Kelvyn Cullimore - Chairman, President and CEO.

Analysts:.

Well, this is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We want to welcome you to our conference call today to discuss the financial results for the Fourth Quarter and Fiscal Year ending June 30, 2015.

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.

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 statements should be considered in conjunction with the disclosures included specific risk factors and financial data contained on the Company's most recent filings with the SEC, including its most recent Annual Report on Form 10-K which we are filing today.

Today, I'll update you on Dynatronics' results for the quarter and 12 months ended June 30, 2015. And following my presentation, we will open the call up for some questions-and-answers.

We really have some interesting things to talk about today since the last time we had a conference covering the quarter ending in March we’ve had some significant events occur in the company.

Most notable among those was the investment by affiliates of Prettybrook Partners who invested $4,025,000 in the form of a convertible preferred stock investment in Dynatronics.

That investment is convertible on a one to one basis, in other words they have a 1,610,000 shares of preferred stock and it converts into the exact same number of common shares. The stock, the preferred stock carries an 8% dividend and cash or stock at our option.

And they have the right to appoint up to three Board members of the seven that the Board will contain. The stock was granted voting rights by virtue of approval of the shareholders at their shareholder meeting in June.

And the preferred shares also were issued along with one and half warrants per each preferred share and those warrants carry a six year term.

We are quite pleased and excited about this partnership, the partnership with Prettybrook and its principals, the principals are Stuart Essig, who has been the driver behind lifting Integra LifeSciences from under $20 million in sales in late 90s to over $800 million in sales today.

And his wife Erin Enright, who is the other principal who is an attorney with several years of experience in investment banking and also being a med tech executive herself. They are quite well connected in the industry and have some great business acumen that we are counting on.

And it was interesting that the relationship with them developed out of a failed acquisition pursuit; we had this last year. And we get approached frequently by people who are willing to invest in the company and put money in on certain terms. And we could have taken many from any number of sources to help bolster the company's balance sheet.

But in this case it wasn't just the money that attracted us. It was the track record of performance; it was their access to capital and their access to deal flow. We felt it was a game changer for Dynatronics and we are excited about the transaction that took place.

Our goal with Prettybrook is to provide resources for internal growth and to bring to fruition a strategy of growth through acquisitions, much as was done at Integra.

Since the investment at the end of June, we've already been on the trail of evaluating potential acquisitions and have held many meetings with investment sources and research analysts, and we anticipate that an initial acquisition would occur sometime in 2016.

This investment will certainly change our strategic direction and result in some significant new growth for the company. Now let me address some accounting impacts that occurred in the fourth quarter that affected our 2015 results before I get into the specifics of the financial statements.

In the year we are reporting about $5.1 million net loss for shareholders, and let me explain some of the components of that. First of all, an association with the investment in the preferred stock that was created what is called a beneficial conversion factor.

It is a factor that is recorded as a dividend below the net loss line resulting in the net loss for shareholders. The dividend was about $2.9 million and is representative of the difference between the closing bid price on the day of the transaction and the conversion price as adjusted according to accounting rules.

It is a non-cash transaction, non cash dividend. In short, the accounting rules required that we allocate the purchase price of the preferred stock between two components, warrants and the preferred stock itself. That effectively reduced the adjusted price paid for the preferred stock.

That reduced price was compared to the closing bid and the difference was reported as one time non-cash dividend. It is important to note that the preferred stock transaction did not contain any embedded derivatives that will affect future accounting or profits of the company.

This dividend is one time event and one time occurrence to comply with the accounting rules related to a beneficial conversion feature. A second factor that affected our financials for the year and for the quarter was the recording of a $1.4 million valuation allowance against deferred tax assets.

Deferred tax assets for those who are not familiar with that term are essentially net operating losses and tax credit incurred in one year that are intended for use in a future year. And therefore you take the value of those losses and record them as an asset on our balance sheet to be used against future tax obligations.

