Dynatronics Corporation (DYNT) CEO Christopher von Jako on Q2 2019 Results - Earnings Call Transcript

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About: Dynatronics Corporation (DYNT)
by: SA Transcripts
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Earning Call Audio

Dynatronics Corporation (NASDAQ:DYNT) Q2 2019 Earnings Conference Call February 13, 2019 8:30 AM ET

Company Participants

Christopher von Jako - Chief Executive Officer

David Wirthlin - Chief Financial Officer

Conference Call Participants

Scott Henry - ROTH Capital Partners, LLC

Jeffrey Cohen - Ladenburg Thalmann Financial Services Inc.

Dave Therkelsen - First Light Asset Management

David Kuang - Maxim Group

Operator

Good day, ladies and gentlemen, and welcome to the Dynatronics Second Quarter 2019 Earnings Call. All lines have been placed on a listen-only mode. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Christopher von Jako, CEO.

Christopher von Jako

Good morning and welcome to the Dynatronics Investor call. I'm Chris von Jako, Chief Executive Officer; and with me on the line is David Wirthlin, our Chief Financial Officer.

We issued a press release this morning announcing the financial results of our second fiscal quarter and 6 months ended December 31, 2018. Later this morning, we will file our 10-Q for the quarter. Today, I will provide brief commentary of our second quarter. And then I will turn it over to David, to provide a detailed analysis of our financial performance.

I will follow this up by providing an update of our fiscal 2019 financial guidance. At the conclusion of our commentary, we will have the operator open the phone lines for questions.

Before we begin, let me remind you that during the course of this call, we will make forward-looking statements regarding our current expectations, plans, projections and financial performance relating to our business. These forward-looking statements reflect our view as of today only, and they will involve risks and uncertainties that could cause our actual results to differ materially from those discussed today.

Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements today are included in our most recent 10-K filed with the SEC. I caution you not to place undue reliance on forward-looking statements we make this morning. We undertake no obligation to update or revise forward-looking statements.

The second quarter of fiscal 2019 was rewarding strategically. But our financial performance was somewhat weaker than expected, as we continue to position Dynatronics for long-term success.

Our focus remains two-fold. First, we have been driving profitability with continued operational improvements in our therapy products business. And second, we are continuing our efforts to scale the company by organic growth and by acquisition.

Our sales for the quarter declined somewhat more than expected, primarily due to reduced sales of our physical therapy and rehabilitation products in our direct channel. As expected, sales decreased due to transitions in the sales force and the product rationalization project we implemented at the beginning of the fiscal year.

In addition, we experienced general softness in demand through our direct channel. The decline is sales in the direct channel also had the impact of reducing our gross margin percentage, as the mix of sales was weighted more heavily to the dealer channel, the average selling price decreased, thus reducing gross margin percentage. A corresponding reduction in the selling expenses partially offset the decline in gross profit.

In the last several quarters, we have significantly reduced general and administrative expenses and selling overhead in unproductive direct sales territories for our physical therapy and rehabilitation products, focusing the organization on a streamlined more customer-focused experience.

We will continue to take aggressive actions to eliminate unproductive activities, reduce overhead burden and begin to generate synergies amongst our selling channels. While this may continue to have a negative impact on our top-line growth for several quarters, it will also position us well for greater profitability and cash flow in the longer term.

David will now provide a financial report.

David Wirthlin

Thanks, Chris. I will now provide a financial report on the quarter and 6 months ended December 31, 2018.

Dynatronics closed the acquisition of Bird & Cronin in the beginning of our second quarter of fiscal year 2018. Therefore, Bird & Cronin's operating results are included in the full 6 months ended December 31, 2018, but are included in only 3 of the 6 months in the same period of the prior year.

Net sales for the quarter ended December 31, 2018 decreased $2.6 million or 14.6% to $15.4 million, compared to $18.1 million in the same quarter of the prior year. The decrease was primarily due to a $2.6 million reduction in sales of physical therapy and rehabilitation products, due to product rationalization initiatives implemented at the first of the fiscal year, transitions in our sales force and general softness of our sales in our direct channel.

