Dynatronics Corp (DYNT) 2015 Q2 法說會逐字稿

Hello, everyone. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We'd like to welcome you to our second fiscal quarter financial results conference call.

The purpose of today's conference call is to discuss financial results for the quarter and six months ended December 31, 2014.

Before we begin, as a reminder, during the course of this conference call, management may make forward-looking statements regarding the 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 included in specific risk factors and financial data contained on the Company's most recent filings with the SEC, including its most recent Annual Report on Form 10-K.

Today I'm going to update you on our results for the quarter ended December 31 and the six months ended at the same time. When I have completed my remarks, we'll be happy to take some questions from anyone who would like to ask them.

By virtue of the fact you're on the call and you have seen the press release, and seen some of the information that I will be covering here, I'll try to give a little more detail, a little more insight into things.

I'm going to start off with some good news. The sales for the second quarter increased 2.2% or about $156,000 to $7.3 million. This compares -- that 2.2% may sound pedestrian, but we are pretty excited about it because this compares to an average 7% decline in revenues for the prior two years during the same period. Sales for the six-month period increased also by 2.2% or about $317,000. Again, for the 30 months starting in January 2012 through about June 2014, we were on a year-over-year decline of about 7% on average.

So the fact that we have now sustained six months' worth of positive growth of 2.2% is about a 10 point turnaround from where we've been and we feel like that is an indication that we seem to have bottomed out; next time the economy and healthcare reform and we're starting to see things turn around.

Interestingly, the increased sales to Amerinet clinics through the GPO contract that we began this last summer that accounts for the majority of the growth in sales during the quarter and six-month period. Specific product categories that showed increases were capital exercise equipment and distributed capital [endowments].

On the flip side, our gross profit margins this quarter took a pretty good hit. And the reason for that is that, during the quarter, the increase in sales and sales net shifted more heavily towards the lower margin distributed products that we sell as opposed to the higher margin manufactured products. Sales of manufactured capital products were pretty flat, whereas sales of the distributed products increased pretty dramatically. So the result is a $214,000 reduction in gross profit during the quarter and a $227,000 reduction for the six months. So as you can see, for the six-month period, the majority of the loss in gross profit occurred during this most recent quarter.

We don't know if this is indicative of a developing trend or whether this is just an anomaly for the quarter, that the majority of change occurred in this quarter ending in December. As a result, the gross profit for the six-month period, as I mentioned, was down as well about 4.3%. And so we're going to be focusing, we're going to monitor this carefully to see if this is a developing trend or whether this is just something that will be an anomaly associated with this particular quarter due to these high sales of distributable capital equipment.

And that's not unusual for a calendar year end, when people are spending budgets and buying things that they may need. So, we are hoping to see the margins return to normalized levels in the third and fourth quarter.

Our SG&A expense for the quarter was up about $64,000. That bears some explaining. During the quarter, our labor in operating expenses were actually down about $87,000 and selling expenses were down. Where the increase came was in two areas. One of them was about $143,000 during the quarter of nonrecurring legal and acquisition-related expenses.

For the last six months, we have been engaged in negotiations to acquire a new technology that was invented in a target company we were trying to acquire. Things were looking quite good on that acquisition until in the last 30 days, as we were completing due diligence, we realized that there were some fatal flaws within the Company and things that posed greater risk than we were comfortable doing. As a result, we terminated our efforts to conclude that acquisition. Unfortunately, we were quite a ways down the road and therefore, we've incurred this additional cost that now must be expensed.

Also during the quarter, we did have higher amortization interest expense associated with the capitalized lease that we had mentioned in the last quarter when we sold the building in August -- that is our corporate headquarters and leased it back.

For the six-month period, our expenses decreased by about $63,000. That is even including [that's under $20,000] of nonrecurring legal and other acquisition-related expenses that were incurred during that period and the terminated acquisition. The main reason for the decrease in expenses, in spite of the higher legal expense, is the fact that our labor and operating expenses dropped by $225,000 and selling expenses also dropped by about $86,000.

Moving on to R&D expenses, the second-quarter R&D was comparable to last year's Q2. R&D for the six-month period, however, was down $102,000. It was up a little bit this quarter and more comparable to last year because of some accelerated R&D that's going around with some new products we're getting ready to introduce. But overall, our efforts over the last few years have focused on developing the Solaris Plus platform and most of our products are being developed from that.

So the heavy lifting in R&D has occurred in the last two years -- in the last three years, excuse me, and now we're benefiting from that. We expect to see R&D expenses maintain at current levels for the next little while.

Overall, the pretax loss for the quarter was about $226,000, and for the six months, the pretax loss was about $170,000. As for the nonrecurring costs related to the acquisition, we would have generated a profit of about $50,000 for the six-month period. And included in that was about $42,000 in medical device taxes paid in the second quarter and $86,000 in the six-month period. We believe with the changes that have occurred in Washington, DC, there's a better than average chance of that medical device tax will actually be repealed in the next six to 12 months. And that will be welcome.

I won't spend any time on income tax. You can read those provisions in the 10-Q. Other than timing differences related to the building sale and R&D tax credits, that's still pretty standard.

