Greetings, and welcome to the Dynatronics Conference Call to report Financial Results for Fourth Quarter and Full Fiscal Year 2018. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Chris von Jako, CEO of Dynatronics. Thank you. You may begin..

Thank you, Michele. We welcome you to the Dynatronics Corporation Investor Call to review the results of our fourth quarter and fiscal year which ended on June 30, 2018. I am Chris von Jako, the Chief Executive Officer. With me on the line is David Wirthlin, our Chief Financial Officer.

This morning, we issued our earnings press release, and later this morning, we will file our Annual Report on our Form 10-K for fiscal year 2018.

Before we begin, let me remind you that during the course of this call, we will make forward-looking statements regarding our current expectations, plans, projections and financial performances relating to our business.

These forward-looking statements reflect our view as of today only, and they involve risks, uncertainties that could cause our actual results to differ materially from those discussed today.

Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements today are included in our most recent report on Form 10-K. I caution you not to place undue reliance on forward-looking statements we make this morning.

We undertake no obligation to update or revise forward-looking statements. Today, we are going to talk about our operating results from our fourth quarter and our fiscal year, which ended on June 30, 2018. At the conclusion of our commentary, we will have the operator open the phone lines for questions. First, I would like to introduce myself.

As the Company announced on June 26, 2018, the Board of Directors appointed me to be the CEO and serve as a member of the Board. I am honored and grateful for this opportunity to lead the Company.

I would like to thank our previous CEO, Kelvyn Cullimore, who sits on the Board for his many contributions to Dynatronics and his assistance on my onboarding. I have over 25 years of experience and success in leading, growing, and transitioning multiple startup and turnaround medical device companies.

Most recently, I ran a startup company, NinePoint Medical where I successfully raised over $75 million in equity and debt, and in April of this year, secured a significant strategic investment and long-term partnership with Merit Medical Systems. Previously, I held Senior Executive roles with companies like St.

Jude Medical, Integra LifeSciences, Covidien and Medtronic. Based on this experience and my observations in my first 90 days, I am enthusiastic about the opportunities to lead Dynatronics. I believe we have the opportunity to create medical device industry leader in the physical therapy and rehabilitation space.

Fiscal year 2018 has been a period of significant progress for Dynatronics. The Company has undertaken several actions to grow the organization, improve operating results and position ourselves for additional growth and acquisitions. Some of our most important changes and our accomplishments in the year include the following.

In the first quarter ended September 30, 2017, the Company prepared to acquire Bird & Cronin. We negotiated the transaction, completed the due diligence, and announced the signing of the Asset Purchase Agreement.

Simultaneously, we executed the private placement of our equity securities and modified our bank credit facility in order to position us to complete and finance the acquisition. In the second quarter ended December 30, 2017, the Company finalized the private placement and bank modification and closed the transaction with Bird & Cronin.

This was completed in early October and we immediately began integration activities. By the end of the quarter, we successfully completed an efficient and seamless integration of the Bird & Cronin business.

In the third quarter ended March 31, 2018, we made several changes to improve organizational structure and established new leadership necessary to enable the Company to drive profit improvements and prepare for scale by acquisition. First, we announced that the Board of Directors would begin a search for a new CEO.

Simultaneously, we designated the Dynatronics legacy operations to be called the Therapy Products Division. We appointed a newly hired President, Brian Baker in February to run this division. Brian and I worked together for several years at Integra LifeSciences. He is an experienced medical device executive with strong execution skills.

Brian has already taken significant steps at assessing the operations of the division with a mandate to restructure the business for profitability. Based on that review, the Therapy Products Division has made numerous changes to reduce costs and streamline operations.

Organizationally, the Presidents of the Therapy Products division, the Hausmann division, and the Bird & Cronin division each directly report to me.

In addition to the changes in the Therapy Products Division, the Company made important additions to its corporate leadership team, hiring Skyler Black as Corporate Controller and Daryl Connell as Chief Information Officer. These additions further strengthened our ability and enhanced our capacity to acquire and integrate additional companies.

