Kelvyn Cullimore - President, Chief Executive Officer.

Jeffrey Cohen - Ladenburg Thalmann.

Welcome everybody. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We want to welcome you to our quarterly conference call today. We’ll be reporting on the fiscal year ended June 30, 2016 and the same quarter ending at that same date. We want to particularly thank anyone who is with us from the west coast.

We recognize this is an early time for the call. We appreciate you joining us nonetheless. Before we begin, as a reminder, during the course of this 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, 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 we’re going to talk specifically about the results from the quarter and 12 months ended June 30, 2016. When I have concluded with my presentation, we’ll have the operator open the call for any questions that you might have, and then we’ll conclude the call.

Wanted to start off today talking a little about some of the significant events that occurred during the last quarter before we jump into a total discussion of the financial outcomes. As everyone is aware, we have been making some important changes within the company to position us for achieving the strategic objectives that we have set.

Among those include changes in our senior management. We have made changes with Larry Beardall, who was our former Executive Vice President of Sales and Marketing. He left employment with the company in June. Also, Bob Cardon, who was our VP of Administration and Investor Relations, left employment with the company in July and retired.

My father, Kelvyn Cullimore Sr. will be retiring at the end of the calendar year as well. He has been working part-time heading up our international sales.

Those changes are fairly significant changes that have occurred and are a harbinger of the reshuffling of executive management to better position the company for achieving our strategic growth objectives. As we have mentioned, in association with those changes we have made some significant changes also with our sales management within the company.

We hired in March of last year Jeff Gephart, who is making some tremendous improvements in our sales and marketing organization, and as you’re aware, he has a significant background in our core markets of physical therapy, athletic training, and chiropractic. He has brought on some additional personnel to help us in the sales and marketing arena.

We brought on a new regional sales manager to head up the east region.

We hired them away from a competitor, DJO, the Chattanooga group of DJO, and also a new international director who we also hired away from that competitor, and his emphasis, while he is very, very good with international work, he is also very good at training and product development and things of that nature, and so we’re very excited to have him.

His name is Chris Ramsay. The changes within our sales management organization don’t end with just the new personnel.

There has been significant improvements in pipeline management and targeted marketing programs that we think will have a measurable return on investment, so we are moving the sales and marketing organization in new directions and with new management, and it’s already starting to bear fruit in seeing the sales needle start to move.

In support of that, we’ve also introduced some new products. The new products were actually released subsequent to the fiscal year end and so they did not have a direct effect on our financial outcomes for the fiscal year, but our new Solaris Plus, what we refer to as the Tungsten line, was released in July.

It basically is an incremental improvement of the basic product line that includes some medical safety standard upgrades, has greatly simplified manufacturability and serviceability, upgraded some components and added some usability features, which makes the product even more attractive than it has ever been and will improve our market position with it.

In the long run, we believe we’ll make it more profitable because we were able to do all of this without raising the price, which I think will make the product even more attractive vis-à-vis competitive options. So we are truly excited about this new version.

It’s been out on the market now for 60 days, and we have yet to have any significant complaints about it, which for a new product release is remarkable. We also released in August a new standalone ultrasound unit, and I say new - we had previously had a standalone ultrasound product.

That standalone ultrasound product was retired a little over a year ago, and so we did not have this in our financial reporting for the last fiscal year. This new device is a significant upgrade and is going to be very attractive to that segment of the market. It won’t be a home run; it will be what we call a single for the next year.

We should do about a quarter million dollars of business with that. We think about 60% will be direct, 40% dealer, but more importantly this new product is also very attractive for the international market. It is something that we have had lots of requests for and are pleased that we now have that product out and available.

During the last quarter also, we’ve continued with our business development and continuing to pursue merchant acquisition opportunities. Obviously I get asked frequently where are we on that, when are we going to have the first one to announce.

I can say that we are working diligently on several options and opportunities, and it’s just difficult to predict timing.

As you may be aware, any kind of M&A activity is by nature difficult to predict, but we are very active in that effort, and as you know, a year ago we hired a full-time business development person, Jim Ogilvie, and he is very much on top of that and helping to move that forward, along with the support we get from Prettybrook Partners.

So that gives you a little bit of an upgrade or an update on what is happening with the company since our last call - a lot of management shuffling, a lot of new direction, and some of that did start to be realized during the fourth quarter. Let me move now to talking about the financial review of the fourth quarter and the full year results.

We recognize that the press release we sent out outlines some of the income in detail, so I’m just going to touch on a few key points and then if you have specific questions, feel free to ask those at the end of the call here. Net sales for the quarter increased 2.8% to $8.1 million compared to $7.9 million for the same period last year.

The highlights there were we had about 6.5% growth in our core therapeutic modalities, which is our higher margin products, and we also had a similar growth of about 6.5% in the distributed capital.

