Dynatronics' (DYNT) CEO Kelvyn Cullimore on Q3 2016 Results - Earnings Call Transcript

| About: Dynatronics Corporation (DYNT)

Dynatronics Corporation (NASDAQ:DYNT)

Q3 2016 Earnings Conference Call

May 16, 2016 04:30 pm ET

Executives

Bob Cardon - Vice President of Administration, Secretary, Treasurer

Kelvyn Cullimore - Chairman, President, CEO

Bob Cardon

This is Bob Cardon, Vice President of Administration at Dynatronics Corp. We welcome you to Dynatronics' Third Fiscal Quarter Financial Results Conference Call. The purpose of today's conference call is to discuss financial results for the quarter ended March 31, 2016.

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.

I'll now turn the call over to our Chairman and CEO, Kelvyn Cullimore Jr. to discuss the quarterly results.

Kelvyn Cullimore

Thank you, Bob. I appreciate you doing that introduction for us and getting the necessary readings out of the way. It's my pleasure today to be with you on this call and to talk a little bit about the outcomes for the quarter ended March 31, 2016 which is our third fiscal quarter of our fiscal year ending June, 30.

Talk first about sales, some very good news there. Our quarterly sales did increase almost 11% to $7.4 million from last year's total of $6.7 million. Year-to-date that brings our total increase to about 5% or $1.1 million in total increase in sales or cumulative sales increase to $22.3 million compared to $21.2 million for the nine months period ending last year.

Specifically, the drivers of our growth there were three primary categories where we saw the increases that accounted for the almost 11% increase in sales during this particular quarter. One of the primary ones was the increase in sales of our top of the line SolarisPlus combination therapy units and their accessories, that jumped 14% in the third quarter and this continued the trend that we saw starting last quarter, when we saw that category increased 26% as a result of focused strategic efforts that stemmed from our National Sales meeting last September.

So we're seeing that sustained growth in the therapeutic modalities which is for higher margin products. We also saw in the quarter some improvement in two other areas; one of them was in sales of custom manufactured products for athletic training faculties. We saw almost 24% increase in sales of wood treatment tables and accessories, things that go into locker rooms of major colleges. We did in the quarter for schools like Vanderbilt and Louisiana State and places like that and that was a significant contributor to our increase in sales. But as also happens in the first quarter of a calendar year which is our third fiscal year.

We saw new budgets open up and we saw new clinics established and expansion of other clinic among our clientele. As a result not only did we see the increases related to the SolarisPlus line that I mentioned a minute ago, but we also saw 48% increase in the sale of capital exercise equipment and metal treatment tables, that was almost $600,000 of the increase, that is been a significant contributor during the quarter and it is a good harbinger of growth within the industry.

Our gross profit of course thanks to the increased sales, also saw an increase about 13% to $2.5 million compared to $2.2 million in Q3 of fiscal year 2015. That increase gross profit was almost totally attributable to the increased sales. We did see a slight increase in the gross profit margin percentage for the quarter, it went from 32.8% last year to 33.6% this year, that increase of an eighth of percent is primarily associated with better freight rates were negotiated with freight carriers that began to manifest during this quarter, thus lowering our cost of delivering our product to our customers.

And so that 0.8% increase was attributable primarily to the freight improvements. The increases of sales of high margin SolarisPlus products during the quarter was offset little bit by the increase in the lower margin products, which in the end kept our gross profit margin percentages about the same with last year. The gross margin percentage for the nine months was 34.4% compared to 34.1% during the same period last year. So we've improved slightly and most of that improvement is the product mix between the two higher margin products accounting for a little bit higher percent of sales and also the improvement in freight in the course of the year due to the better freight rates that we have negotiated.

Our SG&A expense during the quarter jumped about $400,000 and for the nine month period, it was up almost $600,000. The categories where we saw those increases part of it comes from higher selling expenses due to higher commissions because we had higher sales and we had about $152,000 in higher selling expenses during the quarter which incorporated the commissions, some new sales expenses, some more trade shows that we attended things of that nature.

