Dynatronics Corp (DYNT) 2018 Q2 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to the Dynatronics' Second Quarter 2018 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Kelvyn Cullimore. Thank you, you may begin.

Thank you very much. I want to welcome everybody to the Dynatronics Corporation investor conference call. We are going to review the results of our quarter ending December 31, 2017, which is the second reporting quarter of our fiscal year 2018. As was introduced, I am Kelvyn Cullimore Jr., Chief Executive Officer, and with me today is David Wirthlin, our Chief Financial Officer.

After the market closed today, we filed our 10-Q for the quarter ended December 31, 2017, and also issued the earnings press release. So before we begin our discussion, as a reminder, during the course of this 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.

So today, we're going to talk specifically about the operating results from the quarter and 6 months ended December 31, 2017. And at the conclusion of our commentary, the operator will open the lines for questions.

First, I wanted to bring you current on the most important events since the filing of our first quarter 10-Q on November 14. On October 2, 2017, we closed the acquisition of Bird & Cronin. We're pleased report that the acquisition of Bird & Cronin has gone very well. As you recall, they were operating as a manufacturing division of the company and continuing to sell through their established distribution channels of sales reps and dealers. Mike Cronin and Jason Anderson serve as co-presidents of that division, and they manage the operations as they have done over the past several years. There have been no significant surprises thus far in the integration process. The Bird & Cronin division continues to operate as expected and, indeed, had a strong first quarter as part of the combined company, reporting sales of $5.7 million. The morale of the employees is very positive, and there has been no significant attrition. Culturally, Bird & Cronin has been a very good fit.

As you may recall, we funded the Bird & Cronin acquisition in part with net proceeds from a private placement of our Series C preferred stock to institutional investors and our Series D preferred stock issued to the sellers. The Series C preferred and the Series D preferred automatically converted into common stock of the company upon shareholder approval, which we obtained on November 29, 2017, at our Annual Meeting of Shareholders. The company issued 1.36 million shares of common stock in conversion of a portion of the Series C preferred and nearly 1.6 million shares of common stock in conversion of all of the Series B preferred. Certain of the Series C preferred shareholders elected not to convert the preferred stock into common, and thereby forfeited all preferences associated with their preferred, including dividends, liquidation priority, voting rights and redemption rights. As of December 31, 2017, 1.44 million shares of this Series C preferred, commonly known as Toothless preferred, remained outstanding.

We're also pleased to report that the integration of the Hausmann acquisition, which we executed in April of last year, continues to proceed very well. And the division is contributing positively to our consolidated operating results. These 2 acquisitions have been positive first steps in executing our strategy to go by acquisition. Consistent with the direction we gave in November, we can -- we expect to operate at an annualized rate of approximately $65 million to $70 million in sales. And we believe we will generate a positive cash flow from operations.

I'll make a few more remarks at the closing, but for now I would like to turn the call to David Wirthlin, our Chief Financial Officer, to provide a financial report on the fiscal quarter ended December 31, 2017.

Thank you, Kelvyn. I will provide additional detail and color to the press release that was issued this afternoon.

There are a few factors that had a material impact on our operating results for the quarter and 6 months ended December 31, 2017. First, the acquisitions of both Hausmann in April 2017 and Bird & Cronin in October 2017 had a significant impact on the quarter and 6 months ended December 31, 2017. As Kelvyn noted, Hausmann's operating results are included in both the first and second quarters of fiscal 2018, and Bird & Cronin's operating results are for the first time included in our second quarter, and neither acquired operation is included in the comparative periods of the prior year.

Second, we incurred a significant legal and accounting fees and expenses in the first and second fiscal quarters of 2018 in connection with the acquisition of Bird & Cronin. Acquisition costs, included in SG&A expenses, were approximately $100,000 for the quarter and $314,000 for the 6 months ended December 31, 2017.

