Ladies and gentlemen, hello and thank you all for joining this Dynatronics First Quarter 2020 Earnings Calls. All telephone lines are presently in a listen-only mode and instructions on how to submit a question will be shared after today’s prepared remarks.

As reminder, today’s session is being recorded and now for opening remarks and introductions I am pleased to turn the floor over to your host, Mr. Brian Baker. Welcome Brian..

Good morning, and thank you for participating in today’s call. I’m Brian Baker, President and Chief Executive Officer and with me is our Chief Financial Officer, David Wirthlin. We issued a press release this morning announcing the financial results of our quarter ended September 30, 2019.

Today, I’ll provide a brief commentary and then I’ll turn it over to David for a financial report. I’ll follow David’s report by confirming our guidance on the 2020 fiscal year. After conclusion, the operator will open the phone lines for questions.

I will now ask David to remind you of our reliance on the Safe Harbor under the Federal Securities Laws..

Thank you, Brian. 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 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 today are included in our most recent 10-K and other reports filed with the SEC. 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, David. Dynatronics delivered a profitable quarter that reflects the continued execution of our operating plan and achievement of our guidance. My team’s focus on operational improvements and cost reductions contributed to reduced SG&A, reduced cost of goods sold and improved cash flow from operations.

Management actions have created an improved foundation to scale the business for our organic revenue growth and future acquisitions, while many of these changes are not fully reflected in our financial statements our progress can be seen through the 572,000 reduction in SG&A and 178,000 increase in operating income compared to the first quarter of the prior fiscal year.

These incremental improvements have led to our highest level of operating income in two years. As an example of our operational changes we are making over the last year we have qualified a contract manufacturer to produce our Solaris product line. We have transferred approximately 50% of our demand to this vendor.

In addition, we’ve moved manufacturing of cut and sell products and a large portion of our wood products from our Tennessee facility to our Minnesota and New Jersey plants.

Our aim is to create centers of excellence across the organization that eliminate redundant manufacturing, enhance supply chain processes, and standardized quality systems while maintaining the highest level of customer care.

As we look forward to growth in the business, we will add two senior leadership positions to accelerate our organic and M&A growth strategies. These individuals will be joining me in Minnesota where we have begun to concentrate much of our senior leadership team. To drive organic growth we have created a role of Senior Director of Sales Operations.

This short term objectives for the role are to assess the competitive landscape product positioning and appropriate pricing strategies. In addition, the physician will lead initiatives to refresh product content and launch marketing campaigns to drive new product demand.

We've also created a General Counsel role that will support our M&A strategy specifically in contract negotiation, due diligence and integration. We'll share more information on these positions in the coming months. It is worth noting that the cost of these positions is proactive in our guidance.

Today, we are providing a report on our quarter ended September 30, 2019. Let me start by focusing on a few highlights. First, in the first quarter, we generated $2 million in positive cash flow from operating activities. We continue to manage the company without the need of outside capital to support ongoing operations.

Second, as I mentioned earlier, we have improved operational effectiveness and reduced costs. This is reflected by $572,000 reduction in SG&A, compared to the same period of the prior year. Third, we delivered on the most recent guidance.

We believe that consistent achievement of our guidance will build confidence with the investment community, our customers and employees. Our overall strategy for the company remains steady. We aim to become the recognized standard and restorative solutions.

For our fiscal year 2020, we will continue to focus on executing on our operational plan, positioning the company for modest mid single-digit organic growth and integrating future acquisitions. David will now provide a financial report..

Thanks Brian and good morning everyone. I am pleased now to review the financial performance during the quarter. Net sales for the quarter ended September 30, 2019 decreased $676,000 or 4% to $16.4 million compared to $17.1 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 in our direct channel. Gross profit for the quarter decreased $393,000 or 7.1% to $5.2 million representing 31.4% of sales, compared to $5.5 million or 32.5% of sales in the same quarter of the prior year.

Lower sales was the primary cause of the decrease, reducing gross profit by approximately $220,000.

