Kelvyn Cullimore - President, Chief Executive Officer David Wirthlin - Chief Financial Officer.

Jeffrey Cohen - Ladenburg Thalmann & Co. Inc..

Welcome everybody. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation and we welcome you to our conference call today. We’d like to begin with our Safe Harbor statements.

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 ended September 30, 2016. And when I am concluded with the presentation, we’ll have the operator open up the call for questions that you might have, and after the questions we’ll conclude the call.

Today I am pleased to have with us David Wirthlin, who is our new Chief Financial Officer for the Company. In fact, the last six months of our operations have been marked with significant change here in the Company many of those we outlined in the last call that we had and in the 10-K that was filed. Today I’d like to highlight a few others.

First of all David Wirthlin is our new Chief Financial Officer and we will have him speaking about the outcomes for the quarter in just a minute and then you will get an opportunity to hear from him. We’re pleased to have David, he is very experienced CFO and brings many new attributes to the table.

We're very fortunate in the fact that Terry Atkinson our former CFO remains with the company and he is setting up all the accounting functions for the company. The budget headroom part of the budget headroom that was required to hire David was made possible when Bob Cardon our former VP of Admin and Corporate Secretary, Treasurer retired this summer.

In addition to David we've also hired a new Director of Clinical Education. This director will be a support to customers and sales reps alike and has proven in the marketplace to be an invaluable asset and articulating the benefits of our equipment and the processes that our salesmen are so effective at selling.

We also had a change in the General Manager of our Tennessee operations.

Regrettably we found that our previous manager have been with us for 20 years was not measuring up to expectations and we felt a change was in order there and we have brought on a new manager Jonathan Arnold that we brought in from industry and we believe that it’s going to make a significant difference in our operations there.

We also made a change with our purchasing manager for the Company and have hired a new more experienced Director of Supply Chain Management. And are excited about the contributions that he will make.

So we continue to transform the company and make changes that will help us to become a more scalable to the growth that we're anticipating and we believe these changes all add significantly to our abilities to achieve our strategic objectives in the future. In addition to the personnel changes we did launch some new products during the quarter.

We were able to launch the upgrade to our core product line which was the Dynatron Solaris in 25 Series products we mentioned that briefly.

In the last call that we had those upgrades help us better meet safety standards, simplified manufacturing process significantly improved usability features for at least the ultrasound and positions us better for international sales without requiring to raise any pricing and we believe these changes will all help to make the product more profitable as we move forward.

In addition, we introduced a new low cost user-friendly standalone ultrasound device. Two years ago our standalone ultrasound became obsolete with the parts obsolescence that occurred at that time.

And we were unable to continue to manufacture that, so we redesigned the particular product to make it more attractive and we were successful in doing that, our engineers did a fabulous job and we began launching that product recently and we have forecast sales of that product in the $200,000 to $300,000 for the year and well on track for that.

We did also introduce a redesigned iontophoresis device called iBox that device only sells for $300, but it's a razor/razorblade theory and we will also have a proprietary electrode that we sell with that and we believe this will help to sustain in the future enhancement sale of those electrodes.

So we've seen some significant new product releases in the quarter and we anticipate additional new products for this we will talk about later throughout the coming year.

We also announced recently that we did change accounting firms, our accounting firm previously was BDO they were previously Mantyla McReynolds acquired by BDO in the last year and we have switched our accounting relationship back to Tanner and Company, a company did audit work for us for over a decade prior to our switching before, so we are pleased to be back with Tanner and certainly appreciate the support we have from BDO for the four years we are with them.

Let me now introduce to you David Wirthlin, David is as I mentioned the new CFO and we are going to throw him first into the fires here.

He has been which us for not quite a month and we are going to have him give you the report, the financial report for the first quarter and when he is concluded with his report I’ll follow-up with a few closing comments. So David, take it away..

Thank you, Kelvyn. First, I just want to say that I am pleased to be part of the Company and I look forward to working with Kelvyn and the Management Team and the Board of Directors. And what I believe will be exciting times for the Company.

We recognized that the press release outlines the income statement in detail so we will only touch on a few key points. Net sales for the quarter increased 10.3% to $8.2 million, compared to $7.4 million in the same quarter of the prior year.

Sales growth was weighted towards distributed capital products including treadmills, exercise bikes and exercise equipment and this was indicative of new clinic openings and expansions. We had about 20% growth in sales from direct and contract sales representatives while there was a reduction in sales through dealers both international and domestic.

We anticipate growth in higher margin manufactured products in coming quarters. To achieve that we are focusing on new marketing efforts on higher margin products, we are aligning sales incentives on those products and we expect an increase in dealer sales which typically focused on higher margin products.

