Dynatronics Corp (DYNT) 2008 Q4 法說會逐字稿

(Operator Instructions) I would like to welcome you to the fourth-quarter and fiscal year end financial results conference call. The purpose of today's call is to discuss financial results for the quarter and the year ended June 30.

Before we begin, as a reminder during the course of the 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.

And 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 SB. Today I plan to update you on the results for the quarter and fiscal year ended June 30 and following my presentation, we will open the call up for some questions.

Again, we still have a little bit of background noise. [Operator Instructions] Thank you. We need to also record this call (multiple speakers)

Okay, let me give an update on several factors relating to the fiscal year. We have had some good results and then some interesting developments that we need to report to you on.

As we reported in the press release, we generated almost a doubling of revenues from fiscal 2007 to fiscal 2008.

All-conference participants are muted.

And we will be -- we're thrilled about that. That is -- the majority of that increase came from the addition of our six acquisitions of independent rehab dealers which was completed the beginning of the fiscal year. As a result of that, we now have 36 direct sales reps covering 29 states across the country in addition to our well-established domestic and international dealer network.

Just a reminder, of part of the strategy that led to that decision, We are at the beginning of the fiscal year, the reason for implementing that strategy had to do with consolidation factors within our market. Two major companies, Patterson companies and Chattanooga Group or their parent company, DJO Inc., had begun a significant consolidation effort in the year before.

That consolidation effort threatened distribution channels for Dynatronics as well as operating segments of our market. And it was determined that our long-term viability depended on protecting those distribution channels. That is what precipitated the acquisition of the dealers a year ago.

Since that time, I am pleased to report that the segments that we acquired have performed as expected. The amount of sales generated from those acquisitions hit projections and we were pleased with that aspect.

Margins were a little bit lower than what was expected, but part of that had to do with exhausting inventories that they had on hand before being able to get to inventories that we were manufacturing. So, we feel that the strategic move that was made was very important to our long-term viability although it did take a little bit longer and it was a little more costly to finalize than had been expected.

Associated with that in the course of the year especially in the fourth quarter, there was some pressure on the stock price of the Company. Some I guess perhaps were not as enamored with the strategy we were pursuing and the sale of stock that occurred dropped the price of the stock below $1.00.

That reduction in the value of the stock triggered a review or an evaluation of goodwill according to financial accounting standard 142. We were required as a Company to do an analysis to see if that goodwill was impaired.

And the main basis for that is the moment that your market value of the Company as determined by the market capitalization dropped below the book value, then by definition you have an impairment of your goodwill. The impairment as it was reviewed by an independent appraiser was a total impairment and therefore according to the financial accounting standards, we were required to write off the entire amount of goodwill on the books of the Company which was about $6.6 million.

That certainly is a very large number and very startling to those who may not have been expecting that. But as noted, it is a write-off of an intangible asset and was a non-cash and a non-operating loss. And so that will be the end of our goodwill evaluations until such time as we may have additional goodwill on the books so that would not be a factor in the future.

FAS 142 does require that we continue to do evaluations of long-lived assets of other natures which we will continue to do. But as far as goodwill is concerned, that is now off of our books in totality. As a result of that, we ended up with a pretax loss for the fiscal year of about $9.9 million. That compares to about a $271,000 loss the prior year.

As mentioned that loss is comprised of basically three factors. One was the goodwill write-off. The second one was about $2 million in acquisition related expenses. Those are expenses we have eliminated and do not expect to be recurring plus reductions in overhead that were made as part of the consolidation effort.

And then thirdly as a result of the new operating paradigm, there was a decision to increase reserves for bad debt and inventory going forward and that was almost an $800,000 adjustment in the course of the year as well. All of that was part of the strategy that was being pursued in order to improve the positioning of the Company to compete in a more consolidated market.

We believe all of those things are behind us and now are looking forward to the benefit of that strategy that was implemented. We do have the issue of the stock being below $1.00. We did receive a deficiency notice from the NASDAQ market in June which gives us 180 days to correct that deficiency.

That deficiency expires -- has to be corrected by December 22. Given current market conditions and the general economy, we have great concerns about being able to achieve that.

Should that not be achieved, the Company's stock would then be traded on the OTC bulletin board. We recognize that there are options for staying on the NASDAQ that would include doing a reverse stock split. At this point on in time, the Board of Directors has stated that that is not in their plans.

And so we are looking at continuing to support the stock, we're improving operations and doing all that we can to help people understand the undervalued nature of the stock at this point in time. We believe that is a reflection primarily of concerns of the losses of the past year. Much of that was expected but we believe now that we are in a position to move forward and are accelerating towards profitability.

Presently, just a brief comparison of this year to last year; of course we mentioned that sales have almost doubled. Gross profit for the year was up significantly because of the retail nature of some of the sales to our direct sales reps. Conversely, we also had higher selling expenses associated with paying commissions to the new sales force. We had about $4.2 million in higher selling expenses.

Margins compared to last year, we had not as big of an increase as some might have thought. Gross margin within the Company on a percentage basis, that's primarily -- we had about 37% gross margin this year compared to 39% last year.