Third, we incurred approximately $325,000 in our second fiscal quarter of 2018 in expenses related to a research and development project, that after much analysis, we determined to abandon.

Net sales for the quarter ended December 31, 2017, increased approximately $9.4 million or 107.5% to $18.1 million compared to $8.7 million in the same quarter of the prior year. The year-over-year sales growth for the quarter came primarily from the inclusion of Hausmann and Bird & Cronin. Hausmann contributed sales of $4.4 million in the quarter and Bird & Cronin contributed $5.7 million. These increases were partially offset by a decrease of approximately $700,000 in net sales from Dynatronics legacy operations, that decline was primarily attributable to a single order of over $500,000 invoiced in 2017 that did not repeat in 2018.

Net sales for the 6 months ended December 31, 2017, increased approximately $40 million or 83% to $30.9 million compared to $16.9 million in the same quarter of the prior year. The year-over-year sales growth for the 6 months came primarily from the acquisitions of Hausmann and Bird & Cronin. Hausmann operations contributed sales of $9 million in the 6 months ended December 31, 2017, and Bird & Cronin added $5.7 million in the 6 months, all in the second fiscal quarter of 2018. These increases were partially offset by a decrease of approximately $731,000 in net sales from Dynatronics legacy operations, primarily attributable to the same single order in the second quarter of 2017 that did not repeat in 2018.

Gross profit for the quarter increased approximately $2.7 million or 87.7% to $5.8 million, representing 31.9% of sales compared to $3.1 million or 35.3% of sales for the quarter ended December 31, 2016. The acquisitions of Hausmann and Bird & Cronin are the primary year-over-year difference. Hausmann operations contributed $1.1 million in gross profit for the quarter, and Bird & Cronin operations contributed $2.1 million. These gross profit increases were partially offset by a decrease of approximately $451,000 in Dynatronics legacy operations, about half of that decrease was attributable to lower sales and the other half to reduced gross margin percentage. The year-over-year decrease in gross margin percentage to 31.9% from 35.3% was due primarily to the inclusion of Hausmann sales, which have a lower gross margin percentage in the quarter as well as reduced gross margin in Dynatronics legacy operations, primarily attributable to reduced margins on freight-charged customers.

Gross margin for the 6 months increased approximately $4.2 million or 72.3% to $10.1 million, representing 32.7% of sales compared to $5.9 million or 34.8% of sales for the 6 months ended December 31, 2016. The year-over-year increase in gross profit is attributable to the acquisitions of Hausmann and Bird & Cronin. Hausmann operations contributed $2.7 million in gross profit for the 6 months ended December 31, 2017, and Bird & Cronin operations contributed $2.1 million, all in the second fiscal quarter. These gross profit increases were partially offset by a decrease of approximately $525,000 in Dynatronics legacy operations, about 1/3 of that decrease was due to lower sales and the other 2/3 to reduced gross margin percentage. The year-over-year decrease in gross margin percentage to 32.7% from 34.8% was due primarily to the inclusion of Hausmann sales at lower gross margin and reduced margins on freight.

Selling, general and administrative expenses for the quarter ended December 31, 2017, increased approximately $2.3 million or 79.2% to approximately $5.1 million compared to approximately $2.9 million in the same period of the prior year. The primary drivers of the $2.3 million increase were $2.5 million of SG&A expenses from the Hausmann and Bird & Cronin operations, offset by $220,000 of decreased SG&A in Dynatronics legacy operations, primarily attributable to lower commissions. SG&A expenses included approximately $100,000 in acquisition-related expenses in the current quarter.

Selling, general and administrative expenses for the 6 months ended December 31, 2017, increased approximately $3.3 million or 59.1% to approximately $8.9 million compared to approximately $5.6 million in the same period of the prior year. The primary drivers of the $3.3 million increase were $3.4 million of SG&A expenses from the Hausmann and Bird & Cronin operations, offset by $115,000 of decreased SG&A in Dynatronics legacy operations due to lower commissions and lower sales. SG&A expenses included approximately $314,000 in acquisition-related expenses in the 6 months ended December 31.