We are showing as a result of that more tax expense on our income statement than we showed operating loss. I realized that's not intuitive to most people. But that is what we are required to do to be in compliance with accounting rules.

Essentially because we recorded a fourth consecutive year of operating losses, the rules consider that negative evidence that we will ever be able to use our deferred tax asset in the future. That loss was not fully recognized until the fourth quarter and we realized where we would end up for fiscal year 2015.

We had positive evidence of our ability to utilize those tax assets. However, in following the guidance in the accounting literature, our positive evidence was insufficient to overcome the negative evidence of consecutive years of losses. Therefore, we recorded a full valuation against all of the deferred tax assets on the books.

As we are able to use those deferred tax assets in the future, they will come back as a reversal of that tax expense taken in Q4 and result in lower tax expense in the years when it is reversed.

And while we do expect to see profits in future years as result of our current strategy, according to the accounting rules that is speculative in nature and not assured where as operating losses are which is why the negative evidence requires that we take the allowance this year for the full amount of the deferred tax assets.

And again once those are reversed in future years when the profits are achieved, those expenses will be reversed. Another factor that affected the year was an inventory adjustment of approximately $952,000.

Backing out the beneficial conversion dividend and allowance for the deferred tax assets, we return to a net loss of about $851,000 for the fiscal year. Included in that number is the non cash expense of writing down inventory by about $952,000.

This write down is a direct reflection of strategic plans made in conjunction with deferred stock investment in the fourth quarter, and which we will be redirecting resources towards new tactical objectives resulting in some product lines being discontinued or deemphasized.

And that analysis at the end of the fiscal year in conjunction with our physical inventory taken resulted in the adjustment of about $952,000 of inventory. And the last thing that affected the statements was the terminated acquisition cost as it has been previously mentioned, we did pursue an acquisition in a related field.

That acquisition was terminated in the third quarter and the cost associated with that were expensed primarily in the second and third quarter totaling about $260,000. The good news from that effort however was that resulted in our introduction to Prettybrook which led to their investment at the end of June.

So we consider it money well spent given the outcome that we achieved. So excluding all of these factors, our pretax operating loss for Q4 was roughly equivalent with operating loss from the prior year. And our operating loss for the fiscal year actually dropped by almost 25% from $400,000 to just over $300,000.

Given the large net loss applicable to common shareholders, given that it is such a large number I felt it was important to peel back the elements of that to get through our base operating results prior to discussing the quarter and year-end results. Another item to note is that during the fiscal year we did do a sale leaseback of our Utah facility.

This was done primarily to reduce debt which helped stage the company for the future investment by Prettybrook. However, while this also helped accomplish our goal of reducing debt, it did result in accounting treatment that had negative effect on earnings as we will talk about in just a second.

So let me with that preface talk specifically about the outcomes of the fourth quarter and the year-end results. In the fourth quarter, quarterly sales actually increased 12.1% or about $851,000 to $7.9 million compared to $7.1 million last year. This continues to sustain upward trend in revenues that began in the second calendar quarter of 2014.

Sales for the year have increased 6.1% or $1.7 million to $29.1 million compared to $27.4 million last year. The acceleration in the rate of sales growth throughout fiscal 2015 was driven by new clinic openings and increased international orders as well as strengthening demand in our core domestic market.

Sales of therapeutic modality products, exercise equipment and treatment tables were the leading growth categories in 2015. This upward trend in sales indicates increased customer confidence in our markets and we are excited to see this especially given that for the two prior years we saw 7% decline in sales.

So to have 6.1% increase and particularly a 12% increase in the current quarter was something that was indicative of a market that is making a positive move forward. Gross profit for the quarter was $1.8 million compared to $2.5 million in Q4 of last year.

And gross profit totaled $9.1 million, or 31% of net sales in fiscal 2015 compared to $10 million, or 36.5% of net sales in fiscal year 2014. But keep in mind that both the quarter and the year include the inventory adjustment of $952,000 which was recorded as charge against cost of goods sold.

