Q2 2021 Dynatronics Corp Earnings Call
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Good morning, ladies and gentlemen and welcome to the dynatronics second-quarter financial year 2021 earnings call at this time. All participants have been placed off. The only mode on the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Skyler black sir. The floor is yours.
Thank you operator before we begin. Let me remind you that during the course of this call. We will make forward-looking statements regarding our current expectations plans projections and financial performance relating to our business with these forward-looking statements reflect our view as of today only and they involve risks and uncertainties that could cause 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 today are included in our most recent 10-K and other reports filed with the month and include uncertainties and wrists 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. Thank you Skyler, good morning. And thank you for participating in today's call. I'm John career president and chief executive officer of dynatronics and with me today are our principal accounting Officer Skyler black who has been a leader within our finance group since January 2018 and our Chief Financial Officer Norm Regner who joined the company in November and was introduced on our last earnings conference call. We issued a press release this morning announcing the financial results of our second quarter ended December Thirty One twenty four fiscal year, 2021, and on today's call. I have some prepared remarks to provide an update on our achievements in the quarter and off all positioning and then I will turn it over to Norm for the financial report at the conclusion. We will have the operator open the phone lines for questions.
first I would like
To think our employees Partners customers and all stakeholders for their continued hard work and perseverance through the trying time of COVID-19 health and safety for our team and partners remain top-of-mind and we continue to do our best to preserve our business and protect our people here at dynatronics. We are committed to responding responsibility to the challenges of the global pandemic. We have included a sled deck as part of our presentation which is available on the webcast if you have registered for it, and if you have not you can find it on our investor page at dynatronics Skyler reviewed the June statement. So let's go to slide three. I'd like to introduce myself and the executive team at dynatronics to provide some color as to our Collective resources and experience that we have brought to life company and our excitement at the significant changes underway. I've been CEO of the company since July 2020 prior to joining dynatronics. I was involved in the management of Orthopedics and bracing companies for nearly wage.
Seventeen years. I started to get to know the dynatronics team several years ago while working for brag a significant dynatronics customer brag is owned by Water Street HealthCare Partners, which is a Thursday at Equity Firm with an extensive track record of success in building great Healthcare companies at Bragg and predecessor companies. I helped execute thirteen successful Acquisitions growing break revenues significantly by building a compelling and sustainable business model. We had industry-leading organic growth and we had an unwavering commitment to customer experience with the Mantra to make it remarkably easy for our customers to choose us our team at dynatronics has that same focus in mind and our industry fundamentals are very similar to Bragg's
Norm Regner who joined us three months ago brings over 20 years of executive financial and operational leadership to dynatronics. Most recently Norm was Vice President of Finance for the Medical Solutions division of phillips-medisize a Molex company during his extensive work at multiple Molex companies normal Ed Financial execution across the commercial organization supply chain and Manufacturing operation. It's well known within the industry that Koch Industries the parent company of Molex has a culture that recognizes operating discipline. So welcome, Norm
We will hear from Norm in just a few minutes.
Moving to slide for the markets that we are serving our large growing and fragmented there is an opportunity here for dynatronics to build a scalable business grow. Its customer Revenue base generate sustainable cash flow so that we create value for our shareholders the industry research and indicates that the rehabilitation and bracing and support markets continue to exhibit unattractive growth profile. As you can see on the slide with both of these markets expected to grow in excess of 5% per year towards an estimated $6 billion in annual sales in 2025 from under 5,000 today drivers of this growth include aging population higher levels of obesity and an increased Focus On Wellness all of which are accelerating demand for rehabilitation support systems also importantly Physicians and Clinics continue to move towards a more conservative treatment style for injuries and the proliferation of physical therapy facilities. Nationwide has been evident for the past decade.
at least
It seems fair to expect that people are going to always want to live healthier and longer lives. Thus there should be demand for our products and we'll get to a market snapshot shortly.
Please turn to slide five at the top of the slide. You can see initiatives important to our success and moving dynatronics to a market valuation that reflects execution of our strategy and financial model. We have begun and will continue to take actions to accomplish these Financial objectives for dynatronics. It's important to acknowledge that the COVID-19 demek continues to present serious business challenges including disruption to our customers and the supply chain which will continue to result in choppiness for the next several months.
