Kelvyn Cullimore – Chairman, President and Chief Executive Officer.

Analysts:.

Welcome to Dynatronics Corporation’s First Fiscal Quarter Financial Results Conference Call, this is Kelvyn Cullimore, I’m CEO of the company and will be conducting today’s call.

The purpose is to discuss the financial results for the quarter ended September 30 and before we begin as a reminder during the course of the conference call management may make forward-looking statements regarding the 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 including 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.

So today, I’m going to update you on this call for the results of the quarter and talk a little bit about our strategic plans and our current position. When I’m done with the call, we’ll open the line and have an opportunity for questions should you have any.

As everybody is aware, at the end of last fiscal year, our previous quarter to the one we are reporting on, we completed a capital infusion with affiliates of Prettybrook partners for the sale of shares of our Series 8% convertible preferred stock and the aggregate amount of about $4 million.

And the strategic decisions over the past few months including the completion of the sale of preferred stock to the affiliates of Prettybrook partners are designed to help us accelerate our growth in the coming years.

And the financing has significantly strengthened our balance sheet and provides resources to increase our market and geographic footprint while maintaining our status as an innovative leader in the rehabilitation and physical therapy products market.

The real advantage of the combination with Prettybrook was to take the solid corporate infrastructure that we built over last three decades and combined that with the business achievement and access to capital on deal flow provided by Prettybrook.

And that should allow Dynatronics not only to strengthen, the legacy business that we have, but also position the company for growth of strategic acquisitions. Our M&A strategy is focused on acquiring businesses that simultaneously fit our criteria and enhanced our product offering.

So we’re currently evaluating acquisition opportunities and we anticipate executing on at least one of those during the calendar year 2016. I mean we’re confident these actions will transform Dynatronics into a company that will grow faster than others within our market segment.

Let me tell you about some of the things we’ve done since our last call to address the strategic plan. First of all we did hire a business development officer and his main responsibilities have to do with evaluating expansion through M&A opportunities. And he came on Board in early August.

We have retained an investor relations firm to help get the Dynatronics story told and we just retained that firm EVC in the last 30 days. We have done some restructuring of our management to allow focus on the strategic planning by dividing responsibilities of our Executive VP of Sales and Marketing.

So that the sales function will be split off and Larry Beardall who is our Executive VP of Sales and Marketing will be focusing more on the strategic planning and marketing that is a part of the M&A strategy.

We’ve also added some experienced board members as been reported in our filings and we have budgeted funds to cover canvassing cost associated with identifying target candidate. So the strategy of the M&A acquisition paradigm has begun in earnest and we’re moving in a direction that was anticipated when we took in the funding last June.

That has created some additional overhead in cost that will be borne throughout 2016 will have perhaps a slight negative impact on bottom line earnings as we work towards finding those first acquisition targets.

So with that let me report specifically on what happened with the results of the first quarter ending September 30 that was put out on our press release today. As was noted, our quarterly sales increased by about 2.5% from $7.2 million to $7.4 million. This continues a sustained upward trend in revenues that began in the second quarter of fiscal 2014.

We’re very pleased with the continued strength that were seeing as many of you’re aware for about 30 months prior to that time we’re seeing the declining revenues and so we’re very pleased to see the increasing revenues.

Sales of exercise equipment in Medland where treatment tables were the leading growth categories in the particular quarter that we’re reporting and the upward trend of sales does reflect improving overall market conditions and increased customer confidence in our markets, blended with our preparations for these opportunities through the introduction of new products and marketing efforts.

The gross profit for the quarter was $2.5 million, which was down a $100,000 from Q1 of the prior fiscal year. So we recognized that despite the increase in top line sales our gross profit margins were down slightly two factors affected March and for the quarter.

First of all, the same thing that has effected margins for the past four quarters, which is a shift in product mix to higher sales of the lower margin exercise product and treatment tables. And then secondly, we’re seeing increased sales dealers, who sell to at wholesale pricing and that has the effect of course of lowering the gross profit margins.

So those two factors have been in play for several quarters and we’re seeing the shift in product mix and also the increase of sales to wholesale dealers. The good news is that going back about four quarters, margins were down in the 33.7% and 32.8% range.

And for the last two quarters, we’ve brought those margins upto the 34% range, and are targeting this year keeping that at 34% or above, moving that more to a historical norms of the 35% to 36% range. We have some strategic plans in place to continue to push sales and cost of goods sold and let me talk about those for just a minute.

Some of the drivers associated with that is with the influx of capital that we’ve received. We’re in the better position to expand our sales force domestically and in particular we’ve identified some top 10 territories where we want to make those improvements, and are moving aggressively in that direction.

We also have the resources to consider moving into some tangential markets that we have not been able to pursue things such as long-term care or podiatry, even more into the acute care market and hospitals. The other area that is emerging for us right now is international sales.