Research and development expenses for the quarter ended December 31, 2017, increased $244,000 or 78.8% to $553,000 from approximately $309,000 in the quarter ended December 31, 2016. R&D expenses for the 6 months ended December 31, 2017, increased to $217,000 or 36.9% to $805,000 from approximately $588,000 in the quarter ended December 31, 2016. The increases in both the quarter and 6 months ended December 31, 2017, were driven by $325,000 in costs, incurred due to the abandonment of a R&D project during the second fiscal quarter of 2018.

Net income for the quarter ended December 31, 2017, was approximately $14,000 compared to a net loss of $95,000 for the quarter ended December 31, 2016. The $109,000 improvement in net income for the quarter was attributable to $2.7 million higher gross profit, offset by $2.3 million higher SG&A expenses and $244,000 higher research and development expenses. Net income for the 6 months ended December 31, 2017, was approximately $213,000 compared to a net loss of $381,000 for the 6 months ended December 31, 2016. The $594,000 improvement in net income for the 6 months was primarily attributable to $4.2 million higher gross profit, offset by $3.3 million in increased SG&A expenses and $217,000 higher research and development expenses.

Net loss attributable to common stockholders was $1.3 million for the quarter ended December 31, 2017, compared to net loss of $560,000 for the same period of the prior year. The $755,000 year-over-year increase is due to approximately $217,000 of additional preferred stock dividends, paid mostly in common shares associated with preferred stock issued in the past year, including Series A preferred in December of 2016; Series B preferred in April 2017, in connection with the Hausmann acquisition; and Series C preferred and Series D preferred issued in October 2017, in connection with the Bird & Cronin acquisition. The increase was also attributable to approximately $648,000 in additional noncash deemed dividends and accretion of discounts associated with the Series C preferred shares and warrants issued in connection with the Bird & Cronin acquisition. These increases were partially offset by $109,000 in higher net income in the current quarter compared to the same quarter of the prior year.

For the 6 months ended December 31, 2017, net loss attributable to common stockholders increased $369,000 to $1.3 million compared to $935,000 for the 6 months ended December 31, 2016. The increase in net loss attributable to common stockholders is due to approximately $594,000 in higher net income in the 6 months ended December 31, 2017, compared to the same period of the prior year, partially offset by $315,000 of additional preferred stock dividends, paid mostly in common shares associated with the issuance of preferred shares in the past year as well as an increase of approximately $648,000 in additional noncash deemed dividends and accretion of discounts associated with the Series C preferred shares and warrants issued in connection with the Bird & Cronin acquisition.

As of December 31, 2017, we had $3.7 million in cash. We had an $11 million asset-based line of credit, pursuant to which we had borrowed $6.7 million as of December 31, 2017. More recently, our line-of-credit balance is averaging approximately $5 million, leaving available borrowings of more than $3 million based on our borrowing base of approximately $8.5 million.

That summarizes the operating results. Kelvyn will make some final remarks before we open for questions.

Thanks, David. The completion of the Hausmann and Bird & Cronin acquisitions has been a major focus over the past several quarters, and the integration of those operations is proceeding well. We continue to hold discussions with numerous potential target companies and remain optimistic about our ability to achieve our goal of at least one acquisition per calendar year.

Looking forward, with inclusion of Hausmann for all of 2018 -- fiscal 2018, and Bird & Cronin for 3 quarters of fiscal 2018, we continue to expect consolidated revenues for our fiscal year 2018 to be in the range of $63 million to $67 million. We continue to target top line growth for the consolidated company in the mid-single digits. We've adjusted our expected gross margin and SG&A for fiscal 2018 slightly in response due to better visibility we now have on the acquired businesses. We expect our going-forward consolidated gross margin to be in the 32% range and SG&A to be about 31% of sales, including about $1.4 million or 2% of revenues and noncash charges.

