Good day, ladies and gentlemen, and welcome to your Dynatronics Fourth Quarter 2020 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, John Krier, President and CEO. Sir, the floor is yours..

Good morning, and thank you for participating in today's call. I'm John Krier, President and Chief Executive Officer. And with me is our Principal Accounting Officer, Skyler Black. We issued a press release this morning, announcing the financial results of our fourth fiscal quarter and full year ended June 30, 2020.

Today I will provide a brief commentary, and then I will turn it over to Skyler for a financial report. At the conclusion, we will have the operator open the phone lines for questions. I will now ask Skyler to remind you of our reliance on the Safe Harbor under the federal securities laws..

Thank you, John. 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. In addition, the uncertainties and risks related to the impact of the COVID-19 pandemic on the business results.

We caution you not to place undue reliance on forward-looking statements that we make this morning. We undertake no obligation to update or revise forward-looking statements..

Thank you, Skyler. By way of introduction, I have been with Dynatronics for 6 months. I joined the company in March of this year to lead Dynatronics as the Chief Financial Officer and Commercial Leader. In July of this year, my role was expanded to President and Chief Executive Officer, as Brian Baker resigned due to lingering COVID-19 health issues.

Over these initial 6 months, I have focused a great deal of my time leading our organization through the unprecedented events of the global pandemic. Our employees across all of our sites and brands have been tremendous teammates, continuously adapting to changing events and remaining committed to taking care of each other and our customers.

Today, we are providing a report on our fourth quarter and fiscal year ended June 30, 2020. Let me start by focusing on a few updates from our prior disclosures, and then discuss additional key updates.

in early July, 2020, we disclosed that our net sales for the fourth quarter of fiscal year 2020, finished 47% to 49% lower than the same period in fiscal year 2019, which was a sequential improvement compared to the nearly 65% revenue reduction we experienced in April 2020 over the April 2019 period.

Since our disclosure concerning our Q4 fiscal year 2020 revenues, we have experienced continued positive revenue momentum. July and August 2020 net sales are approximately 60% to 70% of when compared to the same period in fiscal year 2020. Given the ongoing uncertainty in our markets due to the COVID-19 pandemic, we will continue to suspend guidance.

We continue to take significant actions to improve operating profitability by reducing costs and increasing scalability. First, in June of this year, we announced the decision to close our Chattanooga, Tennessee facility.

We have transferred manufacturing operations from Tennessee to our existing facilities in New Jersey and Minnesota, and we have transferred distribution operations to a third-party logistics provider, Millstone Medical Outsourcing for a service agreement we executed on July 8, 2020.

Operations with Millstone commenced mid September 2020, and the final transition of inventory is being completed on schedule. We continue to pursue the sale of our Chattanooga facility in the coming months to generate additional flexibility to our liquidity goals.

Second, we continue to improve operational effectiveness and reduce costs across the company. The cumulative effect of our cost reductions have enabled us to reduce ongoing operating expenses.

Third, despite significant revenue reductions due to COVID-19 in Q4, the company generated positive cash flow from operations of $541,000 in the period as our employees executed a working capital plan.

The cumulative effect of operating efficiencies, working capital improvements, the ATM stock sale proceeds and the SBA paycheck protection program loan has enabled Dynatronics to stabilize in this uncertain time and prepare for the future. Our overall strategy for the company remains steady.

Our focus continues to balance the uncertain present business environment with the opportunities we see in our markets and for our products. Skyler will now provide a financial report..

Thanks, John. I am pleased to review the financial performance during the quarter, and briefly cover the year end results. Net sales for the quarter ended June 30, 2020 decreased $7.4 million or 48% to $8.1 million compared to $15.5 million in the same quarter of the prior year.

The decrease was primarily due to a reduction in sales due to COVID-19 stay-at-home restrictions and holds on elective procedures. Gross profit for the quarter decreased $3.1 million or 68.9% to $1.4 million, representing 17.4% of sales compared to $4.5 million or 29.3% of sales in the same quarter of the prior year.

Lower sales were the primary cause of the decrease reducing gross profit by approximately $2.1 million. The decrease in gross margin percentage to 17.4% from 29.3% contributed about $1 million to the reduction in gross profit.

