Dynatronics Corp (DYNT) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Dynatronics Third Quarter 2020 Earnings Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host, Brian Baker, President and CEO. Sir, the floor is yours.

Good morning, and thank you for participating in today's call. I'm Brian Baker, President and Chief Executive Officer. And with me today is our recently appointed Chief Financial Officer, John Krier; and Skyler Black, Corporate Controller and Head of Investor Relations. We hope you, your families and friends are healthy and remain safe.

This morning, we issued a press release announcing the financial results of our third quarter ended March 31, 2020. On today's call, I'll provide some initial commentary, and then turn it over to John for our financial report. Following John's report, I'll provide closing remarks and then have the operator open the phone lines for questions.

Before we begin, let me remind you that during the course of this call, we may 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 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 are included in our most recent 10-K and other reports filed with the SEC. In addition, the uncertainties and risks related to the impact of COVID-19 pandemic on the business results. We 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.

I'll begin by welcoming John Krier as our newly appointed Chief Financial Officer. John brings years of well-rounded executive leadership experience in multiple functional areas in addition to finance. Most recently, John was a Vice President at Breg, which is a long-standing partner of Dynatronics and an important player in the orthopedic soft goods, athletic training and physical therapy markets.

At Breg, he had responsibility for commercial operations, including billing services revenue, marketing, reimbursement, patient service, customer experience, communications and brand strategy. In addition to leading our finance organization, John will be responsible for our commercial teams. I am pleased John is joining our executive team, and I look forward to partnering with him to lead the company.

Now I want to take a moment to thank our employees for their unwavering commitment to the company during this challenging time. The COVID-19 impact to our business, employees and community is unprecedented, and the effects have been and remain fluid. I'm proud of our team's response to this ever-changing situation. Our management team quickly responded by implementing modified systems and processes to enhance employee safety while keeping our facilities operational to satisfy customer demand for our products.

In addition, our employees have been nimble and creative, implementing new ways to support our customers and our communities in the fight against COVID-19. We have provided bedside cabinets, overbed tables, temporary and pop-up medical facilities, distributed disinfectant products to our dealer supply channels, and we are manufacturing face masks for local hospitals and health care workers. While these products do not contribute significantly to overall revenues, our actions have been important and meaningful to our employees and customers in supporting the frontline medical professionals during this pandemic.

In response to the initial impact that COVID-19 has had on the U.S. economy, our teams reacted quickly and decisively to control costs and manage working capital. We accelerated the already planned consolidation activity from Utah to Minnesota, resulting in roughly a 20% permanent headcount reduction. Our operations teams also discontinued the use of contract staffing and furloughed production employees to align our capacity with reduced near-term demand.

We eliminated all discretionary spend for fiscal '20 and deferred nonessential capital expenditures to fiscal '21. Our supply chain leaders quickly took steps to rightsize incoming materials and adjust inventory management accordingly. Our finance team is providing extra focus on collecting receivables and is negotiating extended payment terms with many of our suppliers. We are optimistic that many of these new process enhancements will contribute in meaningful ways, even when business normalizes.

We have also taken important steps to improve our access to working capital in this uncertain environment. We secured a $3.5 million Paycheck Protection Program loan to cover payroll costs and other qualified expenditures, and we raised approximately $2.3 million in cash through the issuance of 3.2 million shares of common stock through our ATM facility. We also continue to have a very collaborative relationship with the Bank of the West under our asset-based loan facility, and we have remained in compliance with the financial covenants in that loan facility.

In working with our customers, suppliers, employees during this difficult time, I've seen the best in people. My leadership team and I value these key relationships and are humbled to see so many good people come together in support of the large and national, international community at this critical time.

Now I will turn the call over to John to provide the financial report. John?

Thanks, Brian, and good morning, everyone. First, I want to thank Brian and the Board of Directors for this opportunity to join Dynatronics. Although new to Dynatronics, I'm not new to our industry, products, competitors or customers. My background has served me well over my first 2 months leading the financial and commercial teams.

