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

Jeffrey Cohen - Ladenburg Thalmann & Co. Inc. Ryan Zimmerman - BTIG.

Operator:.

Welcome everybody. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We appreciate you joining us on our call today. 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 Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.

Well today we’re going to talk specifically about the results from the quarter and six months ended December 31, 2016, that is our fiscal second quarter and when I conclude my presentation we will have the operator open up the call for questions that you may have, and then we'll conclude the call.

Let me first start by talking a little bit about the significant events that occurred during the quarter and that we have an offering of preferred stock. In December 2016, we issued the remaining 390,000 shares of our Series A 8% convertible preferred stock of the 2 million shares originally approved by shareholders in June of 2015.

The issuance of those shares resulted in $975,000 in gross proceeds and the majority of those shares were purchased by affiliates of Prettybrook Partners, the same investors that participated in the original offering of approximately 1.6 million shares of preferred stock in June 2015 which at that time raised about $4 million.

Certain of our officers joined the Prettybrook affiliates by investing in this most recent private placement. The investors received a total of 390,000 shares of the Series A preferred stock and warrants to purchase a total of 585,000 shares of common stock at $2.75 per share, the same terms as last June.

This financing provides us with additional capital for operations and to promote organic growth as well as support our pursuit of potential strategic acquisitions with a significant events in December and we are pleased to close out the balance of that of those 2 million share that were authorized by the – approved by the shareholders in June of 2015.

So if you have questions about that at the end of the call I'll be happy to respond to those. I'd like now to turn the time over to David Wirthlin. David is our Chief Financial Officer.

As most of you know, David started with us in mid-October which was midway through the current quarter we are reporting on today and so I am very pleased that he is here to join us and to give us a brief overview of the financial outcomes of our fiscal year second quarter that ended December 31. So David, I'll turn the time to you..

Thank you, Kelvyn. We would like to provide some additional detail and color the press release that was sent out in the last hour. As many of you know, in the past year we have made a number of investments in strengthening our sales and marketing efforts.

We hired a new Vice President of Sales as well as a third Regional Manager, a new head of International Sales and a Head of Clinical Education. We also expanded our efforts in the long-term care market and initiated a sales training program for all of our sales reps.

We have also updated our website and have begun a digital marketing program that we believe will drive additional sales. These investments in sales and marketing are starting to pay off. We are reporting increased sales for both the quarter and six months ended December 31, 2016.

Net sales for the quarter ended December 31, 2016 increased 16.6% to $8.7 million compared to $7.5 million in the same quarter of the prior year. Net sales for the six months ended December 31, 2016 increased 13.5% to $16.9 million compared to $14.9 million in the prior year.

The sales growth in the two periods was more heavily weighted toward distributed capital products made by other manufacturers versus ourselves manufactured capital products. This quarter we had a 53% increase in distributed capital products compared to last year and for the six months we had a 43% increase compared to last year.

A significant portion of our increased sales and distributed capital products this quarter was attributable to sales into the long-term care market. We believe that over time we will be able to convert these types of sales to our self manufactured capital equipment which carry higher gross margins.

Due to the increased year-over-year sales gross profit for the quarter increased $396,000 or 14.8% to $3.1 million compared to $2.7 million the same period last year. For the six months gross profit increased $680,000 or 13.1% to $5.9 million compared to $5.2 million last year.

Distributed capital products carry a lower gross margin than our overall average gross margin, therefore the growth in this category contributed to slightly lower overall gross margin. Gross margin percentage for the quarter was slightly lower at 35.3% compared to 35.8% for the second quarter last year.

Gross margin for the six months was down slightly at 34.8% compared to 34.9% last year. Our sales training is focused on increasing sales of proprietary therapeutic devices to increase our overall gross margin. As in the past, we continue to expand our therapeutic modalities offerings through the introduction of new products, both OEM and proprietary.

Selling, general and administrative expenses increased 15.5% or $382,000 to $2.9 million for the quarter compared to $2.5 million for the same quarter last year. For the six months SG&A expenses increased 16.4% or $791,000 to $5.6 million compared to $4.8 million in the first half of last year.

The largest portion of the increase in SG&A reflects our investments in selling and marketing. Selling and marketing expenses represented $232,000 of the $382,000 of SG&A increased for the quarter including $98,000 in higher commissions, $75,000 in additional sales management personnel and $32,000 associated with our digital marketing program.

