Good morning, ladies and gentlemen, and welcome to the Dynatronics Third Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions] As a reminder, this event is being recorded. It is now my pleasure to turn the floor over to your host, Norm Roegner, the company’s Chief Financial Officer. The floor is yours..

Thank you, operator. Skyler is not in the office today, so I will call your attention to our Safe Harbor statement before we begin. Please note that during this call, we will make forward-looking statements regarding our current expectations, plans, projections and the financial performance relating to our business.

These forward-looking statements reflect our view as of today only, and they involve risks and uncertainty that could cause 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 and include uncertainties and risks related to the impact of the COVID-19 global pandemic on our business results.

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. During our prepared remarks, we will be referring to slides that are available for viewing in the webcast and posted in the Investor Relations section of dynatronics.com.

I will now turn the call over to John Krier, our President and Chief Executive Officer..

number one, ramped up cadence and expanded pipeline of product innovations; two, at the end of January 2022, under the umbrella of Return to Mobility, we launched an exclusive suite of products and additionally three new metal tables; and three, dealer and customer feedback drove the product releases.

The new metal tables were launched on January 31, 2022. Due to the typical time line for orders, product build and then shipments, there was a small immaterial revenue impact from these new products in our third quarter of fiscal year 2022.

While the corporate-wide impact was immaterial in Q3, booked orders on these new products were almost 200% higher than our baseline expectations in the third quarter, exceeding every metric in the plan. We believe this demonstrates market acceptance of the Mammoth line and expect it to become a more important contributor to our revenues over time.

To use a baseball term, the Mammoth launch was a single that drives our net sales growth over time. Looking at Slide 11. Brian Baker rejoined Dynatronics full time as Chief Operating Officer in January 2022. Brian served as our Chief Operating Officer from May 2019 until his promotion to Chief Executive Officer in August 2019.

Brian held that position until July 2020, when he resigned due to health issues relating to COVID-19. Thankfully, he has recovered from the COVID-19 virus, and I was delighted when he accepted the opportunity to rejoin our management team full time. As you can see, new leadership hires have been a major focus area at Dynatronics.

We also implemented a culture of accountability at the company and focused our employees on overall organic sales growth and consistent profitability. On Slide 12. The markets that we serve are large, growing and highly fragmented.

The industry research continues to indicate that the rehabilitation and bracing and support markets exhibit attractive growth profiles, each of about 5% to 6%.

Opportunities exist across Dynatronics primary brands to expand market share within existing customers as well as to introduce additional product offerings within the segments in which we compete.

As we are all likely experiencing or reading about the statistics of facility activity, orthopedic procedures and other peripheral activities like team sports that create demand for our products are volatile based on COVID-19 activity and staffing shortages. Building on the foundation in the markets we serve, let’s move to Slide 13.

Our M&A strategy is detailed here to give you an idea of what we look for. We continue to have conversations and pursue acquisitions, innovation partnerships and other business ventures. We have the leadership team to execute on any that meet our well-defined criteria.

Our focused criteria include greater than 40% gross margin and cash flow contribution within the first year. Our focus is on our current markets. Our near-term targets are at the lower end of the $5 million to $30 million revenue range.

We prefer to make a smaller acquisition using our balance sheet or bank debt rather than equity because we believe our share price is undervalued and want to unlock some of that value. I will now turn the call over to Norm..

Thanks, John. Please turn to Slide 14, which contains our quarterly financial and business highlights. 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 $10.3 million for the third quarter of the fiscal year.

That compares to net sales of $11.5 million in the same quarter of the prior fiscal year. $10.3 million net sales in the third quarter exceeds the $9.25 million quarterly continued product net sales baseline set in April 2021.

Our net sales across the quarters of fiscal year 2022 align with historical trends, lower in the second and third quarters and higher in the first and fourth quarters. We continue to see an increase in overall activity compared to the prior year, which was impacted by COVID-19 shutdowns and other related disruptions.

