UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
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(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's common stock, no par value, as
of May 10, 2002 is 8,869,335.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
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DYNATRONICS CORPORATION
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Balance Sheets
March 31, 2002 and June 30, 2001..............................................1
Unaudited Condensed Statements of Income
Three and Nine Months Ended March 31, 2002 and 2001...........................2
Unaudited Condensed Statements of Cash Flows
Nine Months Ended March 31, 2002 and 2001.....................................3
Notes to Unaudited Condensed Financial Statements.............................4
Item 2. Management's Discussion and Analysis or Plan of Operation.............7
DYNATRONICS CORPORATION
Condensed Balance Sheets
(Unaudited)
March 31, June 30,
ASSETS 2002 2001
-------------- --------------
Current assets:
Cash and cash equivalents $ 320,110 258,884
Trade accounts receivable, less allowance for doubtful accounts
of $169,657 at March 31, 2002 and $140,735 at June 30, 2001 3,809,506 3,426,404
Other receivables 145,522 191,845
Inventories 4,341,539 4,746,323
Prepaid expenses 326,188 212,429
Prepaid income taxes 0 26,003
Deferred tax asset-current 268,735 268,735
--------------- ---------------
Total current assets 9,211,600 9,130,623
Net property and equipment 3,151,360 3,277,458
Excess of cost over book value, net of accumulated amortization
of $627,948 at March 31, 2002 and $568,640 at June 30, 2001 811,226 876,637
Other assets 286,497 275,629
--------------- ---------------
$ 13,460,683 13,560,347
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 206,414 239,151
Line of credit 2,451,671 2,871,024
Accounts payable 625,676 407,727
Accrued expenses 371,949 424,257
Accrued payroll and benefit expenses 244,489 216,518
Income tax payable 15,949 0
--------------- ---------------
Total current liabilities 3,916,148 4,158,677
Long-term debt, excluding current installments 1,702,755 1,834,903
Deferred compensation 276,826 260,599
Deferred tax liability - noncurrent 78,846 78,846
--------------- ---------------
Total liabilities 5,974,575 6,333,025
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued 8,928,774 shares at March 31, 2002
and 8,840,422 at June 30, 2001 2,638,026 2,565,926
Treasury stock, 59,439 shares at March 31, 2002
and 35,584 shares at June 30, 2001 (159,696) (120,096)
Retained earnings 5,007,778 4,781,492
--------------- ---------------
Total stockholders' equity 7,486,108 7,227,322
--------------- ---------------
$ 13,460,683 13,560,347
=============== ===============
See accompanying notes to condensed financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2002 2001 2002 2001
-------------- -------------- -------------- ---------------
Net sales $ 4,159,244 4,417,682 12,282,961 12,531,726
Cost of sales 2,539,529 2,513,796 7,335,329 7,245,046
-------------- -------------- -------------- ---------------
Gross profit 1,619,715 1,903,886 4,947,632 5,286,680
Selling, general, and administrative expenses 1,250,614 1,407,076 3,869,262 4,031,561
Research and development expenses 171,891 276,778 497,981 613,715
-------------- -------------- -------------- ---------------
Operating income 197,210 220,032 580,389 641,404
-------------- -------------- -------------- ---------------
Other income (expense):
Interest income 800 2,775 3,696 5,875
Interest expense (66,492) (75,484) (221,750) (235,830)
Other income, net 1,241 5,445 5,738 12,829
-------------- -------------- -------------- ---------------
Total other income (expense) (64,451) (67,264) (212,316) (217,126)
Income before income taxes 132,759 152,768 368,073 424,278
Income tax expense 49,837 61,755 141,787 167,590
-------------- -------------- -------------- ---------------
Net income $ 82,922 91,013 226,286 256,688
============== ============== ============== ===============
Basic and diluted net income
per common share $ 0.01 0.01 0.03 0.03
-------------- -------------- -------------- ---------------
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,865,835 8,787,871 8,850,350 8,782,538
Diluted 8,898,061 9,475,180 8,902,927 9,176,499
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 226,286 256,688
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property and equipment 243,613 224,322
Other amortization 65,411 73,434