Excluding this charge, gross profit for 2015 would have been reported as about $9.9 million, which is a percentage of net sales would have been 34% and down only $100,000 from last year. And gross profit for the quarter would have actually been reported at about $150,000 higher than last year.

While sales increased during the quarter and year the increase was primarily in the lower margin distributed products including distributed capital equipment; exercise equipment and treatment tables which carry lower than average margins.

Some of these sales occurred because they were large orders commanding discounted pricing, others had to do with just the increase in demand for clinic openings which include often these types of products.

Increases in international sales also affected gross margin somewhat as some of the sales in international markets do carry lower margins than comparable sales in the US. But management has developed plans for increasing gross profits by focusing sales on the company's proprietary therapeutic devices.

These carry the highest margins of all the products we sell and increasing sales of these capital equipment products will be one of the keys to improving gross profit margins going forward, both domestically and internationally. Our SG&A expense in Q4 increased by $108,000.

This increase was attributable in part to higher sales commissions due to higher sales in the quarter. SG&A expenses for fiscal year 2015 were even at $9.2 million, or 31.7% of sales in fiscal year 2015, compared to $9.2 million, or 33.6% of net sales in fiscal year 2014.

During fiscal year 2015, keep in mind that we had approximately $256,000 of expenses related to the terminated acquisition efforts. This increase expense was offset mostly by lower labor cost during the fiscal year compared to fiscal year 2014. The sale and leaseback also has had an impact.

It appears we have recorded about $165,000 in additional expense due to the capital lease than we would have had without it during the fiscal year. And that will continue as an ongoing expense because of the nature of the capital lease.

And also $20,000 more in interest was expensed due to the cost on the new line of credit being higher than our prior line of credit. In R&D category, R&D expense increased just a little bit in Q4 as we are working on some new products. For the year, we were down about $66,000.

That's more a reflection of higher R&D cost last year and bringing out some products under this lower expense this year. R&D continues to be a main focus for us to bring out new competitive products and innovative products as we move our strategic plans and efforts forward. We expect to introduce several new products during the current fiscal year.

The pretax loss for our Q4 was about $885,000 compared to $47,000 last year. And there was $1.4 million for the year compared to $397,000 last year.

Keep in mind we had included in that the inventory write-off and the terminated acquisition expenses, exclusive of those pretax loss from operations in 2015 was as I mentioned earlier about $100,000 lower about 25% lower than they were last year. An income tax, we've already talked about this briefly.

During the year, during the current quarter and the year, we booked the deferred tax assets expense was significantly increased our tax expense for the quarter to about $1,064,000 compared to a benefit last year of about $2000 and for the year we were at an expense of about $851,000 compared to a benefit of $126,000 last year.

Again, that was all associated with the recognition of the expense associated with valuation allowance and the deferred tax assets.

So all of that combined yielded a net loss, net loss for Q4 of about $1,949,000 and you take into account the deferred tax assets and the inventory write-off from the terminated acquisition expense, compared to $46,000 last year. And the net loss for the year was $2,250,000 compared to $271,000 for the year same period last year.

Importantly as we mentioned the factors that resulted in that and this year because of the dividend associated with the beneficial conversion feature associated with preferred stock, we had a below the line adjustment related to the dividend of almost $2.9 million, that was recorded based on the beneficial conversion factor resulting in a net loss applicable to common shareholders of $5.1 million.

And that is below the line adjustment. Our strategic plan going forward is we talked about both in press releases and otherwise, clearly 2015 was a watershed year in which we took significant steps to change the direction of the company. And to position ourselves for strong growth and profitability going forward.

We are encouraged by the recent acceleration in sales growth at 12% in Q4 and 6% for the year compared to the declines we had seen in prior two years. And during that period of decline we did lower our expenses by about $1.6 million which helped us be little leaner coming into this improved years.

We've also reduced debt by virtue of the sale leaseback of Utah facility and our R&D pipeline continues -- includes new therapeutic devices and we have several new products for revision of existing products in the pipeline that will be introduced during the fiscal year 2016.