Net sales for the 6 months ended December 31, 2018 increased $1.6 million or 5.3% to $32.5 million, compared to $30.9 million in the same period of the prior year. The sales growth came primarily from the addition of Bird & Cronin, which contributed an increase in sales of $6 million. This increase was partially offset primarily by a decrease of approximately $4.4 million in sales of physical therapy and rehabilitation products for the first half of the fiscal year.

Gross profit for the quarter ended December 31, 2018 decreased approximately $1.1 million or 18.9% to $4.7 million, representing 30.3% of sales, compared to $5.8 million or 31.9% of sales in the same quarter of the prior year. Lower sales was the primary cause of the decrease, reducing gross profit by approximately $788,000.

The decrease in gross margin percentage to 30.3% from 31.9% contributed about $302,000 to the reduction of gross profit and was due primarily to reduced sales in our direct channel, which had the effect of lowering the average selling price of our physical therapy and rehabilitation products, but also reducing selling expenses.

Gross profit for the 6 months ended December 31, 2018, increased approximately $118,000 or 1.2% to $10.2 million, representing 31.5% of sales, compared to $10.1 million or 32.7% of sales in the same period of the prior year. The increase in gross profit included an increase of $2 million attributable to the acquisition of Bird & Cronin, partially offset by approximately $1.4 million due to lower sales and $0.5 million due to lower gross margin percentage.

The decrease in gross margin percentage to 31.5% from 32.7% was due primarily to a decrease in sales through our direct channel, which reduced average selling prices on sales of our physical therapy and rehabilitation products for the first half of the year.

Selling, general and administrative expenses, which includes research and development for the quarter ended December 31, 2018, decreased approximately $0.9 million or 15.7% to $4.8 million, compared to $5.7 million in the same quarter of the prior year. The decrease is attributable to lower selling expenses of $531,000, consisting of lower fixed sales management salaries and lower commissions.

Additional decreases included acquisition related expenses of $85,000 and research and development expenses of $539,000. The decreases were partially offset by $264,000 in higher corporate, general and administrative expenses.

Selling, general and administrative expenses for the 6 months ended December 31, 2018 increased approximately $531,000 or 5.5% to $10.3 million, compared to $9.8 million in the same period of the prior year.

The increase was attributable to the acquisition of Bird & Cronin, which contributed approximately $1.7 million in additional SG&A expenses and to increased corporate G&A salaries and benefits of $323,000 and additional severance of $124,000. These increases were partially offset by reduced selling expenses of $828,000 due to lower fixed sales management salaries and expenses, and reduced commissions, reduced research and development expenses of $780,000, and reduced acquisition expenses of $293,000.

Net loss for the quarter ended December 31, 2018 was approximately $441,000 compared to net income of $14,000 in the same quarter of the prior year. Depreciation, amortization and other non-cash expenses were $463,000 in the quarter, including an income tax provision of $204,000 related to temporary book to tax differences associated with amortization of goodwill for tax purposes.

Net loss for the 6 months ended December 31, 2018 was approximately $125,000 compared to net income of $213,000 in the same period of the prior year. Depreciation, amortization and other non-cash expenses including the $204,000 income tax provision were $818,000 in the period, offset by a non-cash gain of $375,000 related to evaluation adjustment of acquisition related contingent consideration.

Net loss attributable to common stockholders was $644,000 for the quarter ended December 31, 2018, compared to a loss of $1.3 million for the same quarter of the prior year. The $671,000 improvement in net loss attributable to common stockholders is primarily due to a $1 million reduction in deemed dividends associated with the issuance of preferred stock and warrants, and a reduction of $102,000 in preferred stock dividends in the quarter ended December 31, 2018, compared to the same period of the prior year. These improvements were partially offset by the $455,000 increase in net loss.