Given all these factors, we ended up reporting a net loss for Q2 of $134,000 compared to a net profit of $44,000 last year. Again, keeping in mind that the majority of that loss was associated with the nonrecurring expenses associated with the aborted acquisition attempt. And for the six-month period, the net loss was $93,000 compared to $64,000 loss last year.

Moving on to our plan, we are encouraged by the trend in improving sales of Amerinet, one of the five largest GPOs in the nation. We are seeing double-digit growth. That's not hard to accomplish when sales are so low, but we are working on ways to accelerate sales under that agreement. It will be a slow process, but it is moving in the right direction.

Over the last two years, we reduced our expenses by about $1.6 million, so we're pretty lean and we intend to continue to maintain our vigilance on costs. The sale of our building back in August has created some additional expense for us. It's about an $11,000 per month higher expense for occupancy, all related to amortization and imputed interest associated with the capital lease that we were required to book associated with that transaction.

From a cash perspective, it has been a trade-off. We don't spend more in cash than we were before, but the accounting treatment of it does require that we post more in expenses associated with occupancy now than we did related to that capital lease.

We have introduced several new products over the last few years, as you're all aware. And we will be introducing some additional new products in the coming six to 12 months, that are then being worked on. The ThermoStim probe continues to be a popular item and about 80% of the units of the ThermoStim probes we sell requires sale of a base unit with it, so it has been a very big help in that regard.

And we are continuing to sell approximately 40 of the ThermoStim probes a month.

We have been working diligently on being sales reps and dealers to provide better coverage and deeper market penetration. The new products we have introduced has been a real incentive to attracting those reps and dealers.

The first time in our history were starting to see some real movement on international sales. Our international sales managers returned from a trip to the Far East, meeting with a -- our future distributor in China and getting a read on where we're at on getting approvals there. And it appears we are very close. And in Southeast Asia as well as in Japan getting new Solaris Plus products approved.

For the next year, we believe we will start to see a significant improvement in international sales. The distributor in China alone with the previous vendor they represented did over $2 million in purchases of products like ours. And we would be replacing that distributor.

Many of you may be aware that our relationship with [Finance] Bank that has been in place for about 20 years is coming to an end. The line of credit that we had with them was extended through the end of February, but they have required that we find other financing, as they were not inclined to renew the line of credit. That was unfortunate. We regretted that because we have had a great relationship with them for quite a long period of time.

But we have moved forward, and we have signed a term sheet and have an agreement in principle with a new asset-based lender to replace the line of credit facility with Zion. That new facility will start out as a $3 million facility and the interest rate will be more than double by the time we're done unfortunately because of the nature of the land that is made. Instead of the commercial line of credit, it is an asset-based line of credit. So those are a little more expensive.

We did back in September file an S3, where we announced the potential of [rating] additional capital. That was being done partly in anticipation of the acquisition we were contemplating. It is a self registration that is still active. We filed this, as I mentioned, in anticipation of the acquisition.

But it is still active and we anticipate that there may yet be an opportunity to utilize that filing. But of course before we do, it would require filing of additional documentation to the SEC that would (technical difficulty).

So bottom line, we regret that the targeted acquisition that we were working on failed because of the expense that was then imposed on the last six months. Had we removed that expense from the last six months, we would've been at a $50,000 profit for the six-month period compared to about $100,000 loss from the year before despite the reduction in gross profit margin that we experienced in the second quarter.

So the fact that sales are turning around and are improving now instead of declining, and the fact that we are -- that we would've been significantly more profitable absent those nonrecurring costs and as evidence that our situation is improving. And we're moving in a direction that I believe will help the Company to build on a positive note instead of fighting the negative currents that we have been fighting for the last 30 months.

So the factors that will affect our performance in the coming months -- obviously health reform will continue to be a factor as well general economic conditions. Acceleration of sales under the Amerinet contracts, our international sales could be a factor getting in the coming quarters, probably not -- we might start to see something in Q4, but more likely Q1 and Q2 of the next fiscal year capitalizing on the new products we have introduced and introduce some additional new products and expanding our distribution capabilities.

And we'll of course continue to be vigilant in maintaining our operating efficiencies and costs and we'll continue to look for opportunities such as the one that failed in this last quarter. And we will continue to look for opportunities to build shareholder value not only organically, but if there are opportunities through an acquisition that makes sense, we would consider that as well.

With that explanation, I'll open the phone lines and ask the operator, Victoria, if you would give instructions on how they can ask questions, I will entertain those questions and they can get some answers.

(Operator Instructions) And it looks like there are currently no questions over the phone.

Well, okay. I guess I was thorough enough in my explanations. We certainly would welcome questions. If you want to call in and speak to me or Bob Cardon that you come up with after we terminate this call, I would be happy to take those questions. We are confident about our future and we believe that things are turning in the right direction and that opportunities ahead are much more promising that they have been in the past 30 months.

And we appreciate your continuing support and I hope that that positive outlook will be reflected in the stock.

And one last opportunity for any questions. Victoria, has anybody registered anything before we terminate the call?

And there are currently no questions in queue.

Okay. And with that, we'll thank you all for being on the call today and appreciate your ongoing support. Thank you.

Ladies and gentlemen, that does conclude the webinar call for today. We thank you for your participation and ask that you please disconnect your lines.