We also had about $152,000 increase in labor and management benefits and some overhead costs associated with the workforce during the quarter. The general expenses relating to investor relations, director and officers liability insurance and acquisitions related expenses were up about $99,000 close to $100,000. So those are the three main categories, the workforce expenses we've got $152,000 selling expenses, we've got $152,000 and general expenses of about $100,000.

The nine month period has reflected similar types of increases. Our wages and labor expenses and overhead and benefits were up about $333,000. Selling expenses were up about $193,000 and general expenses were only up $70,000 for the nine months period. So we did see, some increased expenses during the period and a lot of that is related to the new strategies that we're implementing to drive sales organically and to pursue a specific strategy of M&A type activity.

During the period's we recorded approximately $122,000 for the three month period and $300,000 and expenses related directly to our implementation of the strategic plans to transform the company into a platform for growth, through carefully planned acquisitions. So some of what we're investing now, we'll begin to bear fruit in the future and the positive indicators of the higher sales and improved gross margin combined with some of the investment that we're doing in the new sales strategies and growth strategies are all harbingers of an improved future.

Along with that, I would add the R&D expenses for the quarter. R&D expenses did increased $14,000 compared to last year and were up $81,000 for the nine month period compared to last year. Introducing new products has always been a strength of Dynatronics and that does require investment in R&D and the current R&D increases are targeted towards two or three new products that will be introduced during fiscal year 2017.

We'll have one or two out early in the year and another one later in the year that all are calculated to help to drive sales and improved organic growth for the future. Of course with the increased expenses, our pre-tax loss for the quarter was $451,000 compared to $345,000 in Q3 last year. For the nine months, our pre-tax loss through March 31 was $757,000 compared to $514,000 last year. That increase in pre-tax loss for the quarter was primarily attributable to the $403,000 of higher SG&A expenses offset by the $295,000 an increased gross profit.

The increase in pre-tax loss for the nine months was the almost $600,000 and increased SG&A expense partially offset by $451,000 in increased gross profit. So the main difference in pre-tax profits between the two quarters was just over $100,000.

For income tax, this bears a little bit of explaining for those who are interested. We are showing zero tax income tax benefit for the quarter and for the nine month periods whereas last year, when we had losses, we did record an income tax benefit. However at the end of last fiscal year, we did record valuation allowance to offset the deferred tax asset that had been accrued to that point and during this year, we have not booked any additional deferred tax assets that is consistent with the accounting rules that required that if you had multiple years of losses that you should not be booking those deferred tax assets until you can show that there is income to utilize those deferred tax assets.

We believe that there will be an opportunity in the next year or two, to utilize those tax assets and will expect to see those valuation allowances reversed at that point in time. But for now, it does show zero tax benefit for this quarter and the nine month period, whereas last year we were showing an income tax benefit to the first nine months.

So given that the net loss looks a little bit greater because we did not recorded tax benefit this year. So the pre-tax loss falls through as the net loss of $451,000 and last year, we were able to book the tax benefits [indiscernible] net losses only $208,000 for the quarter. Similarly, $757,000 for the nine months compared to $301,000 last year for the same nine period taking into account, the valuation allowance for this year.

We do have a line identified as net loss applicable to common shareholders that reflects dividends that have been paid to the preferred shareholders. Dividends approved on our convertible preferred stock were $81,000 for the quarter and $242,000 for the nine month period resulting in the numbers manifest there for $531,000 for last year compared to $998,000 this year.

So there were no dividends of course paid in the comparable periods last year, which is why it's the same number I carried forward. So that gives an overview of the financial performance for the quarter. Again just recapping on that the sales increase of almost 11% is indicative of the new strategies that have been implemented which is helping to drive gross profits higher. We do anticipate in future as we execute on our plans to see gross profits margin as a percentage increase as well beyond just what is achieved through the savings on freight that we have achieved this year or this quarter.

