Dynatronics Corporation (NASDAQ:DYNT) Q3 2023 Earnings Call Transcript May 12, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Dynatronics Third Quarter Results for Fiscal 2023 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. [Operator Instructions] I would now like to turn the conference over to John Krier, President and CEO of Dynatronics. Please go ahead.

John Krier: Thank you, operator. Good morning, everyone, and welcome to Dynatronics’ third quarter earnings call. Before we begin, I will call your attention to our safe harbor statement found on Slide 2. I remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company’s most recent filings with the SEC. We caution you not to place undue reliance on forward-looking statements we may make this morning. We undertake no obligation to update or revise forward-looking statements. During our prepared remarks, we will be referring to slides that are available for viewing in the webcast and posted on our Investor Center page at dynatronics.com.

On today’s call, we will cover the highlights and achievements of the third quarter of fiscal year 2023 as well as provide commentary on the financials, and then we will have the operator open the phone lines for questions from our analysts. Slide 3 highlights key takeaways for Dynatronics’ third quarter of fiscal year 2023. I want to begin by highlighting three external market events, which have impacted us this quarter. First, competitive acquisitions by one of our rehabilitation customers; second, a reduction of specific SKUs from an OEM bracing customer; and finally, general market choppiness have caused us to reexamine our assumptions for the back half of fiscal year 2023. Net sales are expected to be $7.5 million to $8.5 million for Q4 of fiscal year 2023 and $39.5 million to $40.5 million for the full fiscal year.

As I have stated earlier and despite any external events, we remain firmly focused on gross margin improvement. Due to the external market events, we now anticipate lower revenue in our fiscal fourth quarter than previously planned. However, that has not changed. In fact, it heightens the focus on continued gross margin expansion. In Q3, despite lower revenue, Dynatronics delivered a gross margin of 23.9% versus 22.4% in the prior year. Finally, we have made significant cost structure changes and reductions in response to the lower anticipated revenue. Using the baseline run rate of costs through March 2023, we have made approximately $1.5 million to $2 million of cost reductions to selling, general and administrative expenses to be realized in fiscal year 2024.

Moving to Slide 4. 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 $9.2 million for the third quarter of fiscal year ‘23 compared to net sales of $10.3 million in the prior year period. Gross profit for the quarter was $2.2 million, or as I noted earlier, 23.9% of net sales compared to $2.3 million or 22.4% of net sales in the same period the prior year. The increase in gross profit as a percentage of net sales was driven by the continued combination of net price realization and better overall product mix. We remain cautious about the external outlook and have modeled cost pressures to continue for the remainder of calendar 2023.

Selling, general and administrative expenses decreased $0.3 million or 8.1% to $3.4 million for the quarter ended March 31, 2023, compared to $3.7 million for the quarter ended March 31, 2022. Reductions in salaries and benefits were the primary drivers of the decrease. Net loss for Q3 fiscal year ‘23 was $1.2 million compared to a net loss of $1.5 million in the same period of fiscal year 2022. Outstanding shares will increase approximately 120,000 per quarter, depending on our share price. The approximately 120,000 shares per quarter is based on a share price of $1.40 per share. The net cash balance was approximately $0.7 million on March 31, 2023, the same as on June 30, 2022. We reduced our inventory balance by approximately $2.4 million from our June 2022 levels to $9.7 million.

We will continue to strategically optimize our inventory while preparing for new product introductions and seasonal demands in our upcoming quarters. Cash generated by operating activities was $0.4 million for the first nine months of our fiscal year 2023, which compares to cash used by operating activities of $3.3 million in the same nine months of the prior year. This concludes our summary of the financial and operating results. Turning to Slide 5. As stated earlier, gross margin expansion remains a key focus. Gross margin increased to 23.9% in Q3, a 1.5 percentage point increase from the prior year gross margin of 22.4%. Sequentially, the decrease in gross margin of 4.2 percentage points from Q2 reflects the customer disruption previously discussed, coupled with macroeconomic supply chain challenges.

We are continuing to execute against our 6-point gross margin plan. Number one, price rationalization; number two, rationalized product; three, new product introductions; four, manufacturing efficiencies; five, revenue scale; and six, mergers and acquisitions. Slide 6 provides the fiscal year ‘23 guidance details. I discussed our net sales guidance range for fiscal year ‘23 of $39.5 million to $40.5 million. Effectively, we have reset the baseline net sales performance to approximately $9.25 million per quarter and align the performance to our historical seasonality trends. Historical seasonality trends tend to be highest in the first and fourth quarters of our fiscal year. The company is continuing its recent trend of not providing forward-looking gross margin guidance due to the choppy nature of the business transformation and the impact of the noted external events.

We anticipate selling, general and administrative expenses of 35% to 40% of net sales in Q4 of fiscal year ‘23. As we move through the upcoming quarters, we expect to continually leverage and improve our scale on this SG&A cost base and return to our targeted range of 30% to 35% of net sales in fiscal year ‘24. This guidance is based on our current operations and is subject to the risk factors and other forward-looking statements and uncertainties contained in this presentation and in our filings with the SEC. Turning to Slide 7. Refreshing our product portfolio is a key part of our growth plan. The Dynatronics team has reached approximately 6% of revenue coming from products released in the past three years and has been able to maintain this level for four consecutive quarters.

Slide 8 shows the investment highlights for Dynatronics. The markets we serve, rehabilitation and bracing have opportunities for Dynatronics to expand its product profiles. We target improvement in gross margin in the coming quarters despite the revenue disruption and overall macroeconomic environment. We have approximately $0.7 million of cash and $9.7 million of inventory on the balance sheet at the end of March with no debt. Dynatronics has not borrowed against its asset base of inventory or accounts receivable since July 2020, representing 11 consecutive quarters of no debt. Dynatronics is focused on ensuring financial flexibility by evaluating additional working capital reductions, a possible asset-based line of credit and potentially using our ATM facility as appropriate.

We will continue to share our progress and updates as we move through our fiscal year 2023. I will now turn it over for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brooks O’Neil of Lake Street Capital Markets. Please go ahead.

Operator: Our next question comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.

Operator: Our next question comes from Scott Henry of ROTH Capital. Please go ahead.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Krier for any closing remarks.

John Krier: Thank you, operator, and thank you all for your interest in Dynatronics. If you have any further questions, please direct them to ir@dynatronics.com. Have a great day.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.