This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We’d like to welcome you to our conference call to review the financial results for the first quarter of our fiscal year 2013, ending on September 30, 2012.

Before we begin, as a reminder, during the course of this conference 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 our most recent Annual Report on Form 10-K.

Today, we’ll update you on our results for the first quarter ended September 30, 2012. Then following my brief presentation, we’ll be happy to open the call up for some questions and answers.

I’ll cue the operator at that point, so she can unmute the lines and allow the questions to be asked.

Let me tell you, we have both good news and bad news for the first quarter ending September 30. The bad news, of course, is that sales were down about 10%, but the good news is, that despite those lower sales, we improved our performance by about 30%, based on our pre-tax numbers, over the same quarter a year ago.

Sales were actually down about 9.9% or about $791,000, which resulted in gross profit also declining by about the same percentage, resulting in about $290,000 reduction in gross profit for the quarter. That, as a percentage, is 37.6% of sales compared to 37.5% of sales last year during the same quarter.

Let me give you a little more perspective on our sales performance for the quarter. The diminishment in sales continues a trend that began last January, where the continued weakness in the economy has demonstrated itself through continued weakness in sales of capital equipment.

We had this [ph] sales the last 2 quarters, 8.7%, 5.5%, and then 9.9% this quarter. That continuing weakness seems to be stabilizing at the current levels, and in fact, there is reason to believe that we will see increasing sales going forward, as I’ll talk about in a moment.

In addition to the weakness in the economy being a contributor, first quarter is typically a slower quarter for us, always has been, and this was no different. We did see a significant increase in backlog of orders, however, this quarter.

That is attributable partly to the new products that we introduced, the Solaris Plus, as well as other products, capital equipment purchases, that were delayed for deliveries in October or later, or we were just backlogged due to production issues with the new product line.

The lower sales of capital, exercise and motorized treatment tables and such were the biggest contributor to lower sales during this particular quarter. It’s interesting to note that as we divide our sales between manufactured capital products and distributed capital products, our sales of manufactured products is actually up over the last year, compared to distributed capital products, items that we distribute for other manufacturers, showing a significant decrease.

Number one, it shows a good acceptance of some of the new products that we’re introducing. And number two, of course, we have higher margins on our proprietary manufactured products than we do on distributed capital products.

So we are very pleased that we are seeing an upturn for the first time in 2 to 3 years of manufactured capital equipment despite the downturn in distributed capital equipment. That is partly an issue associated with the time of year; summer is always slow for these kinds of capital equipment.

But the decreased sales of that distributed capital is what led to the $791,000 reduction in overall sales for the quarter, while sales of our manufacturing capital increased sales. That $290,000 reduction in gross margin was offset, fortunately, by about $330,000 in reduced expenses during the same quarter, compared to a quarter a year ago.

Our sales, general and administrative expenses were down $236,000 compared to last year, and our R&D expenses were down about $90,000, compared to the prior year.

So despite the fact that sales were down, resulting in lower gross margin, the fact that we were able to reduce expenses by a greater dimension, resulted in the bottom line of pre-tax profits, or I should say, pre-tax losses in this case, diminishing from $106,000 last year to $74,000 this year. Again, we are never satisfied with a loss in any quarter, but the silver lining on that is that we are showing improvement over last year.

And the fact that we have been able to reduce our expense base bodes well as we work to improve sales and margin going forward.

Of course, after tax, the net loss for the quarter is reported at about $51,000, which is $0.00 per share, compared to the next loss of $68,000, which rounded up to $0.01 a share last year.

Those are the financial metrics for the quarter. I think, to talk a little bit about our strategic initiatives, and where we’re headed at the present time.

The last 2 years as we have been reporting, we have invested significantly in R&D. That is going to result in fiscal 2013, which is the year ending June 30, 2013, reflecting the most significant number of proprietary manufactured products introduced in a single year in our history.

We started off with recently, last spring, with the QUAD7 product line. And then in August, late August, we released our new Solaris Plus units.

