Q3 2021 Dynatronics Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Dynatron ex third quarter 2021 earnings call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host Skyler Black the Companys principal accounting officer Skyler the floor is yours.
And 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 and projections and financial performance relating to our business.
These forward looking statements reflect our views 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. A day are included on our most recent 10-Q and other reports filed with the SEC and include 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.
We have included a slide deck as part of our presentation, which is available on the webcast. If you haven't registered for it. If you have not you can find it usually on our investor page at <unk> Dot com.
Directly and the middle of our Investor Relations homepage.
Thank you Skyler and good morning, and thank you for participating in today's call on John career, and President and Chief Executive Officer of <unk> and with me today are our principal accounting officer, Skyler, Black and our Chief Financial Officer Norm Regner.
On today's call, we will cover the highlights and achievements of the quarter the year to date and we will also discuss the transformational projects that we announced on April 22nd just a few weeks ago.
Normal provide commentary on the financials and then we will have the operator open the phone lines for questions.
First I want again to thank our employees partners customers and all stakeholders for their continued hard work and perseverance during the COVID-19, disruptions health and safety for our team and partners remain top of mind, and we work hard to preserve our business and protect our people here at <unk>.
We are committed to responding responsibly to the challenges of the global pandemic.
We issued a press release this morning announcing the financial results of our fiscal year 'twenty 'twenty. One third quarter ended March 31, 2021, we have been planning and executing and ongoing business transformation over the past nine months, while simultaneously dealing with a global pandemic that has impacted our business significantly.
We continue to experience gradual reopening and and uptake and rescheduled procedures at the facilities, we serve and we believe this bodes well for our future growth.
Skyler has reviewed the forward looking statements on slide two of the presentation materials. So let's go straight to slide three which we think is worth revisiting at this stage of the turnaround.
Our transformation is being led by a new management team of Dynatron X you can see norms and my background on this slide.
Last quarter, we introduced norm Ragnar as our Chief Financial Officer. He brings over 20 years of executive financial and operational leadership to the company and was most recently vice President of finance for the medical Pharma solutions Division of Philips <unk> <unk> company.
Norm has brought operating discipline and planning talent Dynatron X and led the team that developed the streamlining plan that we announced on April 20 <unk>.
Moving to slide four the markets that we serve are large growing and fragmented.
<unk> is building a scalable platform to grow its customer and revenue base and generate sustainable cash flow. So that we create value for our shareholders.
The industry research indicates that the rehabilitation and bracing and support markets continue to exhibit an attractive growth profile and as I mentioned at the beginning the statistics of facility reopening orthopedic procedures and other activities that create demand for our products are on the rise.
Please turn to slide five.
While each of these bullets is very important to our growth platform I am going to primarily discuss the three emphasize points, which.
And which are described in more detail on slide six.
Looking at slide six goal number one is to drive sales growth and better partner with customers.
To better allow us to accomplish this goal we are eliminating approximately 600 skus of low margin third party distributed products with annual revenues of approximately 11 million and our rehabilitation segment.
These products were low or no growth carried low are unacceptable margins and we're not our own manufactured products.
The forward looking strategy is to one focus sales and marketing resources on products manufactured by Dynatron X and to streamline sales exclusively to dealers, thereby eliminating perceived competition with customers from historic direct sales efforts.
Moving to the dealer channel is a strategic move to simplify our business strength in our revenue platform and generate cash.
Over the past few weeks I and my team have been able to discuss this change with our dealer partners and the response has been overwhelmingly positive.
Goal number two is to expand margins and profitability.
As a company we are going to focus on higher margin differentiated products that we manufacture.
We will be consolidating support functions to reflect this focus and we will be targeting significant increases in EBITDA and profitability.
Eliminating 11 million worth of revenues that generated the low margins is going to have a positive effect on our company's gross and EBITDA margins.
Goal number three is to strengthen the balance sheet via sustainable cash flow from operations, which can support additional investment and or M&A and target markets.