Joining the organization on March 23, in the middle of the COVID-19 pandemic, has brought unique challenges. But the Dynatronics team was ready to execute on a clear set of priorities. I'm impressed with the focus and flexibility of the team, its commitment to restructuring the business to drive future profitability and cash flow in the face of challenging revenue declines.

I will now provide our financial report. Net sales for the third quarter ended March 31, 2020, decreased $845,000 or 5.8% to $13.7 million compared to $14.6 million in the same quarter of the prior year. The decrease was primarily due to a reduction in sales of physical therapy and rehabilitation products. Notably, sales were particularly challenged in the last 2 weeks of March, which would have been traditionally the strongest weeks of the quarter.

Gross profit for the quarter decreased $461,000 or 10.5% to $3.9 million, representing 28.8% of sales compared to $4.4 million or 30.3% of sales in the same quarter of the prior year. Lower sales were the primary cause of the decrease, reducing gross profit by approximately $256,000. The decrease in gross margin percentage to 28.8% from 30.3% contributed $205,000 to the reduction in gross profit. These reductions were driven primarily by lower sales volume in our physical therapy product lines.

Selling, general and administrative expenses for the quarter increased approximately $89,000 or 1.9% to $4.9 million compared to $4.8 million in the same quarter of the prior year. The increase was primarily due to an increase in severance costs of $257,000, partially offset by lower selling expenses of $219,000, consisting primarily of fixed sales management salaries and lower commissions.

Net loss for the quarter was approximately $1.1 million compared to a net loss of $563,000 in the same quarter of the prior year. Depreciation, amortization and other noncash expenses were $488,000 in the quarter. Cash flow from operating activities was negative $367,000 in the quarter, but positive $2.5 million for the 9-month period.

As of March 31, 2020, we had cash balances of approximately $1.5 million. We have an $11 million asset-based line of credit, pursuant to which we had borrowed $6.4 million. More recently, as of mid-May and taking into account the proceeds from the Paycheck Protection Program loan and the ATM, our cash balances are averaging approximately $4 million, and our line of credit balance is averaging about $3 million. We have availability on our line of credit of about $4 million based on our current borrowing base.

The number of common shares at the end of Q3 was 10.4 million, which increased 458,000 in the third quarter due to a conversion of Series C preferred to common. Considering the shares issued in April under the ATM, the company currently has approximately 13.8 million common shares outstanding. And including the preferred shares, the total is 17.5 million. Excluding any future transactions, which may take place under the ATM, we expect our outstanding common shares to normally increase in the range of 240,000 per quarter, depending on our share price.

This concludes our summary of operating results. I will now provide comments on the business. We withdrew our previously provided guidance for the remainder of our fiscal year, anticipating that sales, profitability and operating cash flow will be negatively impacted in the fourth quarter ended June 30, 2020. We further explained that we are unable to forecast the breadth or depth of COVID-19 impact on the business. We believe that legal and practical limitations on clinicians having access to patients and clinics, the deferral of elective procedures to free up hospital capacity to address the pandemic as well as the reluctance of patients to engage with medical practitioners are the primary drivers of reduced near-term demand for our products.

Further, customer deferral of CapEx spending and the resulting temporary delay of new facility openings has impacted and will likely continue to impact capital equipment sales. For the month of April, we experienced an approximate 2/3 reduction in revenue related to these negative impacts. Our cost reduction and cash flow-conserving measures are designed to partially offset the impact of these reductions in revenues. Due to the continued uncertainty, we will not provide forward-looking guidance for the business.

I will now turn the call back over to Brian.

Thank you, John. In closing, I'd like to express my appreciation to our employees, customers and investors for their support during this time. We all recognize the unprecedented challenges we are facing. As the result of COVID-19, we have been forced to act decisively in a rapidly changing environment.