Selling, general and administrative expenses for the quarter decreased approximately $1.2 million or 25.4% to $3.6 million compared to $4.9 million in the same quarter of the prior year.

The decrease included lower selling expenses of $0.9 million as a result of lower fixed sales management salaries and lower commissions, and a decrease of $0.3 million in other general and administrative expenses primarily related to lower personnel costs.

Net loss for the quarter was approximately $2.3 million compared to net loss of $0.2 million in the same quarter of the prior year. For fiscal year 2020, I'll highlight just a few points. As of June 30, 2020, we had cash balances of approximately $2.3 million and an outstanding balance on our line of credit of $1 million.

We have an $11 million asset-based line of credit, and we currently have availability on that line of approximately $5.2 million based on our current borrowing base and taking into account that we currently have no borrowings under the line. The number of common shares outstanding as of June 30, 2020 was approximately $13.8 million.

The company currently has approximately 14.1 million common shares outstanding and including the preferred shares the total is 17.8 million. We expect our outstanding shares increased by approximately 240,000 per quarter, which is dependent on our share price. This concludes our summary of operating results. I will now turn the call back to John..

Thank you, Skyler. These last 6 months have provided tremendous challenges and opportunities for Dynatronics. Our employees have reshaped our operating footprint, focused our energies on taking care of each other and our customers, and highlighted for me the opportunity we have together.

Dynatronics has strong brands and dedicated employees committed to our business. Despite this uncertain market, we will continue to execute a disciplined operating approach and look to take advantage of market opportunities as they present themselves. We appreciate and thank our investor base and employees for their ongoing support.

I will now turn it over to the operator for questions..

Thank you. [Operator Instructions] We'll take our first question from Nathan Weinstein with Aegis. Please go ahead, sir..

Good morning, John and Skyler. Thanks for taking my questions..

Good morning, Nathan..

Good morning.

Just firstly, personal protective equipment, just curious if it's a material part of your product portfolio? And if so, kind of how the demand trend has been as we come into the back half of the year?.

Yes, that's not a significant portion of our overall sales or portfolio. We do have certain products that we supplied on a limited basis, such as out of our Hausmann division with overbed tables for pop-up temporary facilities or face masks for selected providers in Minnesota and for our local partners.

But other than that, it's not a large portion of our business..

Got it. Thanks. And then second question, just on your manufacturing and distribution footprint with the changes you described and the relationships there.

Is that largely intact so that as demand comes back on the revenue side, you think you're in a good position to meet that demand going forward?.

Yes, that's correct. We have the ability to ramp that up or dial that back based on the different factors that we're seeing in the market. So we do like our operating footprint with the different changes that we've executed in the business..

Got it. Thanks. And then just one final question for me.

Just curious if there's any new products you see coming in, potential new products that could be interesting or exciting for you guys?.

We're constantly evaluating that portfolio and we'll continue to look for that, especially as we continue to understand what may or may not be changing with different demands as a result of COVID-19, longer term. We certainly don't have a certain view to that at this point, but we're constantly evaluating different products..

Okay, John. Thanks a lot for taking my questions..

We'll take our next question from Anthony Vendetti with Maxim Group. Please go ahead..

Thank you. I was just wondering, you’re talking about obviously some SG&A reduction initiatives.

Just if you could outline a little bit more on where that would be, the magnitude of that either on a percentage basis just to try to get a little bit of a better [technical difficulty], right? Because right now in July and August sales are about 60% to 70% of what sales were last year during those same months.

So I was just wondering how you're rightsizing the SG&A?.

Yes, absolutely. I would do a couple of different things. So if you look at Q3 and Q4, when we had our Q3 earnings call, we talked about the permanent reductions we made in the business. And so it was approximately a $1.3 million gross change from Q3 to Q4 going into the year.

We also talked about the changes we've made, for example, with our Tennessee facilities. The large volume of that was lower salaries and commission related costs. And prior to that, if you looked at Q1 to Q3, our overall SG&A was running at about 30% of revenue. So we certainly -- continue to look to have a plan to get back to those points..

