Dynatronics Corp (DYNT) 2009 Q4 法說會逐字稿

This conference is being recorded. All conference participants are muted.

Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We welcome you to our conference call to report earnings for the fourth fiscal quarter of fiscal year 2009 and year-end results.

The purpose of today's conference call is to discuss the financial results for the quarter and year ended June 30, 2009. And 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 results for the quarter and year ended June 30, and following my presentation we'll open it for questions.

We will be filing the formal 10-K on Monday, and that document will be available for inspection online after it is filed on Monday.

We're very pleased to report the results of the fourth quarter and fiscal year-end. Let me start with a brief overview of the fourth quarter ending June 30, 2009.

We are reporting a pretax profit of about $75,000, compared to a $7.3 million loss the year before. Of course, last year included the $6.6 million write-off of the goodwill. And that turns out to a net of $46,000 versus a net of $6.8 million last year -- for the quarter.

While those are very modest profits, they demonstrate a significant turnaround in direction for the Company. This will be the third consecutive quarter that we have reported a profit. And that is the first time we've accomplished that since, I believe, fiscal year 2005. So we are showing positive direction and performance, which is significant given the general economic conditions we are under.

The distinction is even more dramatic when comparing the fiscal-year numbers. For the fiscal year ended June 30, 2009, we are reporting a $185,000 pretax profit. Again, a modest profit, but a profit nonetheless. And when compared to the prior year, which had a $9.9 million pretax loss, it represents overall a $10.1 million turnaround year over year.

That has not been accomplished without some significant effort. And let me detail for you the elements of that $10.1 million turnaround. $2.8 million of that turnaround was reduction in SG&A expenses. Specifically, there was about $1.5 million in reduction of labor and operating costs. Much of that had to do with the assimilation of the acquisitions where we still had many duplicate employees in the prior year and were able to reduce that significantly in the current year in rationalizing all of the operations.

Similarly, we were able to reduce general and administrative expenses by about $800,000, and lower selling expenses by about $500,000. So the SG&A expenses were reduced by about $2.8 million, given those components.

Much of that reduction was achieved with the help of Vici Capital, a firm that we retain to assist us in helping to re-evaluate the organizational structure and cost-saving opportunities. We implemented many of the ideas that came from that effort, but many are yet to be implemented.

Overall, we identified $2 million in economic benefit that could be achieved, either through increased revenues or reduced expenses, just on the status quo. Some of that is reflected in the $2.8 million, but it will take, in our estimation, up to the rest of fiscal 2010 to fully realize all of the economic benefit identified by this effort.

In addition to the $2.8 million in SG&A, we were able to improve margins by about $300,000. Of course, we had the goodwill write-down of $6.6 million and the R&D expense reductions, which approached $400,000 year over year.

So overall, those four components equal the $10.1 million turnaround -- $2.8 million in SG&A; a $300,000 increase in margin; $6.6 million in goodwill; and $400,000 reduction in R&D.

Despite the bad economy that we're in, which is affecting companies worldwide, we are very pleased with the fact that we were able to maintain sales to be equivalent to what they were last year. So despite the stiff economic headwinds that we're facing, that everybody is facing, we were able to maintain our sales in that environment.

We were able to do that in part because of the new catalog that was introduced. We have experienced a diminishment in demand for our capital equipment. That demand translates to about a 10% to 15% reduction in sales of capital equipment.

But that has been offset by an increasing demand for catalog and supply sales, which are up between 15% and 20%. What that means is that Dynatronics -- while everybody's share of the capital equipment market is down, we are gaining market share through the sale of catalog equipment and supplies. That's a very positive indicator.

We also introduced the new Vforce device that we began selling in June, which also gave a boost to our capital equipment sales.

So we believe that the indicators from our sales numbers are that our actual market share is increasing. And we're accomplishing that in different respects. And I will go into a little more detail on that in just a minute.

One of the ways that we are doing that is by increasing the number of direct representatives. A recent press release announced the addition of several, about 10, new sales reps that we have brought on. And two new dealers that we have brought on in just the last few months.

The full impact from those changes won't be seen until the first two quarters of this next fiscal year. And we are very excited about that.