Gross profit for the quarter increased 11.3% to $2.8 million compared to $2.5 million in the same period last year. The increase is due mostly to the increased sales. Gross margin percentage increased slightly from 33.9% to 34.2% year-over-year. This reflects a shift to higher representative sales at retail and lower dealer sales at wholesale.

Strategies that will contribute to increased gross profit margins include introduction of new products with higher gross profit margin, focusing our sales efforts on higher margin products, and increasing sales through dealers while dealers sales are at wholesale which has the tendency to reduce gross profit margin and also are focused on higher margin products that we manufactured.

Selling, general and administrative expenses increased 17.3% to $2.8 million for the quarter compared to $2.4 million in the same quarter last year. The $409,000 increase includes a little more than $200,000 in higher sales and marketing expenses and $200,000 in higher general and administrative expenses.

The increase in sales and marketing expenses included about $45,000 on higher commissions due to the higher sales also about 90,000 increased sales and marketing, personnel costs and the balance included a combination of sales and marketing initiatives, sales travel with additional sales managers and a restructured bonus program for sales management.

The $200,000 increase in general and administrative expenses included about $145,000 in operations, personnel costs about $90,000 of which was incurred in Tennessee where we had some production management challenges. We have taken steps as Kelvyn mentioned to change top management and do some other restructuring to improve efficiencies.

It also included new hires of about $30,000 and $25,000 in payroll taxes and benefits due to new hires and increased medical insurance premiums. There was also about $40,000 increase in professional fees which is mostly a timing change related to audit fees.

Research and development expenses increased slightly from $265,000 to $279,000 year-over-year due to acceleration of cost associated with new products that we expect to launch in fiscal 2017. We expect these levels of R&D expenses to remain generally constant this fiscal year.

That concludes the financial review, so Kelvyn you can go ahead with the conclusion..

Thank you, David. And I would say you did a great job for your first time. Thank you. Key objectives for the year have not changed from what we articulated to in the previous call that we had.

Our first objectives continues to be to achieve organic sales growth that has been manifested somewhat this quarter with the 10% increase that we did see and we are accomplishing that and continuing to do that through improved sales management, new product introductions which we believe fiscal year 2017 maybe the most prolific for new product introductions that we had in sometime.

Geographic expansion both domestic and international and expansion in the post-acute care markets. We will acknowledge that our international effort has not blossomed has we have hoped that we are still confident that that will occur. We did hire in the last six months or so Mr.

Chris Ramsay who heading up that international effort and his defense a little bit we did have to borrow him while we were transitioning management at our Tennessee operations to assist with that. And he is back on the job with international sales and we believe that we will see an expansion of that this year as we have budgeted.

Solidly achieving organic sales growth has been significant practical efforts behind it. In addition to that, we continue to focus on executing on business development strategy.

Identifying and acting on acquisition opportunities that will further enhance our product offering and distribution coverage and leverage our current sales network to improve our gross profit margins. We continue to work diligently on those fronts. As many of you are aware M&A work can be quite fickle.

And while we are in discussions with several companies at the present time, we are not prepared to close on anything at the moment, but we do anticipate if things go as we expect they should that there will be a closing of a transaction before the end of the fiscal year.

Of course, as I mentioned those things can be very fickle and that is our best estimate of the present time. In addition to achieving organic sales growth and executing our business development strategy, we are working to improve our Investor Relations reach in order to better alert the market through our strategic objectives.

And we believe that as we execute on these objectives the market will be responsive to the achievement of those strategic objectives. Dynatronics today looks very different than the Company of the past. Our management is changing quite drastically.

And right now we have done much in the way of positioning the Company to be more scalable for growth and anticipating what we hope to be able to accomplish with our strategic objectives, we are building that foundation.

Those changes have been significant and somewhat costly obviously as we reorganized and augmented the Company’s management and supporting personnel. We believe all of that is critical to positioning ourselves for the long-term strategic objectives that we have set.

And while there were some change [although some] charges this quarter that made our expenses look a little higher than they would normally have been. We believe that we will be able to normalize that more as we move forward and the investments that we are making now will help to achieve the long-term objectives we have for growth.

So with that, that's a summary. We don't have many year-to-date numbers review because the first quarter is just that the first quarter and so the calls little be a shorter than normal, but we will at this time open the line for questions. So operator if you could explain the process by which they can ask questions. I would appreciate it..

[Operator Instructions] And we have a question from the line of Jeffrey Cohen..

Hi, guys. Can you hear me okay..

Very fine Jeff. Go ahead..

Wonderful. So I guess I’ll start with David. Can we talk about gross margins a little bit they came in strong, a little bit low on what we're thinking as you rollout some new products.