In the fourth quarter ended June 30, 2018, the Therapy Products Division continued to take on actions to improve profitability. The division implemented a reduction in-force of 10 individuals, completed an upgrade of its ERP system and standardized processes to improve efficiency.

The division also undertook a comprehensive review and rationalization of all of its products in order to increase efficiency, margins and profitability. A significant number of unprofitable or slow running products were discontinued.

In combination, the steps taken at the Therapy Products Division in our third and fourth quarters are expected to decrease the division sales by approximately $5 million on an annualized basis. Much of this revenue had negligible contribution margin and we will discuss the impact of this reduction in our forward-looking guidance later in the call.

Finally, in the fourth quarter, the Board of Directors completed search for the new CEO and appointed me in June. Subsequent to June 30, 2018, we have taken additional actions to reduce corporate level cost in order to reduce the overhead burden.

We also have made additional personnel changes investments to reduce the cost in the Therapy Products Division.

With these acquisitions, organizational changes, executive additions, cost reductions and process improvements, we believe we are well-positioned to further scale the business through strategic acquisitions and improved profits and cash flow as we drive more efficiency in the operations.

I would now like to turn the call over to David Wirthlin, our CFO to provide a financial report..

Thanks, Chris. I will now provide a financial report on the quarter and year ended June 30, 2018. Note that we issued a press release this morning, highlighting the financial results for the quarter and year. There are a few factors that had a material impact on our operating results for the quarter and year ended June 30, 2018.

First, the acquisitions of both Hausmann in April 2017 and Bird & Cronin in October 2017 had a significant impact on the comparison of fiscal year 2018 to fiscal year 2017. Hausmann's operating results are included in all of fiscal 2018, but only one quarter of fiscal 2017, thereby, adding three additional quarters in the year-over-year comparison.

Bird & Cronin's operating results are included in the final three quarters of fiscal 2018, but none of the quarters in fiscal 2017, which also adds three additional quarters in the year-over-year comparison.

For the comparison of the fourth quarter of fiscal 2018 to the fourth quarter of fiscal 2017, only the Bird & Cronin acquisition was a significant factor as Hausmann's operations were included in both periods.

Second, we incurred acquisition-related legal and accounting fees in the year ended June 30, 2018 of approximately $314,000 primarily in connection with the Bird & Cronin acquisition. This compares to $678,000 in fiscal 2017 primarily associated with the Hausmann acquisition.

This is a $364,000 year-over-year decrease in acquisition-related expenses, included in SG&A. Third, we incurred $325,000 in our second quarter of fiscal 2018 in expenses related to an R&D project that was abandoned. Four, in our third quarter ended March 31, 2018, we incurred significant severance expense primarily as a result of Mr.

Cullimore’s departure as our CEO, but also for a reduction in force which we executed in the fourth quarter. The Company recorded severance expenses totaling $978,000 in the year, including $138,000 in the fourth quarter.

Finally, as part of our profit improvement initiatives, we undertook a review of product profitability in the fourth quarter, pursuant to which we decided to discontinue certain products and reduce the number of our SKUs. This resulted in inventory write-offs that exceeded write-offs in the prior year by approximately $257,000.

Net sales for the quarter ended June 30, 2018 increased $5.7 million or 51% to $16.9 million, compared to $11.2 million in the same quarter of the prior year. The sales growth came primarily from the addition of Bird & Cronin, which contributed sales of $5.9 million.

Net sales for the year ended June 30, 2018 increased approximately $28.7 million or 80% to $64.4 million compared to $35.8 million in the prior year. The 80% year-over-year sales growth came primarily from the acquisitions of Hausmann and Bird & Cronin. Together, the two acquired operations contributed an increase in sales of $30.5 million.

These increases were partially offset by a decrease of $1.9 million primarily due to decline in sales of physical therapy and rehabilitation equipment, and medical supplies.

