Kelvyn Cullimore - Chairman, President and CEO.

Analysts:.

Welcome to Dynatronics Fourth Quarter and Fiscal Year-end Conference Call. This is Kelvyn Cullimore, President and CEO of the Company. We appreciate you being on the call today. I apologize for any mix up on the telephone calling number. I appreciate the fact that you got the updated information.

Before we begin, as a reminder, during the course of this conference call management may make forward-looking statements regarding future events or the future financial performance of the Company. We appreciate you taking the time to be on the call today.

Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements.

We caution you that any such statement should be considered in conjunction with the disclosures, including specific risk factors and financial data contained in the Company's most recent filings with the SEC including its most recent Annual Report on Form 10-K.

Today I will update you on Dynatronics’ results for the quarter and year ended June 30, 2014. Following my presentation, we will open the call up for some questions, until then the call will be muted and I will continue speaking. So let me begin with the report on the fiscal year that ended on June 30 and for this quarter ended on the same day.

Fiscal ’14 was probably one of our most challenging years since we began operations. Other than fiscal year ’08, which was the year after we executed our plan to vertically integrate by acquiring all of our dealers, we reported some significant losses in that subsequent year. This was been the most challenging year we’ve had.

We’ve only had about six years. We lost money since we began and so we don’t like these kinds of outcomes. The good news is the trends that we’ve seen towards the end of the fiscal year have continued on a positive trend and to fiscal year ’15. So we’re hoping that the worst is behind us and that we’re moving forward.

So let me give you some perspective on some of the various categories here. Sales; in Q4, our sales declined about 207,000 or just under 3%. By comparison in Q3, we were down 12.5%, and in Q2 we were down 10.6%.

So to return to a much more moderate decline number of 2.9%, it is an indication of the upward trend that we’ve been seeing in the last six months. The increased sales of ThermoStim Probe and Solaris Plus units was offset by lower sales of other manufacturing modalities.

In fact through the course of the year, our capital sales were down, although in the fourth quarter, capital sales were actually higher than they were in the prior year. So again the trend is headed in the right direction. Healthcare reform has certainly had a continued negative effect on our operations.

We simply have not seen the kind of clinic expansion that we’ve been accustomed to, at least not until the recent quarter ended. Clinic seemed to be healthy.

They just are being very, very conservative, not expanding, not growing, not buying new equipment at the moment, all waiting to see what happens with reimbursement and the various structures of healthcare reform. For the year, our sales declined about $2.1 million or 7.1% overall. Fortunately we are seeing the trend line starting to curve upward.

As I’ve mentioned, sales over the last four, five months are running ahead of last year. That is not -- that’s something that has not happened for at least the last 30 months to have a sustained increase as we’ve seen during that period of time. Let me talk a little bit about gross profits.

Obviously, the lower sales affected our total gross profit production. The lower sales accounted for about $800,000 less in gross profit during the course of the year. In Q4 and the quarter itself with 207,000 less in sales, we saw gross profit down about 150,000, and for the year we were down about 1,060,000 in profit.

It wasn’t just the lower sales that contributed that, we also saw about a 1 point decline in gross profit margin. So, if you divide the two, the lower sales accounted for about 800,000 of the decline and the gross profit margin decline accounted for about $270,000.

In Q4, we saw our gross profit margin drop from 36.6 to about 35.5 and from the fiscal year dropped from 37.5 to 36.5. The reasons for the decline in the gross profit margin are twofold.

One, over a year-ago we discontinued the Company’s Stream product, which was a software service that we had provided that ran out during the course of the year and we realized about $100,000 in gross margin last year from that and did not see that same gross margin this year.

The other $170,000 loss in margin was attributable to lower gross margin because we had a higher mix of lower margin supply and distributed items this year than we did last year.

That’s again a reflection that capital equipment sales for the year, which were our higher margin products, were down until we got to the fourth quarter when we saw them turn back around. SG&A expense was about a $150,000 less in gross profit in Q4. It was necessary to lower expenses to compensate.

In the fourth quarter, we did lower expenses by $180,000. About $59,000 of that was labor and operating, 106 was lower selling expenses, and 14 of lower general expenses. For the fiscal year, our gross profit was down as I mentioned before about 1,066,000, and we reduced our fiscal year expenses by almost 650,000 for the year.

That breaks down into lower labor and operating costs of 227,000, lower selling expenses of 280,000, much of which was lower commissions due to lower sales, and 139,000 of lower general expenses and 29,000 of lower interest expense. This follows on the heals of expense reductions in 2013 of about the same amount, 650,000.