Our first 4 Solaris Plus units, which is our top-selling product line, our combination electrotherapy, ultrasound, light therapy devices, which carry some of the best margins of many of the products that we sell.

We are very pleased with the way those products are being received in the markets. They have shown a significant amount of planning and resiliency in the fact that the products are holding up very well, even on initial release, we usually expect to see a few rough edges along the way, and we are pleased to report, so far, we are not seeing that with this particular product line, which is a real tribute to our engineers, who have done an excellent job of producing a very solid product.

With this new product line, we will be introducing additional new products between now and the end of June. All of which are calculated to help boost sales and margins, as we are seeing already, with about 5% increase in these types of products, just with the release in the last half of this quarter, we believe it will give a significant boost in the second quarter and beyond.

We’re also working to expand our distribution channels within the market, and have plans to do so on an even greater scale between now and the end of the fiscal year.

The Solaris Plus family of products represents basically an upgrade or replacement of the Solaris line, and is an upgrade including new features and design that makes it significantly more attractive along with a new cart. Overall, capable of being used with our new ThermoStim Probes that are part of the QUAD7, all of it is kind of an intrinsic design to advance the desirability of our manufactured products.

We do have some additional products as I mentioned, planning to be introduced as well as we will be introducing 2 new treatment tables that we will be offering, starting in this month or the first part of December. This will significantly upgrade our line of treatment tables, and we believe will offer some of the most desirable treatment tables on the market.

So we are not just limiting the new product introduction to the higher-margin modalities, we are also doing some things with the new treatment tables. All of this is a reflection of our R&D efforts and investments over the last 2 years.

And of course, now that we have done that investment, we begin to reap the benefits of that, while R&D expenses decline to more normalized levels. And so, we believe the coming quarters will be reflective of that benefit.

We are always interim reporting on what’s happening with some of our national account efforts in our attempt to grow our business through national accounts and GPOs. We spoke less than 2 months ago and not a significant amount has changed in that period of time.

We continue to try and work with the contracts that we have.

They are challenging at best to continue to develop new business, but probably the most exciting thing along those lines that has happened was the addition of a GSA contract with the Federal Government, which resulted in a couple of hundred thousand dollars of sales to Veterans Administration and other government agencies in just the last few months. And we believe that GSA contract will be something that will help us leverage our sales in the market where we have not had as much success in the past.

We are continuing to explore international sales. We are starting to see a little bit of movement, with sales on the international market increasing a little bit over the last 12 months, and with the prospect of some new distributors coming online in the next 12 months, that could further advance our efforts to secure some distribution in Europe and other international markets.

So we are continuing to advance the strategy of promoting our proprietary manufactured products, expanding our distribution network both domestically and internationally, and we believe we are well-positioned to do that as we go forward. We have, of course, been fighting the NASDAQ deficiency as everyone is well aware.

We are granted an extension on meeting the $1 minimum bid deficiency until November 5 of 2012. We, obviously, did not regain compliance with that $1 minimum bid rule by November 5.

We did receive notice from NASDAQ that our failure to achieve that would result in a delisting unless we applied for a hearing and appealed that decision, and we have done so. That appeal is based on the fact that we have filed a proxy statement that calls for a 1-for-5 reverse split.

one was to allow the stock to be delisted to an OTC market or to go ahead with the reverse split and to do so with the intent of preserving our NASDAQ listing.

We’ve done some studies on that. We recognized that it’s basically a lesser of 2 evils, but we do believe that the upside potential associated with staying on NASDAQ makes it a much more desirable option than the delisting to an OTC market.

OTC markets or the reverse split we recognized have the potential of diminishing market capitalization, at least in the short-term. But in the long term, as we evaluate which option is best for shareholders, the board felt strongly that a reverse split, in order to remain on NASDAQ, was a preferable option for the shareholders, in that, it would preserve visibility of the stock and the liquidity on a much better basis than it would if we were delisted.

Again, we recognize that we would prefer not to have to do either, but unfortunately, there was not a third option to consider. And the board authorized the 1-for-5 split as has been outlined in the proxy statements that were mailed out.