Net loss attributable to common stockholders was $515,000 for the 6 months ended December 31, 2018, compared to a loss of $1.3 million for the same period of the prior year. The $788,000 improvement in net loss attributable to common stockholders is primarily due to a $1 million reduction of deemed dividends and $103,000 decrease in preferred stock dividends in the 6 months ended December 31, 2018, compared to the same period of the prior year. These improvements were partially offset by the $338,000 increase in net loss.

As of December 31, 2018, we had cash balances of approximately $524,000. We have $11 million asset based line of credit, pursuant to which we had borrowed $5.1 million as of December 31, 2018. Our line of credit balance is currently averaging approximately $4.5 million, leaving available borrowings of about approximately $2.5 million based on our current borrowing base.

In the 6 months ended December 31, 2018, we paid $913,000 in acquisition holdback payments. Remaining deferred acquisition payments totaled $967,000. This concludes our summary of operating results. Chris will make a few final remarks before we open for questions.

Christopher von Jako

Thank you, David. As we discussed on our previous calls, fiscal 2019 will include a full year of both Hausmann and the Bird & Cronin operations. We currently expect consolidated sales of fiscal 2019 of approximately $61 million to $64 million. This is lower than the guidance given last quarter and is reflective of our second quarter results.

We continue to expect our consolidated operations to generate positive cash flow from operations in fiscal 2019. We currently expect gross margin to be in the 31% range and SG&A to be about 32% of sales for the current fiscal year, including approximately $1.7 million or 2.7% of sales in non-cash charges.

The number of common shares outstanding as of December 31, 2018 was approximately $8.2 million. We expect our outstanding shares to increase approximately 70,000 shares per quarter, throughout the year. Again, this guidance is based on our current operations and does not include the impact of any potential acquisitions.

Our strategy is to grow organically and by acquisition. And we continue to maintain our focus and discipline in seeking out potential M&A targets. We are also focused on improving our operation margins and cash flow. In all of these efforts, we are committed to delivering restorative products to accelerate patients' return to optimal health.

I continue to spend time meeting with sales professionals, vendors and customers. In fact, I attended the largest physical therapy meeting, the American Physical Therapy Association Combined Sections Meeting in Washington D.C. at the end of January.

This was a very successful meeting for a physical therapy brand as more than 16,700 physical therapists, physical therapy assistants and physical therapy students were present. This was the second largest attendance in history.

Dynatronics continues to have an important presence at the meeting and I was pleased to meet a number of our customers and distributor partners. We also continue to share our story and build relationships with the investor community. We had the opportunity to attend the Benchmark Discovery One-on-One Conference in Chicago in November.

I also had the opportunity to attend the 7th Annual ROTH Utah Corporate Access Event in December in Park City. We are pleased that ROTH Capital initiated equity research coverage in December and we will be presenting at their investment conference in March.

We appreciate our shareholders for their ongoing support. We continue our commitment to partnering with our customers by providing restorative products to realize our shared vision of improving the lives of patients.

I will now turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] We have our first question from Scott Henry with ROTH Capital. Go ahead, Scott.

Scott Henry

Thank you and good morning. Just a couple of questions. First, when we think about the weakness in physical therapy and rehab, as far as divisions, do you - I don't know how you're using those categories. They can be broadly used. But division-wise is the weakness mostly in the legacy business or is it Bird & Cronin or Hausmann? How should we think about that?

Christopher von Jako

Good morning, Scott. Welcome to the call. This is Chris. So like we said on the prepared statements, yes, it was in the legacy business with the direct channel and that's primarily where we saw some softness.

Scott Henry

Okay. And then, we think about Q3 and the rest of the year, looking at your guidance. I guess, so we should - it sounds like gross margins should improve off of Q2, but perhaps not get to Q1 levels, is that a fair statement?

Christopher von Jako

So we don't historically give our guidance out per quarter. But historically, third quarter is our lowest quarter of it. And from a guidance standpoint and the margin, we're estimating 31%.

David Wirthlin

Yeah, we're expecting the 31% for the full fiscal year approximately. And that's the guidance we're giving.