We have implemented a number of new processes in order to effectively manage this crisis. Those include applying for the Paycheck Protection Program loan, holding weekly telephonic meetings with Bank of the West and frequently updating our forecast, including cash flow estimates, among others. Through these decisive and early actions, we have better positioned the business to navigate this period of uncertainty and beyond.

Dynatronics employees remain committed to keeping our plants operational to safeguard supply of our quality products to health care workers while making employee safety job one. We continue to monitor changes in the commercial, financial and regulatory environments and look forward to returning to a more normalized economic environment.

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

(Operator Instructions) We'll take our first question from Nathan Weinstein with Aegis Capital.

So I guess if we just think about the organization and your current expectations for when patient volumes in the end markets might start to come back, if they were to come back faster or if they were to take longer than currently expected in both of those scenarios, kind of what's your organization's ability to adjust?

Yes, we can be adjusting very quickly to volumes as they start to increase, Nathan. We have our furloughed employees that have the ability to come back in 20 hours of notice. So we're able to flex in labor very quickly as needed. And we're also staying in close contact with all of our suppliers, Nathan. Many of those key suppliers have our materials ready to ship as soon as we need to come back to normal demand. So I think we're well positioned to ramp up very quickly.

And then in terms of virtual capabilities of the organization, have you done any virtual sales and marketing efforts?

Yes, Nathan, we've -- I think from an IT perspective, we had to get our networks working really well so that we could start doing virtualization, and we get that activity pretty quickly. And then I'll ask John to just weigh in here.

Yes, absolutely, Nathan, great to hear your voice. I think from a sales and marketing perspective, we've been communicating with our sales reps daily, talking to our key customers in our calls where they can. Admittedly, most of the practices directly are focused on their own employees and their own patient care. And so we're being delicate with the sales and marketing activities at that line. But we're absolutely in communication with our key dealers, our customers around the country and our sales force.

And I suppose just one more for me. I'm curious about your supply chain. And have you noticed that it's become more difficult or challenging to secure materials across the product portfolio?

No, we haven't seen any of those challenges, Nathan, in supply chain. As I mentioned earlier, we're staying in very close contact with key suppliers. They actually have a delivery stage to ship to us as soon as we're ready to receive those materials back in. A big piece of that is when we are managing our suppliers, we were in communication with them very early on in the process. And they did have things staged to us, so they're willing to push out deliveries. And that's why we've got the supply in queue when we're ready to receive those materials in.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

So I guess I'm trying to get a better sense of your Q4 and May, in particular. Obviously, no one can read into June yet. But are you seeing some bounce back in May? And what are you seeing out with the clinicians in the field as facilities begin to open up in particular states?

Yes. I think, Jeff, just the discussion we talked about in our remarks was focused on what we've seen in April. We're not implying that, that has any bearing on the future. What we do know is what's happening in April. We are, to your point, watching what is happening in each of the states as they reopen. As you know, they're not opening up consistently all at once. And so each of those markets will be different. They'll have different impacts on our business, where our dealers are touching, and we look forward to seeing that rebound.

Got it. And I'm just trying to get a recap on the balance sheet and some of the cash flow movements. So $3.5 million for the PPP, $2.3 million in the ATM, and I believe the total available on the ATM is $6.4 million, if I'm not mistaken, and then $1.5 million of cash, $6.4 million borrowed out of $11 million on the line of credit. Was there anything else I missed there?

I think that's correct.

Okay. And the share count you gave at 13.8 million was as of when?

That's as of the 24th of April.

The 24th of April, okay. So has any more of the ATM have been used since your commentary on the 3 -- $2.3 million from the 3.2 million shares?

No, that share count is still accurate.

(Operator Instructions) Sir, there appear to be no further questions at this time.

Okay. Thank you for your questions and for your interest in Dynatronics. If you have any further questions, please direct them to our Investor Relations contact, Skyler Black.

Operator, you may end the call.

Thank you. This does conclude today's teleconference. We thank you all for your participation. You may disconnect your lines at this time, and have a great day.