Gross profit for the quarter ended June 30, 2018, increased approximately $2.1 million or 71% to $5 million, representing 29.7% of sales compared to $2.9 million or 26.3% of sales in the same quarter of the prior year. The acquisition of Bird & Cronin was the cause of the increase, contributing gross profit of $2.1 million.

The increase in gross margin percentage to 29.7% from 26.3% was due primarily to the contribution of Bird & Cronin sales, which carry a higher gross margin percentage.

Gross profit for the year ended June 30, 2018 increased approximately $8.9 million or 78% to $20.4 million, representing 31.7% of sales compared to $11.5 million or 32.2% of sales in the prior year. The increase in gross profit is attributable to the acquisitions of Hausmann and Bird & Cronin, which together contributed an increase of $10 million.

This increase was partially offset by a decrease of $1.1 million in gross profit from lower sales of physical therapy and rehabilitation equipment and medical supplies. Approximately half of this decrease was caused by lower sales and the other half by lower gross margin.

The decrease in gross margin to 31.7% from 32.2% was due primarily to inclusion of lower gross margin Hausmann sales as well as higher freight costs and a write-down of inventory due to product rationalization and SKU reductions.

Selling, general and administrative expenses for the quarter ended June 30, 2018, increased approximately $2 million or 60% to $5.3 million compared to $3.3 million in the same quarter of the prior year. The primary driver of the increase was $1.6 million of SG&A expenses from the Bird & Cronin operation.

In addition, the Company incurred $138,000 in severance expenses as well as additional personnel cost due primarily to the Company's investment in additional management personnel at the corporate level.

SG&A expenses for the year ended June 30, 2018, increased approximately $8.4 million or 69% to $20.5 million compared to $12.1 million in the prior year.

The primary drivers of the $8.4 million increase were $7.7 million of SG&A expenses from the Hausmann and Bird & Cronin operations, $1 million of severance, $750,000 in increases due to salaries benefits and other G&A expenses, all of which were partially offset by $673,000 of decreased selling costs, primarily commissions and a decrease of $364,000 in acquisition expenses.

Research and development expenses for the quarter ended June 30, 2018, decreased approximately $116,000 to $146,000 compared to $262,000 in the same quarter of the prior year. R&D expenses for the year ended June 30, 2018, increased $113,000, or 10%, to $1.2 million from approximately $1.1 million in the prior year.

The increase was driven by $325,000 in costs incurred due to the abandonment of an R&D project during our second quarter of fiscal 2018. Net loss for the quarter ended June 30, 2018 was approximately $538,000 compared to a net loss of $731,000 in the same quarter of the prior year, for an improvement of $193,000.

Depreciation, amortization, and other non-cash expenses were $292,000 in the quarter. Net loss for the year ended June 30, 2018 was approximately $1.6 million compared to a net loss of $1.9 million in the prior year. Depreciation, amortization, and other non-cash expenses were $1.5 million in the year.

In addition, severance expenses of $1 million and a one-time charge of $325,000 related to the abandoned R&D project contributed to the net loss in the year. Exclusive of these charges, the adjusted net loss, and a non-GAAP performance measure was $300,000, which is a $1.6 million improvement, compared to the prior year.

Net loss attributable to common stockholders was $728,000 for the quarter ended June 30, 2018 compared to a loss of $2.5 million for the same quarter of the prior year. The $1.8 million decrease in loss is due primarily to the $193,000 reduction of net loss and a $1.6 million reduction of non-cash deemed dividend.

In the quarter ended June 30, 2018, there was no deemed dividend. By comparison in the same quarter of fiscal 2017, the Company recognized a deemed dividend associated with the issuance of Series B preferred stock and warrants in connection with the acquisition of Hausmann.

For the year ended June 30, 2018, net loss attributable to common stockholders decreased approximately $794,000 to $3.5 million, compared to a $4.3 million loss in the prior year.

The decrease in net loss attributable to common stockholders is due to the $264,000 reduction in net loss, plus a $920,000 reduction in non-cash deemed dividends and accretion of discounts associated with the issuance of preferred shares and warrants.