I want to remind investors that historically there has been some seasonality to our business in which our sales are often a little higher in the first quarter. And the fourth quarter in sales are a little lower in the second and third quarters looking forward. We are planning for sales and gross margin to be in line with the quarter ended December 2020 due to the COVID-19. We are operating in a similarly. We are planning for cash flow from operations to be negative in the third quarter due to seasonality the negative impact from COVID-19 and planned inventory increases wages. We adjust for the disruptions in the global supply chain. We are targeting are returned to positive cash flow from operations in the fourth quarter.
Our team is accelerating our business optimization and product portfolio rationalization. I'm confident that our experience transformation team is focused on the right strategies in growth markets to build a competitive and sustainable business and financial model with higher sales margins and free cash flow.
Please turn to slide 6 for the results. We achieved in the second quarter at a high level before getting into the quarterly comparisons and what we achieved in the quarter. Our team is committed to improve operating leverage and generating cash continuing on our path to up level the leadership team and maintaining the strongest balance sheet possible from which to grow our business the financial highlights include an odd cash flow for the quarter of 1.5 million which represents an increase of 34% compared to the prior quarter you $1.21. We reported net sales of approximately twelve million, which was within one per-cent of what we had in the prior quarter and from a transformation perspective. The fact that we were able to stabilize revenues in the COVID-19 environment was significant considering the challenge described a moment ago on the expense side. We realized a 7% reduction in sg&a relative to the prior quarter benefiting from matching Staffing facilities inventory month.
And procurement to customer demand including reviewing our customer accounts and Order activities.
We ended the quarter with zero borrowings on the line of credit and overall. We had net cash of 3.5 million with a borrowing base of approximately 5.4 million on the $11 asset-based line of credit. I'd like to now turn the call over to Norm to go through the financial details that include a more traditional rundown of sales gross margins operating expenses and the bottom line.
Thanks, John.
Please turn to slide seven which contains our quarterly financial highlights the full income statement and management discussion. And Analysis can be found in the 10-q and I summarize them here.
Net sales decreased 3.2 million or 21.2% to 12 million for the quarter ended December 31st, 2020 compared to net sales of 15.2 million for the quarter ended December 31st, 2019 not sales decreased 7.5 million or 23.7% to 26.1 million for the six months ended December 31st, 2020 compared to net sales of 31.6 million for the six months ended December 31st, 2019. The year-over-year decrease is primarily due to COVID-19 precautions and Associated changes in elective procedures, which reduced demand for our products month. We continue to have no significant customer concentration and none of our customers accounted for more than 10% of sales in the quarter.
Gross profit for the quarter ended December 31st, 2020 decreased 1.2 million for about 27.1% the 3.3 million or 27.9% of net sales by comparison gross profit for the quarter ended December 31st, 2019 was four point six million or 30.2% of net sales gross profit for the six months ended December 31st, 2020 decreased two point five million or about 25.6% to 7.2 million or 13.1% of net sales by comparison gross profit for the six months ended December 31st, 2019 was nine point seven million or 30.8% wage that sales.
Year-over-year decrease in gross profit and gross margin percent was primarily attributable to lower sales and COVID-19 packs which reduced gross profit off and changes in the mix of salesmen in our major product categories selling General and administrative expenses decreased zero point seven billion or 14.7% to 3.9 million for the quarter ended December 31st, 2020 compared to four point six million for the quarter ended December 31st, 2019. Selling expenses decreased zero point five million compared to the prior-year. Do you primarily to lower commission expense on lower sales and decrease sales manager salaries in general and administrative expenses decreased zero point two million compared to the prior-year. Driven primarily by a decrease in payroll and benefit,
as a result of headcount Redux
Selling General and administrative expenses decreased one point four million or 14.2% to 8.2 million for the six months ended December 31st of 2020 compared to nine point five million for the six months ended December 31st, 2019 reductions were attributable to the same factors as in a quarterly factors. I just imagined getting to the bottom line net loss was 0.7 million for the quarter ended December 31st, 2020 compared to Jersey zero point 1 million for the quarter added the suburb 31st 2019.