These are things like exercise bikes, treadmills, weight stacks, things of that nature that we are a distributor for, and a lot of that had to do with our entrance into the long-term care market, which is a new market that we have begun to explore in the third and fourth quarters of last fiscal year. Our annual growth was about 4.4%.

That was an increase of $1.3 million, reporting sales in at $30.4 million for the year. For the year, we saw about 5% growth in our therapeutic modalities, and so there is continued strength in those higher margin products. We also saw for the year some significant growth in manufactured capital that was about 16%.

That also carries better margins than most of our products, so our growth seems to be in the areas where we are seeing good margin. We did see 8% growth for the year in distributed capital, which is lower margin but still important to see.

With the increased focus on sales and marketing, we continue to expect to see that kind of mid-single digit sales growth continue. On the gross margin side, we saw a significant increase in gross margin for the quarter, increased about 45% to 33% of sales for the quarter.

Of course as you may be aware, last year during this same period and this year, we have inventory adjustments that affected gross margin in the particular quarters, and so exclusive of those, the gross margin increased from 34% last year in the quarter to 34.5% year-over-year, so we did see a slight uptick in gross margin exclusive of the one-time adjustments.

For the annual gross profit, it was the same - we saw 34% gross profit for fiscal year ’15 and 34.5% for fiscal year ’16, net of the inventory write-offs.

We do expect to see our gross margins continue to trend upwards as we focus on our higher margin products with our sales and marketing efforts and as we strive to improve the gross profit margin on those products. On the SG&A expense, associated with some of the management changes that were made, we incurred some significant severance expenses.

We booked about $770,000 in severance expense in the fourth quarter, which obviously contributed significantly to the reported loss for that quarter.

Additionally for the year, we had about a million dollar increase in SG&A expense exclusive of the severance, $400,000 of that was related to the selling expenses, part of which was new hires that I have just articulated, and the other was higher commissions. With sales being higher, commissions were also higher.

We had about a $300,000 increase in administrative-related costs which were related to higher health insurance, some new hires, and regulatory costs that were incurred, and then we did spend about $300,000 towards the new strategic initiatives.

That included things related to M&A activity, investor relations expenses, directors and officers expense, and things of that nature.

So while the severance is a one-time cost, the other SG&A expenses were planned as part of our strategic initiatives or related to the higher sales revenue, meaning commissions, so those kinds of expenses should continue but we should have higher sales in the future to offset that.

Research and development, because of the new products that we introduced that I did mention - the new Solaris Plus line along with the 125, and some additional products we intend to introduce in 2017, we saw a slight increase of about $150,000 raising our R&D expense to $1.1 million for the year.

About $60,000 of that increase was experienced in the fourth quarter, which is typical when you are at the end of a phase ready to introduce products, as we did in July and August. We don’t anticipate any of the one-time expenses that were incurred during the last quarter to continue, and we still have great expectations for the future.

Our loss before income tax for the quarter was about $1.2 million compared to $0.9 million in the fourth quarter of ’15, and our loss before income tax for the year was $2 million compared to $1.4 million in fiscal year ’15.

Adjusting for one-time severance and inventory write-offs, our loss before income tax for the year was about $1.1 million compared to about $600,000 last year. As you can see, there is about a $500,000 differential there.

That could be accounted for with the increased gross profit that we generated offset by the increased SG&A expense that I mentioned. Our cash position during the year did diminish. We ended the year with about a million dollars in cash, which means that we consumed about $2.9 million in cash for the year.

However, $1.9 million, a little over $1.9 million was the payoff of our line of credit, and we have re-opened that line of credit at a million dollar level presently, which we don’t anticipate using but it is there in case there is a need.

So we believe that our $1 million that beyond the line of credit that was used was related to operations and capital expenditures, helping to build the platform for our strategic objectives for the coming year, so we believe that our cash resources are ample to achieve our strategic objectives, with the obvious exception of M&A activity that may require securing some additional financing.

So as we move forward into fiscal year ’17, we have three main objectives that we are working on. One is to achieve organic sales growth as we’ve talked about through the improved sales management, new product introductions, geographic expansion both domestic and international.

Our international goals were not achieved in the last year, but we believe we did lay a good foundation for them to be achieved in the coming year, and we also are expanding into the post-acute care markets. That’s a market we have not done a lot in until the last six months and are moving more aggressively into that arena.

Secondly, we’re going to execute on the business development strategy, continue to identify and act on acquisition opportunities that will further enhance our product offering and distribution coverage and leverage our current sales network to improve gross profit margins.

We were working closely with our partners at Prettybrook to assist us in that effort, and we have some significant activity occurring there. Then lastly, improve our investor relations reach, trying to make sure our investor relations efforts are improved to better alert the market to our strategic growth initiatives.

So the Dynatronics of today actually looks very different than the company of the past with all of the changes that are taking place. All of them are positive to help us move in the direction that was anticipated when we brought in the private equity from Prettybrook Partners.