Provision for doubtful accounts 36,000 27,000
Provision for inventory obsolescence 153,000 153,000
Provision for warranty reserve 184,600 162,953
Deferred compensation 16,227 19,260
Compensation expense on stock options 0 7,000
Decrease (increase) in operating assets and liabilities:
Receivables (372,779) (263,661)
Inventories 251,784 (476,197)
Prepaid expenses and other assets (124,627) (188,497)
Prepaid income tax 9,450 0
Trade accounts payable and accrued expenses 9,012 142,941
Income taxes payable 36,237 82,586
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Net cash provided by operating activities 734,214 220,829
------------ ------------
Cash flows from investing activities-capital expenditures (117,515) (163,664)
Cash flows from financing activities:
Principal payments on long-term debt (164,885) (180,293)
Net change in line of credit (419,353) 189,247
Proceeds from sale of common stock 28,765 9,779
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Net cash used in financing activities (555,473) 18,733
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Net increase in cash and cash equivalents 61,226 75,898
Cash and cash equivalents at beginning of period 258,884 233,756
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Cash and cash equivalents at end of period $ 320,110 309,654
============= ============
Supplemental cash flow information
Cash paid for interest 227,276 240,658
Cash paid for income taxes 96,100 89,067
Supplemental disclosure of non-cash investing and financing activities
Common stock and options issued for license agreement 0 73,240
Common stock and options issued in exchange for mature stock 39,600 0
See accompanying notes to condensed financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 2002 and June 30, 2001 and for the
three and nine months ended March 31, 2002 and 2001 were prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. Certain prior
period amounts have been reclassified to conform with the current year
presentation. The results of operations for the respective periods presented are
not necessarily indicative of the results for the respective complete years. The
Company has previously filed with the SEC an annual report on Form 10-KSB which
included audited financial statements for the two years ended June 30, 2001. It
is suggested that the financial statements contained in this filing be read in
conjunction with the statements and notes thereto contained in the Company's
10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three and nine months
ended March 31, 2002 and 2001 is summarized as follows:
4
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average number
of common shares outstanding
during the period 8,865,835 8,787,871 8,850,350 8,782,538
Weighted average number of dilutive
common stock options outstanding
during the period 32,225 687,309 52,577 393,961
------------ ------------- -------------- -------------
Diluted weighted average number
of common and common equivalent
shares outstanding during the period 8,898,061 9,475,180 8,902,927 9,176,499
============ ============= ============== =============
Outstanding options not included in the computation of diluted net income per
share for the three month periods ended March 31, 2002 and 2001 total 504,238
and 63,000 and for the nine month periods ended March 31, 2002 and 2001 total
211,471 and 207,829 respectively, because to do so would have been
anti-dilutive.
NOTE 3. COMPREHENSIVE INCOME
For the periods ended March 31, 2002 and 2001, comprehensive income was equal to
the net income as presented in the accompanying condensed statements of income.
NOTE 4. INVENTORIES
Inventories consisted of the following:
March 31 June 30
2002 2001
---------------- --------------
Raw Material $ 2,492,075 2,914,710
Finished Goods 2,238,124 2,071,822
Inventory Reserve (388,660) (240,209)
---------------- --------------
$ 4,341,539 4,746,323
================ ==============
5
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31 June 30
2001 2001
-------------- -------------
Land $ 354,743 354,743
Buildings 2,820,894 2,802,894
Machinery and equipment 1,375,125 1,335,828
Office equipment 348,569 288,351
Vehicles 61,771 61,771
-------------- -------------
4,961,102 4,843,587
Less accumulated depreciation
and amortization 1,809,742 1,566,129
-------------- -------------
$ 3,151,360 3,277,458
============== =============
6
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Condensed Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this Form 10-QSB.