Net loss was 1.1 million for the six months ended December 31st, 2020 compared to $39,000 for the six months ended December 31st, 2019.
The higher net loss was attributable to a decrease in gross profit partially offset by a decrease in sg&a and a decrease in interest expense as a result of lower average borrowings on our home credit.
As John mentioned the balance sheet is in better shape than it's been in three years with a net cash position in our 10-q. You'll see a paycheck Protection Program or p p loan of approximately 3.5 million on the balance sheet based on our review of the loan forgiveness rules. We believe this amount will be forgiven in. We are not including it in our net that calculation that net cash position was 3.5 million as of December 31st 2020.
Also worth mentioning is that as of February 1st. I'm pleased to say we regain compliance with the NASDAQ minimum bid requirement of $1 per share. So if you do see it, we did file an 8K on February 1st, and we are in full compliance with the NASDAQ listing requirements.
This concludes our summary of operating results. I will now turn the call back to John I believe so we're on the right track to stability and then to growth we broke these activities down into a few groups as you can see on the slide and I'll highlight a few of the actions taken leadership hires outside of stabilizing our Revenue base and the safety of our employees. This has been a major Focus area implementing Partners in leadership cultural change focusing our employee actions to overall organic Revenue growth and consistent profitability.
The Tennessee facility is now fully exited listed for sale and being marketed through a broker in Turley or group purchasing organization or intalere. GPO agreement is extended for life or three years this Builds on our twenty-plus year relationship with intalere and we share this contract with the three industry leaders embracing and supports djo brag and 6 2 new products recently announced both Hausman tables reflecting opportunities for organic growth and margin expansion.
turning to
M&a strategy our m&a strategy is detailed here to give you an idea of what we will be looking for we continue to have conversations with potential merger partners and to age or product opportunities that may exist as we have strengthened. Our leadership team's execution capabilities and our balance sheet. We are positioned to be opportunistic as Acquisitions took a present.
Let's turn to slide ten.
Dynatronics is undergoing optimization starting with an aggressive experienced management team seeking to build a competitive and sustainable business model. I'm confident that we have the strategies revenues and the commitment to re-energize the customer experiences. We deliver at the same time. We are continuing to pair our cost structure to meet the market demand at attractive gross. Margin. Our employees are culturally aligned to see all of these metrics improved substantially given sometime dynatronics as well respected Brands which stand the test of time and irrelevant projects portfolio serving growth markets. We are developing a culture focused on optimizing resources and applying discipline Financial models to investment decisions. We have generated cash flow from operations, and we have no debt other than the PPP loans and our management incentive compensation is linked to revenue and ebitda growth.
It takes commitment talent and focus to build a great business and as you'll see on slide eleven, we've accumulated some outstanding senior level Talent here many coming to us within industry experience. We continue to benefit from our continuing association with Brian Baker. With whom I have worked closely before Brian has c-suite experience at great competition like Integra and see spine are most recently announced tire was RJ Smith who was heading up our customer experience team. I have also worked with RJ before I knew r j as in Echo sales and marketing leader and he was the recipient of numerous accolades in his nearly ten years at Bragg including being named Bragg cultural champion of the year, which was an award given to outstanding contributors page even breaks key results of organic Revenue growth and expansion RJ's focus on results and collaborating with the other members of the leadership team make him the kind of leader. We wanted dynatronics.
Our employees across all of our locations will continue to assess and adapt to the changing market conditions related to COVID-19 and react accordingly. We have demonstrated this ability over the past thousand dollars resulting in a stabilization of our business despite the significant disruptions to our end-user customers.
While we remain committed to taking steps to build from here throughout calendar 2021 and into fiscal year 2022. I want to maintain a cautious Outlook page managing change and we've got the added layer of COVID-19 that are still out there affecting our customers and the supply chain given the ongoing disruption. It would be reasonable to expect some choppiness as we drive the company forward into a growth model as a result. We will continue our recent practice of not providing forward-looking guidance.
We appreciate.
And thank our investor base and employees for their ongoing support and commitment to dynatronics. I will now turn it over to the operator for questions.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask your question you please pick up your handset if listing on speaker phone to provide Optimum sound quality. Please hold while we pull for questions.