Norm will get to the balance sheet, but it is very important to note that in addition to the cash we show as of March 31, and 2021, we are expecting additional cash to come in through the employee retention credit that we detailed in our press release and proceeds from the announced sale of our Tennessee facility.
Slide seven is a snapshot of the before and after picture from our announced projects the.
And the consolidation of our facilities will reduce our facility overhead by 40%.
We have executed a purchase and sale agreement on the Tennessee facility as I've mentioned.
We are eliminating satellite offices in Michigan, and Texas that supported our distributed products operations.
And are reducing our Utah footprint by nearly 75%.
Second, let's focus on brand emphasis and simplification.
Here is what transitioning to a full dealer model means.
First we are not trying to do something that hasn't been done before currently approximately 65% of our rehabilitation revenue is transacted with dealers and and moving fully to a dealer model. We are following what we see being done by the most successful medical products companies in our businesses.
Enhancing 100% of our management focus on our brands will lead to additional support to our customers and product innovation opportunities. So that we can provide the greatest experience to our customers.
Looking to slide eight accomplishment.
Got it and go through the slide frame by frame I'll talk about what I'm hearing from our customers as we've approached them about the new focus.
And each of the conversations it is clear that this is a welcome change.
By sharpening our focus on our dealers, we have the opportunity to build our industry, leading brands and generate new sales.
We are continuing to add leadership talent strengthen our balance sheet and take necessary actions to begin our fiscal year, 2020, two with a clear path to organic revenue growth and profitability.
Building on the foundation of these accomplishments provide let's move to slide nine M&A strategy.
We continue to pursue acquisitions innovation partnerships and other business ventures and have the balance sheet and leadership team to execute on any that meet our well defined criteria.
I'd like to now turn the call over to norm to go through the financial details that include a rundown of sales gross margins operating expenses and the bottom line.
Thanks, John.
Please turn to slide 10, which contains our quarterly financial highlights.
Full income statement and management's discussion and analysis can be found and the 10-Q and I will summarize them here.
Net sales of $11 5 million for the quarter ended March 31, 2021 were down from $13 7 million and last year's quarter, which was a 16.4% decline.
For the nine months ended March 31st 2021, net sales were $35 6 million compared to $45 3 million.
The year over year decrease was primarily due to COVID-19 precautions and.
And associated changes and electric procedures, which reduced demand for our products.
Gross profit for the three months ended March 31, 2021 decreased <unk> 6 million to $3 3 million or 28, 8% on sales compared to $3 9 million or 28, 8% of net sales.
Gross profit.
For the nine months ended March 31, 2021 decreased $3 1 million to $10 5 million or 29, 7% of sales compared to $13 6 million or.
32% on net sales.
The year over year decrease and gross profit and gross margin percent was primarily attributable to lower sales and COVID-19 impacts, which reduced gross profit and changes and the mix and sales and our major product categories.
Excluding the $75000 attributable to the employee retention credit.
Gross profit for the quarter ended March 31, 2021 was $3 2 million or 28, 2% of sales.
Selling general and administrative expenses of $3 9 million represent a 20% year over year decrease from.
And from $4 9 million and last year's period.
For the nine months period, SG&A was down $2 4 million compared to the prior year period, due primarily to lower commission expenses on lower sales.
And decreased payroll and benefit cost as a result of head count reductions.
Excluding the $98000 a tribute to the employee retention credit SG&A for the quarter ended March 31, 2021 was $4 million.
Getting to the bottom line net income was 0.1 billion for the quarter compared to a loss of $1 1 million and last year's same quarter.
Net loss was 0.9 million for the nine months ended March 31 and 2021.
Compared to a net loss of $1 1 million for the nine months ended March 31 2020.
The improved net loss was attributable to our benefits and the employee retention credit deep.
Decrease in SG&A and interest expense offsetting a decrease in gross profit.
Excluding the $1 million attributable to the employee retention credit.
Net loss for the quarter ended March 31, 2021 zero point $8 million.
$747000 on the employee retention credit remains due at March 31 2021.