How do you look at that for the year, I think that we currently expect that those averages will trend up toward call it 36%, 37% and how do you feel about the product mix now for second quarter and forward and how the margins may reflected with some of the work you are doing in Tennessee?.

Yes. We're expecting higher sales of - some of our manufactured products that will have a little bit higher gross margin and also shift more to dealers. I think we expect those will increase a little bit as we move forward as those manufactured products come in a little stronger in the following quarters.

And we have some new products that we're going to be launching that will also have some – a little bit more healthy gross margin. So all of that combined we expect the gross margins to increase a bit..

Okay.

And could you talk a little bit about some of the product developments for some of the interest rate of products I imagine that will be during fiscal 2017 and those are order of Solaris type of ASP type products or how should we think about that?.

Let me take that one if it’s okay Jeff. We are working on several new products we've got one that's scheduled for release and the quarter ending in March that will enjoy very good margins, say new product that is very different from the Solaris line electrotherapy.

So it is not just an incremental improvement it actually addresses an entire new market for us and when I say entire new market within the physical therapy discipline. So it will be an exciting product we showed it at the recent show in Las Vegas.

It's called a new [ROM] device and it does exercising on the knee in a post surgical environment and then we are fairly confidence this is going to be a very popular product. So we intend to have that released by the end of the quarter ending in March.

On top of that, we are working on some programs to OEM, some products for us that are modalities that do not compete directly with what we do. There are different kinds of modalities that will expand the breadth of products that we offer and still maintain the kinds of margins that we are accustomed on modality type sales.

So those new products efforts I believe will contribute significantly to improving margins as we move through the second half of the year..

Okay. Got it. That’s very helpful.

Could you give us a little further flavor on the M&A front, I know I keep asking you this, but it’s always good to get enough data as far as what you’ve been looking at, in what types of areas and looking at the size whether it would be material to current revenues and how you are feeling about closing something in fiscal 2017?.

Well as I mentioned in my previous comments these things are still fickle, it's really hard to predict. I think our expectation is that we should be able to close a transaction before the end of the fiscal year which will be June 30. We are progressing nicely in that arena which gives me the confidence to be able to say that.

Our criteria for the acquisition have not changed. We continue to look for companies that are squarely in our marketplace that can help to achieve the goals of either enhancing our product offering, our distribution coverage or leveraging our current sales network.

And as far as size goes, we are looking at anything from now $5 million up to $30 million which is how big we are. So we're right in the middle of that sweet spot now with the companies we're talking to and so we're right on target..

Okay. And then lastly if I may, could you talk a little bit about the Solaris line in the most recent quarter for which the approximate percentage of composition have been compared with previous quarters and average orders number, different modalities which are being ordered.

Are do you seeing more modalities being ordered with new units or less modalities and any general pricing trends there? Thanks..

Yes. The number of accessories that are being ordered with the basic units is maintaining the same consistency as in the past. We are seeing no change there. 60% to 70% of all base units ordered also order an accessory. And as you know the accessories that we sell have significant gross profit margins in the 70% to 80% range in many cases.

As far as actual sales of the units themselves compared to last year the sales of the modalities were pretty flat in the first quarter.

I will acknowledge the last year in the first quarter we had two very large international orders that were all modality sales which contributed significantly and this year we did not have those international sales and all of modalities sales.

So on the one hand while we were flat the good news is as we made up for a loss of international sales would increase strength on the domestic side and that's something that we felt very, very good about achieving. So we're looking towards Q2 and Q4 are typically our best modality sales quarters. Q1 and Q3 typically are a little weaker..

Perfect. Okay, thanks for taking the questions. I appreciate it..

That’s good to have you on the call Jeff. End of Q&A.

[Operator Instructions] And there are no audio questions at this time..

Okay. Well if you think of any last minute questions you can press your star one while we make these final comments and we allow the operator puts you through otherwise we want to thank all of you for being on the call today. We really are excited about the future of Dynatronics.

We are very fortunate to have some good partners that we are working with especially on the M&A front and to help us with achieving our strategic objectives.

And we are confident at the direction that we're moving in is one that will be very positive long-term even acknowledging that in the short-term we're going to have to endorse some higher expenses as we gear up for this long-term strategy.

So we appreciate your interest and we appreciate your confidence in us and we look forward to the next few quarters have even better results to report to you.

So any last questions operator on the call?.

There are no audio questions..

Okay. Then we will thank you for being on the call today and invite if you have any follow-up questions to give us a call here and we'll do our best respond to them. Thank you being on the call today..

This concludes today’s conference call. You may now disconnect..