And the first question is coming in from Jeffrey Cohen, Jeffrey, please announce your affiliation and pulls your question.
Oh, hi, John, Norman Skylar. How are you? Good morning, Jeff great your voice. So we've done some work on this and we just trying to get your sense to Thursday. We speaking on a provision packed and culverts effect on the markets, which you serve more specifically, you know rehab rehab and and you know what time it looks like it sounds like and feels like it's bottomed out or you seeing any signs of growth over the past two or three months and took your take on disruptions out there. And you know where stabilization has occurred or will occur.
Yeah, thanks Jeff. I would look at it like this. We're looking at are the patient volumes largely stabilizing. I think you see that in our revenues in Q2 compared to q1. One of the area's that's interest for us is given the breadth of the markets we serve the impact of that stabilization is a little bit different. So what's happening in athletic training in schools may be different than what's happening with physical therapy facilities both Prime and the acute idn locations versus Ambulatory Surgery centers, but I think largely we would look at it as those volumes have stabilized but there was certainly choppiness in Q2 with the spike of Tobit activity, and we're looking forward to to Q3.
Okay, got it and some commentary in the margin front feels like you continue to you know, do some work there has that Bond them down for Thursday. You have you discontinued Lawrence or unproductive and added on other products and lines which are more productive. I'm driving that hire.
Sure, you know Jeffrey, good morning. How are you doing today? Thanks for calling in terms of the margins. Have you saw obviously margins dropped a bit from a commercial. So from few hundred and that was really driven by a favorable product mix we saw in q1, but didn't bleed into Q2. So going forward. We think that the margins office point for Q3 should be in line with this second quarter results and in terms of products and we were always looking for opportunities to improve the margins and new products as part of that the releases with our house would take if I come in we'll we'll see you some improvement there, but generally we're looking for Q3 to be in line with you to this point.
Yep. Okay got it. And then last you could you talk about the m&a front and
Charlie address some of the slides and you know where your aspiration are looking for, but it seemed like out there that there's there's more activity going on or less activity or you can see need to be as busy as you have been on the phone.
Thanks, Jeff. We do continue to be as busy as we have in the past actively having conversations with with merger Partners, especially those that are complementary in the categories that we participate in. So we'll continue to do that with the nice part is where we've landed the balance sheet with our cash position and the acid base line of credit being available to us that continues to be an opportunity for us. So we'll we'll have that be an active part of our strategy on going and continuing.
Rep regarding and lastly for me. I know you give nothing forward-looking. But any commentary thus far on how the year has gone. It seems like from your revenues being a relatively stable the last two quarters. We share anticipate that that's a good level to think about as conditions are not changing much on the direction. That's right, Jeff. We're planning four similar activity as what we had in Q2 the challenge that's out. There is is the choppiness and COVID-19 packs that come up and down with with a different markets that we serve. But that is what we're building the business around and planning around.
Perfect. Okay the test for me. Thanks for taking the questions. Thanks, Jeff.
Thank you. And the next question is coming from Scott Henry Scott you please answer your affiliation and pulls your question. Thank you. Good morning. Just a couple questions that may just expand on a few of the prior questions. I guess for for starters gross margins. It was probably a a couple years ago. But at one point the corporate goal was noted as about 40% The question is a longer-term. Not not just looking at them this fiscal year, but as business comes back on speed do you think those higher levels are still attainable or should we be thinking that the long-term number, you know, maybe maybe lower maybe maybe 35% would be the long-term Target.
Thank you.
John I don't know if you want to jump in on this one at this point, but what I would say in general, you know, we're looking at history for going to try and they have been able to walk, you know that mid-thirties for a margin perspective and we're aiming to get back to that. I think we have some work to do obviously to get there we're looking at a lot of different options and and and doing a lot of different one on new product releases. Obviously we're looking there we've got some work doing our operation operating structure to to improve our margins. And and of course we're looking at it from a commercial perspective in terms of rationalizing products just start in line with our overall margin perspective and expectations. So there's a lot of work. I don't know if we really set a long-term Target, but knowing that dynatronics historically has gotten into the mid thirties. I think that's a fair goal for us to get back to
God I'll build on what Norm said as well that you know industry participants and in various categories have been able to achieve margins higher.