And it will be received and cash in the coming months.
The balance sheet is and our strong position with a net cash position.
And our 10-Q, Youll see a paycheck protection program or.
P. P P loan of approximately $3 5 million on.
And the balance sheet.
Based on our review of the loan forgiveness rules. We believe this amount will be forgiven and full and thus, we're not including and our net debt calculation.
You will see that our share count is up as well and in addition to the dividend paid with 225000 shares of common stock. We also took advantage of the conditions and the market and late February to draw on our ATM we.
We sold $2 2 million shares with an average sale price of $1.61.
And I think $3 $5 million and net proceeds.
Cash improved to $4 5 million at the end of Q3, FY 'twenty, one up 103% from June 30 of 2020.
We have a zero balance on our line of credit and a borrowing base of approximately $4 $5 billion as of the end of Q3 fiscal year 'twenty one.
Also you will see on the balance sheet and held for sale line items and the 845000.
Which is the book asset value of the Tennessee facility that we are in contract to sell with the purchase and sale agreement executed on April 2nd 2021.
The contract sales price for the facility is $1 seven and $5 billion and we expect to close no later than June 30 of 2021.
Moving to slide 11.
Here's what we see for the future outlook related to the business optimization announcement on April 22nd.
John will talk to the strategic points again, and his wrap up with you or the technical points.
Moving to fiscal year 2022, you're planning for and reduction of approximately $11 million and annualized net sales as we finalize this transition.
The company expects to record approximately $1 2 million and restructuring charges.
Of which 0.4 million. This is expected to result in cash expenditures.
The majority of these costs will be and our Q4 FY 'twenty one.
Financial results.
More generally the company and its customers expected to experience continued challenges due to COVID-19.
Including reduce capacity and operating hours and supply chain disruption and extended handling times.
We expect some continued volatility ahead.
And to the ongoing pandemic and the business changes announced in late April.
Given the ongoing disruption and execution of the changes announced it will be reasonable to expect choppiness in the coming quarter.
As a result, we will continue our recent practice of not providing forward looking guidance.
This concludes our summary of operating results and we'll now turn the call back to John.
Thank you norm.
As I reflect on slide 12, and the investment highlights for Dynatron X. Each statement is reflective of a set of actions designed to deliver results.
Our business optimization plans remained our top priority during the quarter with a clear focus on driving organic revenue growth profitability and cash flow from operations.
We are well capitalized with $4 5 million of cash on the balance sheet and additional cash infusions coming from the sale of our Tennessee facility receipt of proceeds from the employee retention credit and operating a business that generates consistent cash flow from operations.
Overall, we anticipate good progress in all of these key strategic areas in our fiscal year 2020 two.
We are excited to be moving down to tronox and the direction that we're both reward our shareholders and provide a consistently differentiate experience to our customers.
I will now turn it over to the operator for questions.
Thank you ladies and gentlemen on 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 do ask if you are listening via speakerphone. Please pick up your handset for optimum sound and quality. Once again, if you have any questions on.
Comments, Please press star one on your phone now.
Our first question today is coming from Jeffrey Cohen. Please announce your affiliation and then pose your question.
Oh, good morning, Hi, Skyler, drawing and norm how are you.
Good morning, Jeff gradually voice.
So.
Bunch of questions sure so.
Norm you were talking about the.
Shell of the building hopefully closing in on them.
Next quarter by June what was the commentary about the.
Purchase and sale leaseback or do you expect the on the one point, so far just to flow through into the balance sheet directly.
Yes.
Thanks, Jim.
Yes, we plan to close this quarter and it will flow back to the balance sheet.
Net proceeds will be just under $1 7 million.
Okay got it and can you walk me through how the on employee retention credits are working.
And $747000.
Yes, that's what's remaining for the year see collection and our other receivables at quarter end.
Okay got it and then you sold some shares what were see 1.61 million insurers or two parts humor insurers and 161.
Yes, and yes.
We did we sold an aggregate of $2 3 million shares common stock under the equity distribution agreement and the ATM and the average.