We recently held a national sales meeting with all of our sales representatives where they were trained on better ways to sell our products and to be more effective. They also heard from the new Board members and Prettybrook partners and it was probably the best sales meeting we've ever had in history of the company.

In July 2015, we announced that we received the CE mark approval for Solaris Plus and 25 Series product line which will open sales of these products in Europe and other countries which require this distinguish mark of quality. During 2015, we also received clearance for the same products in Japan.

As a result, we expect international sales growth to accelerate as we extend our geographic reach and become a provider of these products on a more global basis. International sales have always been challenging for us in the past and it seems like we are finally starting to make a little progress there.

We are working and expecting to have approvals in China, other Southeast Asian countries as well as Mexico in the next fiscal year. Hopefully in the first half of the fiscal year. We also have sales in other areas internationally that are starting to blossom and those have equally encouraging promise.

The most significant change of course has been the infusion of the capital and the addition to the Board members who are helping us promote an aggressive M&A strategy. This element is already underway, we hired Business Development Director, and his name is Jim Ogilvie, experienced in this area. We have done some restructuring of management.

Larry Beardall who has been Executive Vice President of Sales and Marketing is having his position changed to be Vice President of Strategic Planning and Marketing which will be focused on helping us in this M&A activity.

And we are in the market right now hiring a new Vice President of Sales to help in Beardall some of his responsibility so that he could focus on the strategic planning. Already we are pursuing efforts to identify key opportunities for M&A work.

And expect as I mentioned before that we hope to have at least one acquisition announced sometime in calendar 2016. We are working to bring attention the new strategic direction being facilitated by our preferred stock investors. We've held many meetings with investor bankers and research analysts.

We are presenting at a conference tomorrow in New York in Landenberg Securities, Landenberg Thalmaan is hosting that conference. We plan to hire an investor relations firm in the coming months to assist us in telling our story to appropriate market segments.

We expect to see continued improvement going forward with sustained sales increases and improvements in gross profits.

Factors affecting our performance in the coming months will include acceleration of sales growth, international sales, gross profit returning to historical norms, strategic acquisitions and growth initiatives related to the Prettybrook Partners capital infusion, capitalizing on the new products introduced over the past two years and introduce new products during the current fiscal year.

Expanding our distribution capabilities and being vigilant in maintaining operating efficiencies. Dynatronics is changing for the better. Management wanted to do something significant to breakout of the stall pattern of sales and profits that we've been experiencing in the last couple of years.

We believe we have found the right partners to help us do that in Prettybrook. And we anticipate that there will be much to talk about in the future. Of course, we are only few months into this new strategy and the relationship with Prettybrook and it will take time to fully develop and execute on these strategies.

But we believe the future looks very promising for the company despite having reported a $5.1 million net loss applicable to shareholders this year. And so we at this time will conclude my dialogue and we will open the call for questions. We will ask operator to step in and facilitate that. .

[Operator Instructions].

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Ladies and gentlemen, it appears we have no questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks. .

Thank you. We appreciate that and I am sure there has been a lot to digest with what we have communicated today. The bottom line is that we've made some major changes in the company. We have some new partners; we have an exciting future direction.

But there were some accounting requirements related to some of the things we are doing that we had to record in the fourth quarter and during the fiscal year. It will be good to have those behind us and we can move forward with much more positive news going forward.

I don't know that there has ever been a more exciting time for the company than right now. I can tell you personally how appreciative I am of the systems we've received in Prettybrook Partners group and for the business acumen and ideas which they brought to the table and the resources that have been brought to the table.

And we believe very firmly that the future of Dynatronics is never look brighter. So welcome your continued participation with us as shareholders and look forward to having future conversations with you. If you have questions that come up in your mind after this to the degree that we can respond to them privately, would be happy to do so.

Feel free to call my cell or Mr. Bob Cardon, our VP of Administration and Investor Relations. Thank you for being on the call today. .

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day..