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

Jeffrey Cohen - Ladenburg Thalmann.

Ladies and gentlemen, greetings and welcome to the Dynatronics Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to Mr. Kelvyn Cullimore. Thank you, you may begin..

Thank you very much. I want to welcome everybody to the Dynatronics Corporation Investor Conference Call. We’re going to review the results of our quarter ending December 31, 2017 which is the second reporting quarter of our fiscal year 2018.

As was introduced, I am Kelvyn Cullimore, Jr., Chief Executive Officer and with me today is David Wirthlin, our Chief Financial Officer. After the market closed today, we filed our 10-Q for the quarter ended December 31, 2017 and issued the earnings press release.

So before we begin our discussion, 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.

So today, we’re going to talk specifically about the operating results from the quarter and six months ended December 31, 2017, and at the conclusion of our commentary the operator will open the lines for questions. First, I wanted to bring you current on the most important events since the filing of our first quarter 10-Q on November 14.

On October 2, 2017 we closed the acquisition of Bird & Cronin. We are pleased to report that the acquisition of Bird & Cronin has gone very well. As you recall, they were operating as a manufacturing division of the company and continuing to sell through their established distribution channels of sales reps and dealers.

Mike Cronin and Jason Anderson serve as Co-Presidents of that division and they manage the operations as they have done over the past several years. There have been no significant surprises thus far in the integration process.

The Bird & Cronin division continues to operate as expected and indeed had a strong first quarter as part of the combined company reporting sales of $5.7 million. The morale of the employees was very positive and there has been no significant attrition. Culturally, Bird & Cronin has been a very good fit.

As you may recall, we funded the Bird & Cronin acquisition in part with net proceeds from the private placement of our Series C Preferred stock to institutional investors and our Series D Preferred stock issued to the sellers.

The Series C Preferred and Series D Preferred, automatically converted into common stock of the company upon shareholder approval which we obtained on November 29, 2017 at our annual meeting of shareholders.

The company issued 1.36 million shares of common stock and conversion of a portion of the Series C Preferred and nearly 1.6 million shares of common stock in conversion of all of the Series D Preferred.

Certain of the Series C Preferred shareholders elected not to convert the Preferred stock into common, and thereby forfeited all preferences associated with the preferred including dividend, liquidation priority, voting rights and redemption rights.

As of December 31, 2017, 1.44 million shares of this Series C Preferred commonly known as "toothless Preferred" remained outstanding.

We are also pleased to report that the integration of the Hausmann acquisition which we executed in April of last year continues to proceed very well and the division is contributing positively to our consolidated operating results. These two acquisitions have been positive first steps in executing our strategy to grow by acquisition.

Consistent with the direction we gave in November, we expect to operate at an annualized rate of approximately $65 million to $70 million in sales and we believe we will generate positive cash flow from operations.

I’ll make a few more remarks at the closing, but for now, I would like to turn the call to David Wirthlin, our Chief Financial Officer to provide a financial report on the fiscal quarter ended December 31, 2017..

Thank you, Kelvyn. I will provide additional detail and color to the press release that was issued this afternoon. There are a few factors that had a material impact on our operating results for the quarter and six months ended December 31, 2017.

First, the acquisitions of both Hausmann in April 2017 and Bird & Cronin in October 2017 had a significant impact on the quarter and six months ended December 31, 2017.

As Kelvyn noted, Hausmann’s operating results are included in both the first and second quarters of fiscal 2018 and Bird & Cronin’s operating results are for the first time included in our second quarter and neither acquired operation is included in the comparative periods of the prior year.

Second, we incurred a significant legal and accounting fees and expenses in the first and second fiscal quarters of 2018 in connection with the acquisition of Bird & Cronin. Acquisition cost included in SG&A expenses were approximately $100,000 for the quarter and $314,000 for the six months ended December 31, 2017.

Third, we incurred approximately $325,000 in our second fiscal quarter of 2018 in expenses related to our research and development project that after much analysis we determined to abandon.