The decrease in gross margin percentage to 31.4% from 32.5% contributed about $173,000 due to reduction in gross profit, driven primarily by lower sales volume in our physical therapy product lines and a lower portion of sales through our direct channel.

Selling, general, and administrative expenses which includes research and development for the quarter decreased approximately $572,000 or 10.4% to $4.9 million compared to $5.5 million in the same quarter of the prior year.

The decrease includes lower selling expenses of $302,000 consisting primarily of lower fixed sales management salaries and lower commissions and a decrease of $270,000 in other general and administrative expenses.

Net income for the quarter was approximately $99,000, compared to net income of $316,000 in the same quarter of the prior year, which included $375,000 in other income associated with the revaluation of the acquisition earn-out liability.

Operating income improved $178,000 for the first quarter of fiscal 2020, compared to the first quarter of fiscal 2019. As of September 30, 2019, we had cash balances of approximately $475,000. We have an $11 million asset-based line of credit, pursuant to which we had borrowed $5.1 million.

This is a $1.4 million reduction from the $6.5 million balance at June 30, 2019, and reflects decreases in our working capital accounts and positive cash flow from operating activities since June 30.

Our line of credit balance is currently averaging about $5.5 million and we have availability on our line of credit of about $2 million based on our current borrowing base. By the end of the second quarter ending December 31, 2019, we will have paid off all remaining earnout liabilities from our prior transactions.

This concludes our summary of operating results. I will now turn the call back to Brian..

Thank you, David. In terms of our guidance for fiscal year 2020, we expect consolidated net sales to be in the range of $58 million to $62 million. We expect the distribution of our revenue between quarters to align with historical trends.

Consistent with the past two fiscal years, we expect to generate positive cash flow from operating activities in fiscal 2020 with some volatility in quarters based on working capital changes.

We expect gross margin to be in the 31% range and SG&A could be about 31% of sales for the current fiscal year, including approximately $1.8 million or 3% of sales in noncash charges. We believe there continues to be opportunity to improve in all of our financial metrics.

The number of common shares outstanding as of September 30, 2019, was approximately 8.7 million. We expect our outstanding shares to increase in the range of 240,000 per quarter depending on our share price. Again, this guidance is based on our current operations and does not include the impact of any potential acquisitions.

All guidance is also subject to the risk factors and other forward-looking statements and uncertainties contained in our filings with the SEC. In my role as President and CEO, I continue to visit key customers to form stronger partnerships to gain greater access to the markets we serve.

Our quality brands continued to drive value with our distribution partners and they will provide greater opportunity in the future. As a reminder, our focus for the current fiscal year is to lay the operational foundation to scale the business.

The foundation will position the company for mid-single digit organic revenue growth and enable our M&A strategy going forward. I mentioned in my opening remarks, two positions we are adding to – at the senior leadership team to support our growth strategy, those being Senior Director of Sales Operations and a General Counsel.

These roles have been identified specifically to help drive our organic growth plans and M&A strategy. We also anticipate adding resources to support our selling initiatives and to create opportunities. We are being thoughtful and deliberate in our actions and our confident in our ability to achieve our long-term objectives.

We appreciate and thank our investors and employees for their ongoing support. We are committed to effectively serving our customers by providing restorative solutions. I'll now turn it over to the operator for questions. .

Gentlemen, thank you for your remarks. [Operator Instructions] We'll hear first from Jeffrey Cohen at Ladenburg. Please go ahead. .

Good morning. Hello, Brian and David.

How are you?.

Good, Jeff.

How are you doing?.

Just fine. So few questions I wanted to address.

So firstly, what's in the Tennessee facility now? You’ve made some changes operationally as far as Minnesota, New Jersey and Salt Lake, so what's currently you run out of Tennessee?.

Jeff, so I'll come back to what I discussed in my earlier remarks. We get transfer cut and sell products that's mostly orthopedics operating to Minnesota and then a large portion of our wood products for transfer to New Jersey, such as training stairs, taking patients and treatment tables.