That will, we believe, according to our discussions with NASDAQ, enable us to retain that listing. We do have our panel hearing coming up with them on December 20; at which time, they will make a final decision.

So in summary, we did improve our performance by reducing the loss, $106,000 loss, last year to $74,000 loss this year. Despite the 10% reduction in sales, we were able to offset that reduced margin by a greater reduction in overall expenses.

We believe doing so positions us well as we move forward to improve sales and still maintain a lower cost basis.

We believe the total value of the expenses that we have targeted for reduction comes to about $0.75 million a year. That includes R&D expense reductions.

With our new GSA and national account business, we believe we’ve got potential for growth, but the best growth, we believe, will come from the introduction of the new products, not only the ones that have already been announced, but the ones that we plan to introduce between now and the end of the fiscal year.

So we, again, while we are disappointed that we were not able to achieve a profitable quarter in the first quarter, we at least made some progress, compared to last year and despite some fairly stiff headwinds, are continuing to push forward in the current environment.

Speaking of which, one last commentary and before we open it up for questions. With the elections in November, there have been some directions that have been more solidified now, it’s very clear that there will not be a repeal of Healthcare Reform, included in that Healthcare Reform is the medical device tax.

The medical device tax is a 2.3% excise tax on sales of all devices sold by manufacturers or importers in the United States. That tax is supposed to begin in January of 2013; however, the IRS has yet to issue the final rule describing how that tax will be assessed, or how it will be collected, or on what products exactly it will be charged.

The industry believes that because of that delay in issuing that final rule, there will be at least a 6-month delay in the implementation of that tax provision, which means it would not impact our performance in the current fiscal year.

And, of course, there is still hope that the tax will be repealed, the House of Representatives has passed a measure to repeal that tax, the Senate has not taken it up, nor do we expect that they will. But, instead, it could be with the delay in the implementation of this tax, it could be considered as part of the overall corporate tax reform that the current administration is undertaking.

We hope that will be the case, if not, the last attempt will be to go to Congress and seek a Safe Harbor for companies under $150 million in sales so that they are exempt from that tax, the rationale behind that being that about 70% of the companies would fall into that category. But that would only account for about 30% of the tax revenue that would be lost and could be offset with other measures.

In doing so, it will not have some of the negative effects of affecting unprofitable startup companies, stifling innovation, and things of that nature, so we are hopeful that one of those things will occur so that Dynatronics will be able to dodge that 2.3% excise tax bullet. For now, we believe it will be delayed until July at least, and maybe even for a year.

The rest of Healthcare Reform will move forward. There is always the possibility that starting in 2014, when they add additional persons to the rolls of the insured, that there could be increased demand for products at that time, and we will certainly look forward to that should that be the case.

So with that information dump, I will ask the operator if she will go ahead and open the line for questions, and we will be happy to take your questions.

I just want to ask, and I missed the first part of the call, and I apologize if you went over this already. Can you talk about your projections for the rest of the fiscal year, given your new product introductions and everything, do you expect profitability for the balance of the fiscal year?

Maybe even talk about guidance for the second quarter, this kind of thing.

You bet. Thank you, Jeff.

Let me address your question. We do anticipate profitability in the second quarter.

The degree of that profitability -- last year, we were also profitable in the second quarter. Our expectations are with the new product introductions that we are pushing out right now that we should match or exceed the profitability that we had last year, despite the fact that we believe overall sales will probably not be as great as they were in the second quarter of last year.

It seemed like last January is when we saw the precipitous drop in sales that occurred. And so until we get to that same period in a comparative state, we expect that sales will probably still be down compared to the prior quarter.

But that said, our expectation is that with the cost reductions we’ve achieved and the new products that are being introduced and the increase in sales of proprietary manufactured items, that we should see profitability equal to or greater than the second quarter of last year, despite lower overall sales.

