Good day ladies and gentlemen and welcome to your Dynatronics Second Quarter 2020 Earnings Conference Calls. All lines have been placed in a listen-only mode and the floor will be opened for questions and comments following the presentation. [Operator Instructions]. At this time it is my pleasure to turn the floor over to your Mr.

Skyler Black, Corporate Controller. Sir, the floor is yours..

Good morning, and thank you for participating in today’s call. I’m Skyler Black, Corporate Controller and head of the company's Investor Relations. With me today is Brian Baker, our President and Chief Executive Officer, and David Wirthlin, our Chief Financial Officer.

This morning we issued a press release announcing the financial results of our second quarter ended December 31, 2019. On today’s call, Brian will provide financial commentary and then he will turn it over to David for financial report. Following David, Brian will confirm our guidance for the 2020 fiscal year and provide closing remarks.

The operator will open the phone lines for questions. 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 involve risks and uncertainties that could cause our actual results to differ materially from those discussed today.

Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements are included in our most recent 10-K and other reports filed with the SEC. 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. This is Brian Baker, President and Chief Executive Officer. I want to welcome Skyler, our corporate controller and newly appointed head of the Investor Relations. Skyler has been a key leader in the organization for the last two years and we look forward to his contribution in this new responsibility.

For the quarter in the December 31, 2019 we are pleased to report that we achieved our sales objectives for each of our major brands; Hausmann, Bird & Cronin and Solaris. As a reminder Solaris is the most recognized brand in our electrotherapy product portfolio. Our teams are committed to achieve stated sales objectives for each brand every quarter.

Our commercial teams are implementing improved sales analytics that provide new insights regarding sales trends and opportunities. Our operations teams continue to excel in delivering our products when and where they are needed.

We remain on track to achieve our fiscal year sales guidance which we are narrowing between $59 million and $61 million for the fiscal year 2020. In the second quarter ended December 31, 2019 we’ve reduced SG&A by 155,000 and improved operating profitability by 61,000 compared to the same quarter last year.

In the first two quarters of fiscal 2020 we have reduced SG&A by 727,000 and increased operating income by 239,000 compared to the first two quarters of the prior fiscal year. Our operating activities in the second quarter generated 924,000 in positive cash flow and $2.9 million in positive cash flow for the first two quarters of this fiscal year.

We've reduced our line of credit balance to $4.8 million as of December 31, 2019. Our positive operating cash flow in the second quarter was driven largely by reductions in net working capital. All of these financial results reflect continued discipline to the operating plan and progress in executing to our strategic initiatives.

In the coming months we will continue to drive operational changes that will reduce cost, improve profitability and position us well for the next fiscal year. To accelerate execution of our operating plan we continue to enhance talent in key areas and consolidate administrative functions to our Minnesota location.

We’ve recently appointed Jason Anderson to our Chief Information Officer. You may recall that Jason is a member of the Cronin family that sold the Bird & Cronin business to Dynatronics in 2017. Jason brings a wealth of knowledge having over 25 years experience running technology, operations and business strategies.

Before joining Bird & Cronin as co-president in 2014 Jason was a partner and CIO of Evercore Wealth Management. We are also recruiting for a Director of Sales Operations rehab, a group controller and our Director of Supply Chain. All of these positions are headcount neutral and planned in our budget.

These individuals will be based in Minnesota and more closely with my senior leadership team. The Director of Sales Operations rehab will have responsibility for the Solaris and Hausmann brands. The short-term focus will be to assess the competitive landscape, refresh product content and launch marketing campaigns.

The group controller will be responsible for building high-performing teams to standardize and streamline our accounting processes, identify cost improvements and improve our working capital metrics. The Director of Supply Chain will focus on strategic sourcing projects, skill management and implementing our S&OP processes.

This year we will be launching a new e-commerce store. This up-to-date platform will improve the customer experience through ease of use, organize landing pages and customized ordering portfolios. This exciting innovation will augment our sales channel for those customers who choose to transact in the evolving digital sales ecosystem.

We aim to be a recognized standard and restorative solutions. During fiscal 2020 we continue to execute on our operational plan, build customer relationships and reduce complexity; all of which position the company well to drive modest mid-single digit organic growth, improve profitability and execute on our acquisition strategy.

David will now provide a financial report..

Thanks Brian and good morning everyone. Net sales for the second quarter ended December 31, 2019 decreased 243,000 or 1.6% to $15.2 million compared to $15.4 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.