For the six months ended December 31, 2016 increases in selling and marketing expenses were $437,000 of the $791,000 increase in S G&A. The increase included $174,000 in higher sales commissions, $174,000 in higher sales management personnel costs and $54,000 in digital marketing expenses.

The increases in general and administrative expenses for the quarter represented $150,000 of the increase in SG&A expenses. This was driven by higher labor and benefits of about $131,000.

For the six months ended December 31, general and administrative expenses increased $354,000 consisting primarily of higher labor and benefits of approximately $298,000. The higher labor and benefits were largely associated with inefficiencies in our Tennessee operations.

We have made changes in top management at that facility and the new management team is taking necessary actions to return labor expenses to more historically normal levels in the second half of our fiscal year. We also had expenses related to our strategic objective of growth through mergers and acquisitions.

These costs were $45,000 for the quarter and $47,000 for the six-month period. Research and development expenses increased 22% from $254,000 to $309,000 for the quarter compared to the same quarter last year. For the six months period R&D expenses increased 13.3% from $598,000 to $588,000 year-over-year.

The increases are attributable to acceleration of activities associated with new products already introduced in fiscal year 2017 and yet to be introduced later in this fiscal year. Our net loss for the quarter was $95,000 compared to a net loss of $125,000 in the second quarter last year.

Net loss for the six months was $381,000 compared to $306,000 last year. The improvement in our net loss position is directly attributable to the higher sales which resulted in improved gross profit offset by the increased SG&A costs mentioned above. So that said, that's the financial summary and I will turn it back over to Kelvyn..

Thank you, David and I appreciate that summary and I am sure there may be a few questions and before we get to those questions let me just review a few last things if I could. Our objectives for the fiscal year 2017 haven't changed from the last time we talked.

We are still targeting organic sales growth and we are trying to achieve that through improved sales management and in product introductions, geographic expansion of both domestic and international, and expansion into post acute care markets as we began to see in this fiscal year already.

We also plan to execute on our business development strategy and that is to identify and act on acquisition opportunities that will further enhance our product offering and distribution coverage and levels of our current sales network to improve gross profit margins.

And lastly, we plan to improve our investor relations reach to better alert the markets to our strategic growth objectives, particularly as we begin to execute on the plan.

The investment in the balance of our preferred A stock by the Prettybrook affiliates is indication of further confidence in the business plan we have put together by our primary investors.

The added capital will certainly strengthen our balance sheet and better facilitate our growth strategies and we remain committed to doing our first acquisition in calendar year 2017. Any such acquisition will of course require additional financial resources that we're prepared to secure as the need arises.

We have done much in the way of restructuring to position the company to be more scalable for the growth that we anticipate. The changes though have been significant and they have required investment in the business as we reorganized and augmented the company's management and employee base.

We believe we have made some good progress in this effort, but expect to make further investments as our revenues continue to grow. For instance, we are currently recruiting a new VP of Operations to help us streamline our product offerings and increase our gross margins through more efficient manufacturing.

We believe we are well-positioned to achieve our strategic objectives. There is no question that it takes time and investments and patience to achieve some of these things, but we believe the indications are there that we are making progress towards executing the plan we are further bolstered by the investments that occurred in December.

So we are we are looking forward to the coming six months, the last half of this fiscal year as we continue to sustained the growth that we have already manifested the first six months and as we continue to pursue our strategic objectives. So with that, I believe we are prepared to take any questions that participants in the call may have.

I will ask the operator to come on and instruct how those questions can be asked..

Thank you, Mr. Cullimore. [Operator Instructions] And we will take our first question today from Jeffrey Cohen..

Well, hi Kelvyn, can you hear me okay?.

I can hear you just fine, Jeff..

Sorry, I missed the first minute or two of the call, but if you could talk to us a little bit about what level of seasonality was attributed to the last quarter and it seems like your topline grew greater than we expected and is that something that you are going to see pull through over the next few quarters or was it just particularly seasonably strong from last year?.

There is a certain seasonality. We don’t have big seasonality like some retail operations do, but typically Q2 is one of our better quarters as is Q4, Q1 and Q3 being less successful typically from our historical performance and so yes we did see some improvement in Q2 which we're pleased with.

Some of that was carryover from Q1 where we had a very large back order of orders on the books. So we ended the quarter well, that we've been able to sustain double-digit growth for two quarters..

Okay so I guess the question is what do the back orders look like into this quarter?.