And then going on beyond that, definitely starting in the third quarter, of course, last year in the third quarter, because we had such high R&D expenses, we reported about a $250,000 pre-tax loss, and we certainly will expect that absent some other economic, foreseen economic factor, we fully expect to be profitable in the third quarter compared to that large loss last year. And so going forward, our projections are for profitability in every quarter between now and the end of the fiscal year.

Okay, okay, very good. And you said you’re hearing what NASDAQ is put end of December?

It’s on December 20, we expect that will be pretty much a perfunctory hearing, because all they will do is, ask us if the shareholders approved the reverse split at the December 17 Shareholder Meeting or not? If the shareholders approved it, it’s pretty much a given that NASDAQ will allow us to remain on while the stock recalibrates to the new reverse split level, and as we then achieve the $1 minimum bid for 10 consecutive days, we automatically retain that listing.

If for some reason, the shareholders vote against the reverse split and it is not successful, it’s pretty much a foregone conclusion that NASDAQ would not accept our appeal and we would be delisted.

Okay. And I mean and how long after that hearing, do you have to actually affect the split assuming that it’s approved by shareholders, pretty closely thereafter?

Yes. It would be fairly immediate.

Once it’s approved by shareholders, the process begins the very next day to go ahead and affect the split. And then we report that to NASDAQ and then we have to show for 10 consecutive trading days that we trade over $1 under the new paradigm, and then you have met the requirement for -- you’ve cured the deficiency.

Okay, okay. So in effect -- you would affect the split before the hearing, to show them what you’ve done and okay, I understand.

Yes.

So, yes. The only way to round [ph] that is somehow the stock gets above $1 between now and then.

[indiscernible]

That’s correct, that’s correct. You’ve got it.

Good afternoon. I have several questions, first would be the line of credit that you have apparently is expiring at 12/15?

Correct.

And you’re still working on trying to get a favorable or renewal terms in some case [ph], I can’t recall who you’re with, but what’s -- you’re about $3.7 million -- $3.6 million to $3.7 million.

Correct.

You’re drawing the lines [ph] currently at the end of September? What was the total amount of the credit total path [ph], was it $7 million?

I can’t recall?

The line is approved for up to $7 million.

Right. But it’s based on receivables and inventory, et cetera?

Correct. It’s actually based on a borrowing-based formula.

Yes, there you go. Do you have any perspective as to how this is proceeding in your negotiations to get it renewed?

Yes. The bank has given us every indication that it’s their intent to renew it.

It is in a renewal stage at the current moment. They’re putting the paperwork together.

We’re providing with the standard documentation. We don’t anticipate there being any problem in renewing the line.

Okay, very good. Second question would be, I understand your sales were a little bit soft in the quarter, because Solaris, you were backordered on the product.

You are now 6 weeks into the new quarter. Can you give us some kind of guidance or color as to whether your sales during the 6-week period are running ahead or behind last year during the comparable quarter?

During the comparable quarter, sales overall are maintaining the same pace they have since last January, they’re down 5% to 8%, overall.

But sales of our manufactured capital products are up significantly. And so that’s where the real bright spot is.

With the introduction of the Solaris Plus, we are seeing some improvement on that side, which is the first time that’s occurred in 3 years. So the last 3 years, our manufactured capital has seen a steady decline, not precipitous, but just steady.

This is the first time we’ve seen a turnaround, which is what we expected and what we have been shooting for with the introduction of the new products. And so the weakness in sales continues to manifest itself, in the sales of distributed capital, which is other manufacturers’ capital products that we distribute, not things that we manufacture.

Do you feel that you’re losing market share in that, in the consumables year-to-date compared to your market competition or impossible to tell?

It’s not easy to tell, but we do have reason to believe that we are not losing market share, but what we are seeing is a reflection of the general market, which is there’s just not significant growth, there’s not a significant amount of new clinics being opened, practitioners are not expanding their practices, everybody seems to be in a hunker-down mode. And so we don’t believe that we are losing any significant amount of market share.

We believe that others are seeing the same thing. As an example, we have a company that I can’t name that we know very well that was discussing with us, and we know that their market share, their sales were down significantly more than ours are.