As we explained in our last quarterly call, there is some seasonality to certain of our divisions. Bird & Cronin revenues have not historically varied significantly through the year. Hausmann's strongest quarter has historically been the quarter ended September 30. Lastly, Dynatronics strongest quarter has traditionally been our second fiscal quarter ended December 31. The weakest quarter for both Hausmann and Dynatronics has typically been the quarter ended March 31. Looking at the 3 businesses combined, we would conservatively model an average of $16 million to $17 million in sales per quarter if there were no seasonality. However, we would anticipate being on the low side of that range for the quarter ended March 31 and closer to an average for the quarter ended June 30.

Gross margins will also be impacted by the seasonality, with higher gross profit margins expected in the more productive quarters, while still averaging around 32% for the year. The additions of Hausmann and Bird & Cronin resulted in pretax profits for the first half of our fiscal year of $213,000, despite incurring $314,000 in transaction-related costs during the 6 months as well as $325,000 in expense related to the abandoned R&D project.

We expect to continue to improve operating profits and cash flow of the company relative to comparative periods in the prior year. During the remainder of fiscal 2018, we are focusing our attention on finding ways to improve operating margins within all divisions of the company. To that end, we have restructured our accounting and finance department. We hired a Corporate Controller and a financial planning analyst to provide additional resources to better analyze and improve gross profit margins and reduce operating costs.

We've also recently restructured our legacy Dynatronics sales and marketing management to streamline reporting and supervision as well as bring more attention and resources to the marketing efforts of the company, all of which is designed to provide sales growth, which is focused primarily on domestic sales.

The management team at Dynatronics is committed to serving our customers with safe and effective products, building our business through organic growth and acquisitions and enhancing shareholder value. We do appreciate the support that our shareholders provide.

We will now open the line to take questions from those of you who have dialed in for this call, so we'll turn the time to the operator.

(Operator Instructions) Our first question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

I guess just a couple questions. So firstly, I guess for you, David, as far as some of the commentary regarding the additional revenues from both acquisitions, Hausmann and Bird & Cronin, do you expect to do that forward? Or how will you consolidate revenues? Or will you talk about commentaries as far as the growth rates or addition from either of those divisions?

We don't intend to break it down. We're providing some commentary now because of the explanation year-over-year, but we do not intend to break it down in the longer term.

Okay. Got it. And then as far as the margins, you stated that you'd be targeting approximately 32% for the year for fiscal '18. So how does that look if you kind of x out a onetime charge from this quarter, it kind of gets you back over 32%, is that accurate to say?

Well, the onetime charge is in R&D expenses, not in cost of goods sold. So it won't impact the gross margin.

Okay. But as far as estimation purposes, 32% sounds like a good number for you for fiscal '18?

Yes.

Okay. Got it. And I guess lastly, or second to lastly, could you talk a little bit about the advanced modalities and Solaris in particular and its contribution over this quarter? And how that pipeline looks? Or how would you expect that to play out over the balance of the year?

The trends are similar to what they have been in past. Our focus is to grow sales of our higher-margin products, including Solaris. And to this end, we have added Zimmer to our therapeutic modality line. And we've seen growth of about 2% in our therapeutic modalities category for the 6 months ended December 31, 2017.

Okay. Got it. And then one more if I may. Lastly, ex-U. S. revenue, how did that look over the second quarter and how might that look over the subsequent quarters for the year as far as contributions to total revenues?

International revenue is not a big focus. It's less than 5% of our sales.

Okay. Are there any efforts underway to invigorate that or to have some further agreements or arrangements with other territories?

We don't have -- I mean, we continue to look for opportunities, but it's not the major focus of our marketing and sales efforts.

(Operator Instructions) Ladies and gentlemen, it appears we have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you very much. We appreciate everybody being on the call today, and we appreciate your continued interest in the company. That will conclude our call, and we will continue to stay in touch.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.