We still have a significant back order position that was over $900,000 that's higher than it was the year before at that same period of time. So underlying order flow through was strong. We have the sales that we did and still maintain a fairly significant open order balance..

Okay, and could you update us a little bit about efforts on the international front as far as new or expanded distribution agreement, sales personnel, new regions of sales et cetera?.

This as well is a sensible topic for us because every time we think something has happened we have a little bit of a setback. It is a minefield that we have to navigate from time to time. We have talked in the past about China and Mexico as being two of our primary targets and we have made some progress on those.

Mexico we had a preliminary indication of some approvals coming that are waiting still for a final on that which we would hope would be soon. But as you know, the approvals really are nothing more than a license then to begin hunting.

And we are working on setting up our distributors in Mexico and that will take some time to ramp up once the approvals.

The same thing in China, China is a very large market but it is also a heavily regulated market and obtaining regulatory approvals is only one step getting the product out and marketed and working with our distributors the next and we are working diligently to make both of those international markets a contributor during the last six months of the year, certainly the last quarter of the year we would hope would see some contribution from that.

Otherwise internationally, we have seen some additional interest. We just got back from [indiscernible]. Our international sales manager was there and there were indications of interest ongoing there.

And so, well Chris has only been with us a few months essentially came on last summer and we’re starting to see the fruits of his labor are starting to come forward as we begin to circulate more on the international scene, but that’s probably as much as there is to report at this point..

Okay and one more question if I may, could you talk a little bit about gross margins and any activities underway to improve them, stabilize them, increase them? Thank you..

Yes, our gross margins are improving. We have made significant efforts to especially on our proprietary equipment to improve gross margins and we have seen that during the quarter. Well, overall gross margins were fairly flat.

So because our biggest increase was in distributed capital the therapeutic modalities that we manufacture have seen margins increase to almost 57% during the quarter and so that’s a nice direction.

And so I believe over time as we begin to improve sales of our therapeutic modalities that will have an effect on moving the overall margin forward as well.

New products that we're going to be introducing will also have an impact on gross margins and we should see that as we introduce some of the new therapeutic modalities going forward that will also help improve margins. So we are continuing to work towards the end of improving our margins, every point counts..

Okay, thanks for taking the questions..

You bet. Thanks Jeff..

[Operator Instructions] We’ll now hear from Ryan Zimmerman..

Great, can you hear me okay?.

You bet Ryan, go ahead..

Great, thanks for having me on. So, lot of questions have been asked already and I just wanted to kind of dig a little bit deeper on the M&A strategy going forward.

I mean, what areas specifically do you consider opportunities for improvement or efficiencies in the product bag that you're targeting for 2017?.

Well, we are very interested in staying in the physical medicine marketplace. That is our primary goal is to find target companies that we can use to leverage our position in the market or leverage our sales force, calling on our existing customer base.

So anything that would add to the product lines that we are doing now that would be complementary would be of interest to us. That's not to say, but if the right opportunity came along in the tangential market we would not consider it, but right now our primary focus is on the physical medicine, physical therapy, athletic training type of products..

Okay, great. And then I know you guys have done a little bit of a skew rationalization over the past year, so I'm just kind of want to dig in a little bit there.

I mean is there anything that you gave up in terms of revenues as you've had those products pare down or was it de minimis from your standpoint, from revenue standpoint?.

Well, most of the paring we have done has been with products where the sales were de minimis and so the impact on topline has not been even measurable in my opinion.

So much of the skew rationalization has been internal and it has been done with an eye towards simplifying the product offering and basically diminishing the level of products that have low, very low to no sales..

Okay, great. Well that's it from me and congrats on the quarter..

You bet Ryan and we look forward to seeing you out very soon [ph]..

Yep..

[Operator Instructions] And at this time, there are no questions. I will now turn the conference over to Mr. Cullimore for any additional or closing comments..

Thank you, I appreciate it very much. We really appreciate really being on this call. We appreciate your patience as investors. We are excited about our future.

I don’t know if there has ever been a more exciting time in the history of the company with the investments that have been made in the company, the direction that we're heading and the strategies that are being followed.

And so we believe that over time and we are getting closer and closer to that time when we can start to execute on all of the strategies we're implementing and are working on doing that even now. So we appreciate your patience. We look forward to further reports over the next six months and we're excited about our future and hope you are too.

Thanks for being on the call today..

This concludes today's call. Thank you for your participation. You may now disconnect..