Gross profit for the third quarter of fiscal year 2022 was $2.3 million or 22.4% of net sales compared to $3.3 million or 28.8% of net sales in the same quarter of the prior year. As John mentioned earlier, we saw COVID-19 and supply chain challenges, including extraordinarily high freight, raw materials and labor costs in the third quarter.

Specifically, gross margin would have been 31.7% or 9.3 points higher without the impact from COVID-19 in the third quarter. About 60% of the 9.3 points of the inflationary cost impacts are related to freight, with the remainder primarily related to raw materials.

Overall, we have seen a slowing of inflationary costs over the last quarter in both freight and raw materials. We expect cost pressures to continue for the remainder of calendar year 2022 with the adverse impacts to be more pronounced in the first half of this year. So freight and raw material costs are probably here for at least a while.

We are raising prices to offset these costs, at least partially, as John discussed. Selling, general and administrative expenses were $3.7 million in the third quarter compared to $3.9 million in the prior year period.

We delivered year-over-year SG&A cost savings as we continue to improve operational performance and leverage our resources on a company-wide basis. The decrease was due primarily to lower direct selling expenses and reduction in general business fees and administrative personnel costs.

Net loss for the third quarter of this fiscal year was $1.5 million, that compares to a net income of $0.1 million in the third quarter of fiscal year 2021, which benefited from $963,000 of employee retention credit. Outstanding shares will increase approximately $280,000 per quarter, depending on our share price.

As of May 6, 2022, the number of common shares outstanding was approximately 18.2 million. We expect sequential improvement in gross margin in Q4 in response to our price increases and favorable mix shift to our new product innovations. The net cash balance was $2.5 million on March 31, 2022.

We invested in inventory due to double-digit higher sales in each quarter of fiscal year 2022. In addition, supply chain volatility continues to cause longer lead times. As a result, the organization made a strategic decision to place additional orders on key raw materials and other supplies.

Cash used in operating activities was $3.3 million for the nine months ended March 31, 2022, due to the company’s working capital investment on effective double-digit growth specifically $5.1 million or 78% increase due to the build in inventory to serve customer demand, additional safety stock to help offset continued expected supply chain disruptions and new product introductions.

Before I turn the call back over to John, I will note we continue to navigate a volatile landscape through the continuing challenges from COVID-19, including higher raw material prices, delivery and shipment costs, supply chain disruption, extended handling times and delays or disruptions in procedure volume.

At the same time, Dynatronics also expects some continued volatility from the company's business transformation. This concludes our summary of the financial and operating results. I will now turn the call back to John..

Thank you, Norm. Slide 15 is the investment highlights for Dynatronics. The markets we serve, rehabilitation and bracing have attractive growth profiles. Our sales growth has been driven by customer and dealer reaction to the business transformation. We are winning market share. Our sales have exceeded the market in four consecutive quarters.

Our target is 15.8% sales growth in the fourth quarter relative to the $9.8 million continued product sales in the same period in the prior year. We target sequential improvement in gross margin in the fourth quarter of fiscal year 2022.

We have approximately $2.5 million of cash and $11.6 million of inventory on the balance sheet at the end of March with no debt. We are excited to be moving Dynatronics in a direction that will reward our shareholders and provide a consistently differentiated experience to our customers. We are actively sharing our story with the investment community.

We will be presenting and hosting one-on-one meetings at upcoming investor events, which will be detailed in upcoming press releases and on our Investor Relations website. We hope to meet with you. I will now turn it over for questions..

[Operator Instructions] Thank you. Your first question is coming from Jeffrey Cohen of Ladenburg Thalmann. Jeffrey, over to you..

Hi, John, Brian and Norm, how are you?.

Great, Jeff. Good to hear your voice..

Please to have you back to work Brian. Hope you’re doing well. And few questions for net rent. So John, can you talk about the number of SKUs? I know you've gone through some rationalization there over the past year.

Could you walk us through perhaps aggregate numbers as they stand and any net change from Q3 and anticipated changes going forward in the short and medium term?.

Thanks, Jeff. Our SKUs run around 5,000 today across all of our brands. No material change across them. We certainly reduced a significant number of SKUs over a year ago when we reset our baseline, and this is now driven by our manufactured products going forward..