Dynatronics has never done a lot in the international arena, though efforts have been made. We announced during the quarter, the receipt of the CE Mark approval for our SolarisPlus and 25 Series product lines. That will open the door for us in Europe and other countries, who recognize that Mark.

And we’ll be – we’ve just established in the last six months, a distributor in Portugal, one in England, so we are making progress there and looking for additional expansion.

In addition, we are actively pursuing product approvals for our co-product line, SolarisPlus, and other therapeutic modalities in China and Mexico and other Southeast Asian countries. We do have a distributor in those countries now, who are gearing up for those approvals, which we expect to come in the next six to eight months.

In addition to expanding our sales force domestically and internationally, we also continue to have new products that we will be introducing that will help to boost domestic sales. We are working on several new products that will be introduced before the end of fiscal year 2016. Those new products will help to fill some gaps that we currently have.

And we are also working on strategic partnerships to help introduce other private label modalities to the market once that perhaps were made by other manufacturers’ products.

So the R&D efforts in international sales of expanding domestic sales continue to be a significant focus for not only improving top line, but improving margins, especially we’re focused on sales of our high margin capital equipment that we manufactured.

Returning to the financial statements for the quarter, our SG&A expenses for the quarter increased by about $104,000; $77,000 of that was higher labor and overhead and $32,000 was higher general expenses, while sales expenses were actually down slightly.

I would say that the majority of the increase in expenses is related to the implementation of our strategic plans to transform the company into the platform for growth both organically and through perfectly planned acquisitions. And so this was not totally unexpected to see an increase in the SG&A expenses for the quarter.

As I mentioned, we do have plans to introduce some new products in the last half of the fiscal year. As a result, we have seen an increase in our R&D expenses during the quarter. Those increased by about $50,000. Those are all tied. Those increases in expenses are all tied to the fact that we will be introducing the new products in the next six months.

And we believe those product introductions will more than pay for the R&D investment in a very short period of time.

So, we recognize that there has been some increase in R&D expenses, but anyone who has followed this for a while, those R&D expenses tend to fluctuate and they tend to increase in the periods just before new product introductions and that’s exactly where we’re at right now. We did see some interest expense increase during the quarter.

The interest expense increased approximately $30,000, a little over $30,000. The majority of that had to do with imputed interest associated with the sale and leaseback of our facility here in Utah and that’s because it was booked as a capital lease. Other than that, that is the only increase that we had.

Our increase in our line – our interest in our line of credit has remained pretty consistent from last year. The pretax loss for the quarter was about $187,000 compared to the pretax profit last year of about $56,000.

The loss is attributable to reasons I’ve already discussed $57,000 of lower gross profit, $104,000 of increased expense primarily related to the implementation of our strategic plans, $31,000 of higher interest expense about $57,000 in higher R&D expense.

The income tax provision for the period maybe curiosity to some, I will explain that briefly typically when you report a loss you also report a tax benefits. In other words you take the net operating loss you were proved that you plan to apply to a future period. And you book that as a benefit.

However, because of past year losses accounting rules required that we reserve against that in other words the assumption is because of past year losses, we may not be able to utilize those tax benefits and so they do not allow us to book them in the current period. It shows up pretty much as a total reserve for those that tax benefit.

However, in the future when we are profitable and we do use those then we will be able to bring those back on to the books as a positive adjustment. For the period, the benefit would have been about $62,000 that would have been added to our net deferred tax assets but we did reserved against that full amount as required by the accounting rules.

The net loss as a result, for the period actually falls through as same as the pretax loss pretty much compared to prior year, when we had a tax expense. So the net loss was $182,000 compared to the net income of $41,000 last year.

We have added one other category to the statements this year that we have not had in the past, which is net loss applicable to common shareholders. The difference between net loss and net loss applicable to common shareholders is the payment of a dividend to the preferred shareholders.

And a value of that dividend was about $81,000 that was all paid in stock the dividend was accrued during the period and then paid in the days following the end of the quarter paid in stock and not in cash.

So going back to what I discussed at the beginning our strategic plans for organic growth I discussed briefly in the sales and cost of goods sold or sales in gross profit margins section the M&A strategy that we are implementing. In this quarter, we have discussions with several target companies.

We focused resources as mentioned beginning of this call, are being dedicated to the execution of the strategy which is adding some cost to the current periods. That will certainly bear fruit in the future periods as we move forward. And we anticipate announcing the first acquisition during calendar 2016.

Of course, it’s really impossible to predict timing on those kinds of things, because it will take evaluating many opportunities before we find one that fits that we’re aggressively pursuing the opportunities and making any contacts to see, which ones maybe the best opportunity. So that strategy is well underway and being aggressively pursued.

The IR firm that we retained EVC has come on board and will be assisting us in telling the Dynatronics story to the investors and analysts to help to give further strength to the company’s stock position.

In the last quarter, we’ve done numerous presentations to analysts and investors and even presented the conference sponsored by Ladenburg in New York City. And we will continue to do those kinds of things to expose Dynatronics, the new eyes and ears over the coming year to make them aware of our strategic plans.

