Q1 2024 Dynatronics Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to Dynatron ex first quarter fiscal year 'twenty 'twenty four earnings call.
It is now my pleasure to turn the floor over to your host Brian.
Brian Baker, the company's Chief Executive Officer, Brian the floor is yours.
Thank you operator.
Good morning, everyone and welcome to <unk> first quarter earnings call with me today is Dave Allen, our new Chief Financial Officer, and John Kurt Our former CEO and CFO.
Before we begin I'll turn the call over to Gabe to introduce himself and to review our Safe Harbor statement.
Thank you Brian This is Gabe L Y Chief Financial Officer of <unk>, Let me start by thanking Brian and the board of directors for the opportunity to join <unk> and to participate with them in leading the company I believe Dynatron X has established strong vendor and customer relationships, our reputation for quality products and dedicated employees.
Which positions us well for success I look forward to building trusted relationships with our shareholders analysts and the investment community.
Turning to our Safe Harbor statement.
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 views 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 to not place undue reliance on forward looking statements. We make this morning, we undertake no obligation to update or revise forward looking statements.
Thank you Gabe This is Brian Baker, President and Chief Executive Officer of Dynatron Us yes.
This morning, we issued a press release announcing the financial results of our first quarter ended September 32023 on today's call I'll provide some initial commentary and I'll turn it over to Jon for a financial report.
Following John I will confirm our guidance for the 'twenty 'twenty four fiscal year and provide closing remarks.
The operator will then open the phone lines for questions.
For the quarter ended September 32023, we are pleased to report that we achieved our sales expectations and delivered EBITDA profitability for the business. Our teams continue to be committed to meeting our stated objectives and profit goals our commercial teams have been.
And we'll continue to work hard to strengthen customer relationships with the goal of improving customer loyalty to the diamond brands.
Operations teams continue to find cost reductions and material freight inefficient use of labor.
These are like financials represent one quarter only however, the results were flat to continued discipline in our fiscal year 2024 operating plan and progress on our strategic priorities.
Our team's daily commitment to the business as being key to achieving our goals and I want to thank every employee for their ongoing dedication to the business.
Before I turn it over to John to deliver our financial report.
Want to take a moment and recognize that todays call represents the 15th and final earnings call for John as he transitioned out of the CEO role on October one.
However, he has continued its a part of myself the board of directors and the management team, while we welcome gate to the team as the new CFO. Thank you John and I'll turn it over to you for the financial report.
Thank you Brian I'm proud of the work you the management team and all the employees of Dynatron X have led to deliver these first quarter results and I look forward to watching the success moving forward.
As a reminder, the full income statement and management's discussion and analysis can be found in the 10-Q I will summarize some of the key financials here.
Net sales were $9 4 million for the first quarter of fiscal year 'twenty four.
That compares to net sales of $12 1 million in fiscal year 'twenty three the year over year decrease is primarily due to the acquisition of a competitor, but one of our larger rehabilitation product category of customers and a reduction in demand in our orthopedic soft bracing category.
Gross profit for the quarter was $2 3 million or 24, 7% of net sales compared to $3 6 million or 32% of net sales in the same period the prior year.
The decrease in gross profit as a percentage of net sales was driven two thirds by the reduction in net sales. We previously discussed and one third by lower product margin as we continue to seek efficiencies at the lower revenue levels.
Selling general and administrative expenses decreased one 6 million or 38, 2% to $2 5 million for the quarter ended September 32023, compared to $4 1 million for the quarter ended September 32022.
The overall reduction in selling general and administrative expenses was led by a reduction of $1 3 million in salaries and benefits with the remainder of 0.3 million spread across other professional expenses.
Net loss for Q1 fiscal year 'twenty four with 0.3 million that compares to a net loss of 0.5 million in the same period of fiscal year 2023.
We anticipate that outstanding shares will increase approximately 275000 per quarter, depending on our share price as of September 32023, the number of common shares outstanding was approximately $4 3 million.
The net cash balance was approximately 0.6 million on September 32023, no change to the 0.6 million reported on June 32023.
As of September 32023, our line of credit balance was approximately $1 8 million and additional line of credit availability was approximately $2 8 million on a borrowing base of approximately $4 6 million.
