Hello, everyone. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation, and I would like to welcome you to our second fiscal quarter financial results conference call. The purpose of today's conference call is to discuss financial results for the quarter and 6 months ended December 31, 2014..

Before we begin, as a reminder, during the course of this conference call, management may make forward-looking statements regarding the 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 on the company's most recent filings with the SEC, including its most recent annual report on Form 10-K..

Today, I'm going to update you on our results for the quarter ended December 31 and the 6 months ending at the same time. When I'm -- when I completed my remarks, we'll be happy to take some questions from anyone who would like to ask them..

By virtue of the fact that you're on the call, you've seen the press release and have seen some of the information that I will be covering here. I'll try and give a little more detail, a little more insight into things. I'm going to start off with some good news. The sales for the second quarter increased 2.2% or about $156,000 to $7.3 million.

This compares -- that 2.2% may sound pedestrian, but we're pretty excited about it, because this compares to an average 7% decline in revenues for the prior 2 years during the same period..

Sales for the 6-month period increased also by 2.2% or about $317,000. Again, for the 30 months starting in January 2012, through about June of 2014, we were on a year-over-year decline of about 7% on average.

So the fact that we have now sustained 6 months' worth of positive growth of 2.2%, is about a 10-point turnaround from where we've been, and we're -- we feel like that is an indication that we seem to have bottomed out, based on the economy and healthcare reform, and we're starting to see things turn around..

Interestingly, the increased sales to Amerinet connects [ph] to the GPO contract that we began this last summer, accounts for the majority of the growth in sales during the quarter and the 6-month period. Specific product categories we saw the increases in were capital exercise equipment and distributed capital modalities..

On the flip side, our gross profit margins this quarter took a pretty good hit, and the reason for that is, that during the quarter, the increase in sales and sales mix shifted more heavily towards the lower-margin and distributed products that we sell, as opposed to the higher-margin manufacturing products.

Sales of manufactured capital products were pretty flat, whereas sales of the distributed products increased pretty dramatically. So the result is a $214,000 reduction in gross profit during the quarter, and a $227,000 reduction for the 6 months..

So as you can see, for the 6-month period, the majority of the loss in gross profit occurred during this most recent quarter. We don't know if this is indicative of a developing trend, or whether this is just an anomaly for the quarter, but the majority of the change occurred in this quarter ending in December..

As a result, the gross profit for the 6-month period, as I mentioned, was down as well, about 4.3%.

And so we're going to be focusing, we're going to monitor this carefully to see if this is a developing trend, or whether this is just something that will be an anomaly associated with this particular quarter due to the high sales of distributed capital equipment..

And that's not unusual for a calendar year end, when people are spending budgets and buying things that they think they might need. So we're hoping to see the margins return to more normalized levels in the third and fourth quarter..

Our SG&A expense for the quarter was up about $64,000, but that, that bears some explaining. During the quarter, our labor and operating expenses were actually down about $87,000, and selling expenses were down.

Where the increase came was in 2 areas, one of them was about $143,000 during the quarter of nonrecurring legal and acquisition-related expenses..

In the last 6 months, we've been engaged in negotiations to acquire a new technology that was embedded in a target company we were trying to acquire.

Things were looking quite good on that acquisition, until in the last 30 days, as we were completing due diligence, we realized that there were some fatal flaws within the company, and things that posed greater risk than we were comfortable pursuing..

As a result, we terminated our efforts to conclude that acquisition. Unfortunately, we were quite a ways down the road, and therefore, we've incurred these additional costs that now must be expensed.

And also, during the quarter, we did have higher amortization interest expense associated with the capitalized lease that we had mentioned in the last quarter, when we sold the building in August, that is our corporate headquarters, and leased it back..

For the 6-month period, our expenses decreased by about $63,000. That is even including about $220,000 of nonrecurring legal and other acquisition-related expenses that were incurred during that previously terminated acquisition.

The main reason for the decreased expenses, in spite of the higher legal expense, is the fact that our labor and operating expenses dropped by $225,000, and selling expenses also dropped by about $86,000..

Moving onto R&D expenses. The second quarter R&D was comparable to last year's Q2. R&D for the 6-month period, however, was down $102,000. It was up a little bit this quarter, and more comparable with last year because of some accelerated R&D that's going on, with some new products we're getting ready to introduce.

But overall, our efforts over the last few years are focused on developing the SolarisPlus platform, and most of our products are being developed from that. So the heavy lifting on R&D occurred in the last 2 years and -- the last 3 years, excuse me, and now we're benefiting from that.

We expect to see R&D expenses maintain at current levels for the next little while..

Overall, the pretax loss for the quarter was about $226,000. And for the 6 months, the pretax loss was about $170,000. Absent the nonrecurring costs related to the acquisition, we would have generated a profit of about $50,000 for the 6-month period.

And included in that was about $42,000 in medical device taxes paid in the second quarter and $86,000 paid for the 6-month period. We believe with the changes that have occurred in Washington D.C., there is a better than average chance of that medical device tax will actually be repealed in the next 6 to 12 months, and that will be welcome..

I won't spend any time on income tax. You can read those provisions in the 10-Q. And other than timing differences related to the building sale and R&D tax credits, that's still pretty standard. Given all these factors, we ended up reporting a net loss for Q2 of about $134,000 compared to a net profit of $44,000 last year.

