending in March that we will see a continued a bending of the sales curve for them for that quarter and quarters beyond that ending up in sales improvements by summer time. In the first quarter of fiscal year ended on September 30, we reported sales declines of 9.9% and then net loss of about $51,000.
So combining those results with the improved in terms of the second quarter yields and net profit for the six months ended December 31, of $89,839 compared to a net loss for the same period of the prior year of about $21,926. The improved profitability for the six months is related to the $585,000 in reduced expenses as explained earlier offset by about $400,000 less in margin due to sales being down by $1,070,000 or 6.6% on average for the six month period.
As explained earlier, this 6.6% average reduction in sales is a combination of the 9.9% reduction reported in Q1 averaged with a 3.3% reduction in Q2. As hopefully it shows the sales are moving in the right direction thanks to the new products that we have introduced. Q2 is typically our best quarter of the fiscal year we acknowledge that. However, our strategic plans to introduce more new products should help to these future quarters as well.
And let me talk a little bit about the new products that we anticipate. Over the last two years as many of you know, we have invested heavily in R&D, those investments during that period certainly dampened our profitability during those years, but they did help build the platform from which we are now launching our current strategic plan.
Economic factors really don't show any signs of significant improvement in the near future and economy such as we are in are challenging from lenders of capital equipment because without a lot of confidence expansion is limited and people tend to use their old equipment more, and in that case we are our almost enemy because Dynatronics equipment is such high quality that it tends to last forever.
But that also gives people confidence to look at the new products we have introduced. So capital sales we are in the need of catalyst in situations like this and our catalyst is in the introduction of new products. It's kind of like with new cars, the car industry maybe sluggish what really motivates people to come and buy a new car is to come and see the new models. If all they could see were the same products that were offer last year, the year before, there is not lot of motivation to buy, and we believe the new products we are introducing will induce a lot of demand for capital equipment in the coming months.
So from the introduction of the Quad7, to the introduction of the new products in the coming six to nine months which is about a 12 to 18 month period, we will have introduced more new products than in any other time in our history during such a short period of time.
The investment in the last two years has allowed us a technology platform that will facilitate the introduction of several new products in the next six to eight months that will require a significant additional R&D expense. We believe as we introduce these new products, we will be able to attract additional dealers and sales representatives to further enhance and grow our top line.
People will want to be selling the most popular products and we believe those will be the products we will introduce. So our main focus in the near future is on the promotion of our newly engineered and introduced capital proprietary products. In addition to the Solaris Plus line of products, we introduced in August 2012 and the Quad7 we introduced last spring, we also introduced two new treatment tables, the Ultra 2 and Ultra 3 in December.
These products represent the initial foray in collaboration with a company known as Enraf Nonius who is the leading manufacturer of physical therapy equipment in Europe. These are very popular tables that they sell in Europe that we are bringing to United States under a private label for us and we believe this will be the first of many ventures we can explore to take strategic advantage of our relationship with them.
And initial response to these new tables has been very positive. So we are excited about that and believe that it leverages their expertise to our benefit. We are continuing to pursue other strategic priorities; in April of this year we will be introducing our new 2013 product catalogue, comprehensive overhaul of the product line is expected to be a further catalyst to sales upon its release.
As everyone maybe aware we have in the past pursued business with Group Purchasing Organizations. Our success has been limited there. We haven't given up on those but we continue to moderate our efforts in that regard and instead are shifting to develop better relationships with national regional accounts including further exploiting the GSA contract we were awarded last year. International sales should also benefit from the new product introductions. We've actually had several international distributors who have indicated an interest in our new Solaris Plus product line, and once we have international regulatory approvals, we should be in next 6 to 12 months we will further explore those possibilities.