Got it. Could you talk about margins and pricing a little bit. It sounds like you took some pricing and remind us what – I think you said 9% was from freight and raw material.

Is your price taking, I guess, keeping up or net neutral to those increases thus far through Q3 and Q4?.

I'll talk first about price and then I can let Norm elaborate on gross margin. So when we look at our Q3 results and the growth that we experienced continued. Roughly 97% of that is driven by volume and only 3% of that driven by price.

And so we're not to the point where the price increases are keeping up with the percentage decline and the inflationary cost that Norm alluded to. The other point about price, though, is that we talked about in our last call that most of those price increases went into effect the first of the year.

And due to the rolling nature of how they're implemented, it takes one, two and three quarters for them to fully make it into our results. And so we're just seeing the beginning of that with that 2.6 percentage sequential increase that we saw in the quarter..

And I can add to that. I mean I do think that in terms of the inflationary costs, yes, we talked about 9 point – 3 point added back. When you look at the inflationary impact, it takes our adjusted margin to 31.7%, which is better year-over-year, obviously. So we're excited about that.

Unfortunately, we got the inflationary impacts that we've got to deal with now. And we are making some of it back, as John just spoke to on the price increases. And we'll continue to watch that. We have seen overall, those inflationary costs start to slow a little bit in the third quarter, which is nice. And hopefully, that trend continues..

Okay. That's helpful, Norm. And then lastly, for us on the margin front, again, I suppose – I appreciate your longer-term number of the 40%. I'm just trying to get a better handle on – for modeling purposes for fiscal 2023 and 2024, how that may look as far as increases.

Do you expect kind of a modest linear increase throughout the next eight quarters, call it, 3% to 5% on an annual basis for the next couple of years at least.

And when you talk about longer-term 40%, I imagine you're referring to three or three-ish years going forward?.

I think starting with just the fourth quarter, we saw a 260 basis point improvement sequentially over the second quarter, and we'd like to see that trend continue, and we think it will in the fourth quarter of this year. And then going forward, yes, I think to get to that 40% margin, we aren't going to be able to do that overnight.

But if we consistently move a study pattern forward with 260 basis point type improvements, we'll get there in the next two plus years..

Okay. That does it for us taking….

Jeff, I would add to Norm's comment, though, just to share what I shared internally with the team. While, I'm proud of the team and our efforts to get to that 31.7% gross margin when you remove those inflationary costs and we're improving it year-over-year. That's not an excuse for us to be able to get to our long-term target.

So we need to be effective at launching new products that are greater than 40%, improving our initiatives internally so that we can get to that point, we won't be satisfied until we get to our peers..

Got it. Thanks, John..

Thank you. There appears to be no more questions in the phone line. I will now turn this call over to Jeff Christensen to read through submitted questions through the webcast. Thank you..

Okay. Yes. Thanks, operator. And our first question is for John.

And – what – you talked about the market growth, and I just want to make sure this question was submitted in the webcast chat was, what's driving that thinking about going forward, what's going to drive that above market growth?.

Yes. The first part of it is just we have a clear strategy and the customer reaction to that strategy is very strong. And so that's being demonstrated by the fact that if our markets are growing 5% to 6%, and we're demonstrating 20% year-over-year with our midpoint and even 16% in Q4, that's three times the market.

So that reaction is there with how we're driving our dealers and our customers to work with us. As we continue to launch new products. So with the new Mammoth line being launched on January 31, just beginning to take hold. That's not even really in our results yet, will be another reaction to that.

So if we can continue this commercial execution, launch new products that will help generate margin. That's how we'll be able to maintain that above market growth rate..

Okay. And our next question in the web chat is just to make – be clear about it.

What – how do we think about what's going to drive – what's going to be the most important factors to drive gross margins higher?.

Well, I think when we look at how are we performing in the market and then how are we driving gross margins higher. The first step for us was to generate net sales growth, organic growth at greater than the market. We've now done that for what will be our fourth and fifth consecutive quarters.

