Dynex Reports Loss from Weak Order Book; Strong Positive Cash Position

May 22, 2018 by Paul Shepard

Dynex Power Inc. announced its financial results for the first quarter ended March 31, 2018, including revenue of $10.6 million was 8% lower than the corresponding quarter of last year, or, 14% lower before the impact of exchange rates. Gross margin was 8.4% of revenue, compared with a gross margin of 23.6% in the corresponding quarter in 2017. The reduction in gross margin in 2018 reflects lower revenues and an unfavourable product mix in a high fixed cost business.

The combination of other income, expenses and costs represented 24.3% of revenue in the first quarter compared to 18.9% in the corresponding period in 2017. The absolute level of such expenditure increased by $386,000 compared to the corresponding period of last year, with $148,000 of this being the impact of exchange rates and $238,000 reflecting changes to the management team and increased research and development costs.

As a consequence of these results, the Company recorded a loss before tax of $1,682,000, compared to a profit before tax of $545,000 in the corresponding quarter of last year. The net loss after tax for the quarter was $1,379,000 or $0.02 per share, compared with a net profit of $406,000, or $0.01 per share, in the corresponding period of last year.

EBITDA for the quarter was negative $186,000 compared with $1,877,000 in the corresponding period last year.

Operating cash was $2,219,000 for the quarter compared with $57,000 in the corresponding period of last year, and the company's cash balance increased in the quarter from $3.6 million to $6.8 million. This reflected tight working capital management, combined with some significant advance payments received from the parent company for products and services.

Clive Vacher, President and Chief Executive Officer, commented, "I have previously explained to shareholders the elements of my five-stream turnaround plan; the two keys to that plan are to make our product quality and new product development second to none, and to substantially improve our financial performance.

"We are making tangible progress on product development and quality plans, and we will not lessen the intensity of our focus. We have hired a Chief Technology Officer who has started well. He and I are dedicated to building Dynex's reputation as market leader in cutting-edge innovation and reliability.

"This quarter was a setback to our financial improvement plans. Despite demonstrating that the market opportunities are there, the volumes we booked were nowhere near where we want them to be. In addition, we have had to improve almost all business processes. The operating deficiencies are greater than I imagined when taking on this job. However, I remain steadfastly committed to making very significant improvements happen.

"As regards to improved financial performance, the key to Dynex's sustained profitability lies in securing more orders and processing larger sales volumes through our high fixed-cost operations. The actions to implement our turnaround plan require an enhanced, technologically advanced new product range, greater operational efficiency, robust and dependable quality, and a high-performing sales team based in the regions that they serve. It also requires more energetic marketing. We continue to make good progress in all these aspects, including improving the quality of our sales force.

"However, after record sales in 2017 and a diminished order book going into 2018, we expected a tough first half of 2018 and it is turning out to be the case. After product quality, enhanced revenue is my highest priority. Therefore, for an interim period, I am taking direct responsibility for the sales activity. There are some significant contracts that we are bidding on in the second and third quarters.

“If we win these contracts, we will be optimistic for revenue in 2019 and beyond. This reflects a timing issue between product portfolio expansion and the revenue generation from it. I am confident we will increase the backlog to the right levels to support growth and profitability; the challenge is how quickly we can do it. We have an intense focus on increasing orders from our established portfolio to bridge the gap and deliver a respectable full-year 2018.

"While we work this challenge, we have been managing our cash flow very carefully. Our cash balance of $6.8 million gives me great comfort that we will be able effectively to sustain the dip in orders and come back stronger than before. We also have the cash to invest in the research and development activities required sustainably to be a technology leader in the industry. These activities continue to accelerate, and further new products will be qualified in the coming months.

"In the meantime, our guidance is that the second quarter financials will be similar to the first quarter, albeit with modest cash usage,” concluded Vacher.

Liu Ke'an, the Chairman of Dynex, added, "The loss in the quarter is clearly a symptom of the order backlog position. The team at Dynex is strongly focused on product quality and the qualification of new products. These products, coupled with our existing portfolio and some detailed sales and marketing initiatives, will lead to an improvement in the financial results. I am confident the detailed plans are being executed efficiently to achieve this. I remain fully behind the change program at Dynex."