Dynatronics Corporation (DYNT) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Dynatronics Third Quarter 2021 Earnings Call. All lines have been placed on listen-only mode and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Skyler Black, the Company's Principal Accounting Officer. Skyler, the floor is yours.
Skyler Black: 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. 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.
John Krier: Thank you, Skyler. Good morning and thank you for participating in today's call. I'm John Krier, President and Chief Executive Officer of Dynatronics. And with me today are our Principal Accounting Officer, Skyler Black; and our Chief Financial Officer, Norm Roegner. 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 22, just a few weeks ago. Norm will 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 Dynatronics. 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 2021, third quarter ended March 31 2021. We have been planning and executing an 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 reopenings and an uptake in 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 at Dynatronics, you can see norms and my background on this slide. Last quarter, we introduced Norm Roegner 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 Medisize, a Molex company. Norm has brought operating discipline and planning talent to Dynatronics and led the team that developed the streamlining plan that we announced on April 22.
Norm Roegner : Thanks, John. Please turn to Slide 10, which contains our quarterly financial highlights. The full income statement and management discussion analysis can be found in 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 in last year's quarter, which was a 16.4% decline. For the nine months ended March 31, 2021 net sales were $35.6 million compared to $45.3 million. The year-on-year decrease is primarily due to COVID-19 precaution and associated changes in electric procedures, which reduced demand for our products.
John Krier: Thank you. As I reflect on Slide 12, and the investment highlights for Dynatronics, 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 receive a 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 2022. We are excited to be moving Dynatronics in direction they'll both reward our shareholders and provide a consistently differentiated experience to our customers. I will now turn it over to the operator for questions.
Operator: Our first question today is coming from Jeffrey Cohen. Please announce your affiliation then pose your question.
Jeffrey Cohen: Okay, good morning. Hi, Skyler, John and Norm, how are you?
John Krier: Good morning, Jeff. Great to hear voice.
Jeffrey Cohen: So a bunch of questions here. So normally, you're talking about the sale the building hopefully closing in next quarter by June. What was the commentary about the purchase and sale? Was there a leaseback or do you expect the $1.75 million just to flow through into the balance sheet directly?
John Krier: So thanks. So yes, we plan to close this quarter and it'll flow back to the balance sheet. Net proceeds will be just under $1.7 million.
Jeffrey Cohen: Okay, got it. And can you walk me through how the employee retention credits are working? You mentioned $747,000.
John Krier: Yes, that's what's remaining for the year collection in our other receivables at the quarter ends.
Jeffrey Cohen: Okay, got it. And then you sold some shares. What was the 1.61 million shares or 2.2 million shares at $161 ?
John Krier: Yes, we did. We saw the aggregate of 2.3 million shares common stock into the equity distribution agreement and ATM, the average sale price of $161 per share that proceeds from the sale of the shares total 3.5 million proceeds were used to strengthen the company's liquidity and working capital position. The ATM is still available. However, we have not had any additional activity since the February transactions.
Jeffrey Cohen: Okay, got it. And so share account this quarter's 15.8 did all that conclude by the end of March and you expect the share count to be similar in the fourth quarter?
John Krier: Yes. So our current share count is 17.4 million shares after those transactions.
Jeffrey Cohen: Got it, okay. So that'll be the Q4 number presumably as of ?
Norm Roegner: Yes.
Jeffrey Cohen: Okay guide and then two of these charges for Q4 the 400 cash and the 100 non-cash restructuring? Well, I see that will be the 400 cash show up under will be including an SG&A in the fourth quarter. And then the non-cash restructuring will show up where?
Norm Roegner: Jeff we're still working on what those charges are actually going to be and determining what those charges are as important to determine the location. If they're related to impairments or severance, they might be presented differently. So we'll provide an update in the next filing on that.
Jeffrey Cohen: Okay, got it. So is any production or current business being concluded out of Tennessee now, or has the building been largely vacated and ready for sale?
John Krier: 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's no activity being conducted in the facility.
Jeffrey Cohen: Okay, and as far as SKU of those already been pared down, you talked about John, a reduction of 1600 of those has that largely been concluded or it's underway now.
John Krier: 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.
Jeffrey Cohen: Okay, it looks like the Q3 margins were slightly higher over Q2, and I see in one of your slides aspirationally 48%, call it So how might that 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 in fashion?