In December, our shareholders approved the one for five reverse split of our stock. This reverse split was necessary to maintain the compliance with our NASDAQ listing requirements. Our stock had traded for over a year under a $1 which is the minimum bid required to maintain the listing on NASDAQ. The company and the board examined several options including delisting to see if that would be a possibility and the general consensus was that it was in the best interest of the shareholders to maintain the NASDAQ listing and the reverse split would be the best way to approach that.
So at the time of the reverse split the stock was trading at approximately $0.47 a share and based on a one for five ratio that translated into $2 post split price. But actually since the split the stock is traded as high as $4 per share, and its really been hovering in the $3.50 per share range. Today its down a little bit on the release of good news, I'm not exactly sure what that means, with good news it would push the stock up and hopefully this call clarifies some of that good news.
With this behind us and the profitability we are reporting and expect to continue to report, we believe our ability to comply with the $1 minimum bid has been achieved now and for the foreseeable future should not be a problem going forward. So in summary, we are certainly pleased to report the significant increase in profitability for the second quarter, almost a tripling of the profits reported last year.
And while sales were down 3.3% overall compared to last year, it’s a significant improvement from the average 8% sales decline experienced from the January to September timeframe and the 10% decline that was experienced in just a quarter before this one. So the bending of the decline in sales curve is due to a 12% increase in sales of our proprietary products, really just the new Solaris Plus and Quad7 products, and the decline in sales that offset that was attributable to the two factors that were identifiable earlier and not just a general across the board loss of sales.
So the plan to introduce new products over the coming 6 to 8 months, additional new products beyond Quad7 and SolarisPlus will further stimulate sales increases and profitability comparing year-over-year, and the ongoing cost savings instituted last year will continue to support and improve profitability. We will explore more aggressively opportunities for international sales once regulatory approval of the new products is achieved, and our focus on our proprietary manufacturing products will not be to the exclusion of our distributor products business as evidence by the introduction of our new comprehensive catalog in April. But our focus will be primarily on manufactured proprietary products, because that’s where the sales growth is occurring and that’s where our highest margins are.
We believe in the next six quarters in particular will benefit from the R&D investment of the last two years and will result in improving sales and profits compared year-over-year. While the second quarter is typically our best quarter every year; Q3 has always been a challenge. Last year it was the worst quarter where we posted a pre-tax loss of about $286,000, I believe, for the quarter. And while we're confident that we will show an even better year-over-year improvement in Q3 than we did in Q2, I want to caution that that does not translate in to same level of profitability we reported in Q2.
Obviously improving from a $286,000 loss is expected and we are targeting a breakeven or there about for Q3, which is about a $300,000 improvement over the same period last year compared to only a $128,000 improvement in the current quarter. So we are confident that we are on the right track, the sales are moving in the right direction, that profits will continue to improve especially in comparison to prior years and we anticipate the future quarters will continue to show significant improvement over comparable quarter from the prior year.
So we believe we are in a position to start to reap the benefits from all of the investments that we have been making for the last couple of years, and hopefully we will see a reflection of that in the profits and then in the price of the stock. So with that overview, Mark we will go ahead and open up the line for any questions that any of the callers may have.
Thank you. (Operator Instructions) There are no questions at this time.
I suppose when the news is good, there is not nearly as many questions. But we appreciate the support of those of who have been on the call. We recognize that last year has been the challenging year. We recognize that the reverse split was not viewed favorably; we are quite pleased with the outcome of that split with the stock price increasing relatively as it did. We are pleased that our [strategies] and program is improving the bottom line and setting a great platform for future quarters as we increased sales due to the new products that are going to be introduced and the new strategies to be implemented, and we believe the next six quarters should be among the accumulative best that we’ve had in many, many years. So we appreciate your support and we will leave an opportunity for one last time for questions, if anybody has any.
(Operator Instructions) There are no questions at this time.
Okay, well we appreciate on being on the call today. We hope you have a great Valentine’s Day tomorrow. And you remember that it is Valentine’s Day and we wish you a great month and look forward to speaking to you again in about three months with the results of ours third quarter. Thank you for being on the call today.
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