This is Kelvyn Cullimore. We'd like to welcome everybody to the Dynatronics Corporation Second Quarter Financial Results Conference Call. The purpose of today's call is to discuss the financial results for the quarter ended December 31. .

And before we begin, just as a reminder, during the course of the 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.

So 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. .

Today, I'll update you on our results for the quarter ending December 31. And when I'm done with my dialogue, then we'll open the call up for any questions. We sent our press release out last night, so I assume the fact that you're on the call means that you received that press release that announced the results for the quarter.

We're pleased that we're able to report, for the first time in 4 quarters, a profit. The pretax profit was about $74,000 for the quarter. That's a turnaround from the losses that have been reported in the last 3 quarters. The net after-tax profit for the quarter was, as you saw on there, about $44,000. .

We recognize that, that's down from last year. But when put into perspective, the profit is a good achievement because, as you probably noticed on the report, our sales for the quarter were down more substantially than we had expected. Sales were down about 10.7% for the quarter. That was not surprising, but it wasn't anticipated.

The primary contributor to that appears to be weakened demand for capital equipment. Typically, December is a very large month for us. December is a month when a lot of customers are trying to use up unspent budget. It's also a time when people are trying to make equipment purchases in order to capitalize on tax depreciation advantages for the year.

For the first time in a long time, we did not see that really materialize this year, and that was a large contributor to the declining sales. .

We think a lot of that is due to uncertainty in the marketplace. Health care reform has certainly taken its toll. We are seeing a lot of people who are doing fine as far as operations go, but they're saying, "We're going to make do with what we've got for a while. We're going to put off expansions. We're not going to open that new clinic just yet.

We want to see how the dust kind of settles." And so that has had a greater effect on us in this quarter than was expected with the loss of those capital sales. So even with a 10% reduction in sales, we were still able to post a profit of $74,000, which is down slightly from last year for the same period. .

For the 6-month period, sales were only down about 6.6%. They're down about $1 million from the same time period the year before. Again, all of this we believe is attributable to softness in the marketplace due to uncertainty associated with health care reform. We are not identifying any kind of a trend or problems with the equipment.

In fact, to the contrary, one of our big challenges is the fact that our equipment is so reliable and so high quality that people have equipment that is 15 and 20 years old, and trying to convince them to upgrade is difficult when they see it continues to work so well.

So we need to tell our engineering department to try and build in a little more product obsolescence somehow. .

one is the fact that the product mix changed, where there's -- the higher-margin capital products were not as high a percentage of the mix. But also, as I mentioned in the call last quarter, we did discontinue, a year ago, our software service that we -- was known as STREAM. And during the quarter last year, we had $30,000 of gross profit from that.

And so with that out, that affected the margin percentage. And year-to-date, it was about $55,000. So that factor did help to contribute to the lower gross margin as a percentage of sales. .

Our sales and expenses, we have been able to keep pace with some of the lower sales by reducing our expenses. In the second quarter, we decreased our expenses by about $260,000. A lot of that was lower labor and operating costs or lower selling commissions, but we also did reduce our general expenses by about $70,000.

For the 6 months, we're down about $340,000 in expenses. So recognizing that sales were down, we also responded by having some expense reductions, which offset a good part of that lost margin. .

Our R&D expense for the quarter declined by about $35,000. That's a reflection of the completion of our R&D effort with the ThermoStim Probe, which was completed in the second quarter. Conversely, if you look at the 6 months, we're actually up $13,000 on R&D expense primarily because of the expenditures during the first quarter on ThermoStim Probe.

So going forward, we really expect that we'll be in a more normalized period, lower R&D expenses going forward because our efforts will be less intense than they have been, and we will be building on the platforms that we've generated from R&D for the past 2 or 3 years. .

So for the quarter, we had about, as I mentioned before, $74,000 pretax profit after taking about $420,000 less in gross profit, offsetting it with about $295,000 in expense reductions. It's interesting to note that of that $74,000 profit, it was impacted by a payment of about $42,000 in medical device taxes.