Our fiscal year 2016 was a year of change, restructuring, repositioning to better execute on those strategic plans, and the changes have been significant and somewhat costly as we reorganized and augmented the company’s management of supporting personnel but have put us in a very, very good position as we enter fiscal year 2017, and we’re confident that we are well on our way to achieving those strategic objectives.

So with that, I will ask the operator to give instructions on how questions can be submitted and do my best to respond to those questions. .

[Operator instructions] Your first question comes from the line of Jeffrey Cohen..

Hi Kelvyn, can you hear me okay?.

I can hear you just fine, Jeff..

Wonderful.

So could you tell us where will Chris Ramsay be located, and more specifically on what geographies he will be driving and involved with?.

Yes, Chris Ramsay lives in the Chattanooga, Tennessee area, so he offices out of our offices in Chattanooga, and we have made a change and moved the whole international sales management to our offices in Chattanooga.

He is there and we have hired an assistant for him, and we terminated the personnel in the Salt Lake office who were handling the international in the past. So Chris will be doing the international from Chattanooga, and literally our focus is going to be on Asia, South and Central America, and some in Europe..

Okay, and Jeff Gephart also is in Chattanooga?.

Yes, Jeff is -- he offices out of the Chattanooga office as well..

Got it, okay.

Could you talk a little bit about current and expected product mix as far as Solaris and products which are gaining traction and those which are not, and perhaps average selling prices and what that trend’s been like over the past couple quarters?.

Sure. Our focus has been on our therapeutic modalities, and primarily our Solaris Plus and 25 Series. Now to be clear, Solaris Plus is the high-end product line that includes the accessories such as the Light Probe, Light Pad, ThermoStim, and we’re seeing steady sales of those accessories and increased sales of the base units.

We are moving in a direction specifically to increase sales with dealers. We are looking to bring on additional sales reps, but there’s more of a focus on the dealers, and some of those dealers will be focusing the 25 Series, some will be focusing on the Solaris Plus units.

What we are seeing is the average selling price in each market, in other words when we work through dealers, those are wholesale prices, and when we work through the direct reps, those are at retail. So the wholesale prices are pretty well set, and our retail prices, we are seeing increasing average sale prices.

The focus is primarily on those from our perspective on the therapeutic modalities, as well as our manufactured capital items, things that are manufactured primarily at our facility in Tennessee..

Okay, got it.

Can you talk to us about product mix over the past couple quarters and trends there as far as product mix, and can you also talk about the percentage of revenue through direct reps versus dealers and how that trend looks as well?.

Yes, we’re not seeing significant changes in product mix. The changes we are seeing are increases on the therapeutic modalities and distributed capital.

The sales of distributed supplies and manufactured supplies was pretty much flat this last year, so as a result, we’re seeing an increase towards the mix of capital items and a slight diminishment on supply type, which if we’re going to have a shift in product mix, that’s where we want to go because typically the capital has better overall gross profit.

So there hasn’t been a huge-- I don’t want to give an impression there’s been a huge shift, but there’s been a slight shift towards more of the capital, less towards the supply. As far as sales between the dealer or direct, that continues to stay at about the same balance it has been.

That balance is somewhat affected by the fact that retail selling prices are obviously higher than the wholesale, but in the last three months, we’ve seen a little bit of a resurgence in the sales through our direct reps, whereas in the past we had also been seeing increase from the dealers.

So it’s kind of like a back and forth - one month one does better, one month the other one does better, but I would say that as we grow, our focus for the next year is to bring on perhaps more dealers than we will direct reps, and we think that those will be the bigger chunk opportunities for increasing sales by bringing on key dealers that will be distributing our products..

Okay, got it.

Lastly if I may, can you talk to us about has the total SKU numbers for the company across the board changed at all over the last two quarters and what that may look like over the next couple quarters, and then couple that with new product introductions, do you expect to see some new product introductions, are you doing some R&D out there for follow-on products?.

We are doing some R&D. There will be several new products introduced, mostly capital products we will introduce, but we do have some vendors that we’re speaking to that have some exciting new distributor products as well that we’ll introduce. But as far as total SKUs, we are actually doing a little bit of a paring down of the total number of SKUs.

As we mentioned, we had a contract with a GPO that we had brought some products on for, and we have discontinued those, and we’re trying to pare back to have fewer products, especially those that just weren’t moving and replacing those at times with products we think will do better.

But I would not say that we are on net adding any new SKUs; if anything, we are diminishing the number of SKUs..

Okay, got it. That does it for me. Thanks for taking the questions..

Jeff, thank you. Appreciate you being on the call, especially at this time..

There are no further questions at this time. [Operator Instructions]. There are no further questions at this time..

Okay, well we recognize that having the call this early in the morning may have limited the number of people on the call, but hopefully others will listen to it, and we will have this posted on our website where folks can listen to the call and the information that was provided.

We do thank those who have been on the call for joining us this morning, and if there are other questions that may come up, feel free to call us. We’ll do our best to respond to them. Thanks for being on the call this morning..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line..