Scott Henry

Okay, yeah. Fair enough. And then, looking at SG&A and I haven't had a chance to run through all the numbers based on your guidance. But with sales coming down and guidance staying the same, it would seem like SG&A will bounce higher off of Q2 levels, just based on the math. Any comments there? I mean, should some of these savings carry forward or do you expect a modest bounce up?

David Wirthlin

Well, we definitely have savings, because we decreased SG&A expenses. But as you say, because the math with the - with sales coming down, the SG&A percentage is up to about 32% for the fiscal year. That's our updated guidance.

Scott Henry

Okay, great. That should do it for me. Thank you for taking the questions.

David Wirthlin

Thanks, Scott.

Operator

Our next question comes from Jeffrey Cohen with Ladenburg. Go ahead, Jeffrey.

Jeffrey Cohen

Hey, good morning. Can you hear me okay?

Christopher von Jako

Perfect, Jeff, good morning.

Jeffrey Cohen

So could you talk about the commercial team in place now? What was in place a few months ago? What's in place now and how that looks over the coming months?

Christopher von Jako

Are you asking - so as you know, we have a hybrid setup with direct sales force in our sales of our products, of the physical therapy and rehabilitation products, and also with our [LXP soft goods] [ph]. But we also have regional dealers as well as national dealers that we work our products through. So nothing has really changed from the setup from previous.

Jeffrey Cohen

But the size of the direct team; has that changed?

Christopher von Jako

Yeah, the size of the direct team, I think we reported on previous quarters, so in some instances, we move from direct to dealer model and particularly in area - Northern California we've done that. And then, we removed some of our direct on non-performing areas, most of that was 1099. And, yeah, that's about it.

Jeffrey Cohen

Okay, so back to my question.

Christopher von Jako

Yeah.

Jeffrey Cohen

The commercial team in place now, the aggregate numbers today versus the aggregate numbers three months ago; what's the change there?

Christopher von Jako

So I think the aggregate numbers, it was somewhat on the order of - from the previous number. I don't have the number offhand. But the previous number was probably down by - on the order of about 10, 10 is my guess, on that order.

Jeffrey Cohen

Okay. I got it. And then, could you talk about the corporate severance and salary reductions for individual severance and the reduction in salary? David you had gone through those numbers. What did you anticipate was included in this quarter as far as the numbers?

David Wirthlin

For severance?

Jeffrey Cohen

Yeah, for severance and salary reduction.

David Wirthlin

Well, we have…

Christopher von Jako

Hold on, Dave is just getting the information.

David Wirthlin

Severance was not material in the quarter. But there was this small amount of severance. And I don't have the number in front of me, Jeff, sorry.

Jeffrey Cohen

Okay, got it. Okay, next question. What was the previous consent - what's the previous top-line guidance for the year from last quarter, remind me please?

Christopher von Jako

Yeah, the previous guidance was $65 million to $67 million for the previous quarter.

Jeffrey Cohen

$65 million to $67 million, okay.

Christopher von Jako

And we lowered, yeah, the guidance to $61 million to $64 million.

Jeffrey Cohen

Okay. So - okay, down to $61 million to $64 million. And when you talk about positive cash flow for 2019, are you talking about for the year or are you talking about for Q3 or are you talking about for Q4?

David Wirthlin

Yes, both. We are operating positive cash flow for the year and for all the quarters.

Jeffrey Cohen

Okay. Year and quarters, okay. And any insight into the margins? It sounded like last quarter that you were kind of scaling back on the lower margin business as far as your product rationalization project. And you think that that would have a positive impact on the gross margins which you did not for this quarter.

How does that look for the year? And how does that fall into what you said previously about your gross margin anticipated to be 31% for the year with SG&A 32%?

David Wirthlin

Right. So we have taken a number of actions to improve gross margin. The impact in this quarter was the direct sales channel was down. Therefore, we have higher percentage of our sales going through our dealer channel. And that mix causes the overall gross margin to be lower with the corresponding decrease in selling expenses.

All of the changes we are making to improve gross margin, well, we still expect in the longer term to drive higher gross margin and better profitability.

Jeffrey Cohen

Okay. Two more questions. Next question, are there more actions to be taken when you talk about actions that were taken?