Norm Roegner: So, I think we're -- you know, still evaluating the impact of the announcement on April '22, and what that's going to do with your margin. So, we do expect the margins to improve at fiscal year '22 over fiscal year '21. There should be an improvement, but we aren't giving me a guidance exactly how that'll look or what those numbers will be at this point.
Jeffrey Cohen: Okay, perfect. I think that those are for us. Thanks for taking the questions.
Operator: Thank you. Our next question today is coming from Scott Henry. Please note your affiliation. Then pose your question.
Scott Henry: I'm from ROTH Capital. Good morning, guys. Just a couple questions. First, you know, for my background knowledge, what exactly is an employee retention credit?
John Krier: Yes, so it's a program that was developed by the government. And it's essentially a credit based on your employee salaries over a quarter that is meant to credit the company to encourage employers to keep their payrolls full during the pandemic.
Scott Henry: Okay, and you have another, I think, did you say another 740,000, coming from that program and should we get all of that in your fiscal Q4.
John Krier: So the original 963,000, we took in the third quarter, there's still 747,000 outstanding that we should be refunded from the government over and during the fourth quarter. Additionally, there is the ability to earn similar retention credits during our fourth quarter of fiscal year '21. In terms of a calculation how that works, the amount of the credit and the calculation is based on employee payroll in the quarter. And whether the company experiences a revenue declined greater than 20% in the quarter compared to the same quarter in calendar year 2019. In addition, there's a mechanism and the rules regulation allows companies to calculate for future quarters based on the prior quarter.
Scott Henry: Okay, great. That's helpful. Thank you. And then when we think about fiscal fourth quarter, are we should we expect? I know you're going to do all this pruning of the SKUs. But, some of that may come on the last day of fiscal fourth quarter, some may come on the first quarter, should we think of the fourth quarter is sort of a transition from, say the current run rate to the 2022 run rate. So probably somewhere in the middle there is that the right way to think about that and on the cost side? Are those are the costs like the SG&A cutbacks is that typically lag and perhaps we'll see that more in 2022, then fiscal fourth quarter, just trying to think of how we should how it should sequentially change next quarter?
John Krier: So I think the way to think about it we run in about 12 million in sales on average over the last three quarters and prior to the discontinued product announcement on April 22, we're planning for fourth quarter to be similar at that level. Obviously, with the discontinuation of products, that number will be impacted by that. In terms of the timing of it, I mean, we're going to over the quarter continue to obsolete products, take them out of the mix as they sell out of inventory. So there will be some impact in our fourth quarter. And it should bring it down from that average. Overall, from an SG&A perspective, we're going to evaluate it throughout the quarter and continue to make some changes to align our operating costs with the new go forward model, what will happen over the quarter and be in effect for the first quarter of fiscal year '21. Excuse me, fiscal year '22.
Scott Henry: Great. And then, you know, maybe a bigger picture question for John. You've got the cash balance built up. Such as helpful as you look for acquisitions. How do you view kind of the timeframe on acquisitions? And are you heavily active now? Or are you getting through the restructuring right now? And, would you expect to do something over the next six months? Obviously there are no guarantees but would that be a goal here?
John Krier: You know, Scott, we're actively involved in those conversations. And those activities need to run in parallel, meaning the execution of this transformation and this discontinuation of these products we announced in April, get those wrapped up by the end of this fiscal year is our certainly our intention. And then if the right opportunity presents 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, as you noted, but the other point that I would just emphasize is, you know, our balance sheet is the strongest that it's been with zero on the line of credit, the cash plus the cash coming in. So as the opportunity presents, we feel good about the chance to execute one.
Scott Henry: Okay. Perfect. I guess just one final. When should we expect the 10-Q to be filed?
Norm Roegner: Scott, the 10-Q has been filed just right before this call.
Scott Henry: Okay, perfect. All right. Thank you for taking the question.
Norm Roegner: Thank you, Scott.
Operator: Thank you. Our next question today is coming from Anthony Vendetti. Please announce your affiliation, then pose your question.
Anthony Vendetti: Thanks, Maxim group. Sure. So I know the skew rationalization should be done by June. But, John, I just don't understand it. Right, because this is the second skew rationalization one before your watch before and I guess is it going to be an ongoing process? I know this is a big this is a big move 1600. But how often do you review your skews because obviously you have a lot of them. And after June, is it just going to be some slight pruning or could they be even more skew rationalization after June?
