Q2 2024 Dynatronics Corp Earnings Call

Operator: Thank you for standing by. This is the conference operator. Welcome to the Dynatronics second quarter results for fiscal 2024 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad.

Thank you for standing by this is the conference operator welcome to the <unk> second quarter results for fiscal 2024 conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question.

Q you May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.

Operator: Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Brian Baker, President and CEO of Dynatronics. Please go ahead.

I would now like to turn the conference over to Brian Baker, President and CEO of <unk>. Please go ahead.

Thank you operator.

Brian Baker: Thank you, operator. Good morning, everyone, and welcome to Dynatronics' second quarter earnings call. This is Brian Baker, President and CEO. With me today is Gabe Elwine, our Chief Financial Officer. Before we get started, I'll ask Gabe to read our safe harbors.

Everyone and welcome to Diamond <unk> second quarter earnings call.

This is Brian Baker, President and CEO.

With me today is <unk>, our chief Financial Officer.

Before we get started I'll landscape to read our safe Harbor statement.

Thank you Brian.

Gabe Elwine: Thank you, Brian. 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 PEN-K and other reports filed with the SBA. We caution you not to place undue reliance on forward-looking statements we make this morning. We undertake no obligation to update or revise such forward-looking statements. Thank you, Gary.

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 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 again.

Brian Baker: This morning, we issued a press release announcing the financial results of our second quarter ended December 31, 2023. On today's call, I'll provide some initial commentary, then I'll turn it over to Gabe for a financial report. Following Gabe's report, I will discuss our guidance for the 2024 fiscal year and provide closing remarks. The operator will then open the phone lines for questions.

This morning, we issued a press release announcing the financial results of our second quarter ended December 31, 2023 on today's call I'll provide some initial commentary and I'll turn it over to Kate for a financial report.

Following games report I will discuss our guidance for the 2020 for fiscal year and provide closing remarks. The operator will then open up all night for questions.

Brian Baker: For the quarter ended December 31, 2023, we continue to make progress on achieving our sales goals and finding our path to positive EBITDA. Although the second quarter historically has been a period with lower revenue, our commercial team worked very closely with our strategic customers to optimize sales opportunities for each of our brands. Our ability to work so closely with these key customers demonstrates renewed strength in our partnership. In addition, our strategic customers have identified new products they desire to begin sourcing from Dynatronics.

For the quarter ended December 31, 2023, we continue to make progress on achieving our sales goals and finding our path to positive EBITDA, although the second quarter. Historically has been a period with lower revenue. Our commercial team worked very closely with our strategic customers to optimize sales opportunities for each.

Of our brands.

Our ability to work so closely with these key customers demonstrates renewed strength in our partnerships.

Additionally, our strategic customers have identified new products. They desire to begin sourcing from diamond products, we have been aggressively developing manufacturing and building stock to support our customer demand.

Brian Baker: We have been aggressively developing, manufacturing, and building stock to support our customer demand. Our plan is to manage a limited launch of the new products in the third quarter fiscal year 2024 and a full launch in the fourth quarter fiscal year 2024. We are optimistic these new product lines will provide incremental revenue to our business. However, it is too early to estimate the level of revenue contribution to the business.

Our plan is to manage the limited launch of the new products in the third quarter fiscal year 2024, and a full launch in the fourth quarter fiscal year 2024.

We are optimistic these new product lines will provide incremental revenue to our business. However, it is too early to estimate the level of revenue contribution to the business.

Brian Baker: Complementing the work of our commercial team, during the quarter, our operations team manufactured stock on strategic products and reduced lead times for make-to-order products. Their customer-centric focus led to backorder reduction and faster revenue recognition. Our higher service levels continue to improve customer confidence as we outperform the competition in product quality and lead time. These results reflect continued focus on our fiscal year 2024 operating plan and progress on our strategic priorities. Our team's daily commitment to the business has been key to achieving our goals, and I want to thank every employee for their ongoing dedication to the business. I'll now turn it over to Gabe to provide a financial report. Thank you, Brian.

Complementing the work of our commercial team during the quarter, our operations team manufacturers to stop on our strategic products and reduce lead times for make to order products. They are customer centric focus by to backfill the reduction and faster revenue recognition.