R&D also saw some declines during this year. In the fourth quarter, we saw R&D expense decline by 82,000. Part of the reason for that is during the course of the year, we were working on the new ThermoStim product and that led to a little bit higher R&D expenses in prior quarters.

But once we completed the ThermoStim project, our R&D expenses return to more normalized levels. For the year, R&D expense is down about 128.

So you can see that in the fourth quarter that accounted for about two-thirds of our R&D reduction for the year, again due primarily to the higher R&D expenses incurred in Q1 and Q2 associated with the ThermoStim Probe.

Going forward, we will be in a more normalized period, and in the coming 12 months as R&D effort is focused on less intensive projects or at least use current platforms to build from in generating the products that we are working on.

So we will see a more moderate level of R&D spending in the coming 12 months than we’ve seen in the last two to three years.

On the pre-tax line, which is where we measure our operating profit the most, we improved our operating performance in the fourth quarter by about 70% compared to last year, dropping our pre-tax losses by 115,000 from 162,000 last year to 47,000 this year. Still a loss, but a significant improvement over the prior year.

Interestingly the medical device tax imposed by the Affordable Care Act, that began in a year and half ago required that we pay about 42,000 medical device taxes in the course of the quarter. So that almost accounted for the full amount of the loss for the quarter.

Last year during the fourth quarter we paid a similar amount in medical device tax about 40,500. For the year, we generated about $397,000 pre-tax loss that compares to $131,000 last year. The medical device taxes during the year amounted to $160,000 or 40% of the total loss.

And it’s interesting to note that of the $397,000 in losses for the year, 65% of that or $255,000 was reported in Q3. Q2 was a profit, Q1 and Q3 were more significant losses and then Q4 has shown a much more moderate loss in showing the trend of moving forward. It’s important to note that income taxes do play a role in getting to net income.

During the current quarter, we made provisions for tax benefits at 3.6% compared to 55% last year. This reflects mainly timing differences and primarily lower R&D tax credits this year compared to last year. For the year, the tax rate applied was 31.7% this year compared to 66.2% last year.

Keep in mind, when I say tax rate applied, that’s the tax benefit applied, because we actually reported losses. And the reason for the higher benefit last year at 66.2% was a true-up of some R&D tax credits in the year ended June 30, 2013 and we did not see those same tax credits this year.

So given that income tax impact, it does skew the net income comparisons a little bit, showing that our net loss for the quarter ending June 30th of this year was $46,000 compared to $73,000 last year. Again, because there was a very large tax benefit booked in the fourth quarter of last year.

For the year, we declined from a net loss of $44,000 last year to a net loss of $271,000 this year. Again, last year being the beneficiary of a very large R&D tax credit, which have the effect of lowering the net income or the net loss for last year.

So that gives a little flavor of the operating performance for the last year and for the fourth quarter. The takeaway is that R&D costs are down because we finished most of our projects and are using current platforms to build from. Sales trends have turned upwards and so have operating profits in the last four, five months.

Yet given the earlier part of the year, we ended up booking the largest operating loss that we’ve had since we began operations except for the year when we did the vertical integration with the dealers. Still about a $397,000 loss. Strategically, let me talk little bit about what we’re doing going forward to address that.

We are encouraged by the recent trend moving forward and we feel like even though we’re little [ph] [gun-shy] to say, we really feel like it appears things have turned around. We’ve seemed to have bottomed out.

September is not keeping pace with that same trend, but we still believe that Q1 will end up pretty equivalent to the Q1 of last year, which is a big improvement. We haven’t shown that kind of a match quarter-over-quarter for the last three years. We did sign at the end of the fourth quarter, a three-year sole-source agreement with Amerinet.

Amerinet is one of the five largest group purchasing organizations in the nation. Sales into that contract are ramping up more slowly than we expected that they’re contributing to the higher sales in the current quarter. We are working on ways to accelerate sales into this agreement, but as I mentioned, it is a little bit slower than we expected.

The change to us being the sole-source provider has disrupted a supplier agreement that will be in place for almost two decades.

And so getting members of that GPO to recognize that and began switching over has been a little more a guerrilla warfare than we had thought it might be, but we’re confident that we will continue to grow and improve, and contribute to higher sales over the course of the next fiscal year. We have lowered our expenses.

As mentioned, we lowered our SG&A expense $650,000 each in the two years and on top of that another $128,000 in R&D -- lower R&D expenses this last year. Over the last 24 months, there has been combined over $1.3 million of expense reductions, $400,000 which was sales commissions.