We do show higher cost associated with SG&A expense and R&D expense. The R&D expense of course is investment in new products that we think will help to improve the top line in the next fiscal year and the increase in SG&A expense is a reflection of the investment and the new strategies that we're implementing both for organic growth and also for the M&A type of activity that we have been engaged in and so we're confident, that we're on plan in that regard and moving in the direction that for the strategy was designed to accomplish.

So let me talk for a minute just about that strategic plan and give you a little more color on that. Right now, organically we are focusing on driving the top line by increasing sales domestically and internationally. One of the key events of this last quarter was the hiring of Mr. Jeff Gephart in February of 2016. He started work in 1st, March. Jeff is highly motivated and very experienced sales executive of many years of proven experience in our industry. He previously worked for a competitor and was successful in leading them to new sales objectives and we expect to see similar kinds of outcomes here.

He is also leading a plan helping to reorganize our sales management efforts and we anticipate announcing the addition of new sales management personnel in the near future to help further enhance and reach our sales goals and objectives. There is significant emphasis on the higher margin products that we manufacture and Jeff has implemented some strategic plans that we believe will help us achieve the kind of growth organically both domestically and internationally that our plan anticipates.

As far as international sales go, as we've talked about this in the past. International sales tend to be a little bit illusive for us. Although, I will say that during this nine months of this fiscal year through March. We're up about 17% on international sales, which is only about $120,000 increase but it is an increase. We are working on some new distribution agreements in areas where we are anticipating regulatory approvals very soon. China, Southeast Asia, Mexico are all areas where we have actual dealers lined up and ready to begin active sales efforts once the regulatory approvals are granted and we are working through some of those and while they have taken a little bit longer than we expected, we are no less enthusiastic about the potential of those particular additions to our sales efforts.

So we believe that those approvals should be coming through in the very near future and we'll begin to see some tractions in international that we've not seen for a while. So those are our two key areas of growth. The other thing that we have done is begun to focus even more on these customized orders for athletic training facilities and we've invested in some state-of-the art software design, hired an additional person to help us with that and we believe there's some great opportunities there.

As you know, things in the athletic training world where they will be at the professional level, the college level are not subject to reimbursement issues, they are a cash business and when you can do customize work that puts their name and logo and colors and things of that nature on it and we're one of the few companies who can do that, we feel very, very strongly this could be an area of great growth for us going forward and will be an area of focus.

All of these factors not only help increase sales but we believe will also increase our gross profit margins. In addition, we believe gross profit margins will be improved by some current efforts that are underway to reduce the cost of manufacturing our core product lines and also during this last quarter, there was this elimination of the medical device tax.

Many of you have heard me talk about that in the past that was costing us around $160,000 a year. We believe with that going away for at least the new two years. We'll begin to see a benefit from that in our cost of goods sold because we have baked the medical device tax into that cost and as that now is falling out, we'll begin to see improved margins going forward starting in the next quarter ending in June.

So there are reasons to believe very solid reasons to believe that we will see improved gross profit margins going forward. As you know that tax was 2.3% of sales not of profits, it was 2.3% excise tax on sales. So those products that carried that should see a corresponding improvement in the gross profit margin percentage.

Our R&D pipeline includes new and redesign therapeutic designs. As I mentioned, we're going to introduce two or three new products before hopefully the end of calendar 2016. Certainly two of those three will be in before end of calendar 2016, it could be additional beyond January before the end of the fiscal year.

And we are continuing pursuit of our strategic plans for M&A activity. We've been active in that since we received the investment dollars from the private equity group affiliated with Pretty Brook Partners and we continue to focus on finding appropriate acquisitions or M&A activity that would be beneficial to us.

Some of the criteria for these acquisitions we're looking to complement our current product offering, leverage our sales force find products that can be accretive to our gross profit margins, current sales between $5 million and $25 million of targeted companies. Clear path to being accretive to earnings within a short-term, be partner to current physical therapy in the rehab market and further enhance distribution channel efficiencies as well and above all provide return to shareholders as well as any new many new investors to facilitate the acquisitions.