Gross profit for the quarter decreased 94,000 or 2% to $4.6 million representing 30.2% of sales compared to $4.7 million or 30.3% of sales in the same quarter of the prior year. Lower sales were the primary cause of the decrease reducing gross profit by approximately 74,000.

The decrease in gross margin percentage to 30.2% from 30.3% contributed about 20,000 to the reduction in gross profit driven primarily by lower sales in our physical therapy product lines.

Selling, general and administrative expenses for the quarter decreased approximately $155,000 or 3.2% to $4.6 million compared to $4.8 million in the same quarter of the prior year. Decrease was primarily due to lower selling expenses of $197,000 consisting primarily of lower fixed sales management salaries and lower commissions.

Net loss for the quarter was approximately 137,000 compared to net loss of $441,000 in the same quarter of the prior year which included $204,000 in income tax provisions. Operating income improved $61,000 for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019.

As of December 31, 2019 we had cash balances of approximately $532,000. We have an $11 million asset based line of credit pursuant to which we had borrowed $4.8 million.

This is a $1.7 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. In the second quarter ended December 31, 2019 we fully paid all remaining liabilities from our prior transactions. This concludes our summary of operating results.

I will turn 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 $59 million to $61 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 to be about 31% of sales for the current fiscal year including approximately $1.8 million or 3% of sales in non-cash charges. The number of common shares outstanding is currently 9.9 million which increased 760,000 in the second quarter due to a conversion of Series C preferred to common.

We expect our outstanding common shares to normally increase in the range of 240,000 per quarter depending on our share price. The total number of common and preferred shares outstanding is currently 14.1 million.

In my role as president and CEO, I continue to visit key customers to form stronger partnerships and gain greater access to the markets we serve. We attended the performance health summit earlier this month as a co-partner.

We are also excited to be attending the American Physical Therapy Association combined sections meeting this week in Denver as well as the American Academy of Orthopedic Surgeons 2020 Annual Meeting in Orlando next month. At these events we will meet with key customers and seek to develop new distribution relationships.

In addition, we will demonstrate the most recent design changes to our proprietary torque table which offers unique features to support their post directing techniques. We also continue to share our story and build relationships with the investor community. We attended the 8th annual Roth Utah Corporate Access Event in December.

We'll also be presenting at several investor conferences in the coming weeks. As a reminder our focus for the current fiscal year is to lay the operational foundation to scale the business. This foundation will position the company for mid-single digit organic revenue growth and enable the continuation of our M&A strategy going forward.

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

Thank you. The floor is now open for your questions. [Operator Instructions] Our first question comes from Jeffrey Cohen of Ladenburg. Please state your question. .

Hello, hi Brian and David.

How are you?.

Yes, good.

How are you Jeff?.

Good morning.

So could you give us a sense on FTEs over the past quarter, a quarter plus just generally speaking, kind of movement have you seen up or down?.

FTEs?.

Full time employees. Yes..

Yes. I don't have the exact number but we're in the low 300 range..

Yes, I think that we are Jeff probably right around 280 a little bit above 280 right now..

Okay. Got it, perfect. It sounds like generally speaking the trends are going in the right way. So just trying to get a better idea to talk about mid-single digit growth.

Do you think that's commencing March/June, end of the calendar year and holding through 2020? Not taking into account any M&A acquisitions, kind of good kind of estimate under model?.

Yes. If we look at fiscal year 2020 and the guidance that we've recently narrowed to $59 million to $61 million, we feel good about meeting those numbers for fiscal year 2020.

Looking after the next fiscal year we don't talk yet to the guidance that we're providing for the next fiscal year but I'd say that we are positioning the company well to move into this modest single-digit growth beyond this fiscal year..

Okay. Got it. And do you think Brian that possibly carries over also to your margins? Looking at your margins it look like the back half the years better than we previously thought.

So does that kind of cadence upwards or do you expect that to be lumpy? Don't try to read into it too much Q3 versus Q4 and then can that carry through expected -- you could do the mid-single digit growth on the margins?.

Yes. On the margin we feel pretty good about where we're at with our operational foundation. We think we've got plenty of capacity in our plants and where we are distributing our products. We don't think we need to add any fixed cost. So as we start to see the sales volume increase we think that will have an effect on gross margin.

We're not really speaking in any details what we think that could contribute as we see the sales on the increase..

Okay. Got it. It looks like you're getting out there more as far as on conferences and trade shows which I'm encouraged to see.

What was that mentioned was that the torque table, could you talk about it a little bit? What it is? Where it's manufactured? What it's supposed to do and could also talk to us a little bit about some of the other innovation going on and the innovation related to Solaris?.