Net sales for the quarter ended December 31, 2017 increased approximately $9.4 million or 107.5% to $18.1 million, compared to $8.7 million in the same quarter of the prior year. The year-over-year sales growth for the quarter came primarily from the inclusion of Hausmann and Bird & Cronin.

Hausmann contributed sales of $4.4 million in the quarter and Bird & Cronin contributed $5.7 million. These increases were partially offset by a decrease of approximately 700,000 in net sales from Dynatronics legacy operations. That decline is primarily attributable to a single order of over $500,000 invoiced in 2017 that did not repeat in 2018.

Net sales for the six months ended December 31, 2017 increased approximately $14 million or 83% to $30.9 million compared to $16.9 million in the same quarter of the prior year. The year-over-year sales growth for the six months came primarily from the acquisition of Hausmann and Bird & Cronin.

Hausmann operations contributed sales of $9 million in the six months ended December 31, 2017 and Bird & Cronin added $5.7 million in the six months all in the second fiscal quarter of 2018.

These increases were partially offset by a decrease of approximately $731,000 in net sales from Dynatronics legacy operations, primarily attributable to the same single order in the second quarter of 2017 that did not repeat in 2018.

Gross profit for the quarter increased approximately $2.7 million or 87.7% to $5.8 million representing 31.9% of sales, compared to $3.1 million, or 35.3% of sales, for the quarter ended December 31, 2016.

The acquisition of Hausmann and Bird & Cronin are the primary year-over-year difference, Hausmann operations contributed $1.1 million in gross profit for the quarter and Bird & Cronin operations contributed $2.1 million.

These gross profit increases were partially offset by a decrease of approximately $451,000 in Dynatronics legacy operations, about half of that decrease was attributable to lower sales and the other half to reduced gross margin percentage.

The year-over-year decrease in gross margin percentage to 31.9% from 35.3% was due primarily to the inclusion of Hausmann sales, which had a lower gross margin percentage in the quarter as well as reduced gross margin in Dynatronics legacy operations primarily attributable to reduced margins on freight charged customers.

Gross margin for the six months increased approximately $4.2 million or 72.3% to $10.1 million representing 32.7% of sales, compared to $5.9 million, or 34.8% of sales, for the six months ended December 31, 2016. The year-over-year increase in gross profit is attributable to the acquisitions of Hausmann and Bird & Cronin.

Hausmann operations contributed $2.7 million in gross profit for the six months ended December 31, 2017 and Bird & Cronin operations contributed $2.1 million, all in the second fiscal quarter.

These gross profit increases were partially offset by a decrease of approximately $525,000 and Dynatronics legacy operations, about a third of that decrease was due to lower sales and the other two thirds to reduced gross margin percentage.

The year-over-year decrease in gross margin percentage to 32.7% from 34.8% was due primarily to the inclusion of Hausmann sales at lower gross margin and reduced margins on freight.

Selling, general and administrative expenses for the quarter ended December 31, 2017 increased approximately $2.3 million or 79.2% to approximately $5.1 million compared to approximately $2.9 million in the same period of the prior year.

The primary drivers of the $2.3 million increase were $2.5 million of SG&A expenses from a Hausmann and Bird & Cronin operations, offset by $220,000 of decreased SG&A in Dynatronics legacy operations, primarily attributable to lower commissions. SG&A expenses included approximately $100,000 in acquisition related expenses in the current quarter.

Selling, general and administrative expenses for the six months ended December 31, 2017 increased approximately $3.3 million or 59.1% to approximately $8.9 million compared to approximately $5.6 million in the same period of the prior year.

The primary drivers of the $3.3 million increase were $3.4 million of SG&A expenses from the Hausmann and Bird & Cronin operations, offset by $115,000 of decreased SG&A in Dynatronics legacy operations, due to lower commissions and lower sales.

SG&A expenses included approximately $314,000 in acquisition related expenses in the six months ended December 31.