We did in August of this year, do a sale and leaseback of our facility here at our corporate headquarters in Utah. The $3.8 million sale was matched with the 15-year leaseback. This sale allowed us to reduce our debt by $2.7 million, and accounted for about 53% of our long and short-term debt that was on the books at the time.

This has left us with about $2.4 million in short and long-term debt, which is comprised primarily of the mortgage on our facility in Chattanooga and the remaining balance on our line of credit which presently is under $1 million.

The new rent payment is approximately equivalent to the savings and depreciation and debt amortization that we’ve eliminated. So we don’t anticipate any measurable impact on cash flow of the Company as a result of that transaction. We were able to reduce the debt and keep monthly cash flow at pretty even.

However, accounting rules speak what they’re have required that we not recognize the profit from that sale which was about 2,250,000 over -- at a single point and reported in this quarter, instead the accounting rules require that we amortize that gain over the 15-year life of the lease.

I don’t pretend to understand the reasoning behind that, but we’re subject to those accounting rules and apparently they have in the past felt that some public companies have abused the sale leaseback opportunity and therefore have taken away any ability to report a single gain from such a transaction instead require we amortize over the life of the lease.

Similarly because of the nature of the transaction we are required to capitalize the lease which means we will incur new depreciation expense and imputed interest expense that will result in recognizing about $11,000 from (indiscernible) and expense on the first half of the lease and see that flip around to be about the same amount less than what we pay at the end of the lease.

Once again, I don’t understand the thought process behind the accounting rules on that. Instead of just reporting our rent payment as an expense we instead capitalized the lease and report depreciation and imputed interest expense.

The tax on the gain of the sale does have to be paid in the current quarter, but that is mostly offset using our cumulated tax attributes, tax credits, deferred tax attributes and that nature. There was a small about $350,000 of tax that was paid out of the proceeds from the sale of the property.

In addition to the sale of the property, we have introduced many new products. In fact the last two years has been the most productive period in our history and bringing new products to market including the Solaris Plus, 25 Series Ultra Table, the new ThermoStim Probe et cetera.

Interest under the new ThermoStim Probe that was introduced in Q3 or at the very end of Q2 has about 80% of those probes being sold with a Solaris Plus unit. Solaris Plus unit is required to operate the ThermoStim Probe and many people who are interested in having a probe needed to buy the new unit in order to operate it.

So its -- the ThermoStim Probe has resulted in a pull through of unit sales that average about $2,900 along with the ThermoStim Probe of about $1,400. That’s been a big plus that has helped us in Q3 and into Q4.

We continue to sell between 40 and 50 of the ThermoStim Probes a month and hoping that as the market improves we’ll be able to pickup those sales in the coming fiscal year.

We are attracting more new sales reps and dealers to provide better coverage and deeper market penetration, a lot of that is related to the new products that we have introduced and the attractiveness of those products. We have for the first time also in many years seen some significant interest on the international front.

Unfortunately some of these markets take some time to develop. We’re working on a very bonafide dealer in China who would be in the $2 million to $3 million a year range once they are up and running and we’re hoping to have that up and going by the third or fourth quarter of this year. Along with that they have other distribution in South East Asia.

We’re working with several in Mexico and Central and South America that shows some real promise. I would also take a moment to mention those who have followed SEC filings or where that the company did file an S-3 Registration Statement.

And if you’re familiar with an S-3 it is what is known as a shelf registration where we have approached the SEC about having some shares that could be used to sell to raise working capital. It’s important to understand that no shares will be sold until there is a prospectus that would be filed along with that.

So the S-3 is a preliminary step that nothing happens until a prospectus is filed with the SEC and that prospectus also will generate an 8-K filing. And so if you follow the company along that line you’ll see more on that in the future but there is nothing immediately happening with that S-3 until that prospectus does get filed in the future.

It’s important to note that under NASDAQ rules we’re not allowed to sell more than 500,000 shares of stock without a shareholder involved, and that’s a 20% threshold that they have set and that will be about 500,000 shares, and we are positioning that (indiscernible) to raise some additional capital to facilitate some strategic business opportunities.

We have been working to develop for the last six months, and hope that we’ll have more to report on that in the coming months. So with the increase in sales anticipated in Q1, and we also anticipate a significant improvement in operating results. In Q1 last year, we posted the pre-tax loss of $169,000.

As with Q4, we anticipate a significant improvement from that result and profitability maybe optimistic, but we should on an operating basis significantly reduce pre-tax losses we anticipate to well below $50,000 for the quarter ending in September.