Yes, I am speaking to the torque table first. That is a Hausmann branded product. It's a proprietary product that we licensed the technology from the inventor.

What this torque table does which unique about it Jeff is it anchors the patient in place so as the therapist is applying a stretching technique, he's able to do that stretching technique with having the patient anchored.

You can kind of imagine it they're on a normal treatment table and I start to pull on the patient's [indiscernible] and so the therapist has got to put some opposing force on the patient to keep them in place.

The torque table provides this anchoring system and it's really a fun product Jeff when the therapists look at it it's kind of [indiscernible] why didn't I think of this technology. So we're pretty excited about launching this product and it's something that we're going to be showing this week in buying sections in Denver.

Other things that we're doing with product innovation, the Solaris product we are looking at refreshing that product. The way that we're looking at that is putting a quick start menu in place so that it’s easier for the therapist to get the desired treatment they want quicker.

So they can move on and treat other patients after they have started their treatment on the Solaris product..

Got it. Okay. That's perfect. I'm just looking at the other questions that I had.

So production of cash from operations for the entirety of fiscal 2020 is your outlook, correct?.

Yes. Our guidance is that we're going to be positive cash flow for the year. As we mentioned we've generated $2.9 million in the first six months. We're going to have some volatility in the quarters but we do continue to expect to generate positive cash flow..

Okay. And then lastly Brian, could you talk a little bit about the M&A front just kind of big picture speaking as far as what you're seeing over the past months as far as [indiscernible] availability of entities what's out there, trends on valuations or pricing, etc. Thanks..

Sure. We do maintain a pretty strong pipeline of acquisition targets Jeff.

We do have new targets come in occasionally and for assessing those from really a value oriented mindset but we do maintain communication with those targets and when it's really the right timing for the owners to sell we get to the valuation that we believe the businesses are worth then we will explore moving those forward at the right time..

Okay. Thanks for taking the questions..

All right. Thanks Jeff..

Our next question comes from Anthony Vendetti of Maxim Group. Please state your question..

Yes.

I was just wondering Brian can you talk a little bit about the outsourcing how that's going, what percent of products right now are outsourced to a contract manufacturer? How many years still producing?.

Good morning Anthony. Thanks for the question. The outsourcing of the electrotherapy line and we're making really good progress on that front. We've gone through a qualification plan with our contract manufacturer and they're almost completely qualified.

Today we'll start planning on what portion of manufacturing of the percent of what we need as far as demand what we'll start pushing over to that contract manufacturer. So I'd say that we're on track and on schedule we’ve planned with that and that's really what we're working at outsourcing as far as manufactured product.

We do do some strategic sourcing on other product lines where we are sourcing product from overseas and that's really nothing new. It's the same products that we've historically sourced from other manufacturers..

And when you completely move that electrotherapy line to contract manufacturing that obviously will contribute to the margin, the long-term margin goal.

Can you give me an idea of what the gross margins would be on that particular product line when it's fully outsourced?.

We're not really talking specific to what we think that margin differences will be Anthony.

It is something say over the next six months or so that we will start to see the effect of that move that will start to come through on our P&L and we do think that it's going to have a good effect on not only gross margin but what we'll see in earnings as well..

Okay and then I know you said you still had some products and this is a constant process of reviewing the product line and calling duplicative or unnecessary products as you've put together the three divisions.

Can you talk about where that's at? How many did you call this quarter? Are you largely done with the initial calling and now it's just an ongoing process?.

Yes, [board towards payments] Anthony what the few rationalization project if you will. We went through and looked at products that were necessarily profitable or didn't set well within our product portfolio. We've been done with that project for quite some time. There are opportunities where we had duplicate SKUs.

I'll use [stores] as an example and we're looking at what line should we be carrying and to get rid of those duplicates to use which will not really affect revenue in any way because we'll just move them over to the models that we choose to have in our portfolio but it will give us an opportunity to reduce [inventory target] because they're like sharing duplicate inventory.

We're working on that over the next say three to four months. And then [indiscernible] everything else is kind of just ongoing management how we look at product lifecycle management..

Okay. Great. Thanks Brian. I appreciate it..

Thanks Anthony. .

There appear to be no further questions at this time. I will now turn the conference over to Brian Baker for closing comments..

Thank you for the questions and for your interest in Dynatronics. If you have any further questions please direct them to our Investor Relations contact Skyler Black. Operator you may end the call..

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