Kelvyn Cullimore - Chairman, President and Chief Executive Officer.

Analysts:.

obviously, the hiring of a business development officer; restructuring of our management to allow for a new VP of Sales that will be focused more on the specific growth strategies that we are devising; and we have, as been announced recently, added some new Board members, who have great experience in these arenas and we're excited about the contributions they are already making; and we are budgeting funds to cover canvassing cost to identify target candidates.

So in summary, we're experiencing momentum in the business, as we begin to execute on these strategies. The costs to do so are well within our expectations. And as we begin to move forward we hope that the future will help all of you realize that being involved with us has been a good thing and will continue to be a good thing.

So with that, we express our appreciation to you for your interest in being on this call today. We also appreciate very much the support that we have received from our partners at Prettybrook, who have been very engaged with us in helping to devise our strategies and to provide the guidance on execution of those strategies.

And the changes that have been made have been well received within the organization and also within the investment community, and we believe it positions us very well for accomplishing the strategic objectives that have been described here. So with that, I'd be happy to open the call.

I'll ask operator, Charlene, if you'll open the lines for any questions, explain to them how to pose those questions and we'll fuel to any questions they may have..

[Operator Instructions] Your first question comes from the line of [ph] Jeffrey Collin..

So my first two questions were answered, because I see your Q was filed and see the share count now.

Do you expect that the additional shares from the financing will convert in the third quarter or is that fairly open and they're going forward from the 2.7 up to 4.1 shares?.

Yes. I think that's fairly open, Jeff. I think the execution of any conversion will probably be dependent upon execution of our strategies..

So can you talk about x U.S.

revenue from the second quarter, I know it's not 10%, because you're not breaking it out yet, but can you give us approximation of a percentage number?.

Revenue international sales for Q2 were down from where they were in Q1. And I've asked if we've got those numbers here. If I can't pull them up really quickly, we can get those to you. But my belief is in Q2, there were certainly under $200,000 for the quarter and in Q1 they were probably double of what they were in Q2.

I guess the point being, we believe that international sales could be a significant contributor to sales increases during the fiscal year. We had really hoped that we would see some of that starting in Q2 -- or was it Q1. And with that we would see some more of that in Q2 moving forward, but some of those have been delayed.

And so I'm just being told that our numbers in Q1, our sales in interest internationals were $336,000, in Q2 they were about a $130,000, so significant fall off in Q2. I will say we did have one large order for about a $100,000 that was supposed to ship in Q2 to international customer that's still pending.

They had problems with fraud on their wire transfer and it was been delayed, but it is still active, so the loss in Q2 will carryover into Q3..

Can you talk about Solaris during the second quarters? I see it was strong because you called it out.

Could you talk about pricing and where there any -- did you take any price increases, if you can disclose a number of units that were shipped? And can you also talk about the specific options and tips that you're seeing any trends for or what was ordered?.

What we saw in Q2, as I mentioned at the end of Q1, we introduced an incentive program inviting our reps to do certain activities to help boost those kinds of the sales. And that seems to have born fruit, because in the quarter, which is always a big quarter for capital, I will say that, so it was a combination of things.

But we saw about a 26% increase in sales of the SolarisPlus family of products during the quarter. And key among those was an increase in accessory sales like light pads and light probes, there was about a 62% increase in the sale of those products.

And the reason that's significant is because our margins on the accessory products are about 50% higher than the base units, and so it's a very important part of our sales strategy to accomplish that. So that was very exciting. If you just talk about total unit sales, we had about 460 units that were sold in Q2 and that was up from 415 in Q1.

And so that 457 units sold with the 26% increase, so you can see that we were up from under 400 units sold in the same period the year before. And that was without any significant international sales of those units..

And could you talk about ASPs for the Solaris for the quarter? Did you take any price increases?.

We did not. Pricing did not change. What did changed during the quarter was we a saw significant increase in sales by our direct representative network as opposed to our dealer network. So the direct rep channel was more productive for us than the dealer channel was during that period.

So that would, on average, make it appear that there was an increase in average selling price because, of course, the sales reps sell at retail whereas the dealers sell at wholesale..

And for outside U.S., could you remind us your current -- you have two distributors thus far in CE countries, could you remind us what countries you're selling into? And talk a little bit about China, Southeast Asia and Mexico, when you have an approval? What would be your selling channel? And who will be ready to sell?.

Yes. So right now, we have a distributor in United Kingdom and we have one in Portugal. The one in Portugal is quite active. The one in Great Britain or in United Kingdom is just getting started, so we're hopeful that that will bear better fruit coming in future quarters.

The Mexico, we have two distributors set up, ready to place orders, as soon as the approval comes through. And we've been working with one of those distributors to get that approval. And so they are very vested in that process and are confident that they will be successful with our products once it's approved.

If you were to believe what they're telling us, it should be in the next 30 days, but I heard that at the end of December as well. So hard for me to say for sure, Jeff, on Mexico when that will come through, but if we do know that all of the review process has been done. It is now in the administrative approval part of the process.

And the same thing in China, we have a very good distributor there who has been very prominent in the physical therapy market in the past and continues to be. And they not only have distribution in China, they've also helped us in Singapore and other places in Southeast Asia where they are active.

And so they're a very broad distributor in that regard and I believe will be a great partner for us once we get that approval. And again, like Mexico, that partner is working with us directly in securing that approval, so they are vested in obtaining that.

They have actually invested dollars to make that happen, and so they're anxious to get a return on their investment as well, and I believe are doing everything they can to help expedite that process. And they tell us that there is no more testing of the products and everything is passed, it's just now in the administrative phase.

