Dynatronics - Q3 2024

Executive Summary

• Q3 FY24 revenue was $7.66M with gross margin of 23.7%; net loss to common was $0.85M ($0.17 per share), improving from a $1.42M loss ($0.36) in Q3 FY23 as cost reductions flowed through.
• Management cut FY24 revenue guidance to $32.5–$34.0M (from prior expectation anchored at the low end of $34–$37M) on slower rehab demand and changes to private label relationships; SG&A guidance narrowed to 30–32% of sales (from 29–33%).
• Operating discipline continued: SG&A fell ~30% YoY to $2.39M in Q3; gross margin held roughly flat YoY (23.7% vs. 23.9%) despite lower sales, aided by mix and cost actions.
• Liquidity is tight but stable: cash ~$0.6M; LOC drawn ~$2.4M with ~$1.9M availability to support working capital; proceeds reduced payables and accrued expenses by ~$1.7M YTD.
• Product catalysts: three new Hausmann lines (Timber, Titan Premier, Forged) launched with positive customer feedback; management expects Q4 to follow historical seasonal rebound, supported by rising quote volumes.

What Went Well and What Went Wrong

• What Went Well

  • New product momentum: three Hausmann introductions (Timber solid-wood furniture, Titan Premier hi-lo tables, Forged athletic training furniture) show “high customer interest” with positive early feedback; inventory positions are in place to support demand.
  • Cost control: SG&A down ~$1.0M (30%) YoY to $2.39M in Q3; salaries/benefits drove ~$0.7M of the reduction, with additional savings across travel/repairs/pro services.
  • Margin resilience: gross margin held essentially flat YoY (23.7% vs. 23.9%) despite lower sales; rehabilitation category margin improved offsetting softness in orthopedic soft bracing.

• What Went Wrong

  • Top-line pressure: revenue declined to $7.66M, driven by private label customer changes and softer orthopedic soft bracing demand; prior-year Q3 sales were $9.24M.
  • Guidance reduction: FY24 revenue view cut to $32.5–$34.0M from prior expectations at the lower end of $34–$37M; gross margin guidance remains suspended.
  • Greater reliance on the credit facility: LOC balance rose to ~$2.35M with availability down to ~$1.9M as liquidity supported working capital (payables/expenses down ~$1.7M; prepaids funded ~$0.4M).

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Dynatronics' third quarter fiscal year 2024 earnings call. It is now my pleasure to turn the floor over to your host, Brian Baker, the company's Chief Executive Officer. Brian, the floor is yours.

Brian Baker (CEO)

Thank you, operator. Good morning, everyone, and welcome to the Dynatronics third quarter earnings call. This is Brian Baker, President and CEO. With me today is Gabe Ellwein, our Chief Financial Officer, who will now read our safe harbor statement.

Gabe Ellwein (CFO)

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 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.

Brian Baker (CEO)

Thank you, Gabe. This morning, we issued a press release announcing the financial results of our third quarter ended March 31, 2024. 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'll provide an update on our 2024 fiscal year guidance and provide closing remarks. The operator will then open the phone lines for questions. For the quarter ended March 31, 2024, we continued to focus on our sales goals and improving profitability. During the quarter, we made another series of cost reductions as a part of our ongoing effort to align costs to today's revenue volume. These steps allowed our gross margin rates to remain in line year-over-year and reducing operating expenses by $3.7 million year-to-date.

Our commercial and operations teams continue to strive to meet our monthly and quarterly sales goals, and I'm proud of their achievements in the third quarter. Our three new Hausmann product introductions are progressing as scheduled. We work closely with our customers and key distributors to design these additions. Our new Timberline offers high quality, solid wood furniture at an economical price. The Titan Premier treatment tables meet high-end functional requirements while supporting our customers' budget needs. We have strong inventory positions for both Titan Premier and Timber product lines that support our customer demand. We are pleased to see the high customer interest in these products, and feedback from customers taking delivery has been positive. Our new Forge line complements our legacy ProTeam products sold into the athletic training centers. Forge is an athletic training furniture solution offering heavy-duty aluminum construction with customers' branding and colors.

We are now quoting our Forge line for upcoming build-outs in athletic training space. While it is too early to estimate the level of revenue contribution from these new product lines, we are optimistic they will enhance our existing sales base. I encourage you to visit our Hausmann website to learn more about these exciting additions. As a reminder, historically, the business experiences higher revenue in the first quarter, lower second and third quarter revenue, with a bounce back in the fourth quarter. Recently, the business has experienced an increase in quote volume, and although not all quotes convert to firm orders, we believe this is a positive leading indicator that the fourth quarter will align with historical trends. These results reflect continued progress in our fiscal year 2024 operating plan and strategic priorities.

Our team's daily commitment to the business has been key in achieving our goals, and I want to thank all of our employees for their ongoing dedication in the business. I'll now turn it over to Gabe to provide a financial report.

Gabe Ellwein (CFO)

Thank you, Brian. 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 $7.7 million for the third quarter of fiscal year 2024. That compares to net sales of $9.2 million in the third quarter of fiscal year 2023. The year-over-year decrease is primarily due to a change in relationship with private label customers and less demand in our orthopedic soft bracing category. Gross profit for the quarter was $1.8 million, or 23.7% of net sales, compared to $2.2 million, or 23.9% of net sales in the same period the prior year.

The decrease in gross profit was driven primarily by the reduction in net sales discussed previously and decreases in product margin rates in our orthopedic soft bracing category, partially offset by an increase in product margin rates in our rehabilitation category. Selling, general, and administrative expenses decreased $1 million, or 30%, to $2.4 million for the quarter ended March 31, 2024, compared to $3.4 million for the quarter ended March 31, 2023. The overall reduction in selling, general, and administrative expenses was led by a reduction of $0.7 million in salaries and benefits, with the remainder of the $0.3 million spread across travel, repair and maintenance, and other professional services. Net loss for Q3 fiscal year 2024 was $0.7 million.

That compares to a net loss of $1.2 million for the same period of fiscal year 2023. Outstanding shares will increase approximately 400,000 per quarter, depending on our share price. As of March 31, 2024, the number of common shares outstanding was approximately 4.9 million. The net cash balance was approximately $0.6 million on March 31, 2024. No change to the $0.6 million reported on December 31, 2023. As of March 31, 2024, our line of credit balance was approximately $2.4 million. Additional line of credit availability was approximately $1.9 million on a borrowing base of approximately $4.3 million. Cash used by operating activities was $1.9 million for the first nine months of fiscal year 2024.

The company used these proceeds from the line of credit to reduce accounts payable and accrued expenses by $1.7 million and to fund prepaid expenses of $0.4 million. The overall net change in cash, cash position for the quarter compared to December thirty-first, 2023, was a positive $40,000. This concludes our summary of the financial and operating results.

Brian Baker (CEO)

Thank you, Gabe. In terms of guidance for fiscal year 2024, we estimate net revenues to be $32.5 million-$34 million due to slower demand in the rehabilitation space and changes to our private label customer relationships. We are not providing gross margin guidance currently. 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 30%-32% 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 investor base and employees for their ongoing support. I'll now turn it over to the operator for questions.

Operator (participant)

Thank you. We will now take questions from the telephone lines. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. There are no questions registered at this time, so I would like to turn the floor back over to Brian for any closing comments.

Brian Baker (CEO)

Thank you for your time this morning and for your ongoing interest in Dynatronics. If you have any further questions, please direct them to [email protected]. Operator, you may end the call.

Operator (participant)

Thank you, Mr. Baker. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.