Again, keeping in mind that the majority of the loss is associated with these nonrecurring expenses associated with the aborted acquisition account [ph]. And for the 6-month period, net loss was $93,000, compared to the $64,000 loss last year..

So moving on to our plans. We are encouraged by the trend of improving sales of Amerinet from the large -- 5 largest GPOs in the nation. We are seeing double-digit growth, that's not hard to accomplish when sales are still low, but we are working on ways to accelerate sales under that agreement.

It will be a slow process, but it is moving in the right direction..

Over the last 2 years, we've reduced our expenses by about $1.6 million. So we're pretty lean, and we intend to continue to maintain our vigilance on cost. The sale of our building back in August has created some additional expense for us.

It's about a $11,000 per month higher expense for occupancy, all related to amortization and imputed interest associated with the capital lease that we're required to book associated with that transaction..

From a cash perspective, it has been a trade-off. So we don't spend more in cash than we were before, but the accounting treatment of it does require that we post more in expenses associated with occupancy now than we did, related to that capital lease..

We have introduced several new products over the last few years, as you're all aware, and we will be introducing some additional new products in the coming 6 to 12 months, which are being worked on.

The ThermoStim Probe continues to be a popular item, and about 80% of the units that we -- of the ThermoStim Probes we sell requires the sale of a base unit with it. So it's been a very big help in that regard. And we're continuing to sell approximately 40 of the ThermoStim Probes a month.

We have been working diligently on attracting new sales reps and dealers to provide better coverage and deeper market penetration. The new products we've introduced have been a real incentive to attracting those reps and dealers..

For the first time in our history, we're starting to see some real movement on international sales. Our international sales managers returned from a trip from the Far East meeting with a -- our future distributor in China and getting a read on where we are at on getting approvals there.

And in Paris, we are very close, and in Southeast -- there and in Southeast Asia, as well as in Japan, getting the new SolarisPlus products approved. So in the next year, we believe we'll start to see a significant improvement in international sales.

The distributor in China alone, with the previous vendor they represented, did over $2 million in purchases of products like ours, and we would be replacing that distributor..

And many of you may be aware that our relationship with Zions Bank, that has been in place for about 20 years, is coming to an end. The line of credit that we have with them was extended to the end of February, and -- but they have required that we find other financing as they were not inclined to renew the line of credit.

That was unfortunate, we regretted that, because we've had a great relationship with them for quite a long period of time. But we have moved forward, and we have signed a term sheet and have an agreement in principal with a new asset-based lender to replace the line of credit facility with Zions.

That new facility will be a -- start out as a $3 million facility. And the interest rate will be more than double by the time we're done with that, unfortunately because of the nature of the loan that is being made. Instead of a commercial line of credit, it is an asset-based line of credit. So those are a little more expensive..

We did, back in September, file an S-3, where we announced the potential of raising some additional capital. That was being done partly in anticipation of the acquisition we were contemplating. It is a shelf registration that is still active. We filed this, as I mentioned, in anticipation of the acquisition.

But it is still active and we anticipate that there may yet be an opportunity to utilize that filing. But of course, before we do, it would require filing of additional documentation with the SEC that would be publicly available.

So bottom line, we regret that the targeted acquisition we've been working on failed, because of the expense that was then imposed on the last 6 months.

Had we removed that expense from the last 6 months, we would have been at a $50,000 profit for the 6-month period compared to about $100,000 loss from the year before, despite the reduction in the gross profit margin that we experienced in the second quarter..

So the fact that sales are turning around and are improving now instead of declining, and the fact that we are -- that we would have been significantly more profitable absent those nonrecurring costs, then is evidence that our situation is improving.

And we are moving in a direction that I believe will help the company to build on a positive note, instead of fighting the negative currents that we have been fighting for the last 30 months..

So the factors that will affect our performance in the coming months. Obviously, healthcare reform will continue to be a factor, as will general economic conditions.

Acceleration sales under the Amerinet contract, our international sales could be a factor beginning in the coming quarters, probably not -- we might start to see something in Q4, but more likely Q1 and 2 of the next fiscal year.

Capitalizing on the new products we've introduced and introducing some additional new products and expanding our distribution capabilities. And we'll, of course, continue to be vigilant in maintaining our operating efficiencies and cost. And we'll continue to look for opportunities such as the one that failed in this last quarter.

And we will continue to look for opportunities to build shareholder value, not only organically, but if there are opportunities to do an acquisition that makes sense, we would consider that as well.

So with that explanation, I'll open the phone line and ask the operator, Victoria, if you would give instructions on how they can ask questions, I will entertain those questions and get them answered. .

[Operator Instructions] And it looks like there are currently no questions, sir, on the phone. .

Well, okay. I guess, I was thorough enough in my explanations. We certainly would welcome questions. If you want to call in and speak to me or Bob Cardon, that you come up with after we terminate this call, we'd be happy to take those questions. We are confident about our future.

We believe that things are turning in the right direction, and opportunities ahead are much more promising than they have been in the past 30 months. And so we appreciate your continuing support, and hope that, that positive outlook will be reflected in the stock. Is there -- one last opportunity for any questions.

Victoria, see if anybody has registered anything before we terminate the call. .

And there are currently no questions in queue. .

Okay. Then with that, we'll thank you all for being on the call today, and appreciate your ongoing support. Thank you. .

Ladies and gentlemen, that does conclude the webinar call for today. We thank you for your participation, and ask that you please disconnect your lines..