And with that move, what we did, Jeff, we took those products out of a low manufacturing environment and put it into higher manufacturing environments with the New Jersey and Minnesota site that help with getting our cost on those products down.

So what's left in Tennessee is there's some small belt volume of wood manufacturing that still exist there, some hot and cold therapy products. And then just to remind you, Jeff, a large portion of what we distribute goes out of that site as well, around 250 shipments a day..

Got it. Okay.

And then, secondly, can you give us a better sense of the revenue composition from direct as well as distribution partners for the quarter or any general trends that we should think about?.

Sure. So I'll ask David to answer that question, Jeff..

Yes, Jeff, we really don't report channel mix because the way you would define that at each of the brands is a little bit different and we just don't report channel mix. But we did know that the channel mix shifted more towards dealer in the quarter compared to the prior year..

Got it. Okay.

And then lastly, could you talk a little bit about the R&D and if there's any new product introduction that you expect? And then along with that, could you discuss a little bit about M&A strategy going forward versus what's been done thus far?.

Yes. Jeff, for the physical therapy product line, we have moved out to an outsourcing model and all of the R&D activity, we do go through those third parties. It's just a more cost effective way of how we develop new products..

Okay. Perfect.

And any commentary on M&A generally speaking?.

M&A, we're still focusing on saying strategies being criteria, Jeff. We’re continuing to target acquisition with valuation of 6 to 8 times EBITDA. We have been focused on smaller transactions, so we can use cash opposed to stock. We'll look at larger transactions down the road when our initiatives are reflected in our share price..

Okay. Got it. Those are for me. Thanks for taking the questions..

Okay. Thank you, Jeff..

And next we'll hear from the line of Scott Henry with ROTH Capital. Please go ahead sir. Your line is open..

Thank you, and good morning.

Just a couple of questions, first, could you kind of remind me of why we see the seasonality in a strong first quarter, quarter ending in September that we’ve seen in the past couple of years?.

Sure. Good morning, Scott.

How are you today?.

I'm doing well, thank you..

All right. So I'll let Dave comment a little detail. But before Dave comments, I'll just remind you that we do sell into the athletic training market. And as we come into the fall season, that's when athletic trainers are spending their budgets and so that does have a contribution to that..

Right. And so the effect of that, Scott, is that our sales are a little bit higher in the first quarter and the fourth quarter. And sales are little lower in the second and third quarters..

Okay. Thank you for that color.

And how is the macro environment? Are you getting any impact from that either internationally or in the U.S.? Just curious how that backdrop is affecting the business?.

No. We're not really focused on international markets right now, Scott. If we look at the U.S. markets, the markets we're selling into athletic training, chiropractic, physical therapy, long term care, all of those markets are growing. And so we do have some tailwinds within those markets.

I should remind you that we are making that shift from a direct sales model to a dealer sales model. And so that does have an effect on our revenue..

Okay. And just kind of final question.

What would the timeline – what sort of timeline would you expect to start to see growth on an organic basis? Meaning, when would we expect to start to see positive comps with the current business? So not including any sort of M&A, just wants get your sense on that in terms of when the rationalization would be done and when we would start to see growth? Thank you..

When we look at beyond our guidance – we are – I'll emphasize, still targeting those mid-single-digit organic growth, 40% gross margin and 10% EBITDA. More specifically, how – comment that I have been out there working with some of our strong distribution partners, and our products are really well known in the market. They respect us as brand.

And so as for opening up broader distribution for our differentiated products, for example, like Solaris, we are starting to see clear opportunities to increase volume through these channels..

Okay. I mean, I guess, I thought it would be, if you're rationalize starting in kind of late – your fiscal 2019, by the time, you're through 2020, we should start to see apples-to-apples comps in your fiscal year 2021.

Is that a kind of a reasonable way to look at the business?.