Part of what is creating that is some consolidation that is taking place in our market. Since our last call, there have been some fairly significant changes that we would like you to be aware of.

One of our largest manufacturing competitors, Chattanooga Group, which was acquired -- which was part of the DJ Orthopedics family of companies, had some significant changes announced in June. DJO came in and announced that they were going to close the Chattanooga main facility in Chattanooga, Tennessee.

That has been a legacy company that has been around much longer than we have been. And they are going to assimilate the products that were being manufactured in the operations that were being done there into other operations that they have. That is going to create some significant downtime for them and an opportunity for us, as they go through that transition. And it has changed the perception within the marketplace.

The other significant event that has occurred is that DJO also sold their catalog division, which was a direct competitor to our catalog, to Patterson, which is another competitor. In doing so, it has changed the dynamics of our market. There now are only two companies that have direct sales force and a broad line of products. And that is Dynatronics and Patterson.

Chattanooga will continue to sell their products through independent dealers and through the Patterson channel, but they no longer have a direct sales force access to the market.

And so that is creating some significant stir in the market. Sales reps who were employed previously by the MP division that DJO sold are looking for a home, and we've been fortunate enough to pick up some of those better reps.

And the change with the Chattanooga Group closing their operation also led to interest on the part of some of the dealers that we have acquired, some that we have been working on for quite a while. And that helped to tip the scales a little bit in our favor.

So those changes in the marketplace have resulted in a narrowing of distribution, and we think is an opportunity for us to significantly increase our market share over the coming year. So we are excited about those opportunities.

In addition to that, we are starting our first e-commerce solution for our customers, which will significantly facilitate doing business with Dynatronics and will also lower our cost of transactions. We are well along the path of getting that e-commerce site launched, and expect that to occurred during the quarter ending December 31. We believe that will, over time, become a significant tool in attracting additional business.

We are also, for the first time, pursuing group purchasing organizations and large national accounts. With the broad product line we have and the large -- and the expanding distribution network that we are building, we are in a much better position to better facilitate these large accounts. In the past, we were not able to -- qualified to bid on those. But we are now.

And recently, we announced the addition of Western Rehab Health Network and are working on several other large national accounts, as well as large group purchasing organization contracts that we hope to be able to announce in the coming year.

So many opportunities are unfolding for us in the current market condition. Despite the depressed economic markets generally in the United States and worldwide, we've probably never had more opportunities for growth than we do right now.

If we're able to fully seize those opportunities, we believe that as the economy starts to come back, it will only add further fuel to our fire, and we are excited that we can have these opportunities and be making the progress we're making during difficult economic times because that bodes well for when the economic times improve.

I'd also like to comment for a minute about our current stock situation. Many have inquired about that. We, of course, received a deficiency notice from NASDAQ over a year ago because of our $1 minimum bid -- our failure to meet the $1 minimum bid. Our stock dropped to about as low as $0.17, I believe, at one point, after we announced some of the large losses.

I believe there were many who wondered if we would still be in business. I think the last year has shown that not only were we able to weather the storm, but we have now positioned ourselves for some significant growth. And the anticipation of that turnaround and the future growth has driven the stock back up.

Unfortunately, it has not reached the minimum level required. NASDAQ did have a proposal into the SEC that would have given us another six-month extension, companies like Dynatronics, and the SEC has failed to act on that. And the deadline for our stock delisting is coming up in early October. And I believe it is October 9.

And so, we are certainly hopeful that maybe we'll see some miraculous strength in the stock as we approach that date, and maybe dodge that bullet. We are certainly close. We closed yesterday at $0.96 on the bid. And we're down a little bit today, but we are watching it carefully and hoping for some improvement there.

But if that does not occur, people have asked what happens if we are delisted. And the Board will be meeting next week to evaluate their options. Traditionally, people consider everything from going to another exchange -- the Bulletin Board exchange, or trying to take steps that would requalify us for the NASDAQ exchange.

So we'll see what happens over the coming weeks. And we'll be putting out press releases keeping people informed of what is happening there.

But as we look forward to fiscal 2010, as I have mentioned a couple of times, we believe we have some unique opportunities because of the narrowing of distribution in our marketplace, as well as the opportunities for growth that we have been able to generate. We are still working on new products that we intend to introduce in the coming year. And so there are many opportunities for growth.