The deemed dividend in fiscal 2018 was associated with the issuance of Series C non-voting preferred shares and warrants in connection with the acquisition of Bird & Cronin, which was less in comparison to the deemed dividends in the prior year associated with the issuance of Series A preferred stock in December 2016 and Series B preferred stock in April 2017.

These decreases were partially offset by a $390,000 increase in preferred stock dividends associated with the issuance of additional preferred shares. As of June 30, 2018, we had cash balances of approximately $1.7 million. We have an $11 million asset-based line of credit, pursuant to which we had borrowed $6.3 million as of June 30, 2018.

Our line of credit balance is currently averaging approximately $5.5 million, leaving available borrowings of $3 million based on our borrowing base of $8.5 million. That summarizes the operating results. Chris will make some final remarks before we open for questions..

Thank you, David. As discussed previously, the completion and successful integration of the Hausmann and Bird & Cronin divisions have been a major focus over the past several quarters. We have now positioned the Company with leadership and infrastructure to make additional strategic acquisitions.

We continue to hold discussions with numerous potential target companies and remain optimistic about our goal of one acquisition per calendar year on average. We are opportunistic in our approach, so transactions will not be evenly spaced, and we did not include the financial impact of any of the potential acquisitions in our financial guidance.

In fiscal 2019, we will have a full-year that includes both Hausmann and Bird & Cronin divisions. We expect consolidated sales in fiscal 2019 of approximately $65 million to $67 million. Bird & Cronin will contribute four quarters of sales rather than three quarters of sales included in fiscal 2018.

The growth implied by consolidating a full-year of Bird & Cronin sales will largely offset by lower sales in the Therapy Products Division. Our product rationalization, targeted reductions in personnel and other margin improvement projects have been calculated to improve profit and cash flow.

The actions we have taken will reduce our expected sales in our Therapy Products Division by approximately $5 million annually to drive expected positive impact to profitability. Consistent with our previous guidance, we expect our consolidated operations to generate positive cash flow from operations in fiscal 2019.

We expect gross margin to be in a 32% range and the sum of SG&A and R&D to be about 31% of sales, including approximately $1.7 million or 2.4% of sales in non-cash charges. The number of common shares outstanding at June 30, 2018 was approximately $8.1 million.

We expect the outstanding shares to increase approximately 65,000 shares per quarter throughout the year. For the first quarter of fiscal 2019, which ends September 30, 2018, we expect consolidated sales to be at or slightly below the fourth quarter of the prior year.

Again, this guidance is based on our current operations and does not include the impact of any potential acquisitions. In summary, for fiscal 2019, we are focused on leveraging the investments we have made in the last two years for profitability.

Beyond this, we continue to implement a strategic growth plan, which is to grow by acquisition organically and to improve operating margins and profits.

This will allow us to continue our commitment to provide our clinicians with safe and cost effective products to enable rehabilitative therapy for their patients while growing Dynatronics’ shareholder value. We also recognize the need for continued investor relations in order to better convey our strategic growth objectives and performance.

Thus, we have a number of investor conferences on our schedule for the fall, and we will continue participating in the appropriate conferences and holding discussions with key investment analysts throughout the year. I look forward to meeting our investors and analysts in the coming months.

Finally, I would like to conclude my first earnings call by thanking the Board for entrusting me with this exciting task of growing the business. Secondly, I want to thank our employees and shareholders for the continued support and commitment, which produced another successful quarter, improving people's lives with the products we provide.

With that, now we look forward to taking questions from those of you who dialed in for this call..

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question..

Hi, Chris and David.

Can you hear me okay?.

Perfectly, Jeff, thanks..

Good morning.

So firstly, can you talk a little bit about the ERP upgrade? Does that include all of the divisions and has that concluded or has it begun?.

The ERP upgrade was just in the Therapy Products Division and it was an upgrade on the same platform like we are already on to just the most current version of the software, and we will be working on that over the next several quarters.

We will be working on ERP upgrade for the whole division, but that will take probably a year or two to get that done. [Later corrected by the company as 'The ERP upgrade was just in the Therapy Products Division and it was an upgrade on the same platform like we are already on. It was just the most current version of the software.'].