So we are very focused on finding appropriate targets given that it's hard to predict when that first one may occur, we will certainly hope we might see something by the end of the calendar year but that is certainly not a guarantee, these kinds of transactions can be elusive or they can materialize very quickly. Suffice it to say, we are in discussions with numerous targets and believe that there are opportunities out there.

Over the last quarter, we've also engaged in some investor relations work. We did hire an investor relations firm, who has helped us for the last six months and we have attended meetings in Chicago, California [indiscernible] several many managers and analysts had our an analyst publisher report on us during the quarter and we do plan to hold meeting soon in Minneapolis, New York and other areas to further expose the company's strategic plans to [indiscernible] types, who might have interest in participating with us in this strategic plans that we have.

We do expect to see continued improvement going forward with sustained sales increases and improvements in gross profits for the reasons I've mentioned, those will happen through the acceleration of our sales growth, expanding our distribution capabilities international. We talked about strategic acquisitions and introducing new products.

That said, there is no question our current fiscal year is a building year, trying to reinforce the company's abilities to achieve the strategic goals that have been set and as a result, the investment in those are incurring some higher than maybe some expected expenses, as we hire new personnel and position the company better for the kind of growth that we would anticipate and the kinds of restructuring [indiscernible] mergers and acquisitions that we're anticipating.

So in summary, we are experiencing momentum in the business as we continue to successfully execute on our growth strategy and we really are excited about the future of the company. It's very exciting to be part of this new growth strategy that is been facilitated by the new money that has been invested and the ability to leverage the business knowledge and abilities of our investment partners has been significant in helping us to work towards our goals.

So we are still very bullish on our future for all the reasons that we have indicated. So with that, I'll be happy to have the operator open the line for any questions that you may have and as soon as those questions are done, we'll conclude the call.

Question-and-Answer Session

Operator

[Operator Instructions] and your first question comes from the line of Jeffrey Cohen. Please go ahead.

Unidentified Analyst

So a number of questions, I'll start off with the easiest of them. What share count was used for the quarter?

Kelvyn Cullimore

I'm sorry, what did you say?

Unidentified Analyst

What was the share count used for the quarter?

Kelvyn Cullimore

You mean the total outstanding shares to get to the earnings per share you mean?

Unidentified Analyst

Yes.

Kelvyn Cullimore

It was 2,000,731.

Unidentified Analyst

Okay, got it. Could you talk a little bit the Solaris contribution for the quarter more specifically are ASPs higher or you're seeing new sales with more probes and features than you'd been previously selling or are you also seeing existing units that are ordering upgrades and add-ons?

Kelvyn Cullimore

There's not as much of the upgrade and add-ons. It is more new sales associated with the base unit and the accessory. So right now about 70% of the base units that we sell also include an accessory at least one and many have two and by accessory I mean a light probe, a light pad or a ThermoStim probe, and so that is very good and as you know, we have a direct sales force that sells at retail essentially or professional.

We also have a dealer network that sales to them are at wholesale and so sometimes that effects our average sale price, if we have more sales to dealers in a month than average it could affect ASPs, but what we're not seeing an erosion of the ASP at this point in time. We are actually seeing an improvement in overall gross profit margin as accessories are sold along with the units.

Unidentified Analyst

Okay and can you give us a ballpark estimate of what percent of total revenues from the quarter came from Solaris or any other advanced energy?

Kelvyn Cullimore

Our total sales for the quarter of SolarisPlus was about. We had SolarisPlus all of our therapeutic modalities for the quarter accounted for about little over $2 million in sales of the $7.4 million.

Unidentified Analyst

Okay, got it and could you give us a little more insight into SG&A. Do you anticipate that you will see some operational leverage there and if so, what kind of revenue do you expect to see some leverage there? Is it the $7 million plus area or is it more like $8 million or $9 million on a quarterly basis.