And so there's a reason that we need to be able to improve our operations in our business model to do that as well. But but throughout the year, it seems like you're starting to kind of bring out a newer product cycle. The question is, you know, how impactful can that be on the the Box?
Or on the top line, I should say absolutely and I think those two products are are are nice sign of us moving forward and joined us as our director of product marketing towards the end of our fiscal year q1 and this is a nice indication of that work starting to pay off. I would have two things to this those two tables are interesting in in two fronts while they're not going to materially they're not mature the revenue. They are both additive the first one being our Hausman treatment table was a combination of two products from our former Tennessee facility in our New Jersey facility and the ability to bring it into one with the features of both so we could then have an opportunity to expand our gross margin similarly the second table. We we release the stand-in table was a product that we had traditionally sourced from another provider in sold in the market place. We were able to bring that design in-house produce it in our New Jersey facility grow revenues with it and expand our gross margin. So that is a sign of of some of the work that we're looking for and we do believe Thursday.
Launches and releases will be an important part of our future.
Okay, and I guess the final question just when I think about you know, that that Revenue growth coming through now, we recognize it's not going to happen in fiscal third-quarter and and probably not fourth quarter as well. Would you expect 2022 fiscal year to be a time when we do see this Revenue growth coming through assuming obviously.
You know from a I guess I'll start with the sg&a park and you know at this point we've scaled. I think the operating costs are estimated to the level. We're at and we're planning to maintain its near-term until we see a change in that Top Line number. So we feel pretty comfortable. I think it'll our plans to hold it there for the near term in terms of you know, when do we need to see the growth of the top line? I think world. We're aiming to start looking to see more growth in the second all starting in 2022, but probably as we go through the year, we should see some momentum with their revenue, but we've got to get through this quarter and it's in this year at this point and see where the the final numbers land.
Okay, great. And I guess just the final question. When should I expect to see the 10-q filing? Should that be today?
Yes. That would be just later this morning. Okay, great. Thank you for taking the question.
Thank you, and the next question is coming from Anthony vendetti Anthony, please announce your affiliation and pulls your question.
Thanks Maxim group. How you doing?
Thanks for thanks for joining in. Hey, how you doing? Hey Norma. Hey John, just just most of the questions been answered. But if she has had an impact on the business, it sounds like things are stabilizing which is great to here has it has been packed with the product mix to some extent and and if so, in what way and then glad to hear the about the new Houseman tables obviously combining those into one, you know provides gross margin opportunity. Can we just talk a little bit about other initiatives in in the product pipeline that could do something similar? Um, do you know if if you can't get too specific? You know, how many of those initiatives are in the in the pipeline at this point? Thank you.
absolutely, I think
Um Anthony if we look at the overall product mix given the categories we serve certainly are Orthopedic braces and supports has had a stronger mix compared to the rehabilitation equipment. If you look at a quarter-over-quarter so that if you looked at that overall from the company, you're seeing that play out on the on the individual product pipeline or category opportunities. You're right without being too specific. We have opportunities in each of our categories. I think the housing in tables shows an opportunity in the treatment equipment area. We've got opportunities in our Orthopedic bracing and supports line that we have and and in our thoughts of modalities. So the nice as we've added in individuals in our product marketing team and started to lean into this area will now be able to build a Cadence and a pipeline going forward that we can selectively release them to use that to build our revenues.
Okay, just on the Cove in pack has that that had had much impact in terms of the product mix or not real?
It has not for us, you know our product mix of being the modalities and the capital equipment with Hausman that has stayed consistent. We've not participated in any meaningful way on the supply side other than our traditional supply business that supports are modalities or our treatment equipment.
Okay, great. All right. Thank you. Thanks Anthony.
Thank you, and they were no other questions at this time. Thank you, and thank you for all the questions and for your interest in dynatronics. If you have any further questions, please direct them to Skyler black or Peter Salzburg. Their contact information is in this presentation and on the press release issued earlier this morning operator. You may end the call.
Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.