So we're just waiting for the actual letters to be issued saying that we have the approvals..

Your next question comes from the line of [ph] Raymond Myers..

Kelvyn, can I pick up where Jeff left off there, and ask more specifically about your expectations for the sales levels of China and Mexico.

You kind of, I think, implied that it might be more than some of the other countries that you had picked up for the best?.

That's correct. I believe both of them are going to be, if you classify Peru and Singapore as a single, I would at least have to classify Mexico as a double and China as a potential homerun if everything goes as it should over time. China, we know that China was previously representing one of our competitors.

And in the last year, they only represented them for a couple of years, is my understanding. In the last year, they had between the $1 million and $2 million worth of purchases from them. And so we would be hopeful that we could over the next year or two build to that same level. That's the only benchmark [Multiple Speakers]..

$1 million to $2 million run rate over a couple of years?.

Yes..

That's a pretty good though in one country..

Yes. And Mexico, it's hard to say for sure, I really don't have any benchmark to measure against. I know one of these distributors in the past has ordered, as much as back before approvals were required in Mexico, they ordered as much as $80,000 to $150,000 worth of product in one year.

And now we've got two distributors, one that's even bigger than that one. So trying to extrapolate that is difficult, but perhaps somewhere between $200,000 and $500,000 once we get on our run rate..

And then you mentioned coming potentially two or three proprietary new products launched in the current fiscal quarter, can you touch on what those are and what the impact of those might be?.

They are redesigns pretty much of existing products that will help position us better in the market for those products. I prefer not to go into too much detail on those right now. I think we'd like to give the opportunity of protecting the proprietary nature of those.

But there are those products, and then a reengineering of the existing product lines that should significantly reduce our cost of goods sold or I should say, materially reduce our cost of goods sold. All of those are expected to be introduced in this fiscal year.

I don't know that any of the new products per se that we're introducing will generate significant additional sales. One of them we expect to be in the $200,000 to $300,000 year range of sales. And then another one should facilitate sales of $100,000 to $200,000 a year, things of that nature. That's our expectation.

We are working on some new products that will be introduced in the next fiscal year. One of which right now seems to be, using the baseball analogy instead of the singles, that we might be introducing in this fiscal year, could be a double or triple in the next fiscal year..

How many sales people do you have in the company now?.

Total sales people on the fields including employee [ph] employed and 1,099 reps, because we have some that are direct sales reps and some that are independent sales reps. It's about 50, and of that 50, there is probably half that are generating the majority of the sales and half that are occasional sales people..

And then in your prepared remarks you wrote something that caught my eye. You said, you continue to benefit from the better market environment today. You're probably one of the few companies reporting earnings this week that reporting a better market environment.

Can you elaborate on that, which better amongst the marketing environment for Dynatronics?.

Well, put it in a perspective, Ray, from the introduction of healthcare reform in January of 2012 until about June of 2014, we saw year-over-year declines of 7%. The market was just almost in a free fall for us.

And so in the last 18 months, we've seen a reversal of that where instead of declining, everything is on the upswing and there seems to be optimism and there seems to be opportunities for new clinics opening and we're hearing of large orders coming down the pike, things of that nature, that just simply didn't exist in the 30 months prior to that.

I mean there was nothing. And so from our position, I think our particular market segment went through some real difficult times from 2012 through about half way 2014.

And then as the smoke started to clear on healthcare reform and we could see winners and losers kind of coming out of that, it started to become apparent that physical therapy was a potential winner in all of that.

And I think our confidence started to build and people have begun to again expand and try and meet the demand that is growing out there as part of the demand for both pre-habilitation and rehabilitation..

You have a follow-up question from [ph] Jeffrey Collin..

Kelvyn, just a quick one for you, if I may. You talked about the medical device tax benefiting the company approximately $130,000 in the second quarter, could you talk about that? Is that 2.3% going back to the company applying for all of your products --.

No..

Or just a particular portion of the products..

Only about a third of our products were subject to the medical device tax. Thank goodness, [Multiple Speakers] very bad otherwise..

So round about $10 million, that would be $230,000?.

Yes. And it was actually only $160,000 a year is what we actually paid, because international sales don't count and a lot of the type of products we did also were excluded, so it may have been closer to 25% of our sales.

And that means that there's about a $160,000 a year that was being absorbed into cost of goods sold that will now go away and reduce that cost of goods sold by an equivalent amount..

So if one was assuming, call it, 34% of margins, a third of those margins would be benefited by 230 basis points..

Right, that's a good way to look at it. That's a good way to look at it, or you could just simply say we're going to drop in the equivalent of $40,000 of extra gross margin in a quarter. And we charge double if you ask two questions..

Send me the bill..

And I show no questions in queue..

Anybody else have any follow-up questions, we'll give you one more opportunity. If you do press star one. If nobody presses star one, we'll call it good.

Anybody else, Charlene?.

No sir, I'm showing no one in queue. End of Q&A.

We will thank everyone for being on the call today.

We are truly excited about the new Dynatronics and the direction that we are going, again with our partnership with Prettybrook and their investors and the infusion of capital and the infusion of business acumen and opportunities, we are thrilled with where we are and the position that we are in and where we are headed.

We hope that you are catching that same vision and we appreciate you're being on the call today to be updated. We look forward to doing this again in three months. If you have any questions in the meantime, please feel free to call us. You can call myself or Bob Cardon, we'll be happy to try and answer your questions.

Thanks for being on the call today..

Thank you for your participation. This concludes today's conference call. You may now disconnect..