To be about 30% of revenues in total SG&A?.

That's what we had for Q1 and Q3..

Okay. Okay. And then just in terms of new products, or opportunities you see on horizon, there used to be a stated goal of trying to make an acquisition or at least -- I know you probably have a pipeline.

But are you seeing more opportunities because of COVID, or fewer opportunities? And then even if you are seeing opportunities because you're focused on getting your business back, are those opportunities been put on the back burner, just in terms of how you look at the acquisition pipeline?.

Let me try to tackle that in a couple of different ways. I would say, I don't know if there's more or less per se. I would say that we do maintain an active pipeline and it is a very, very important part of our strategy going forward.

I would also say, given all those moves that I highlighted at the start of this call that we've made in the operating footprint and continued in the business, that working capital execution that we've had has put us in a stronger position to be able to take advantage of an opportunity if it presents itself.

Skyler highlighted that where are we at currently, for example, with our cash balances and no borrowings on our current line of credit, we're in a good operating position despite this uncertain environment. So certainly we look forward to continuing those conversations with our pipeline targets and take advantage of it if one comes around..

Okay, great. All right. I'll hop back in the queue. Thanks..

Thanks..

We'll take our next question from Scott Henry with ROTH Capital. Please go ahead..

Thank you and good morning. A couple of questions..

Hi, Scott..

First, could you repeat what you said about July and August, like I wanted to make sure I have that correct..

Absolutely. So what we discussed was that July and August revenues are running approximately 60% to 70% compared to prior year..

Okay, great.

And how is the -- how do you see the trend in that? Is it getting better or is it getting worse or staying the same? And within that trend, how are you seeing it in the United States versus internationally?.

Yes. So let's talk about a couple of things that we know at this point. So running at about 60% to 70% of prior year, Q1 of FY '20 was our largest quarter of the year. Our trend continues to be positive. So nearly two-thirds reduction in April finished the quarter at approximately 48% for Q4. So that demonstrated the sequential improvement.

We've certainly continued to see that in July and August. No certainty for the future. We know what we've seen to this point, that'll all be dependent on continued activity within the facilities that we serve. Relative to domestic versus international, we have a very small international business of approximately 2.5%.

So that's not a significant contributor to our activities and we'll focus all of our energies here in the U.S..

Okay, great. And assuming these trends continue, how should we think about that gross margin line? COGS as a percent jumped again from Q4 over Q3. Is this the rate we should think about at these levels? Or should we see some improvement in the coming quarters..

I will highlight a couple points on that. So certainly our gross margin percentage was at 17.4% for Q4. That's certainly related to the decline in the sales volume. If you look prior to that, Q1, Q3, that's running at approximately that 30% level as well.

So our plan is to go to take a hard look and continue to look at those levels and focus our energies with the staffing changes that we've made, the production changes we've made, the transition out of our facility in Tennessee to work to those levels..

Okay.

And do you think those levels are achievable at lower revenue run rates?.

I can't comment on the future. I don't have a view to what that would be. I do know that we work in very hard to right size our resources to the demand and to be able to plan to get back to those points..

Okay. Kind of final question, which I know some of the other guys have kind of circled around as well. I mean, given what you guys make, the type of products, you would think there might be some PPP opportunities out there, maybe some innovative products that could be beneficial at a higher margins.

I'm curious, are there opportunities out there that you think you could capitalize on, or perhaps that business is just very low margin right now? Just wanted to get your sense of that market?.

Yes, that market for us has been insignificant contributed to us. Speaking just broadly about the products, there are product opportunities out there just in general, irrespective of say personal protective equipment, and that's what we're focusing our energy on. And we've got some excellent brands with great products that we can make a difference on.

And so we're focusing all of our energy there, regardless of how the pandemic continues or COVID-19, our products get people back to health and are really a key need for the rehabilitation space. And so we're focusing our thoughts and energy there..

Okay. Great. Thank you for taking the question..

Thanks, Scott..

[Operator Instructions] And that appears to be all the questions that we have for today. I'll turn the call back over to Mr. Krier for closing remarks..

Thank you everyone 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. And operator, you may end the call..

Thank you. Ladies and gentlemen, 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..