Research and development expenses for the quarter ended December 31, 2017 increased $244,000 or 78.8% to $553,000 from approximately $309,000 in the quarter ended December 31, 2016 R&D expenses for the six months ended December 31, 2017 increased $217,000 or 36.9% to $805,000 from approximately $588,000 in the quarter ended December 31, 2016.

The increases in both the quarter and six months ended December 31, 2017 were driven by $325,000 in costs incurred due to the abandonment of a R&D project during the second fiscal quarter of 2018. Net income for the quarter ended December 31, 2017 was approximately $14,000 compared to a net loss of $95,000 for the quarter ended December 31, 2016.

The $109,000 improvement in net income for the quarter was attributable to $2.7 million higher gross profit offset by $2.3 million, higher SG&A expenses and $244,000 higher research and development expenses.

Net income for the six months ended December 31, 2017 was approximately $213,000 compared to a net loss $381,000 for the six months ended December 31, 2016.

The $594,000 improvement in net income for the six months was primarily attributable to $4.2 million higher gross profit offset by $3.3 million and increased SG&A expenses and $217,000 higher research and development expenses.

Net loss attributable to common stockholders was $1.3 million for the quarter ended December 31, 2017 compared to a net loss of $560,000 for the same period of the prior year.

The $755,000 year-over-year increase is due to approximately $217,000 of additional Preferred stock dividends paid mostly in common shares associated with Preferred stock issued in the past year including Series A Preferred in December of 2016, Series B Preferred in April 2017 in connection with the Hausmann acquisition and Series C Preferred and Series D Preferred issued in October 2017 in connection with the Bird & Cronin acquisition.

The increase was also attributable to approximately $648,000 in additional non-cash deemed dividends and accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin acquisition.

These increases were partially offset by $109,000 in higher net income in the current quarter compared to the same quarter of the prior year. For the six months ended December 31, 2017 net loss attributable to common stock holders increased $369,000 to $1.3 million compared to $935,000 for the six months ended December 31, 2016.

The increase in net loss attributable to common stock holders is due to approximately $594,000 in higher net income in the six months ended December 31, 2017 compared to the same period of the prior year partially offset by $315,000 of additional Preferred stock dividends paid mostly in common shares associated with the issuance of Preferred shares in the past year as well as an increase of approximately $648,000 in additional non-cash deemed dividends and accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin acquisition.

As of December 31, 2017 we had $3.7 million in cash. We had an $11 million asset-based line of credit pursuant to which we had borrowed $6.7 million as of December 31, 2017.

More recently, our line of credit balance is averaging approximately $5 million leaving available borrowings but more than $3 million based on our borrowing base of approximately $8.5 million. That summarizes the operating results. Kelvyn will make some final remarks before we open for questions..

Thanks, David. The completion of the Hausmann and Bird & Cronin acquisitions have been a major focus for the past several quarters and the integration of those operations is proceeding well.

We continue to hold discussions with numerous potential target companies and remain optimistic about our ability to achieve our goal and at lease one acquisition per calendar year.

Looking forward with inclusion of Hausmann for all of 2018, fiscal 2018 and Bird & Cronin for three quarters of fiscal 2018, we continue to expect consolidated revenues for fiscal year 2018 to be in the range of $63 to $67 million. We continue to target topline growth for the consolidated company in the mid-single digits.

We’ve adjusted our expected gross margin and SG&A for fiscal 2018 slightly in response through better visibility we now have on the acquired businesses. We expect our going-forward consolidated gross margin to be in the 32% range, and SG&A to be about 31% of sales including about $1.4 million or 2% of revenues and non-cash charges.

As we explained in our last quarterly call there is some seasonality to certain of our divisions, Bird & Cronin revenues have not historically varied significantly through the year. Hausmann strongest quarter has historically been the quarter ended September 30.

Lastly Dynatronics strongest quarter has traditionally been our second fiscal quarter ended December 31. The weakest quarter for both Hausmann and Dynatronics has typically been in the quarter ended March 31.