Kelvyn Cullimore

Well what we are targeting of course, we some of the new hires that we've brought on, some of the new programs we've implemented are all geared towards trying to drive sales up over $8 million in a quarter. So there would not need to be other than the variable cost associated with commissions, things of that nature. We would think that the structures that we're putting in place should be ample to support significant growth in sales.

Unidentified Analyst

Okay, got it.

Kelvyn Cullimore

We will be doing some new marketing programs and things of that nature, but as far as structurally some of the things that we are implementing we believe will help to build us to the levels we anticipate, it won't, otherwise would be in trouble. If we had to add that kind of overhead every quarter we have in the last year to just drive sales that would not good, we believe what we are doing right now is investing in that future.

Unidentified Analyst

Okay, got it. And one more, I may? Could you talk a little more about the international sales although it's from a relatively small base, where [indiscernible] top two or three geographies in the past quarter and what do you anticipate specifically in China as far as your regulatory timeframe. Does it seem like you're a third, a halfway through that process thus far?

Kelvyn Cullimore

Well, we believe we're 90% of the way through that process maybe even 95%. We had indications from our contacts over there, that final approvals are eminent. We've got a few details just to resolve the thing that you never know for sure is will any of those "small detail" take more than a small amount of time to resolve and so assuming that what we're being told is accurate, I would be surprise if we don't have that approval in the next 90 days or so, but I have been surprised before, so I would say that we are well past that and in Mexico, I know that they thought the approval was eminent and we submitted two families of products both 25 series and the SolarisPlus to be approved and thought they could be all approved as one group, but as they kind of got towards the end of the approval process, they said they needed to bifurcate the two and give them each a different approval path.

And so what we thought was going to be an end of March approval now has been extended, but we don't know how long we're being told again kind of like China, it should be in the next 90 days and so, we have been, this is the tail-end of what has been for China a two-year investment. We began this process almost two years with them. So this is not a relatively new process, it is very mature in the timeline and the same was Mexico, we've been working with them for six or eight months and that means in their timeline we're maturing that process as well.

Unidentified Analyst

Okay, got it and do you anticipate with some of the approvals in these territories we're mentioning that there would be some stocking orders to anticipate a [indiscernible] of orders coming in from [indiscernible].

Kelvyn Cullimore

We do, what that is, I won't know but I don't think you'll see I wouldn't want to say, they're going to order 100 units all at one. But I do think, you'll see some stocking orders and then hopefully those will continue to replenish as we go and we expect China very frankly to be our largest international customer in fiscal 2017, not saying a lot with sales of only about $1 million to $1.2 million of international altogether but we expect China to be, a very good customer.

Unidentified Analyst

Got it, that does it for me. Thanks for taking the questions.

Kelvyn Cullimore

You bet, Jeff. Thank you.

Operator

And your next question comes from the line of Raymond Myers [ph].

Unidentified Analyst

Thanks for taking the questions.

Kelvyn Cullimore

Ray, how are you?

Unidentified Analyst

Doing great, thanks. I want to know, if you could touch on the progress you're making to realign and strengthen the sales force, understand Jeff Gephart's background is quite impressive you've we've been over there for just over two months, so maybe it's not slight fair but can you tell us what progress that he has implemented already and give us some flavor to what we has in store?

Kelvyn Cullimore

For those who don't know much about the competitive landscape that we're in, one of our largest competitors is company called DJO and they have a division that has been our direct competitors for years, Chattanooga Group. Jeff was the sales manager, VP of Sales for Chattanooga Group for many, many years. So he is extremely familiar with the market. He's extremely familiar with distribution channels and he's extremely familiar with methods.

So he has been taking steps to realign the sales management and some of the key sales personnel associated with the company and trying to identify additional resources that we can utilize to go after some of that business and so he is, he brings that fresh look, fresh approach one that has proven successful at competitors over the years and we believe as we implement the things he's talking about and are able to bring on the people he has identified, the sales will begin to mount because a lot of it has to do with not just direct sales people but dealers and distributors out in the field for instance, 10 years ago when he was right in the middle of working with a competitor.