And if the general economy starts to show any signs of life, that should help the capital equipment side of the business to start to catch up more with the catalog and supply sales.

So we're very excited about where we stand right now. We're very pleased that, even though the profits we've generated have been very modest, the turnaround of $10.1 million is very significant.

And we certainly are on the right track and showing the direction that we had hoped when we implemented this strategy two years ago. And believe that the next fiscal year will be an opportunity for us to show that growth and to start to shape the future of the Company.

With that, we'll unmute the lines here so that you can ask questions. And would welcome any of your questions at this time.

If you're talking, I can't hear you. Let me make sure that -- . Excuse me.

(Operator Instructions).

I'm sorry, now we can take your calls. Somebody has some real bad background noise. If you're not going to be asking a question, could you please press pound-one to mute your line.

Whoever is on the line that has the bad background noise, if you could please press pound-one. Thank you. Now, does anybody have any questions?

If you are trying to ask a question and I'm not hearing you, you need to press pound-two to unmute your line. And if you're not asking questions, we'd ask you to press pound-one so we eliminate the background noise.

Nobody has questions for us today?

Kelvyn? [Bill Courtney] here. I tuned in a little bit late and got you right when you were talking about the e-commerce. And that is going to be available the December of this year?

It's going to be launched during the second quarter ending December 31, yes.

Beautiful. Boy, I am looking forward to that.

Yes, we believe that's going to be a big positive for the Company in many respects.

Yes, it's going to really speed up sales, processing, and ordering, and make it easier for our customers to do business with us.

Yes. Thank you.

It was great working for you, and (multiple speakers). Really appreciate it.

Any other questions? I will assume that when there is good news that there's not as many questions. We appreciate you being on the call today and would welcome your individual questions. Feel free to call us directly at the Company and ask for myself or Bob Cardon --

I have a question. Is that okay?

Yes. Please.

My name is [Besan Garbey]. I'm calling from New York City. My question is very simple. What is the effect of the new healthcare reform on your Company?

What is the effect of what? Healthcare reform?

Yes.

(Multiple speakers). Of course, right now --

(Multiple speakers) is not good, or what's your perspective of that?

Right now, nobody knows what the final form of the legislation is going to take. But the healthcare reform is going to affect every company in this country.

Because under the current proposal, they are proposing excise taxes on insurance companies that will likely raise everybody's insurance rates anywhere from 20% to 30%. And so, we probably won't be immune from that.

They've also proposed right now a tax on medical device companies, an excise tax of $4 billion a year on medical device companies. We've calculated that, and right now, because most of our products are Class I and they've exempted Class I products from the tax, that -- and they've also exempted the first $5 million in sales of Class II or III products from the tax -- so that means we'd have about $5 million of taxable sales.

And so, that would probably be about $100,000 to $150,000 a year excise tax that they would impose on Dynatronics. And that's just as the bill currently stands.

We're part of the Medical Device Manufacturers Association. And we are fighting that bill vociferously, hoping that it can be modified. Because it's very egregious in the taxes that it's going to impose, and from an irony point of view, if companies like us who are marginally profitable at the moment, if we had to pay the full excise tax on the full sales, would be a burden that we would not be able to assume without eliminating things like our health insurance. (Multiple speakers).

Thanks so much. I am very excited about the company. And I am looking forward to seeing the benefits.

Thank you. We are looking forward to it as well.

Anybody else have questions that I cut off a little prematurely?

Hello. My name is Joe. My question is about shareholder interest. What is Dynatronics doing to create shareholder interest in the Company?

Right now, the shares are very thinly traded. And there is no mention anywhere -- and whenever I talk to various people about the Company, they say they'd never heard of it, and so forth. What are you doing to improve the situation?

In years past, we tried things like investor relations firms and learned that we paid a lot of money for very little benefit.

And so, what we have been doing is primarily the standard approach of trying to get our press releases out and distributing them as broadly as we can. When you are a nano cap company, one of the challenges you face is that there are not many funds out there that are willing to invest.