Sales price of 161 per share.
Net proceeds from the sale of the shares totaled $3 5 million proceeds were used to strengthen the company's liquidity and working capital position.
And the ATM is still available. However, we have not had any additional activities since the February transactions.
Okay got it and so share count this quarter's 15, eight three and all of that conclude by the end of March and you expect the share count to be similar and the fourth quarter.
Yes, our current share count is $17 4 million shares after those transactions.
Got it okay. So that'll be the on the Q4 number presumably or aricept.
Yes.
Yes.
Okay got it and then two of these charges for Q4, the 400 cash and 800, a non cash restructuring.
Well I see that will on the 400 cash show up under on it and it will be included in SG&A and the fourth quarter, and then and noncash restructuring will show up on where.
Jeff we're still working on what those charges are actually going and b and determining what those charges are as important to determine the location.
Later to impairments or severance they might be presented differently. So we'll we'll provide an update and the next filing on that.
Okay got it so and Ah.
Is any production or our current business being concluded out of Tennessee, now or has your building and virtually on vacating and ready for sale.
And Jeff. This is John we were vacated and ready for sale at the end of December and then added actively on the market. So there is no activity being conducted and the facility.
Okay and as far as our Skus have those already been paradigm and you talked about Charlie a reduction of six to 800.
Of those has that largely been concluded or it's underway now.
It is not concluded it is underway now our intention and goal stated goal is to have that complete by the end of our fiscal year, but we're actively working on that as we speak.
Okay and it looks like the Q3 margins were on a slightly higher.
Over Q2, and I, she and one of your slides aspiration we.
40 ish percent call. It so how much I look over the next five quarters or so do you expect that to be a gradual tick up or do you expect it to be step like and fashion.
So I think we're still evaluating the impact of the announcement on April 22nd and what that's going to do it here on margin. So we do expect the margins to improve and fiscal year 'twenty two over fiscal year 'twenty one and.
And there should be and improvements, but we aren't giving any guidance exactly how that'll look on what those numbers would be at this point.
Okay.
Perfect and I think that those are for us thanks for taking the questions.
Thank you. Our next question today is coming from Scott Henry.
Please announce your affiliation and then pose your question.
Roth capital Good morning, guys.
Just a couple questions first you know.
And for my background knowledge.
What exactly is and employee retention credit.
Okay.
Okay.
Yeah. So it's a program that was done.
Helped by the government and.
And it's essentially a credit based on your <unk>.
Employee salaries over a quarter.
Debt is meant to credit the company two to encourage employers to keep their payrolls full during the pandemic.
Okay, and and you have another I think did you say another 740000.
And from that program and and should we get all of that and your fiscal Q4.
So we so the original 963000, we took and the third quarter.
There is still 747000 and outstanding debt.
We should be refunded from the government over and during the fourth quarter. Additionally, there is the ability to earn similar retention credits.
Sure.
Quarter on fiscal year 'twenty one.
And in terms of day calculation and how that works.
On the amount of the credit and the calculation is based on employee payroll and the quarter and whether the company experienced a revenue decline greater than 20% and.
And the quarter compared to the same quarter and calendar year 2019.
In addition, there is a mechanism and the rules and regulation allows companies to calculate for future quarters based on the prior quarter.
Okay. Great. That's helpful. Thank you and then when we think about fiscal fourth quarter on.
I mean should we expect.
And I know you're going to do all this pruning.
S. K use but you know some of that May come on the last day of fiscal fourth quarter. Some may come on the first quarter shall we think of the fourth quarter as sort of a transition from say the current run rate to the.
2020 two run rate, so probably somewhere in the middle there is that the right way to think about that and and on the cost side.
Are those are the costs like the S T and a cut backs.
Is that typically a lag and perhaps we'll see that more and 2022, then fiscal fourth quarter, just trying to think of.
How we should how it should sequentially change next quarter right.
So I think the way to think about it we run in about $12 million and sales on average over the last three quarters and prior.