Yes, I think if we go into the next fiscal year that we're going to see an opportunity. I believe in opportunity can move into those modest single-digit growth organically. And then as we get further into the fiscal year 2021 that we'll be able to start moving towards those mid-single-digit growth opportunities..

Okay, great. Thank you for taking the questions..

Thank you, Scott..

[Operator Instructions] Next, we’ll hear from Nathan Weinstein at Aegis..

Good morning guys, and thanks for taking my question..

Good morning..

If you wouldn’t mind, and I know you already addressed this to some extent, but when we think about the M&A environment, can you just, maybe make further comments about the funnel, what you’re seeing, if there’s still companies out there that could be interesting? And then what gets you to a place where you make an acquisition? Is it adding these additional headcount, I mean, in the organization to be able to do that? Or do prices have to come down? I mean, what would it take to get a deal done?.

I would say, Nathan, starting out with, we do maintain a strong pipeline accompanies. Those pipelines have been built up over several years. Can we continue to be at various stages of conversations with those companies. Coming to your question on the new positions. the General Counsel position was added specifically to support our M&A strategy.

I’d also say that the General Counsel also elevates our day business activity as we wanted to elevate our legal needs, it’s a large organization. So that position we did look out specifically for M&A. The other position is really to support the organic growth of the company, focusing on those objectives that I stated earlier in my prepared remarks..

Okay. And I guess just one more for me. I mean looking at the net income profitability this quarter and something you’ve shown in prior quarters.

And given the run rate you’re at now, is it possible that through cost cutting, it would be – you could run a profitable business through all four quarters if that’s what you’re interested in doing?.

We’re – we – our guidance is – I’m just going to reiterate the guidance. We expect gross margin at 31% in gross and the SG&A at 31% with $1.8 million of non-cash charges. So we expect, cash flow to be positive cash flow from operations to be positive for the year with some volatility.

How that plays out exactly on the net income line, We’re going to have a little bit of volatility there. We did have the profitability in this quarter..

Thanks a lot. Appreciate it..

[Operator Instructions] We’ll hear next from Anthony Vendetti at Maxim Group. Please go ahead sir..

Thank you. Good morning..

Good morning, Anthony..

Just we talked about the rationalization, so I was just like – I’ll follow-up on that. I believe you’re largely done with the calling of the products that no longer makes sense either they’re duplicative or low margin or unprofitable.

Approximately, if you had a gauge, where are you in that process? Are you 90% done? Or are you 80% done?.

Yes. For the activity that we went through, Anthony, we are done with what we’d rationalize. But they’ll come back to as a normal course of business; we need to always look at product life cycle management. That’s going to be an ongoing process within the business..

Okay. So, the rationalization is done, but there might be still some products out in the dealer networks that you still have to run through.

Is that correct?.

Yes. Again, Anthony, just talk about normal course of business, we always have to evaluate the products that we’re selling and the value that that’s bringing to the company. And I just looked at that as part of our product life cycle management process that what we went through with rationalizing products that is essentially done that’s ongoing.

We always have to evaluate our product lines and how they’re contributing to the business..

Sure, understood.

And then you mentioned on the call that you’re outsourcing, approximately 50% of the products to a contract manufacturer, has that already started? And then b, why 50% is because you can produce the other products cheaper, more efficient or you’re going to look to continue to outsource more products as you move forward?.

Yes. We selected 50% of the volume, Anthony, to qualify as a supplier and we are going through that process right now of establishing that history to get them fully qualified.

And as we go through the process, we will look at how we shift more volume to that outsourcing partner, and we believe in that shift, we will find additional opportunities to reduce our overhead in Salt Lake City. .

Okay, great. That’s good for me. Thanks..

Okay. thank you, Anthony. .

And ladies and gentlemen, at this time, there are no further questions in the queue. We thank you all for your interest in your questions today. I will turn it back to our leadership team and Mr. Baker for any additional or closing remarks..

Thank you for the questions and for your interest in Dynatronics. If you have any further questions, please direct them to our Investors Relations contact, Jim Ogilvie. operator, you may end the call..