This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. I'd like to welcome you to our conference call today. .

I'd like to begin with reading our Safe Harbor statement. The purpose of the conference call today is to discuss the financial results for the quarter ended September 30, 2014.

Before we begin, and as a reminder, during the course of the conference call, we 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, I'm going to update you on our results for the quarter ended September 30. And following my presentation, we'll open up the call for questions and answers. .

Let me start out the call today with kind of a sad note. We would like to mention the passing of one of our longtime board members, Mr. Joe Barton. We knew Mr. Barton was ill, but we did not realize it was as severe, and he passed away unexpectedly this past week. And we -- our condolences go out to he and his family.

From a compliance perspective, we have notified NASDAQ of that event, filed the appropriate 8-K, and we have 180 days to replace Mr. Barton as an Independent Director, and so that process is in place..

Let me start off now talking about the results of the quarter. The quarter ending in September was a breakthrough quarter for us in many respects. It was the first quarter since the quarter ending December 30, 2011, that quarterly sales increased over the prior quarter.

Now while it was a modest increase of 2.3%, nonetheless it was an increase, and that is something that we feel is a strong indicator of some changes in the marketplace and improvements because that compares to what we had been reporting, which was average 7% declines in the past 3 years.

So the increase of 2.3% again, while modest, is a great harbinger of what is coming and changes in the marketplace, we believe, and improvements in our sales efforts. .

Increased sales of our top-selling SolarisPlus and ThermoStim products continue to be strong. They were partly offset by lower sales of other medical supplies and products like traction units and exercise products.

But I think the indication from the increase of sales is a reflection of both the positive efforts we've been making on sales, including the Amerinet contract and others, along with what seems to be a little bit of the cloud lifting from health care reform. People are starting to adjust a little more.

The concerns seem to be minimizing a little more, and there seems to be more interest in expansion and clinic openings out in the marketplace. So that's -- those are all initial indicators that give us some confidence that we're seeing general market improvements that dovetail nicely with our specific market and sales efforts at Dynatronics. .

And the gross profit for the quarter was down, unfortunately, due to the product mix of what was sold this last quarter.

Some of the increased sales were of products that did not have as strong profit percentage as others, and so that led to about 1 percentage drop in our gross profit margin, resulting in pretty much the same gross profit being generated this quarter as last quarter. It was about a $13,000 reduction. .

So the real improvement, not only did we improve sales, which helped us to maintain gross profit at least from last year, we did see a significant reduction in our expense line. The Q1 expenses for SG&A decreased by about $128,000, most of which was labor and operating expenses.

We did have higher general expenses that we did absorb this quarter, but the decrease came mainly in labor and operating expenses.

Part of the reason for those decreases is that over the last 2 years, we have worked to adjust our operating model to the decrease in sales that had been occurring and have carved out over $1.6 million in annual expenses out of SG&A and R&D expenses. .

R&D expenses were also down this quarter. They were down about $98,000 compared to the same period last year. Keep in mind that last year during this quarter, we were focused on the introduction of the new ThermoStim Probe. That required some higher investments in R&D at that period, and we did launch that probe in Q2 of last year. .

And so at the present time, our R&D expenses have normalized to levels that we expected. The reason for that is that if you look at our history, we do go through cycles.

The last 2 or 3 years have been a very strong upward cycle on R&D expenditures, and we've generated more new products in that period of time than any other period during our history, but we are now utilizing the platforms developed from that R&D for additional new products contemplated this year and next year.

That enables us to keep our actual R&D expenses down from what they have been in the last 2 or 3 years. So the current level is where we expect them to be, primarily in the coming 18 to 24 months. .

As a result of the improved sales and primarily the reduction in R&D and SG&A expenses, our pretax profit line increased quite dramatically. Last year, we reported a loss of about $169,000 in Q1. This year, we're reporting a profit of $56,000. That is a turnaround of $225,000. .