Our higher service levels continue to improve customer confidence as we outperformed the competition in product quality and we do it.

These results reflect continued focus on our fiscal year 2024 operating plan and progress on our strategic priorities our team's daily commitment to the business has been key to achieving our goals and I want to thank every employee for their ongoing dedication to the business I'll now turn it over to Gabe to provide a financial report.

Thank you Brian.

Gabe Elwine: As a reminder, the full income statement and management discussion and analysis can be found in the 10Q. I will summarize some of the key financial... Net sales were $8.2 million for the second quarter of fiscal year 2015. That compares to net sales of $10.9 million in fiscal year 2016. The year-over-year decrease is primarily due to the acquisition of a competitor by one of our larger rehabilitation product category customers and a reduction in demand in our orthopedic soft bracing category. Gross profit for the quarter was $1.8 million, or 22.3% of net sales, compared to $3.1 million, or 28.1% of net sales in the same period of the prior year. The decrease in gross profit was driven evenly by the reduction in net sales we previously discussed and by lower product margins as we continue to seek efficiencies at the lower revenue level.

As a reminder, the full income statement and management discussion and analysis can be found in the 10-Q.

I will summarize some of the key financials here.

Net sales were $8 $2 million for the second quarter of fiscal year 'twenty for.

That compares to net sales of $10 9 million in fiscal year 'twenty three.

Year over year decrease is primarily due to the acquisition of a competitor by 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 $1 8 million or 22, 3% of net sales compared to $3 1 million or 28, 1% of net sales in the same period the prior year.

The decrease in gross profit was driven evenly by the reduction in net sales, we previously discussed and by lower product margins as we continue to see efficiencies at the lower revenue levels.

Gabe Elwine: Selling general and administrative expenses decreased $1.1 million, or 29%, to $2.7 million for the quarter ended December 31, 2023, compared to $3.9 million for the quarter ended December 31, 2022. The overall reduction in selling general and administrative expenses was led by a reduction of $0.8 million in salaries and benefits, with the remainder of the 0.3 million dollars spread across other professional expenses. The net loss for Q2 fiscal year 24 was $1.0 million.

Selling general and administrative expenses decreased $1 1 million or 29% to $2 7 million for the quarter ended December 31, 2023, compared to $3 9 million for the quarter ended December 31 2022.

The overall reduction in selling general and administrative expenses was led by a reduction of <unk> 8 million in salaries and benefits with the remainder of the $3 million spread across other professional expenses.

Net loss for Q2 fiscal year 'twenty four was 1.0 million.

Gabe Elwine: That compares to a net loss of $0.8 million in the same period of fiscal year. The number of outstanding shares will increase approximately $300,000 per quarter, depending on our share price. As of December 31st, 2023, the number of common shares outstanding was approximately 4.5 million. The net cash balance was approximately $0.6 million on December 31st, 2023. No change to the $0.6 million reported on June 30th, 2023. As of December 31st, 2023, our line of credit balance was approximately $1.9 million. Additional line of credit availability was approximately $2.5 million on a borrowing base of approximately $4.4 million. Cash used by operating activities was 1.5 million dollars for the first six months of fiscal year 24.

That compares to a net loss of <unk> 8 million in the same period of fiscal year 2023.

Outstanding shares will increase approximately 300000 per quarter, depending on our share price.

As of December 31, 2023, the number of common shares outstanding was approximately $4 5 million.

The net cash balance was approximately $6 million on December 31, 2023, no change to the $6 million reported on June 32023.

As of December 31, 2023, our line of credit balance was approximately $1 9 million.

Additional line of credit availability was approximately $2 5 million on a borrowing base of approximately $4 4 million.

Cash used by operating activities was $1 5 million for the first six months of fiscal year 'twenty for the company used the proceeds from the line of credit to fund prepaid expenses of <unk> 8 million and reduced accounts payable and accrued expenses by $7 million.