Q2 has always been our best quarter, and we would anticipate that won't change, and we should be profitable in that quarter. Last year, we showed a profit of $74,000, and if we follow the trends of Q4 and Q1, we’re going to anticipate an improved profit performance in Q2 over that part of the year.

That’s in pre-tax and operating profits I’m talking about. Beyond that, we hope to see continued improvement such that the year end -- year will end with a small pre-tax operating profit. Factors affecting our performance in the coming months and fiscal year will include the following.

Continued impact of healthcare reform, we think that is becoming more clear, but it still has many elements to be resolved. General economic conditions are improving but there are areas of the country where we still see impacts from slower economic conditions.

We are hopeful to see acceleration of sales under the Amerinet contract that will have an impact on how we perform in the coming year. Introducing the new international sales dealers, getting them onboard in Q3 and Q4 will help to move the needle, additional new product introductions.

Even though our R&D expenses are expected to reduce, we’re working on current platforms to introduce two or three more new products before the end of the fiscal year. Capitalizing on the new products that have been introduced over the last two years will certainly help to move sales forward.

Expanding our distribution capabilities will be a focus as we’ll maintain vigilance in keeping our operating efficiencies at current levels. Business opportunities due to strategic expansions and partnerships such as those related to the S-3 filing could also have an impact on what happens in the coming months and quarters.

All of this is calculated to try and build shareholder value and to improve things from the past fiscal year. We believe things are headed in the right direction.

We’re certainly glad to have the past quarters behind this particularly Q3 of last year and feel that we’ve made the changes necessary to keep the ship afloat and keep it viable going forward and return to profitability. With that I’ll ask the operator the open the line for any call or any questions that you may have..

Thank you very much. (Operator Instructions) And there are no questions at this time, sir..

Well I’m sure there maybe some people messing with their phone. Let’s give it another minute and see if they can come up with a few questions here..

Operator:.

):.

How are you guys doing?.

Good Jeff.

How are you?.

Good. I’m just wondering if you all could provide a bit more color on the S-3 that you mentioned. I mean given that you sold the building and you have some cash.

Can you provide any more insight on why you would want to sell shares to raise additional funds?.

The cash that was raised through the sale of the building was used to pay down line of credit debt and so it didn’t leave us with a lot of cash on hand. And so, the S-3 filing is a, I guess you could say a prophylactic approach where we’re protecting ourselves to make sure we have access to capital depending on what transpires..

Okay..

I wish I could give you more color, but then I’d have to shoot you Jeff..

We wouldn’t want that. I mean, but you still have availability with your line of credit. I know you paid it down. You may not have been at compliance, I guess, given your losses and such.

I mean, do you still have room within that line of credit or was it adjusted?.

No, the line of credit was adjusted because of our non-compliance status with the bank. They took the money that we paid on the line of credit and reduced the borrowing base by that same amount. They left us with the same amount of headroom on the line of credit.

Our line of credit right now has been reduced to $2.5 million, and we are under a $1 million in borrowings on that right now. So we still have well over $1 million, and frankly that’s where we’ve been for the last two years. That hasn’t changed.

Most of our losses that have been incurred in the last couple of years, we never really went to a cash loss even with the $397,000 loss that we were reporting for this fiscal year. If it was a cash loss at all, it was made up for in working capital adjustments. So we -- it hasn’t required that we do any additional borrowings on the line.

So the line has stayed very constant for the last two years. And so our borrowing -- they did reduce the borrowing base because of our out of covenant situation that -- so we do not have access to that amount..

Okay. Okay, very good. Okay, I appreciate the answer and thank you very much..

Hey Jeff, you bet..

Good luck for coming fiscal year..

Yes, thank you. We appreciate you being a long-time supporter. We do appreciate that..

(Operator Instructions) There are no questions at this time..

Okay. I know Jeff is a good question asker. If there is anyone else that is thinking of any other questions you would like to ask, we’ll give you one more chance to do that, otherwise we will end the call and invite you to call us with any subsequent questions you may think of. You can call and talk to myself or Bob Cardon.

We will be happy to respond to that.

Any last questions? Operator, can you just give one more instruction on how to do that?.

Absolutely. (Operator Instructions) There are no questions queued up at this time sir..

Okay. Well, we appreciate everybody being on the call today. We have some good trends going at the moment and some exciting things happening, and we hope to be able to have more to report in the coming weeks and months. So thank you for being on the call today..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. Have a great day everyone..