And during the period, we actually paid $43,000 in medical device taxes, which was up from last year's $39,000. And the medical device tax notwithstanding, we were able to show the profit of $56,000. .

If you've been following the election results on a national basis, you're probably aware that the Republican Party is taking control of the Senate, and one of the top items they have on their target list for next year is a repeal of that medical device tax. And so we're anxious to see that, that occurs.

We think that will be healthy for us and for our industry, and we hope to see that happen in the first or second quarter of next year. .

We did, during the quarter, also incur some fairly significant professional expenses that were related to the S-3 registration statement that we filed. Absent those expenses, our profit probably would have doubled from $56,000 to over $100,000 for the quarter. But accounting rules require that we show those expenses the way that we did. .

Income tax. I'm not going to spend a lot of time on income tax because, as I will talk about in a minute, we had a sale of our building during the quarter. We also had some timing differences, R&D tax credit issues.

Suffice it to say, our income tax provision was about 28% this quarter compared to 36% last year and 36% benefit last year compared to 27% tax this year. .

And so bottom line, after all taxes for the quarter, we're reporting a $41,000 net profit compared to a net loss last year of $108,000. Those are some of the numbers for the quarter. .

Our strategic plan going forward. As I mentioned, we're encouraged by what we see as an upward trend in demand for products as the cloud of the Affordable Care Act seems to be lifting slightly.

As we have mentioned before, on July 1, we were awarded the 3-year sole-source agreement with Amerinet, one of the 5 largest purchasing organizations in the country. Sales under that contract are ramping up.

We expected it to be a slow ramp up, but they are ramping up at a double-digit pace, and we're working on ways to accelerate sales under this agreement. We think over the next 12 months, it will account for a significant portion of increased sales that we'll be reporting. .

We have, as mentioned, lowered our expenses over the last 24 months. That has positioned us well going forward to operate from a very lean position. .

And let me talk for just a minute about the sale-and-leaseback of the building that occurred. We've released some information on that.

We discussed it in the last call that we had for the fiscal year end, but for those were not on that call, and who have not been familiar with it, we did make the decision in July to sell the corporate headquarters building here in Cottonwood Heights, Utah for $3.8 million and leased it back for a 15-year period.

That was a strategic move intended to reduce our debt load. We were able to reduce our debt by about $2.7 million as a result of that transaction. That accounted for well over half of our long- and short-term debt that was on the books at the time.

It has left us with about a $2.2 million in debt, $1.2 million of that approximately is our line of credit and the other $1 million is approximately is mortgage on our facility in Chattanooga. That's the main composition of the debt on the company's books at the moment. .

The new rent payment under this arrangement is roughly equivalent to the savings that we generate in depreciation and debt amortization that have been eliminated. And so there's no real measurable impact on cash flow of the company because of the sale-and-leaseback. It pretty much offsets.

However, accounting rules being what they are, they require that we amortize the gain on the sale of the building, which is about $2.25 million, over the life of the lease instead of recognizing it in the period when the transaction occurred. So for the next 15 years, we'll report a monthly income item amortizing that $2.25 million gain. .

Likewise, we're also required to capitalize the lease, which means we will incur new depreciation expense and imputed interest that will essentially result in recognizing about $11,000 from a more -- in operating and occupancy costs at the first of the lease and an equivalent amount less than that towards the end of the lease.

It's accounting rules that I don't really understand why they make you do it this way, but they do.

And so we will see slightly higher operating expenses as -- we had those in the first quarter that we just reported, and they will be ongoing over the life of the lease, with that $11,000 per month increase in cost amortizing down; at about the midpoint of the lease, being roughly equivalent; and then lower going forward than what the rent is we're paying.

So the tax on the gain on the sale of the building was paid during the quarter, and we were able to utilize most of our accumulated tax attributes to offset that gain so that the tax was minimal. .

So the bottom line on the sale of the building is it was a good thing from the perspective of reducing our debt, keeping our cash flow even. And then, we will be reporting in the early years of the lease, higher occupancy expenses that then translate into lower occupancy expenses in the future, relative to the rent that's actually paid.