Cash used by operating activities was $1 7 million for the first quarter of fiscal year 'twenty for the company used the proceeds from the line of credit to reduce accounts payable and accrued expenses by 0.9 million and fund prepaid expenses of 0.8 million.
The overall net change in cash position for the quarter compared to June 32023 was a positive 34000.
This concludes our summary of the financial and operating results.
Thank you John.
In terms of guidance for fiscal year 2024, we are reaffirming our net sales to be in the range of 34 to 37 million. The distribution of revenue is expected to align with historical trends we're.
We're not providing gross margin guidance at this time, given a reduction in revenue expectations and costs, we'd like to have them worked out before considering instituting such guidance.
SG&A is anticipated to be in the range of 29% to 33% of net sales for the fiscal year.
In summary, our focus for the current fiscal year is to strengthen our customer relationships as we improve our operating profitability and financial flexibility.
We appreciate and thank our investors and employees for their ongoing support.
I'll now turn it over to the operator for questions.
Thank you, we'll now take questions from the telephone lines you have a question and using a speaker phone. Please get your handset before making your selection. Each a question. Please press star one on your devices keep that you'll be canceling question at any time by pressing star too. Please.
Please press star one at this time, if you have a question.
The first question is from Brooks O'neil from Lake Street Capital markets. Please go ahead.
Good morning.
Brian and John Thanks for the overview.
I'm going to Miss you, but I wish you well in the future.
And Brian I'm looking forward to working with you as we move forward. So I just have a couple of quick questions. The first one is I know that here over the last let's say year or maybe a little bit more inventory has been relatively high.
Built up in anticipation of the supply chain issues and be.
Be sure you could service accounts during the pandemic.
Do you feel you're making good progress, bringing that down to a level at which it is acceptable and.
Do you still feel that the items.
Tory are saleable in the current market environment.
Yes, perhaps I'll start with responding to your question by indicating.
Indicating I think we're probably at the right inventory levels with where the current revenues in the business and what we need to support the demand.
John can probably go back and give you a kind of a history of what where you work with your inventory and where we're at with current balances I think that would be helpful. To just stop provides a reminder of how historically you'd had higher levels and we believe we've got it down to a more reasonable level to support the business and then to your question on the inventory.
Tories as all Sellable inventory, we've got the right reserves on the books for the inventory that we view as an excess in obsolete position, but we think that we're in a pretty good twice with the inventory you do have on our shelves that are inventories that will sell through.
Great.
Yeah. Thanks.
We appreciate it.
Just got a little bit of color, Brian you know if we go back about a year now year ago, we were at roughly $12 million of inventory you see on this balance sheet. This morning that we released it about $7 million of inventory gives you a sense of what you know all the work that Brian and the team led over the last year to get those inventories at the right level and you know that is a similar level that we expect with this revenue performance.
Great. That's very helpful and then I'm just curious.
I know John well, we were chatting over the last year or more one of your focuses has been trying to.
Introduce high quality new products.
No Brian you're in a position to comment about what the outlook might be with regard to new items over the next year.
Year or whatever but.
Is that going to remain a priority and do you see any exciting new things in the pipeline.
It does remain a priority for us Brooks to make sure that we're providing the right products to our customers.
As I started to get Reengage with customers coming back into this role a we had a lot of good conversations on the products that we need to enhance our current product portfolio and we're focusing on that.
The largest opportunities first but we've got probably a good half dozen products that we believe we need to be adding to our product portfolio over say the next six to 12 months and again, we're just focusing on the once we will launch first based off at the highest opportunity that we're having with our customers. So yes.
In short that is a focus of ours to continue to innovate and find new products to support our customers.
Right.
Thanks for taking my question.
Thank you Brooks Thank you Brooks.
Thank you.
Next question is from Jeff Cohen from Ladenburg Thalmann. Please go ahead.
Oh, Hi, Brian Gabe and John how are you.
Hey, good evening, Jeff.
So two questions from her in.
Could you talk about how you're thinking about the.
Cash utilization over the coming few quarters I know that there was some usage in Q1 of 1.7.