They had literally thousands of independent dealers that they worked with and of course that number of dealers has dwindled significantly today but there are so many, many good dealers out there that we don't do business with and in territories where we do not have great representation with either direct sales person or existing dealer. He's able to identify ways of filling those gaps and that is going to be a significant part of it.

We've also begun to establish relationships with key national distributors that we think will make a big difference. We hired an individual in the second quarter of this fiscal year, who is working a lot of with the national accounts and with Jeff's help that's making progress. We also hired a person who is expert in post-acute care facilities, skilled nursing facilities things of that nature. Jeff is working with them as well to help develop that aspect of the business and so there are some very key elements that are being established to basically fill gaps either in geographic coverage or in discipline coverage.

Unidentified Analyst

That's great. Thank you for all that color. And then maybe could you touch on describing the magnitude of the opportunities that you see both in the new markets that you're looking to penetrate as well as the new products that you're intending to launch over the next medium-term say two or three years.

Kelvyn Cullimore

Well the opportunities that exist out there are once that had been to known to us in our existing market and the key to driving those is going to be expanding our coverage, which is what I just mentioned from Jeff. In addition to that though and that's international as well and so we've been dabbling in the international market but Jeff has some good contacts to bring in some management expertise to help us with that as well.

So in addition to our intent to cover it geographically and improve our geographic coverage there are some new markets that we can look at long-term care of post-acute is one of those markets and Jeff has ideas on how to exploit that market. We have not been in that market very much but we just hired a gentlemen in February or January who just started work for us and we know from his past experience that just him along last couple of years has done between $1 million and $2 million that market and so, if we can get additional personnel hired and the appropriate structure in place that represents one area that we might be able to expand into.

We think the athletic training market has some great long-term potential. If you've been around any of the Power Five conferences it's all about recruitment now and you can't bring recruit into a locker room that looks like it was 20 years old. And so there's a lot of demand for enhancing and improving and really making these training facilities have the state-of-the art equipment and design and we are really focusing on trying to do that and we think that's a recurring market and not only is it good one like I mentioned earlier, there is no reimbursement associated with it. It's a cash business and there is lots of money being spent on these kinds of things.

We also believe that frankly as we make the appropriate acquisitions that it will further entrench us in some of these key areas and allow us to further increase our sales. So we believe that there are opportunities that are immediate in front of us and then there are some longer term opportunities. The new products that I mentioned, none of them are going to be necessarily a multi-million product right out of the gate. We think there's one that could easily be a $1 million seller once it is introduced later in the next year.

It's a fairly innovative device that we're excited about that our R&D team is working on. So what it really amounts to right, is piecing a lot of these pieces together utilizing and leveraging the sales network that we have built and we believe in doing that, we can move the company the sales needle up into 40 and above range.

Unidentified Analyst

That's great. Thank you for all that color. Appreciated.

Kelvyn Cullimore

You bet.

Operator

[Operator Instructions] and there are no further questions at this time.

Kelvyn Cullimore

Okay, last chance. Anybody besides Jeff and Ray would like to ask a question. Nobody else operator.

Operator

And there are no further questions at this time.

Kelvyn Cullimore

Okay, we really appreciate everybody being on the call today. We recognize that we're in transition. We appreciate your interest and watching us as we go through this transition. We think there are very positive signs from the current quarter of not only the increased sales and improved margin, the investment in R&D but also our investment in the strategic plans going forward, the new hires, the people that we have identified to help us move the company towards new objectives. I recognize that in the process of that, it does create some expense and we're seeing that, but we believe that is not uncontrolled expense that is investment dollars to help us achieve the objectives that we're setting. So hang in there, with us we look forward to our next call with you and we hope to have even more exciting things to announce then, thanks for being on the call with us today.

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