David Wirthlin

Specifically, Jeff, what are you - actions in as far as what, to improve gross margin?

Jeffrey Cohen

As far as the commercial team - commercial team margin expansion, expenses?

David Wirthlin

Yeah, so I think that we mentioned on a previous call that we were going through a strategic planning process and we're looking at further actions in the future to continue to improve our profitability. That's the main focus where we are now, it is improving our profitability.

Jeffrey Cohen

Okay. And then lastly, anything on the new product front?

David Wirthlin

From a new product front, we have moved more to an outsourcing and licensing. And we don't have anything to report this time on new products.

Jeffrey Cohen

Okay. Got it, that does it for me. Thanks very much.

Christopher von Jako

Thanks, Jeff.

Operator

Our next question comes from Dave Therkelsen, First Light Asset Management. Go ahead, Dave.

Dave Therkelsen

Good morning, Chris. Good morning, David.

Christopher von Jako

Hi.

David Wirthlin

Good morning, Dave.

Dave Therkelsen

Just one question. So the original revenue guidance for the full year fiscal 2019, I think contemplated about $5 million impact from products that were discontinued. Is that still in the ballpark of the estimated impact?

David Wirthlin

So, yes, that was true. There is a $5 million combination. But the combination was specifically around product rationalization, reductions in transitions in our sales-force. So it's not just the product rationalization. And then, we updated our guidance based on the softness that we saw in the last quarter in our direct sales channel.

Dave Therkelsen

Got it. So you're not changing the impact from the first two factors, but just building in the additional impact from continued weakness?

David Wirthlin

Absolutely, yes.

Dave Therkelsen

Got it. Thank you. That's helpful.

Christopher von Jako

Thanks, Dave.

Operator

Our next question comes from Scott Henry with ROTH Capital. Go ahead, Scott.

Scott Henry

Thank you. Just want to follow up, Chris. Obviously, fiscal year 2019 is a year of rationalization and a year of focusing on cash flow positive operations. The question is, and it's sort of a bigger picture question is how confident are you that fiscal year 2020 should be a kind of a re-emergence of that kind of 4% to 6% top-line growth we should be thinking about as an objective?

I just want to get your sense that this is in fact the base year, and if so, that you would expect to return to growth in 2020 fiscal year. Thank you.

Christopher von Jako

Yeah, thank you, Scott. So we haven't given guidance on the upcoming year and from a timing perspective, we're still trying to see exactly where we are with all the changes that we've made. So it's really difficult right now to point to really, kind of foresee where that is.

Scott Henry

Now, I'm not looking for any specific guidance. But it does still give you another 6 months to manage the current business. But I am asking you kind of directionally, if you put your finger in the air, do you think you should be growing again in fiscal year 2020? I think that's a reasonable question.

Christopher von Jako

Yeah, I would say, we would expect so. But again, we're not giving any guidance.

Scott Henry

Fair enough. All right, thank you for the color.

Christopher von Jako

Thank you.

Operator

Our next question comes from David Kuang with Maxim. Go ahead, David.

David Kuang

Hey, good morning, guys. I just had a question about the general softness you're seeing in the direct channel. Could you just give a little more color on what's happening here? Thanks.

Christopher von Jako

Thanks, David. So I think we basically sell obviously within the direct channel in the physical therapy and rehabilitation area. And this is - our feeling is due to lower clinic openings volume versus the prior year and delayed in upgrading existing capital equipments. We're optimistic that this is temporary pull back in demand though.

David Kuang

Okay. So thank you.

Christopher von Jako

Thank you, David.

Operator

Again, ladies and gentlemen - I'd like to turn the floor back over to management.

Christopher von Jako

Thank you very much. So thank you for your questions and your interest in Dynatronics. If you have any further questions, you could please direct them to our Investor Relations contact, Jim Ogilvie. Operator, you may end the call. I'm losing my voice.

Operator

Thank you. This does conclude today's call. We thank you for your participation. You may disconnect and have a great day.

Christopher von Jako

Thank you.