Much of that has to do with the exhausting additional inventories that dealers had on hand at the time of acquisition. We believe that a more -- there was about 4.2% total -- excuse me -- 1.2% in that area. We believe that the target margins going forward are going to be closer to the 40% range and slightly above that.

We did have in addition as has been mentioned, some expenses that were much higher than the prior year associated with the assimilation in March. We made the major cost reductions associated with the assimilation and reduced our workforce by about 20% and cut about $1.9 million to $2 million in annual expenses.

Subsequent to that time we also have reduced another $250,000 in annual expenses. So we believe those reductions were necessary as part of the assimilation and will not negatively impact the Company's ability to service its sales or operations.

The net loss of course after a tax benefit was about $8.4 million compared to net loss last year of about $85,000. We did have several bright spots in the course of the year adding additional sales reps and bringing on additional sales force in addition to the dealers that were acquired.

We also introduced several new products, the DynaPro Spinal Health System, the X5 Turbo unit. Our new Synergy Elite line of aesthetic treatment devices was also introduced which brings us back into a much stronger competitive position in that particular markets and are still the lowest priced option for those particular lines of products.

We believe now that we have the worst behind us. We are prepared to move forward aggressively. We did just release about two weeks ago a brand-new catalog for the Company. It's our first consolidated catalog since the acquisitions.

It's about 460 pages and contains 12,000 different variations of products. We also have instituted price increases associated with that. Part of the margin erosion that we saw over the last year has been continually escalating costs from our own suppliers and we have not made adjustments to our pricing until we just released this new catalog.

So with those prices being increased, with the new catalog in place, the sales staff is excited about moving forward and helping us to achieve the new sales goal that are needed to help us get to profitability. That essentially outlines the majority of the story and rather than ramble on on my own, I think I would prefer to maybe respond to some specific questions.

(Operator Instructions)

Conference participants are unmuted.

I will at this time entertain questions.

I have a question. Was there any further talk about a stock repurchase plan?

The stock repurchase plan was being -- the stock repurchase plan was being instituted by the Board and has been in place. Although given the current situation, the Board has suggested that the capital associated with that be redirected to improving sales.

So the stock repurchase was deemed to be ineffective at current levels. We are limited on the number of shares we are allowed to purchase based on volume and the impact that it was having was nominal at best. We were only able to purchase around 500 to 1000 shares a day and that just didn't seem to be a good expenditure of funds based on the Board's analysis.

This is Jeff in Argentina. A question on the $768,000 of I guess bad debt and inventory reserve adjustments, how much of that was in the fourth quarter?

The majority of that was in the fourth quarter. We took an adjustment to our receivables and inventory of about (multiple speakers) a good portion of that was in the fourth quarter, I would say about half.

Okay.

About half that was a year end adjustments.

And then looking ahead at your press release, you talked about becoming profitable this fiscal year. The first quarter ends tomorrow. What is your outlook for the first quarter at least?

Well I believe the first quarter, of course we still have today and tomorrow to invoice. We will not show a profit in the first quarter but we will be much closer than we have been at any other quarter I believe since the acquisitions. And beyond that, the second quarter with the new catalog being released and the impetus that's going to give to sales, I think will be the biggest factor in helping us achieve profitability in the second quarter.

And what about the balance sheet? Your line of credit is at $5.8 million, cash is about $300,000. You do have a $5 million receivable. How much more do you have on your line of credit available to you?

Well the line of credit maximum is $8 million and that's limited by a borrowing base based on receivables and inventory. And we ran anywhere from $1 million to $1.5 million headroom on that. As a general rule, our -- if you look at our line of credit balance for the last eight, nine months; it is not budged from an average of about 5.6 to $5.7 million. So we have been able to keep that line of credit very constant.

What does inventory and receivable reserve adjustments -- I mean are you comfortable with where you are (multiple speakers) for receivables and inventories?

Part of reasons we did that is because we are under a new operating paradigm. We're dealing with a different subset of accounts. And so trying to make sure that we have properly allocated for receivable losses and inventory shortages, we felt like it was important to bump that up at the end of the fiscal year just make sure. It was more of a conservative approach to making sure that we had adequate reserves on hand.

Good luck with this fiscal year. Thank you.

Next question? We do know that there is great concern about the stock price. We are also concerned about that. We believe the best thing we can do to improve that stock price is to improve the Company performances and that is where our focus is going to be and we don't control the markets in general especially with what is going on today.

We recognize that there is a fallout that is quite widespread with what is going on in US economy. But nevertheless, we're confident that if we focus on what we need to do as a Company that we will be able to improve operations and benefit from the strategy we implemented a year ago.

We regret that there were those who lost confidence in that strategy and decided to sell their stock holdings and put the downward pressure on the stock. But we are quite confident of our ability to turn things around and now start to see the benefit from that strategy in this new fiscal year. Any other questions?

Get to work.

You got it.

Okay.

We will do that and we appreciate your ongoing support and would welcome your calls to either me or Bob Cardon at any time. If you have specific questions, we would happy to respond. Thank you again for your participation on the call today.