We've managed SG&A to that midpoint to be able to say, hey, at least in our cost base today. What we've done is improved our gross margin absent the COVID factors of the year, but now we need to improve them regardless of the inflationary pressures. So we're working on sourcing relationships. We're working on our factory yields.

We're switching to higher mix products. We're accelerating the cadence of new product innovations. I can't point to any one of them and say that's going to be x percent or y percent, but the culmination of all of those is what's going to allow us to get to our gross margin target..

Okay. Thanks.

What are the most important Dynatronics metrics that we should follow in the milestones that we should look for in the next three, six and 18 months?.

There's three metrics that we're looking at, Jeff. And first, as we talked about, is that consistent net sales growth. And we've seen it over the last four quarters. We want to continue to see that.

And we're watching that because it shows that one, we're making inroads with our customers, and our sales strategy is working; and two, it's going to be a measure of our success around our new product launches. The second metric that we're highly focused on and is a key metric for us is that gross margin, and it's specifically the expansion of that.

Our goal remains to get to 40% gross margin. And while that's not going to happen overnight, we do want to see a steady improvement each quarter going forward so that we can get to that overall target. And the third metric we're always looking at is focused on is operating – excuse me, EBITDA in operating cash flows, a positive operating cash flow.

So those are the metrics we're watching and we're consistently talking about and focused on..

Okay. Thanks.

The next question in the chat is what new products will you be offering?.

Yes. I think if you look at the last few quarters, that's now seven new product releases since January of 2021, six new table lines, a new software application. We'll be launching those new products in both of our segments.

The Mammoth is a series of products that as we continue to test the market and receive dealer reaction, we'll cadence them out at the right time and manage the reaction. So we've got a strong pipeline of new products coming.

We need to make sure that we vet those, use disciplined product execution management led by our team with Sarah Mealman and others and bring those to market over time..

Okay. Thanks.

It is the – the next question in the chat is, is the gross margin on new products launched in Q3 and going forward, are those going to be higher or about the same or lower than the rest of the business?.

Our target for all of our activities is to get our gross margin over 40% long term. A key tenet of that is that anything we launch or changes we make today must all achieve that target. So new products must be able to achieve greater than 40% gross margin so that we're consistently pulling up our overall portfolio.

And as new products released continue to be a greater percentage of our overall revenue, that will raise our margins along with operational improvements led by the return of Brian Baker and the rest of the organization..

Okay. Thanks. Operator, I got a note from Scott Henry [Roth Capital] that he was trying to ask a question on the phone line.

Is that – are you – do you see that? Or is he not able to get in?.

It hasn't come up at all. As I said, Jeff's question came up, no problem. [Operator Instructions]. I can unmute his line. He can ask the question, if he like..

Yes.

Can you unmute his line?.

100%. Just two seconds. Okay. Scott, you can ask your question..

Guys, can you hear me?.

Yes, we can hear you, Scott. It's a little fuzzy, but we can try to make it out. Great to hear your voice..

A lot of pressure. I hope I have two questions. For starters, when I look at 55 on the gross margin, I can't help but ask, you have the bar chart, and if I just look at Q4, it would imply that 26% gross margin. And if I look at fiscal year 2023, it would imply 30% gross margin.

The question is – are those bar charts just put there to show growth? Or are they representatives of actual expectations? I know they don't have numbers, but you can eyeball it?.

So Scott, I'll jump in here. This is John. I would say that what Norm talked about earlier is that if we were able to see a sequential 2.6 percentage point improvement like we saw in Q3 and Q4, that would be a good outcome in the event of these inflationary pressures.

We've not provided going forward gross margin guidance and that bar chart is simply to represent that we expect that to continue. The wildcard will be how fast can we see some of the inflationary pressures continue to slowdown and then also as our price increases come in.

So I wouldn't imply a direct percentage there, but we would be happy with that similar 2.6% increase that we saw in Q3..

Okay. And then so you mean there's not a cash flow burn in the quarter, as you mentioned largely for inventory.