Sure Jeff This is Bryan.
I'd like to do is just like John I will provide some details about that cash utilization yeah, absolutely. Good. It's good to hear your voice again. This morning, Jeff. So if you look at the cash utilization, we actually did increased cash by 34000 in the quarter, but on operating activities. We used $1 seven so the way to the way they really understand that is.
The primary driver of that was reducing accounts payable and other accrued expenses to the tune of just under $1 million and the remainder was funding prepaid expenses with the almost exclusive amount of that being to fund prepaid inventory you know.
Advances to our suppliers as we prepare to prepare it demand in the future. So we're still continuing to getting this business to profitability a good results here in the first quarter. It is just one quarter and that's going to also be important for us to manage cash.
Similar performance.
Okay got it could you talk about margins a little bit for the balance of 'twenty. Four how are you thinking about then this is Q1 represent a floor for you and where could we go through the balance of the year.
Yes, Yeah I'll come back to earlier comments is we're trying to stay away from providing guidance on that right now because there's there's just.
Still some unknowns as it relates to revenue volume and how that can affect margin. Yeah. We're looking still at where our costs are settling and we believe we have some opportunities to reduce costs, but now we have some additional data we don't want to get into any great detail, but yeah, I think that Oh Johnny.
How about anything else you would want to provide in terms of that yeah. I think Jeff you make a good point you know, whereas some of our recent data points and how do we think about the quarter in terms of our margin performance. So our margin at just under 25% for the quarter was actually similar to where we finished last fiscal year. Now Q1 is typically one of our highest quarters along.
With Q4, and what we saw in the quarter our decline from prior year with two thirds driven by just less revenue and one third driven by less utilization or efficiency in our plants. So if we looked at history and we're drawing inferences from history, knowing that Q2, and Q3 tend to be less revenue. It will be if this would be likely somewhere in the higher <unk>.
And this would be the data point to then say, okay. If revenues down a little bit in the next couple of quarters, maybe margin might be down a little bit, but we simply don't know yet which is why we're not giving guidance we need to see some more data, but if I were looking at history, that's what I would draw upon.
Okay got it and one more if I may I commend you on the discipline on the SG&A line for Q1 could you talk about that a little bit and talk about that how that's being leveraged into your your channels and your customers out there in the marketplace.
Yeah. Thanks, Jeff.
Jeff for recognizing the work that we've done with SG&A.
I think that we're we've got that the cost structure and in Opex, we can leverage that as we start to see revenue growth comes through we don't think that there's a lot of additional.
Expenses that we need to put in SG&A as we start to see the growth happened in the business. So I think that's the leverage that we're gonna get John if you want to add anything to that yeah. The only thing I would say you know, adding to Brian's point I mean, if you look at the overall SG&A being sub 28% as a percentage of net sales in Q1.
And was lower than our guidance. So it is expected to likely come up a little bit in a couple of quarters, just with some seasonality in our lower revenue typically in Q2 and Q3, but I think the way Brian described it is accurate, which is we've tried to be very flexible with our labor pool and only adjust labor as revenue will supported because of our.
Very clear goals for operating discipline and profitability at this revenue level.
Okay, perfect that does across thanks for taking the questions.
Thank you Jeff Thank you Jeff.
Thank you I should remind you May press star one to ask a question.
The next question is from Scott Henry from Roth Capital. Please go ahead.
Thank you good morning.
Just a couple questions first is the 10-Q available I didn't see it on your.
Website.
Hi, Scott. This is John it is not out there yet it'll be out by Monday with the holiday being observed tomorrow for veterans day, So with respect to Q on Monday.
Okay. Thank you and good luck as always enjoyed working with you.
Shifting gears when we think about.
I know you don't want to give any guidance. So I'm not going to ask you about 2024, but when we think about 2025.
I mean, do we think that's a year or is it maybe you start to get back to more traditional organic growth for the category.
And what kind of what do you see the category as a whole growing.
Orthopedics.
<unk> physical therapy.
And then I guess you know by then would you be hoping to take share or or do you think you'd still be losing share.
Yeah, I think Scott you just pointed out that the two business units that we view it be happened to business with physical therapy, or a rehab and compete.