Most of you will recall that, last January, the Affordable Care Act imposed an excise tax on the sale of medical devices of about 2.3%. So it's not -- it doesn't matter if you make money or not, the tax is on sales, and that 2.3% applies to, we calculate, about 30% of the products that we sell.

Fortunately, for us, the majority of our products are exempt from that tax. But still, during the quarter, we generated about $42,000 in medical device tax. But for that tax, our profits would have been up closer to about $116,000 pretax for the quarter. .

For the 6-month period, it's a little more daunting because of the loss that we reported in the first quarter. Our pretax losses, through 6 months, are about $95,000. Ironically, our medical device tax during that 6-month period was about $81,000.

So again, but for that medical device tax, we would have been much closer to breakeven for the 6-month period. .

Some of you may notice that the income tax provisions for the quarter are different than last year. The provision is about 39% compared to 30% last year. That's primarily associated with timing differences and also, lower R&D tax credits this year compared to last year. And for the 6-month period, it was about a 33% factor compared to 29% last year.

So overall, we reported a net profit for the second quarter of $44,000 compared to $141,000 last year. And for the 6 months, we declined from a net profit last year of $90,000 to a net loss this year of $64,000. That performance was primarily driven by the lower sales in the second quarter for the reasons I have explained. .

I will give you a quick update on some of our strategic plans here. I will indicate that we have introduced the new ThermoStim Probe that we talked about in the last conference call. We were able to see sales, since the release of that product, that have been pretty close to what we had expected. As my sales manager says, every demo is really a sale.

It's just a matter of whether it's a sale now or later on because everybody that sees it says that they are excited about it and would like to have it. .

We had one of our salesmen go into a clinic in Dallas, and after a 15-minute demo, they ordered 6 packages. Walked into the Dallas Cowboys locker room, demonstrated. They ordered 2 on the spot with intent to buy more as their budget year comes around. Many of the professional sports franchises are doing the same thing.

It's just a matter -- everyone wants it. It's just a matter of fitting it into purchasing cycles, budget cycles and things of that nature. So the -- we're starting a little slower than we had hoped on the sales. Where we had hoped -- I think in my last call, indicating that we'd probably be selling about 100 a month.

And in the last 2 months, we've sold about 150. And so we are expecting a pace of 50 or so in the early months here and then seeing that build as the budget cycles come around. .

So the unanticipated weakness in demand for capital products is also affecting sales of the ThermoStim Probe because a lot of practitioners are hesitant to spend significant amounts on capital equipment until the dust settles on this.

So we are seeing a little bit of an impact from that even on the ThermoStim Probe, although we are trying to work on overcoming that. The new products have provided a basis to sustain interest in sales of capital equipment.

As you know, over the last 18 months, we've introduced more new capital equipment or manufactured capital products than at any other time in our history. And they carry the highest margin, and they have the greatest market appeal of any products, including our SolarisPlus family of products, the 25 Series, ULTRA tables and our new ThermoStim Probe. .

We have been grooming the market for the ThermoStim Probe for the last 6 months and getting people excited about it. But people wanted to see the actual demo of the product, and so that is what we have been out doing. Our sales force is making a lot of sales calls, doing a lot of demos.

And the response is exactly as we had hoped as far as excitement about the product and interest in the product. It's just a little more difficult to bring the sales in because of market uncertainties, budget cycles and things of that nature. But we are undaunted in our belief that this is going to be a real winner. .

Right now, about 50% of those who order a ThermoStim Probe also order a SolarisPlus unit. So we're seeing a pull-through of our core products as we had expected, and we think that's going to help. We're offering special financing and incentives right now so that people who have budget issues can get past that. And we're seeing some real profit.

We're seeing, on average, almost $1,000 of gross profit per probe that we sell and about $1,500 of gross profit for every base unit that is sold with it. .

And so as I mentioned before, we've lowered our expectations a little bit in these first few months as we move forward with the ThermoStim Probe.

Where we thought we might be doing around 100 a month based on the number of demos we're doing, we've reduced that down more to a 50 a month pace until we can get more of the demos out there and take advantage of budget cycles.