Prior to the discontinued.
Product announcement on April 22nd we're planning for fourth quarter to be similar debt level, and obviously with the discontinuation of products.
And that number will be impacted by that.
In terms of the timing of it I mean, we're gonna over the quarter continue to obsolete products, taking them out of the mix as they sell out of inventories. So there will be some impact on our fourth quarter.
And should bring it down from net average.
Overall from an SG&A perspective.
We're going to evaluate it throughout the quarter and seem to make some changes to align on.
Our operating costs with the new go forward model, but it'll happen over the quarter and and be in effect for the first quarter of fiscal year 'twenty, one excuse me fiscal year 'twenty two.
Okay, Great and then maybe a bigger picture question for John.
And you've got the cash balance built up.
Helpful as you'd look for acquisitions.
How do you view kind of the timeframe on acquisitions.
Are you.
Heavily active now where are you getting through the restructuring right now and you know would you expect to to do something over the next six months, obviously, there's no guarantees but would that be a goal of yours.
Scott, we're actively involved and those conversations and those activities need to run in parallel meaning the execution of this transformation and this discontinuation of these products, we announced on April get those wrapped up by the end of this fiscal year as our and certainly our intention and then if the right opportunity presented itself, we'd like to take advantage of the acquisition on the timing front, that's always unpredictable.
Because it takes two parties to make that happen and as you noted, but the other point that I would just emphasize as you know our balance sheet is the strongest that it's been with zero on our line of credit the cash plus the cash coming in and so as the opportunity presents we feel we feel good about the chance to <unk>.
To execute one.
Okay.
Perfect I guess, just one final if and when.
And when should we expect the 10-Q.
To be file.
Scott and the 10-Q has been filed just right before this call.
Okay perfect Alright, Thank you for taking the question.
Thank you Scott.
Yeah.
Thank you. Our next question today is coming from Anthony Vendetti. Please announce your affiliation and then pose your question.
Thanks Maxim group.
Sure so.
I know the.
The SKU rationalization should be done by June.
But John I, just want to understand it right. Because this is the second SKU rationalization one before.
Sure.
Watch before and and.
I guess is it.
Going to be and ongoing process.
I know this is a big this is a big move.
<unk> hundred but.
How often do you review your Skus because you obviously you have a lot of them.
And after June is it just going to be some slight pruning or could there be.
Even more SKU rationalization and after June.
Good morning, Anthony it's a good question.
My standard answer always and these conversations is a well run and medical device medical products company active product lifecycle management is just part of what you need to do on a daily basis that being said this was much different. This was a significant review of the Skus and our rehabilitation portfolio, where we drive value where our customers.
We're leaning from us where our opportunities and margin or any changes from here I would see likely more on the innovation, where we're adding but there would always be some slight tweaks to the overall product portfolio on the orthopedics bracing and supports I think we would have a little bit more opportunity and not only on the innovation side, but and streamlining but nothing as material as what we announced today. So I would view the go forward look.
And being more of just the traditional active product lifecycle management.
Okay, great and that was actually a.
Good lead into my question and you already started to talk about innovation.
As you go on through the SKU rationalization, you're looking at.
Innovation and I think you mentioned.
And we're looking at higher margin products or at least at the current margin or better.
Going forward can you give us an idea of how many.
Particular products you're looking at is it is it a handful is it 10 to 20 on the innovation side.
I would think that from a cadence perspective, we want to be and the routine nature of releasing new products or enhancing existing products. We have we don't have a specific number in mind, but we're gonna be targeting where we see opportunities on the market. We released the two new products in early January which were part of our Q3 and we've put in place the resources and the mechanisms to be able to release products going forward.
We should start to see a more routine cadence of new products coming out and to add to our organic revenue growth.
Okay, Great and then just lastly.
A follow up on the acquisition front.
Do you have a.
A range in terms of.
The value of an acquisition.
In other words.
Could you do a fairly large acquisition versus a bolt on acquisition and if so how would you how would you finance debt.