So we are relegated primarily to investment newsletters. We do talk to a lot of them. In fact, there will be a -- there are those who are already looking at us for evaluating whether they would like to do something, recommendation for us, or those kinds of things are the realm that we work within. So we try and identify those types of investment groups, if you will -- newsletter recommendations.

We do have an extensive list of people we've identified over the years who do invest in nano cap type companies. And so, we are constantly in discussions with them and trying to get our story in front of them.

We have learned it doesn't do a lot of good to try and get the attention of a Merrill Lynch or a Smith Barney or people like that because we're just not a stock that qualifies for them to invest in.

I'm a long-time shareholder. And I've been very disappointed in the results over the years. And I've found that in recent times, the interest in the shares has dwindled considerably compared to what it was in the past. And that was the only reason for me asking my question.

Yes, and I think some of that diminishment is directly tied to what's happened over the last two years. I think there was some concern about the strategy we implemented two years ago that resulted in the huge losses a year ago. And I think that is a direct contributor. And that happened just as the market basically went south, where there was not a lot of general interest.

So when you are a nano cap company, you rely a lot on retail investors. Those retail investors dried up a lot when the market went south a year ago. And it also coincided with us reporting the large losses. Those two factors contributed to our stock price tumbling, which is a reflection of the lack of interest.

Now what we're seeing is it's starting to come back because they are seeing that the strategy -- although there was some risk to it as evidenced by the losses that were incurred -- is now starting to bear fruit as we are now emerging as one of two main distributors in the industry.

Thank you very much. I appreciate your efforts in looking into this matter.

Other questions?

This is Harold. Has the backlog in the Vforce caught up yet or is there still backlog to be made up on this?

No, we have backlog as an ongoing basis. We have anywhere from $0.5 million to $1 million in backlog at the end of any given month overall on products.

The Vforce, however, has caught up. We have hit a few challenges with Vforce. And the biggest challenge has been -- it's such a large piece of equipment -- is getting it out for demos. But the interest is starting to build in the Vforce. So we are confident that we'll hit our numbers for that for this year.

Also, have you ever thought of using a different conference call company? This -- I've never been on a conference call that's been so unprofessional.

You mean as far as the participants in the call or the --

(Multiple speakers). No, the quality of the operation. First of all, when the operator come on, I couldn't even understand her. And I've never had this kind of a problem with other conference calls. They've been clear and concise, and this is just kind of a joke.

Well, that's good feedback to have. We'll look into that.

Yes, I wish you would. Because I don't think it creates a very good image for the Company. Because -- I'm hearing background noise right now. It's not --

Yes, we asked people to mute their lines as a courtesy. But it seems like every time we have a call, there is one or two people with noise in the background that don't seem to understand the request to mute those lines.

If you do have to -- if you are delisted from NASDAQ, are you going to go to the Bulletin Board or the Pink Sheets? Or would there be a chance to get in the American exchange? Would they not qualify for that either?

The American exchange has the same $1 minimum bid requirement. So that -- if you qualify for NASDAQ -- I mean, if you qualify for that, you'd stay on NASDAQ. And so, the Pink Sheets or the Bulletin Board become the alternative to those two options.

And the Board will look at those. We've looked at a couple of the differences between the two. One allows electronic trading; one doesn't. So the Board will be evaluating those options and then making some decisions next week.

Kelvyn, we were up over $1 today. How long do we have to be over a $1 to qualify to stay on NASDAQ?

To qualify to stay on NASDAQ, we have to be above $1 minimum closing bid for 10 days. And that's the minimum requirement. If we are above $1 closing bid for 10 consecutive days, then you've met the minimum threshold.

That doesn't mean that if you close at $1.01 for 10 consecutive days, they'll say that's good enough. They may feel like it's still marginal. But that's the minimum threshold you have to meet.

My guess is, in the current environment they're going to be a little more lenient than in times past. Because NASDAQ doesn't want to be losing clients either.

Any other questions?

We appreciate your participation in the call today. Again, if you do have more direct questions we're happy to field those individually. You can reach us at the corporate office here, and ask for myself or Bob Cardon and we'll be happy to attend to your questions.

Thank you, again, for your participation today, and we look forward to our next call in a couple of months. Thank you all.