Gabe Elwine: The company used the proceeds from the line of credit to fund prepaid expenses of $0.8 million and reduce accounts payable and accrued expenses by $0.7 million. This concludes our summary of the financial and operating results. Thank you, guys. In terms of guidance for the fiscal year 2024, we are now estimating net revenue to be in the lower end of our guidance of $34 to $37 million due to slower demand in the rehabilitation space. The distribution of revenue is expected to align with historical trends. We are not currently providing gross margin guidance. Given our reductions in revenue expectations, we are seeking improved stabilization in the business before considering reinstituting such guidance. SG&A is anticipated to be in the range of 29-33% of net sales for the fiscal year.

This concludes our summary of the financial and operating results.

Thank you Gabe.

In terms of guidance for the fiscal year 2024, we are now estimating net revenue to be in the lower end of our guidance of 34% to 37 million due to slower demand in the rehabilitation space.

The distribution of revenue is expected to align with historical trends.

We are not providing gross margin guidance currently given a reduction in revenue expectations. We are seeking improved stabilization in the business before considering reinstituting such guidance.

SG&A anticipate it to be in the range of 29% to 33% of net sales for the fiscal year.

Operator: 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 investor base and employees for their ongoing support. I'll now turn it over to the operator for questions. Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys.

In summary, our focus for the current fiscal year. It does strengthen our customer relationships as we improve our operating profitability and financial flexibility. We appreciate and thank our investor base and employees for their ongoing support I'll now turn it over to the operator for questions.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

Brooks O'Neill: To withdraw your question, please press star, then two. Our first question comes from Brooks O'Neill of Lake Street Capital Markets. Please go ahead.

Our first question comes from Brooks O'neil of Lake Street Capital markets. Please go ahead.

Brian Baker: Good morning, guys. I guess, first off... As I talk to a variety of healthcare companies, Well, towards the end of the fourth quarter and so far early in the first quarter of the calendar year, I saw a relatively solid level of activity in the hospital and outpatient surgery areas, which I might guess would translate to increased demand for physical therapy services. But I sense in some of your comments that maybe demand is somewhat weak, so can you help me think about what's going on out there in the marketplace right now? Hi, good morning, Brooks.

Good morning, guys.

I have a couple of questions I guess first off.

As I talk to a variety of health care company.

Towards the end of the fourth quarter and so far early in the first quarter of the calendar year.

Right.

A relatively solid level of activity in the hospital and outpatient surgery areas.

I might get would translate to increased demand for physical therapy services, but.

Hey, Ben.

And some of your comments that maybe demand is somewhat weak. So could you help me think about what's going on out there in the marketplace right now.

Hi, Good morning Brooks Thanks for the question.

Brian Baker: Thanks for the question. So the way that I would respond to that, Brooks, is based on the feedback that we're getting from our customers and the customers that are specifically doing new facility openings, and they're some of the larger groups that have historically done new facility openings, and there has been a slowdown in those new facility openings, and it will continue from what they're telling us through the first quarter of this calendar year. And there are several reasons for that.

So the way I would respond to that Brexit is based off the feedback that we're getting from our customers.

And the customers that are specifically.

Joining new facility openings and there some of the larger groups.

Historically, you've done new facility openings and there has been.

Slowdown in those new facility openings and then it will continue.

What they're telling us through the first quarter of this calendar year and there are several reasons for that one of the explanations that we have been given from our customers is there's not enough physical therapists that are graduating that they can staff and then they're also trying to be very strategic about where they want to open new clinics.

Brian Baker: One of the explanations that we've been given from our customers is that there are not enough physical therapists that are graduating that they can staff. And then they're also trying to be very strategic about where they want to open new clinics so that they're getting the best pull-through revenue with the patients that they see. So we're hoping as we're getting into Q4 of our fiscal year, the second quarter on the calendar, that we start to see a pickup there. But we are still seeing ongoing demand for replacement equipment, so that continues to come in from the rehab space. Great. Okay, that's good, Cole.

They're getting the best pull through revenue with the patients that they see so we're hoping as we're getting into.

Our.

Q4 of our fiscal year or the second quarter in the calendar that we start to see a pickup there, but we are still seeing ongoing demand of replacement equipment. So that that continues to come in from.

The rehab space.

Right. Okay. That's good color I appreciate that so secondly.

Brian Baker: I appreciate that. So, secondly, I commented on some of the new product activities. I'm sure, for competitive reasons, you don't want to say a lot about the new products you're working on, but can you just give us any color about... areas where you see opportunity to serve your customers. Sure.