That pretty much sums up the information on the building. If you have questions on that, we'll answer those at the end of the call. .

And as everyone knows, we have introduced many new products. That has been a key to the increased growth that we've been experiencing. It's also enabled us to attract more new sales reps and dealers to help provide better coverage and deeper market penetration.

We're seeing some fairly important relationships being built that we think will sustain -- help sustain the growth that we're seeing in sales. .

Additionally, we have been focusing more on international sales.

We are working very closely with our distributors in Asia, who are working on getting the clearances for marketing the products there that we anticipate will come through in the next 6 to 12 months and, hopefully, allow us to start selling significant amounts of product in those markets. .

One of those distributors had previously been a distributor for a competitor. That competitor decided to go direct in the China market, and so this distributor's anxious to have a replacement line and has done over $2 million worth of sales with that previous competitor in the last year or so.

So we believe there is some significant opportunities there. .

One thing we would like to mention. We did file an S-3 registration statement with the Securities and Exchange Commission that does allow us to raise additional capital. However, these types of shelf registrations are typically limited to 20% of the outstanding shares of the company.

We filed this in order to have the option of raising capital, should an opportunity for a merger or acquisition activity arise or other capital needs.

But rest assured before any stock would be offered formally under that S-3, we would be required to make additional filings with the SEC to disclose that, and there are no such filings currently underway. The S-3 is primarily a shelf registration set up to help us on a just-in-case basis. .

Finally, the banking relationship. We wanted to make sure. We had some questions about that. Our banking relationship has been with Zions Bank for almost 20 years. They recently extended our line of credit to the end of January. However, in discussions with the bank, we have agreed to explore other options for meeting our working capital financing needs.

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We want to emphasize that we are in covenant with the bank as we understand it, and we've never missed a payment with the bank. We don't want this to be misunderstood.

However, our limited profit performance over the last 2 years has caused concerns that have led essentially to a fatigued relationship, and we both feel that it's good timing and appropriate to find new financing. And while we've appreciated the support of Zions Bank over the years, we believe a new banking relationship would be advantageous for us.

So given our improving performance, we're confident that we'll successfully replace Zions' bank line of credit with a new banking relationship and working capital needs within the time frames we've described. .

Looking ahead to the second quarter coming up. Second quarter has typically been a profitable quarter for us historically. Last year, it was a $74,000 profit. Following the trends of Q4 last year and Q1 of this year, we would anticipate a similar profit performance in Q2 over the prior year.

We hope to see that by the end of the first 6 months of our fiscal year, we're in a much better profit position compared to where we were last year. .

Factors affecting our performance in the coming months will be things like health care reform. It continues to be a factor. Although I think with the lifting of the -- or the imminent lifting, I should say, of the medical device tax, that's going to generate some energy that will be positive. .

General economic conditions continue to be erratic depending on the part of the country you're in. We have found that some areas of the country are booming while others continue to struggle. .

Acceleration of sales under the Amerinet contract will be a contributor to our sales increase as will international sales starting in Q3 and Q4. We do have some new products that are scheduled for introduction in Q3 that will also help to boost sales, and we are experiencing some success in expanding our distribution capabilities. .

So if we continue to focus on the things that have resulted in the 2.3% increase in this quarter and continue to move that needle forward, and at the same time, maintain vigilance in our operating efficiencies, we believe the underlying strength of the company will continue to improve.

And after 3 consecutive years of breakeven or losses, we're anxious to show a reasonable profit for this current fiscal year. And starting out this first quarter the way we have is a good way to start that. .

We are continuing to explore business opportunities through strategic expansions and partnerships, such as those that might be related or be supported through the S-3 filing. We don't have anything to report on that at this stage. But as opportunities like that may come to fruition, we will make the disclosures as appropriate.

We are committed to building shareholder value and have -- feel like we've kind of emerged from what has been a fairly ominous cloud the last 3 years and are anxious for what seems to be a new dispensation in operations here. .