Okay.

And could you discuss the margins a little bit and the outlook for 32% margins? Is that basically the 2% upside? Does that come from the decrease coming off the Therapy Products with a low margins? Or how might that mix look? And would that be fairly linear as far as increasing throughout this upcoming fiscal year? Or do you expect it to bump up and then hold flat?.

Yes. Jeff, we expect gross margins of about 32% for the combined business. In the longer-term, we continue to focus on sales and marketing on higher margin products and we are reviewing our product portfolio to identify opportunities to increase our margins.

We're also focusing on continual improvement in manufacturing practices and we're focusing on our engineering and resources on cost reduction. We expect – from the project of product rationalization in the longer-term, we expect to see some benefits, but we are not increasing our guidance on gross margin at this point..

Okay, got it.

And on the inventory side, would you expect to see inventories reduce further? Do you expect further write-downs of inventories throughout the year? Should we see inventories come down from their $10.98 million currently?.

We expect inventories to be about that level. We don't expect to be writing off significant inventory in the future. So we would expect inventory to be about the level it is now..

Okay, got it.

And then on the guidance for this coming year as far as your positive cash statement, is that inclusive of the deemed dividend?.

Not sure, I'm following your question Jeff..

All right. Your guidance for this coming year on producing positive cash, that's to the bottom line that’s….

Yes, we expect to generate positive cash flow. As you know the deemed dividends are non-cash and we don't expect deemed dividends in the future, except to the extent we do additional equity raises that potentially could generate additional non-cash deemed dividends..

Okay, got it.

And then lastly, generally speaking, could you talk about the pipeline that's out there as far as the types of opportunities that you are seeing? Any general trends? Or any areas of interest from your standpoint?.

Jeff, when you say pipeline, you’re talking about acquisitions or you’re talking about….

Yes..

Okay. So we're in various stages of discussions with several companies. And obviously, we're focusing on opportunities on these, but – so we remain hopeful, but we're opportunistic in our approach to these things..

Okay. I got it. That’s it for me. Thanks for taking the questions..

Thanks, Jeff..

Thank you. [Operator Instructions] Our next question comes from the line of Michael Markowski with Overbrook Capital. Please proceed with your question..

Hi. Good morning, guys. Thanks for taking the call. Couple of questions regarding the capital structure.

Can you guys tell us what the fully – the number of fully diluted shares outstanding would be factoring all the warrants, preferred, Series C, everything that you guys have out there?.

Approximately 13 million, just north of 13 million shares..

Okay, 13 million. Thank you.

And regarding your cash levels and the talks of another – potentially another strategic acquisition and your shelf that's been out there, I guess for a little bit – a little while now, can you talk about your plans for any type of capital raise and what your plans are there?.

Yes, we put a shelf registration out there last quarter. It’s a universal shelf. There are no immediate plans to access it. It’s available for use over the next three years and provides another tool to raise capital.

The Company may only issue up to a value of one-third of our public float on a rolling 12-month basis until our market cap exceeds $75 million. If the Company does issue securities under the shelf registration, we will file a supplemental disclosure providing specific details.

And to the extent that we do additional acquisitions, we're just going to look for the best way to finance that at the time..

And internally regarding those acquisitions, is there – do you put parameters around your decisions on what to pursue? Does it have to be accretive? Or are you guys willing to accept something that is not accretive year one?.

We definitely look for accretive. We don’t have any hard and fast rules, but we definitely are trying to find companies that will be accretive immediately. [Later corrected by the company as 'We definitely look for accretive acquisitions.

We have previously stated that companies must be cash flow positive, or have a clear path to cash flow within the first two years.'].

Okay. Thank you, guys..

Thank you..

Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. von Jako for any closing remarks..

Thanks, Michele. Well, thank you for your questions and your interest in Dynatronics. If you have any further questions, please direct them to our Investor Relations contact, Jim Ogilvie. Operator, you may end the call..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day..