Computer Bracings space.
So I'll I'll break those out into two answers starting with the orthopedic bracing.
And front end product line.
We believe that our core competency is how we source from overseas with large items large demand items and how we manage that through an efficient operational process and are able to support our customers with the way we manage their inventory requirements.
We've got a core competency with our cut and sew operation.
The factoring facility here in Eagan, Minnesota to support those are lower volume items and so we continue to leverage those core competencies as we start to talk to our customers about how we can expand that relationship. So that's where I think the organic growth is going to come with orthopedic bracing I'm going out to the rehab side of the business I think we have really good.
<unk> shifts with distributors and dealers that have access to the end users, where our capital is coming from and from a demand perspective, and I think that the way we see some organic growth. There is what I mentioned earlier some of these very targeted new product launches and I think.
As we launch these new products, we're going to get some additional pull through sales gets work, it's now going to be able to support their full product portfolio of requirements. Yeah. So not only what we get.
On these new products, but the existing products that we produce out of that and introduced New Jersey site will start to get that additional demand as they switch over from a competitor to our product line. So that's what I see in terms of opportunity for growth going into this fiscal year and into fiscal year 'twenty five.
And and when you think about I appreciate all the color on those segments, but when you think about how fast they are growing.
Do you think you're growing 5% a year or maybe a little lower maybe three or 4% and you know what what is kind of the category growth.
Yeah.
I think it's too soon if you're asking specific broker and you know this year into the next year.
Talking in terms of where I see the opportunity I can't relate that back into percentage of growth for you right now Scott.
Okay, well I think it's growing around three or four per cent, but yeah, I don't know either.
<unk>.
What about Brian now now that you're taking the CEO role again, how do you think are the acquisition opportunities.
Do you do you would you like to get more aggressive there or you know how are the.
You know a lot of times, there's a disconnect among the private players and to what the market thinks their values their company is worth and what they do.
Is that gap closing just trying to get a sense of the environment and how aggressive or not aggressive dynatron X maybe.
Right.
I believe that acquisitions are still going to be part of our growth strategy I think it's more the timing of when we start looking at potential.
Deals I think right now our focus is let's stabilize the business, but to get the company profitable and then once we're stabilized and were profitable and there's a different dynamic in the business that will allow us to be.
More opportunistic on acquisitions. So I think it's just a matter of timing right now Scott.
Now just to.
Pose the question, but.
Yeah, I looked at a lot of companies all the time and there's always good days and bad days.
And you know businesses get better and then something happens and then they get worse and you ended up you got you.
Rise above and sink below the water level continuously sometimes you just gotta do an acquisition to get scale to stay above the water level all the time.
How do you think of that about that statement relative to dine to tronox, meaning you know maybe yeah, there'll be good quarters, and bad quarters, but maybe you just need to get a little bigger to get to scale.
Yeah.
Hi.
See where you're coming from in those comments Scott and.
There is good quarters, and bad quarters, and you've kind of got to look at where the opportunities are coming from and how they fit into.
Your business and how that May help with scale. So we're keeping our eyes open to what the opportunities are.
I don't want to get too far ahead of myself and say if there was a really good opportunity, we're gonna be positioned well to be able to execute against something so I I don't want to get into that kind of detail, but I'll say, we're keeping our eyes open and right now what our focus is running the business that we currently have and making sure.
We're doing the right things to stabilize it find those opportunities to grow revenue.
Get profitable.
Work on how we service our debt and that's what the immediate focus is of the team, but we don't want to lose sight, if there's a strategic opportunity that we're not taking.
That opportunity seriously and assessing for what it is.
Okay, Great I appreciate that color that should do it for me a good luck, Brian and as well the John.
Thank you Scott Thanks, Scott.
Okay.
Thank you no further questions in the queue I would now like to turn the floor back over to John for any closing comments.
Thank you operator.
Thank you all for your interest in <unk> I am pleased to be supporting Brian and gave in this transition and look forward to watching the success of the organization in the quarters and years to come if you have any further questions. Please direct them to IR at <unk> Dot com.
Great day.
Thank you the conference has now ended.
Please disconnect your lines at this time and thank you for your participation.