When we look at acquisitions the size will obviously be determined by you know where the where the company fits into our portfolio and the strategic angle of it the cash on our balance sheet. The line of credit availability that we would have we can certainly expand our line of credit under the $11 million facility based on the assets of the entity that we may acquire so I think the exact <unk>.
Financing structure would be dependent on it if it is a larger deal we would have to look at a variable financing options to be able to do that if it's a deal that's within our current assets that we have been and the balance sheet. The line of credit we could if we could execute that with what we have available. So we will tailor the exact financing to the target.
Okay, Great and then just the last question on on COVID-19 as we go through our medical device portfolio.
Most most facilities are open.
And most medical practices have reopened for the ones that are reopening on.
And.
Access to hospitals is opening up its not fully theres still some hospitals, where you have limited access but.
Would you say that debt.
The COVID-19 headwinds are largely behind you.
I don't know that I would say, they're largely behind us I would say that they are definitely.
Easing in terms of exactly what you just described the uptick and procedures, the uptick and patient volumes and Theres also a good portion of our business debt, whether it be schools sports and not just the the proteins. They get all the publicity out there that they're returning but we also need the the colleges and the lower level colleges and the high schools to resume to that full activity level that drives some of our activity.
And the athletic training room, or even some of our bracing and supports products. So I wouldn't say that they're behind us I would say that we definitely see them easing as we all do with the momentum and we think that that bodes well for our future growth.
Okay, great that makes sense I'll hop back in the queue. Thanks.
Thank you. Our next question today is coming from Evan Greenberg. Please announce your affiliation and then pose your question.
Legend Caf opportunity fund.
Congratulations on.
All the great work, you've done and the restructuring and I'm very excited to be a shareholder and.
Looking forward to volume or more Sop now one on one of the questions I have.
And I'm very very glad you you you sold you sold the property and I really don't think.
Our company should be and the real estate business, where and when they're in and the product business.
Have you thought about other mechanisms other than the ATM such as perpetual preferred.
And for potential financing, so that you don't need to dilute the common equity perpetual preferred has actually been one of the great enhancement of shareholder value that I've seen and I know there are numerous investors out there looking for yield and the great thing about it is it.
It sits on the balance sheet as equity it doesn't go on there is debt, even though you are paying a dividend.
Thank you yeah. Good good morning, Ivan Thank you for your question, we will continually evaluate all of the available options and make sure. It's a good fit for us. So I appreciate that comment there and that is something we'll always keep looking on is the right financing options for the organization.
Okay and.
And one more thing.
Can you give me an idea of what kind of margins with the products you eliminated where we're creating because obviously the.
And that that was a detriment to the company. It was not a very very good use of cash to continue to sell those products.
And and how much do you expect.
This rationalization of product to increase gross margins by is it.
Is it 5% is it 10% is it more than that.
You know I would hope it would be significantly more than like the 102 hundred basis points.
You know of and the way that I would consider that is that when you look at our run rate of our gross margin coming through the end of Q3 and then these products, we've characterized as low or unacceptably no margins that are in there. So.
Having the fact that those relieved from it we should be able to certainly grow our margins, we're not providing any guidance as to what that is at this point, while we worked through the transition.
Okay, Okay, but what can you give me an idea of what kinds of gross margins that were being provided on an average SKU from the ones from the products you eliminated.
What I would say to that Evan is that given given the overall percentage and that these were on the lower end of that spectrum. It would stand to reason that theyre going to be lower than our current average that we present and a quarter.
Okay. Thanks.
Thank you that is all the time, we have for questions today Mrs.
Mr. Corey or do you have any closing comments you'd like to finish with.
Thank you Kate and thank you all for the questions and for your interest and Dynatron X. If you have any further questions. Please direct them to skyler black or Peter Salisbury their contact information is in this presentation and in the press release issued earlier this morning on.
Operator, you may on the call.
Thank you, ladies and gentlemen, and this does conclude todays event you may <unk>.
Connect at this time and have a wonderful day. Thank you for your participation.