John Krier: Good morning, Anthony. It's a good question. My standard answer always in these conversations as a well-run medical device, medical product 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 skews in our rehabilitation portfolio, where we drive value where our customers are leaning from us, where our opportunities and margin are any changes from here, I would see likely more in the innovation where we're adding. But there would always be some slight tweaks to the overall product portfolio. On the orthopedics bracings in support, I think we would have a little bit more opportunity not only on the innovation side, but in streamlining, but nothing as material as what we announced today. So I would view the go forward look being more of just the traditional active product lifecycle management.
Anthony Vendetti: Okay, great. That was actually a good lead into my question, you already started to talk about innovation. So as you go through the skew rationalization, you're looking at innovation, and I think you mentioned you'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 a handful, is it 10 to 20 on the innovation side?
John Krier: I would think that from a cadence perspective, we want to be in the routine nature of releasing new products or enhancing the existing products we have. We don't have a specific number in mind, but we're going to be targeting where we see opportunities in 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. So we should start to see a more routine cadence of new products coming out to add to our organic revenue growth.
Anthony Vendetti: Okay, great. And then just lastly a follow up on the acquisition front. You have 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 finance that?
John Krier: When we look at acquisitions, the size will obviously be determined by 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 the line of credit under the $11 million facility based on the assets of the entity that we may acquire. So I think the exact financing structure would be dependent on it. If it is a larger deal, we'd 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 meaning the balance sheet, the line of credit, we could execute that with what we have available. So well, we'll tailor the exact financing to the target.
Anthony Vendetti: Okay, great. And then just the last question on COVID, as we go through our medical device portfolio, most facilities are open. Most medical practices have reopened for the ones that are reopening. Access to hospitals is opening up not fully, there's still some hospitals where you have limited access. But would you say that that the COVID headwinds are largely behind you?
John Krier: I don't know that. I would say they're largely behind this, I would say that they're definitely easing in terms of exactly what you just described the uptick in procedures, the uptick in patient volumes. There's also a good portion of our business that whether it be school, sports, and not just the proteins that get all the publicity out there that they're returning. But we also need to the colleges and the lower level colleges and the high schools to resume to that full activity level that drives some of our activity in the athletic training room, or even some of our bracing and supports product. 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.
Anthony Vendetti: Okay, great. That makes sense. I'll hop back in the queue. Thanks.
Operator: Thank you. Our next question today is coming from Evan Greenberg. Please announce your affiliation and then pose your question.
Evan Greenberg: Legend Cap Opportunity Fund. Congratulations on all the great work you've done in the restructuring. I'm very excited to be a shareholder and looking forward to buying more stock now. One of the questions, I'm very glad you sold the property, I really don't think companies should be in the real estate business where when they're in the product business. Have you thought about other mechanisms other than the ATM, such as perpetual preferred for potential financing so that you don't need to dilute the common equity? Perpetual preferred has actually been one of the great enhancers of shareholder value that I've seen, and there are numerous investors out there looking for yield. And the great thing about as it sits on the balance sheet has equity doesn't go on there as debt, even though you're paying a dividend. Thank you.
John Krier: Good morning Evan, thank you for your question. We'll continually evaluate all of the available options and make sure it's a good fit for us. So you know, appreciate that comment there. And that is something we'll always keep looking at as the right financing options for the organization.
Evan Greenberg: Okay, and one more thing. Can you give me an idea of what kind of margins the products you eliminated we're creating is obviously 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 how much do you expect this rationalization of product to increase gross margins by is it 5%? Is it 10%? Is more than that? I would hope it would be significantly more than like 100 or 200 basis points.
John Krier: No, have in 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 work through the transition.
Evan Greenberg: Okay. But can you give me an idea of what kinds of gross margins were being provided on an average skew from the ones from the products you eliminated.
John Krier: What I would say to that, Evan, is that given the overall percentage and that these were on the lower end of that spectrum, it would stand to reason that they're going to be lower than our current average that we present in the quarter.
Evan Greenberg: Okay, thanks.
Operator: Thank you. That is all the time we have for questions today. Mr. Krier, do you have any closing comments you'd like to finish with?
John Krier: Thank you, Kate. And thank you all for the questions and for your interest in Dynatronics. If you have any further questions, please direct them to Skyler Black or Peter Seltzberg. Their contact information is in this presentation and in the press release issued earlier this morning. Operator, you may end the call.
Operator: Thank you. Ladies and gentlemen this does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