So with that, operator, we'll go ahead and open the call for questions. .

[Operator Instructions] And our first question comes from the line of Sam Bergman [ph]. .

So finally, we get a little sales growth, which is nice to see and profitability, both a good start. A couple of questions I have.

On the Amerinet GPO contract, can you give us an idea of what percentage of sales were from them this quarter?.

Amerinet accounted -- let's see, our sales total was around $7.2 million. So they're probably around, let's see, I would say they were no more than 3%. .

No more than 3%. Now the newer or accumulated distributors that you've added to the roll over the last several months, it would seem to me, there should be more of an opportunity to grow sales with them versus a deal like Amerinet.

And is that kicking in at all? Or do you expect it to kick in?.

Yes, it is, Sam [ph]. We are seeing some of that, and we tend to agree with you. We think the ramp-up is better with some of the distributors than with Amerinet. Amerinet is a -- what we call a trench warfare kind of a thing. We have to go out and convert accounts one by one. And while that's happening, that's a slower ramp up.

But the distributors that we're bringing on represent some fairly significant business.

So for instance, if you just take the 2.3% increase that we experienced over the last year, forgetting for a minute that we had been on a 7% decline and you just take that 2.3%, we can identify 2 key new distributors who could easily have accounted for the majority of that, if not more. And so you're right.

The new distributors really bring more to the table quicker than a big contract like Amerinet. .

And the ThermoStim product, has that lived up to expectations up to now or not?.

The Amerinet contract?.

No, the ThermoStim product. .

We -- when you start out, you tend to always be a little overoptimistic. So we had hoped that we'd see sales between 50 and 100 units a month. And what we actually ended up with were sales between 40 and 50 a month.

Given the market conditions that we were in with all of the concerns of health care reform and the diminished demand for capital equipment in general, in retrospect, that probably was a much more realistic level. The thing that we've been pleased with is that, that sales level has maintained.

Sometimes when you introduce a new product, you see a big bump in the first 3 months and then it levels off. And we've been pleased with the fact that we didn't see that. In fact, demand remains constant for that product.

And what's more important is it's not just the probe itself that results in sales, but it is the fact that you must have a SolarisPlus unit to operate the probe. And so about 80% of the probes that are sold also pull a unit sale through with it. .

Is there any acceleration you could possibly see with that product going forward or not?.

I believe we will see the same acceleration we're seeing generally as market demand picks up. It's -- the last 3 years have been a very suppressed market, as people have had concerns about the impacts of health care reform on both reimbursement and delivery of care.

I think as that fog is lifting, we're seeing some of that demand return, and we believe there's going to be some pent-up demand that's going to be expressed over the next 12 to 18 months from the last 3 years.

So I believe there will be an increase in that, just because people will be looking again to expand their practices and open to new ideas that maybe were not open to them in the last 30 months. .

And the S-3 that was filed, are you close at all to any tuck-in acquisitions or not?.

If I answer that for you, Sam [ph], I'd have to shoot you. .

Let's go on to one last item. In terms of the banking relationship. So I assume you're talking to other banks anyways right now. .

Yes. .

How close are you to obtaining that or you expect to obtain it regardless?.

We expect to obtain it regardless. I mean, we've got a couple of offers on the table right now that we could do tomorrow, if we wanted to. We're just looking for better terms. .

And we do not have any further questions at this time, sir. .

Gosh, when you have good news, I guess nobody wants to ask questions. Let's give them one more chance. .

[Operator Instructions] There are no questions, sir. .

Okay, I guess Jeff [ph] must not be on the call today. Usually, Jeff [ph] has a question for me, but Jeff [ph], if you're there, thank you for being on the call anyway. .

If there are no other questions, we'll go ahead and conclude the call today. And of course, as always, if you have questions, you're more than welcome to call and talk to us directly, and we'll try and be as responsive as we can. Thank you for being on the call today..