Looking at the three businesses combined we would conservatively model an average of 16 million to 17 million in sales per quarter if there were no seasonality. However, we would anticipate being on the low side of that range for the quarter ended March 31 and closer on average for the quarter ended June 30.

Our gross margins will also be impacted by the seasonality with higher gross profit margins expected and the more productive quarters while still averaging around 32% for the year.

In addition to the Hausmann and Bird & Cronin, resulted in pretax profits for the first half of our fiscal year of 213,000 despite incurring 314,000 in transaction-related costs during the six months, as well as 325,000 and expense related to the abandoned R&D project.

We expect to continue to improve operating profits and cash flow of the company relative to comparative periods in the prior year. During the remainder of fiscal 2018 we are focusing our attention on finding ways to improve operating margins within all divisions of the company, to that end we have restructured our accounting and finance department.

We hired a corporate controller and their financial planning analyst to provide additional resources to better analyze and improve gross profit margins and reduce operating costs.

We’ve also recently restructure our legacy Dynatronics sales and marketing management to streamline reporting and supervision as well as bring more attention and resources to the marketing efforts of the company. All of which is designed to provide sales growth which is focused primarily on domestic sales.

The management team at Dynatronics is committed to serving our customers with safe and effective products building our business through organic growth and acquisitions and enhancing shareholder value. We do appreciate the support that our shareholders should provide.

We’ll now open the line to take questions from those of you who have dialed in for this call. So we’ll turn the time to the operator..

Thank you. [Operator Instructions] Our first question comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Please go ahead..

Hi, Kelvyn and David, can you hear me okay..

We can hear you fine, Jeff..

Wonderful. Congratulations on a nice quarter. I guess just a couple of questions. So firstly, I guess for you David, as far as some of the commentary regarding the addition or revenues from both acquisitions Hausmann and Bird & Cronin.

Do you expected to do that forward or how are you consolidate revenues or will you talk about commentary as far as the growth rates or addition from either or both divisions?.

We don’t intend to break it down. We’re providing some commentary now because of the explanation year-over-year, but we do not intend to break it down in the longer term..

Okay. Got it. And then as far as the margins, you stated that you'd be targeting approximately 32% for the year for fiscal 2018, so how does that look if you kind of excel one-time charge from this quarter that kind of gets you back over 32.

Is accurate to say?.

Well, the one-time charge is in R&D expenses, not in cost of goods sold. So it won’t impact gross margin..

Okay. But as far as estimation purposes 32 sounds like a good number for you for fiscal 2018..

Yes..

Okay. Got it.

And I guess lastly or second to lastly, could you talk a little bit about the advanced modalities and Solaris in particular and its contribution over this quarter and how that pipeline looks or how would you expect that to play out over the balance of the year?.

The trends are similar to what they have been in the past. Our focus is to grow sales of our higher margin products including Solaris. And to this end we have added Zimmer to our third product the modality line and we’ve seen growth of about 2% on our therapeutic modality of category for the six months ended December 31, 2017..

Okay. Got it. And then one more if I may. Lastly, ex-U.S. revenue, how did that look over the second quarter and how might I look over the subsequent quarters for year as far as contribution to total revenues..

International revenues is not a big focus, it is less than 5% of our sales..

Okay.

Are there any efforts underway to invigorate that or to have some further agreements or arrangement with other territories?.

We don’t have. I mean, we continue to look for opportunities but it’s not the major focus of our marketing and sales efforts..

Okay. Got it. Wonderful. That does it from me at the moment. Thanks..

Thanks Jeff..

Thank you. [Operator Instructions] Ladies and gentlemen, it appears we have no further questions in queue at this time. I’d like to turn the floor back over to management for any closing comments..

Thank you very much. We appreciate everybody being on the call today. And we appreciate your continued interest in the company. That will conclude our call and we will continue to stay in touch..

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..