So the bottom line is we expect to see continued improvement going forward with sustained sales increases and working towards improving the gross profit line. And the factors that are going to affect our performance in the coming quarters of the once we’ve discussed.

The acceleration of sales growth and gross profit, international sales growth, strategic acquisitions, and growth initiatives related to the strategy implement was pretty big back in June. And capitalizing on the new products introduced over the last two years and introducing new products in the coming year.

So we really believe the fiscal year 2016 will be a building year. We will continue to invest in the growth initiatives. And we believe that those investments will support the strategic plans and begin to show a significant improvement in the last two quarters of the current fiscal year and into fiscal year 2017.

So the growth is expected to accelerate as the year progresses some of the new programs being implemented and just been implemented. This quarter and we’ll start to build and bear fruit in the future quarters as I mentioned. So we’re really quite excited about the future of the company.

We are on a track unlike any we’ve been on before, we have resources and support unlike we had in the past. And we believe that the strategic plans have been laid, are going to be something that will point to significant improvement in both top and bottom line in the years to come. That said, there is some growing pains will be incurred this year.

And we’re prepared to work through that and make the appropriate investments to achieve the ultimate goals. So with that, I’ll be happy to have Brenda open the lines for any questions that you may have. And I’ll do my best respond to those. So Brenda could you do that at this time..

[Operator Instructions] And our first question comes from the line of [indiscernible]. Please proceed with you questions..

Hi Kelvyn, how are you..

Yes, Jeff, how are you..

I’m doing fine. Just a few questions so on, could you give us a sense of the percent of revenues that came from your direct reps and indirect reps as apposed to your distributed channels..

Right now, we’re running generally about two-thirds of revenue comes from the direct salesforce and about a third of revenue is coming from the dealer salesforce of distributors..

Okay, got it. Could you give us a little flavor for international flavors further beyond what you talked about and Europe as well as could you talk a little bit China and Asia as far as accruals and efforts underway there..

Sure. In China, we’ve been working on that for couple of years. We have a distributor in China who was previously distributor of competitor’s product. That competitor dropped them in favor of going direct and so that company sought us out over a year ago, and to pickup our line of products. We’ve been working with them since then to get the approvals.

We did just submit – we’re just finished all of the testing required by the Chinese FDA. And so now the paper work has all been submitted and now it’s on the administrative side. And they tell us that that could happen as soon as three months or take as long as six months to eight months.

And so we’ve done all the requirements, we’ve met all the tests and so now, it just a waiting game for that approval. That particular distributor also has distribution capabilities in other parts of Southeast Asia and we’ll be working with them to distribute our products there, as well.

So that one is towards the latter end of the process and we are quite excited about the partner we have and in fact we’ve now finished the heavy lifting on the approval process.

In Europe, we did get the CE Mark as we announced in July, the CE Mark as was roughly the equivalent in Europe of an FDA clearance for marketing your products and again these are therapeutic modalities. And we have a distributor in Portugal, who has already begun to sell products.

And we have our additional process of setting up a large distributor in Great Britain and we will be looking for additional distributors in Europe to help fill other gaps..

And is the distributor for China exclusive?.

Exclusive, as far as they only carry our products for – and not carry competitive products is that your question?.

Yes..

Yes, as far as we are aware featuring our line of products for the type of products that we sell. And we are not right now using any other distributor to sell the products either other than this group..

Okay, and do you have the ability to use other distributors or is it just exclusive to just the one..

Right now, we have not looked for other distributors have and the capability of this particular distributor is quite broad to the country. They have pretty good representation throughout. I’m sure, as we move forward if find gaps, where they don’t have coverage or where the coverage is weak, we would consider other alternatives..

Okay, and more if I may could you give us a little further flavor on product innovations, at least domestically in what types of areas what types of equipment..

Sure. We are working on some products that are evolutionary in nature, primarily in the ultrasound, iontophoresis traction product range – these are products that we are very familiar with and our customers familiar with. That repositioning to take better advantage of changing markets. And so we are excited about the opportunity to get those out..

Okay, perfect, that’s it from me. Thanks very much for taking the questions..

Yes, I appreciate your call..

Thank you, and we will pause for another moment to see if there is any additional questions. [Operator Instructions] And it seems that we have no further questions, so there any closing remarks you like to take..

We just want to express appreciation to everyone who is on the call and I appreciate those who asked questions and for those who maybe have questions could come up after a further review of the information that’s been provided.

You can certainly contact us directly and Bob Cardon, our VP of Administration and Director Investor Relations can assist you with some of that. And this call will be posted on our website as well for future reference.

And so if there are no other questions, we’ll express our appreciation for you being on the call today and appreciate your support to Dynatronics. Have a great day..

Thank you, ladies and gentlemen. This does conclude our teleconference. You may disconnect your lines at this time. And thank you for your participation..