Commented about some of the new product activities.

Sure for competitive reasons, you don't want to say a lot about the new products.

Working down but can you just give us any color about.

Areas.

Where you see opportunity to service your customers.

Sure and I'll reflect back to some of my earlier comments, where our customers are actually coming to us and are identifying where we have gaps in our product portfolio, providing us a product roadmap. If you will of the product you data that we need to make and by doing that she got incremental revenue start to come through.

Brian Baker: And I'll reflect back on some of my earlier comments, where our customers are actually coming to us, and they're identifying where we have gaps in our product portfolio. They're providing us with a product roadmap, if you will, of the product additions that we need to make. And by doing that, we're going to see that incremental revenue start to come through. And we think it's also going to provide some pull-through revenue as we add those products to our product portfolio, and customers will start to purchase those as well. And in terms of what that looks like, we are, as I mentioned earlier, in the process of building stock. We have a limited supply right now.

And we think that's also going to provide some color through revenue is where we add those products to our product portfolio to get the existing products. We have they'll start to purchase those as well and you know in terms of what that looks like we are as I mentioned earlier in the process of building stock we have a limited supply right now.

Brian Baker: We're working with some of our key accounts and getting those out in the market. We're talking with other key accounts on the timing of when we're going to be able to support their demand. And so far, the feedback on the product has been very positive. They look at it as very high quality.

We're working with some of our key accounts are getting those out in the market. We're talking with other key accounts on the tightening of boingo going to be able to support their demand and the and so far the feedback on the product that's been very positive and they look at it is very high quality and actually from a quality perspective and function perspective, probably a better product and then.

Brian Baker: And actually, from a quality and function perspective, probably a better product than the competition. That's great. Let me just ask one more question.

The competition.

That's great.

Just ask one more here.

Brian Baker: Historically, I think, under John's leadership, prior to your coming back, Ryan, inventory was built up a little bit, supply chain issues, and just trying to be prudent about being prepared to service customers. How would you assess, you know, your inventory position today, recognized capital constraints, et cetera, just curious where you feel you stand in that regard? Yeah, our current backorder level has been quite low, and relative to revenue, it's very low.

Historically, I think under John's leadership prior to your coming back Ryan.

Inventory was built up a little bit supply chain issues.

Just trying to be prudent about being prepared to serve its customers how would you would bet.

You know your inventory position today recognize capital good screens et cetera.

Just curious where you.

How do you stand in that regard.

Yeah, our current back order level its been quite low.

Relative to revenue.

Very low and while we've got.

Brian Baker: And where we've got the supply pipeline with key suppliers, we've got plenty that's in the pipeline. And then again, with the new product launches, that's, as we're building inventory, also key to start meeting customer demand. So I'm quite happy with what the supply chain team has been doing to optimize inventory. We're not too high in inventory, but I think we have the right amount of inventory on the shelf to provide these high service levels.

Supply pipeline with key suppliers, we got pointed at the tender pipeline and then again with the new product launches. That's as we're building inventory out so key to start meeting customer demand. So I'm quite happy with what the supply chain team has been doing to optimizing in trade we're not.

Too high in inventory, but I think we have the right amount of inventory on the shelf that provide the tight service level. So I'm quite pleased with how we've been managing that.

Brian Baker: So I'm quite pleased with how we've been managing that. Great Thanks for taking my questions and looking forward to the next few quarters. Okay, thank you, Brooks. Thank you, Brooks. This concludes our question and answer session. I would like to turn the conference back over to Mr. Baker for any closing remarks. Thank you for your time this morning and for your ongoing interest in Dynatronics. If you have any further questions, please direct them to ir at Dynatronics.com, and have a great day. Operator, you may end the call. Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. Dynatronics.com www.dynatronics.com

Great. Thanks for taking my questions and looking forward to the next few quarters.

Okay. Thank you Brook, Thank you Brooks.

This concludes our question and answer session I would like to turn the conference back over to Mr. Baker for any closing remarks.

Thank you for your time this morning and for your ongoing interest in <unk>. If you have any further questions. Please direct them to IR at <unk> Dot com.

And have a great day, operator, you may end the call.

Thank you.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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