How should we think about cash for fourth quarter? And more importantly, in 2023 do you expect to be cash flow neutral or how should we think it?.

Yes. I think if you look at this, Scott, in the nine-month period, so we utilize cash flow from operations of $3.3 million. We spent $5.1 million building inventory. We're heading into our 2 largest growth quarters of the year. Our fourth quarter is our second highest. Our first quarter is our highest.

And so you shouldn't expect to – we also discussed that our inventory is at elevated levels, and it will be around this level going forward. We're going to continue to meet that demand that's there, especially as we head into our peak season.

But as you look ahead, so given the fact that we'll have our strongest revenue quarter, but we're still dealing with a choppy nature. When we go into fiscal year 2023, targeting positive cash flow from operations is absolutely going to be a goal, and we're going to set the business on a path to achieve that..

Okay, that’s helpful. Thank you. And then the last question is somewhat of a couple question and then I’ve not wanted to ask about I think it's relevant. You're talking about growth; you're talking about gaining market share. But we're still down sequentially and down year-over-year.

And I know you reset the base by eliminating SKUs, so it's not apples-to-apples anymore. So the question is, I mean, you can do that once, but after doing that, let's talk about growth, you have to show growth.

So the question is, for 2023, will the growth we're talking about show up in the revenue stream?.

What I would point to, Scott, is we've said all along that we want to generate stability and be confident in the metrics that we put out so that we achieve them. We understand that having confidence in the management team and in our performance is not about the words, it's about the performance that we put up.

And so this is the fourth and fifth consecutive quarter of beating not only the net sales baseline but our market. And in this quarter specifically, that we provided guidance for Q4, that is an apples-to-apples comparison of 16% organic growth against the prior year. So our focus is on being able to maintain that.

The market is giving us, let's call it 6%, we've proven now that for four and five quarters, we can deliver that. We have to continue to launch new products. We have no intention of not being able to do that. We need to simply execute..

I guess I want to – I just want to put it in a different way. Because your Q4, yes, you're telling me it's going to grow. But it's not a change based on Q4 of 2021. So it's not going to grow from 2021's Q4 number.

My question is, when – is 2022 going to be a [indiscernible] based, meaning, say, that's $44 million to $45 million revenue, is that going to be apples-to-apples when we look to 2023? Or are we going to be pulling and pushing things in and out of the 2022 numbers.

I just want to know when we're on that kind of organic baseline what we should be thinking about..

We are on that right now, Scott. The number we're projecting for Q4 against that $9.8 million from Q4 of last year is on that baseline. And the $44 million to $45 million that we project for this fiscal year is the baseline going into the new fiscal year..

Okay, perfect. Thank you for that clarity. Then I guess final question is the market for acquisitions, do you find it improving given the challenging economic backdrop, do you find that sellers are perhaps more going to consider alternative financing such as earn outs.

And is it working – is the market coming to is basically when you think about – just trying to get a sense of that and how we should think about that aspect of the business?.

Yes. The market for acquisitions is still very challenged out there in terms of expectations and then the macro environment uncertainty that's out there, that is still the case. So we have to continue to have these conversations.

We will continue to have these conversations but it hasn't gotten any easier on being able to find that willing partner that advances us going forward.

So the clearest near-term strategy we can do is launch these new products, drive this organic growth and keep those conversations coming and ideally one of those breakthrough in the coming one to two years..

Okay, great. Thank you for taking the questions..

You’re welcome Scott. Great to hear your voice..

So we're all out of time, and I would like to now turn the call back over to John for any closing comments..

Thank you. Thank you all for your interest in Dynatronics. We are actively sharing our story with the investment community as we move forward. So we hope to meet you at upcoming investor events.

And for all those employees of Dynatronics across all of our great sites, I want to say thank you for driving this organic growth and continuing this transformation together. We continue to exceed the market and have great opportunities in front of us. If you have any further questions, please direct them to Skyler Black or Jeff Christensen.

Their contact information is in this presentation and our press release. Have a great day..

Thank you. This concludes today's conference. All parties may disconnect and have a great day..