And so we have a reason to believe this is not unique to Dynatronics. This is fairly market wide and if we could see the effect on all of the companies in our market segment, we would probably find that the impact on us is either equal to everyone else or less than everyone else, because the new products and the direct sales force that we have, I think, is to our benefit.

Okay. I can’t recall, but did you list in the documents you presented, did you list the backlog of orders that you had at the end of 9/30 of this year compared to last year [ph]?

I did not, but our backlog of orders at the end of September was a little over $800,000 at the end of September and whereas the same period, the prior year, we were a little over $500,000.

Okay, well, that’s positive.

Yes. Well, and a good portion of that was the Solaris Plus, where we just, once you introduce a new product line and then production wasn’t able to keep with the demand, but that affected the first quarter and resulted in a greater loss than that we would have had, had we been able to get all those products out the door.

The positive side of that is we’re able to clear that backlog in October, and October was very profitable.

Okay. Kelvyn, a few times you noted in the last year, the STREAM product line that you have, not the product line, but the technology part.

Correct.

And it’s not going to a grand slam homerun; it’s kind of a steady eddy at this point?

No, it’s actually. And I appreciate you bringing that up, Paul, because it’s important to disclose that, that -- our contract with the supplier of that product terminated at the end of September.

And so, it had been diminishing in scope for the last year. And there were some challenges with rolling it out and getting people to adopt it, and it’s just simply died a slow death.

So, it is not contributing at all going forward.

So do you still have those clients that you can continue to have on it, or what’s the status of those...

Under our agreement with the vendor of the software, if we did not achieve certain milestones, that we were not entitled to ongoing commissions on those customers, they revert back to the vendor themselves and they service them directly.

Okay, I understand. Getting back to the other thing that you were real excited about during the last 12 to 18 months was GPOs, I know it’s been a lot tougher than you envisioned, but are you starting to cut back your efforts on the expense side of that, because it hasn’t materialized or is it more of a...

Yes, we did. No, we did do that.

We did cut back on our investment in trying to generate those sales, as we began to realize what was involved in trying to get those sales. We realized that it was, in some cases, easier to get a contract with some of the GPOs than it was to get business from their members once we had the contract.

And so we’ve had to learn through experience, the best way to approach that. We are working with a GPO right now, which we think is one of the 5 large ones that we think is our best chance for getting a viable contract that will actually produce some results.

And so we haven’t given up on the GPO market. What we have done is we have become more laser focused in where those efforts should be deployed.

And we recognize that there are areas where we can be competitive and there are areas where it’s going to cost much more from an investment to develop the sales than we are willing to invest at this point in time until there is a greater manifestation of a benefit. And so we are retrenching our efforts and going after select opportunities as opposed to the broad approach we were taking before of trying to get on with every GPO and building as much business as we could in that market.

Okay. That's fair.

The international market, I know you’ve been in that for a lot of years, and this is a question, not a criticism, but just kind of I’m questioning, I know during these calls and you have to show your strategic vision for the company, like all companies do. Is international a strategic opportunity, or it’s kind of like potentially a black hole putting resources in it, hoping to some extent like GPOs, that something will develop, and it maybe isn’t the best opportunity that you have, but I’m kind of -- go ahead.

It’s not a homerun, but we do believe that for the first time in quite a while, with the introduction of Solaris Plus and some of the other new products we’re coming out with, we have generated more significant interest from distributors overseas than at any other time in our history. So that’s not saying a lot, because we haven’t had a lot of interest in the past.

So I don’t want to give a false impression in that regard. What I am saying is that instead of having our fingers crossed and saying, “Gee, we are hopeful that we can develop something,” we are actually speaking to distributors, and in fact, as we speak, our international sales director is over at the largest international show for medical devices, called Medica, in Germany, and working with some of those very distributors right now.

And in past, our path has been trying to identify who they might be and trying to get them interested. Now we are working with specific distributors on a distribution plan of how we can do -- how we can get our products in and do it in a way that is -- that meets their needs.