We believe that sales of the ThermoStim Probe will help boost sales not only of the probe itself, but it will help to bring sales through of our core products. .

The challenge that we're facing, as we saw in the second quarter, is that there is a more significant erosion of underlying sales, softer demand for capital equipment all the way around.

Therefore, the layering effect that we were hoping for from ThermoStim Probe is going to be dampened by the fact that it's going to have to help fill some of that hole, at least temporarily until sales demand rebounds.

With the new products that we're putting out there, we are attracting more new sales reps and dealers to provide better coverage and deeper market penetration, which is the second step of our strategy.

With direct reps and dealers, we've now added over 35 new sales reps that are selling the products, and we anticipate adding many more in the coming year. .

Expansion of our distribution channel is really a key element of our plan to reverse the tide of declining sales and to take full advantage of our ThermoStim Probe and new technologies. The international sales are starting to show some promise. We have established a new distributor in China, who is starting to take hold.

And they are projecting that they could do a couple of million in sales in the coming year, so we are excited about that; others in Southeast Asia as well, and did do a big shipment in this quarter to a new dealer in Mexico. And so we are seeing some movement on the international front, and we'll continue to pursue that. .

Given the realities of some of the sales weakness that we've seen, we have taken steps to restructure overhead once again. We did some recent reductions in force and elimination of expenses. That will yield about $400,000 in annual savings going forward.

A lot of that won't be seen in the current third quarter, but mostly in the fourth quarter and beyond. We will continue to look for ways to keep our costs low and to eliminate overhead that is necessary to be responsive to any kind of declining sales that may continue. .

We are seeing -- after seeing some sales declines in December and January time frame, we're starting to see sales bounce back up in February.

And so we believe this will be a temporary trend, at least that's what we hope, and hope to see sales strengthen as we are seeing so far in February going into March and April so that as we look at the next quarter, at Q3, with the addition of the ThermoStim Probe essentially offsetting some of the core sales erosion that we saw in December, January, we're thinking that we should do better than we did last year.

But whether we are able to achieve profitability in the third quarter will be dependent on how well sales bounce back or how well ThermoStim Probe sales come through in the months of February and March. .

We also recognize and are hopeful that there is success in the long term in eliminating this medical device tax. If you follow what's going on with Congress, the budget that was just passed does include provisions for eliminating that tax if additional funding can be found elsewhere.

And so there is work being done on that, and we are hopeful that, that will yield a benefit to us as well. .

Overall, our biggest challenge continues to be just the uncertainty that exists in the market and the dampened demand for capital products that flows from that.

We're hoping that as a health care reform moves forward and the dust settles a little bit, there will be greater confidence on the part of practitioners in expanding their practices, buying new equipment and moving forward.

And certainly, by offering the new equipment and offering exciting new technology like the ThermoStim Probe, we believe we can stimulate sales that would not otherwise have been stimulated. .

So while the battle continues to intensify in the market, we believe that we're up to the task, and we'll work hard to achieve our goals of capitalizing on our new products, expanding our distribution, exploring more aggressively opportunities in the international market and reducing costs and overhead as required and being responsive to market conditions.

It's our goal to find every way possible to enhance shareholder value, and we'll continue to pursue the strategy until we achieve that. .

So with that, I will terminate my dialogue here and ask Scott if he would open the line for any questions that people may have. .

[Operator Instructions] And there are no questions registered at this time. .

Well, I appreciate those of you who are on the call being with us today. And certainly, if you have questions that you think of after this call or after reading the 10-Q, feel free to call and speak to us. We'll be happy to visit with you.

Scott, why don't we give one more opportunity for a question, in case someone came up with one, before we terminate the call. .

[Operator Instructions] And there are no questions registered. .

Okay. Well, we appreciate those of you being on the call today. And again, if you do have any questions you think of after the call, feel free to give us a call directly here. Bob Cardon is our main contact, and he'll be happy to visit with you or call me. Thank you for being on the call today..