And so had you asked me that 6 months ago, I probably would have said, “Well, we’re hopeful, we’re not putting a lot of direct resources into it and it’s a measured approach.” But right now, we are actually seeing movement for the first time in 3 years, where there is a potential for distribution to actually develop in Europe, which we have not really ever had.

Well, that’s good. Okay.

Yes. I don’t think we’ll see any specific results from that until the end of this fiscal year.

I don’t think that’s something that’s going to happen in the second quarter or the third quarter, it will be something that may begin in the fourth quarter after we have our international regulatory certifications done.

Okay. Internet sales, you’ve been very bullish on that, because of the investment that you put into it.

Yes, yes.

Okay. Can you give us some color or guidance as to what kind of [ph] your sales are from that?

Yes. We continue to see 30% to 35% of our sales coming through our electronic portal and are working to grow those sales, because those sales are less expensive to service than others.

And so, it has been what we had hoped it would be. We think that there is still more that can be done, and we think that will be -- our biggest challenge with that, I mean, when you start talking about a black hole, I have to tell you that IT kinds of things are a black hole.

And so we have to make sure that what we invest in that electronic portal is something that will generate additional sales or make the portal more attractive. And that’s our big challenge at the moment.

There is no shortage of things that we could do, it’s just, what should we do?

Okay. In conjunction with the Internet I know about a year ago, you were about 12 months behind I believe, in trying to get a new catalog out, and now you are once again suggesting the catalog will come out first part of the next year?

Yes, January.

January, how effective has your large catalog been in conjunction with the Internet, because is such a large catalog needed? And is it a multi-year catalog, or just annual, or biannual?

It's a multi-year. It's a multi-year catalog, and so we will use this for the next 2, maybe 3 years, and so that's part of the reason it’s taken so long to get it out.

But interestingly enough, in the market that we service, paper catalogs still are in demand. And it becomes a sales tool, we saw this 3 years ago, when we introduced the last catalog, we got a bump in sales, when it went out, as people perused it and said, “Oh, I can buy this from your, I can buy this from you.”

And it gives a impetus to the sales reps who are out distributing the catalog. So I do believe it will be a benefit when we introduce it in January, even though there will be an expense associated with that.

I think the benefit will offset that expense.

Do you distribute the catalog, or give it to the distributors to place in the practices?

Yes, we do.

Or do you directly mail it to the practices also?

A little bit of both, so those that we have direct mail, validated direct mail addresses to, we can do the direct mail. But the majority of it gets delivered by hand.

Okay, we’ll assume that Paul was thorough enough in his questioning that everybody else got their questions answered. We'll allow just one more time, while I am wrapping up here, if you have any last questions, go ahead and register those with the operator and she’ll relay them in.

Or as always, we’re happy to take your calls, respond to your e-mails. We do encourage you to examine the proxy statement that was sent out.

We know that reverse splits are never really that popular, but in this case, and we believe it is in the best interest of shareholders. We encourage you to send in your proxies and vote in favor of that reverse split.

We also, as you noticed on the proxy, did change auditing firms this year we have switched to a new firm for the new fiscal year. That was driven not by any level of dissatisfaction with our previous auditors, they were actually quite good.

And we really enjoyed working with them; this was simply a matter of cost cutting from our perspective. And we put it out to bid, and we did save some money on doing that.

We have great confidence in the new firm, that’s come on. They are an excellent firm as well.

And so we feel very fortunate to have been able to work with Tanner in the past and now to work with Larson & Rosenberger, both of which are very reputable firms. And we have appreciated that relationship with Tanner and look forward to the new one with Larson.

And that was put into the proxy as well.

So with that, we appreciate your support. We continue to fight the fight.

We believe we are positioned with the new products and some new strategies now that hopefully will pay off after the investment of the last couple of years, and taking the right steps to make that happen is our goal.

If there are no -– are there any other questions before we end the call?

Okay. We will terminate the call for today, and express our appreciation for those who have been on the call with us.

Thank you very much, and have a great holiday season.