Results of Operations
Sales during the quarter ended March 31, 2002 were $4,159,244, compared to
$4,417,682 during the same period last year. Sales for the nine-month period
ended March 31, 2002 were $12,282,961 compared to $12,531,726 during the nine
months ended March 31, 2001. The economy of the United States has been
recovering from an economic downturn since March of 2001. The slowing economy
was adversely affected by the terrorist attacks on financial and government
centers of the United States in September 2001. The Company believes that its
business has also been adversely affected by these factors. Management believes
the Company has fared better than expected through these economic challenges in
its primary geographic market during the past two quarters, primarily as a
result of the stability of core product sales including sales of the new STS
chronic pain device. By comparison, the introduction of the STS device in the
third fiscal quarter of 2001 boosted revenues by nearly $700,000 in that period
as distributors placed large initial stocking orders for these units. This spike
in sales is primarily responsible for the difference in sales in the third
fiscal quarter of last year compared to the third quarter of fiscal year 2002.
Total gross profit during the quarter ended March 31, 2002 was $1,619,715 or
38.9% of sales compared to $1,903,886 or 43.1% of sales in the quarter ended
March 31, 2001. Gross profit during the nine-month period ended March 31, 2002
was $4,947,632 or 40.3% of sales compared to $5,286,680 or 42.2% of sales in the
nine months ended March 31, 2001. Gross profit during the three and nine months
ended March 31, 2001 was higher primarily due to sales associated with the
introduction of the STS chronic pain device. The large volume of high margin
sales significantly increased gross margins in the prior year, compared to the
nine- and three-month periods in fiscal year 2002.
Selling, general and administrative (SG&A) expenses for the three-month period
ended March 31, 2002, decreased to $1,250,614 or 30.1% of sales compared to
$1,407,076 or 31.9% of sales in the same period of the prior year. SG&A expenses
for the nine-month period ended March 31, 2002 were $3,869,262 or 31.5% of sales
compared to $4,031,561 or 32.2% of sales for the nine months ended March 31,
2001. The decline in SG&A reflects management's efforts to reduce operating
expenses. One such change has been the migration away from direct sales
representatives to the use of dealers for marketing the Company's line of
Synergie products. During the quarter ended March 31, 2002, the Company took
additional steps to increase its profitability through an expense reduction
program that it expects will generate future annual savings of as much as
$500,000.
Research and development (R&D) expenses during the three- and nine-month periods
ended March 31, 2002 totaled $171,891 and $497,981, respectively compared to
$276,778 and $613,715, respectively for the same periods in 2001. Development
work for the STS chronic pain device resulted in higher research and development
expenses in the three- and nine-month periods ended March 31, 2001. The Company
7
remains committed to its objective of investing significantly in R&D to develop
technological enhancements as well as new technologies that address unmet
patient and clinical needs.
Pre-tax profit for the quarter ended March 31, 2002 was $132,759 compared to
$152,768 during the same period of the prior year. Pre-tax profit for the nine
months ended March 31, 2002 was $368,073 compared to $424,278 in the similar
period in 2001.
Income tax expense for the three and nine months ended March 31, 2002 was
$49,837 and $141,787, respectively compared to $61,755 and $167,590,
respectively in the three and nine months ended March 31, 2001.
Net income for the quarter ended March 31, 2002 was $82,922 (approximately $.01
per share), compared to $91,013 (approximately $.01 per share) in the same
quarter in 2001. Net income for the nine months ended March 31, 2002 was
$226,286 (approximately $.03 per share) compared to $256,688 (approximately $.03
per share) in the nine months ended March 31, 2001. Despite the economic
difficulties facing the nation during the past six months, the Company has been
able to maintain profitability due to the stability in demand for its core
products and the success of the Dynatron STS and Dynatron STS Rx products. In
addition, the Company has worked to reduce operating expenses, which is expected
to improve profitability going forward.
Liquidity and Capital Resources
We expect that revenues from operations, together with amounts available under
an existing bank line of credit will be adequate to meet working capital needs
related to our business and planned capital expenditures for the next 12 months.
The current ratio at March 31, 2002 increased to 2.4 to 1 compared to 2.2 to 1
at June 30, 2001. Current assets represent 68% of total assets at March 31,
2002.
Net accounts receivable at March 31, 2002 were $3,809,506 compared to $3,426,404
at June 30, 2001. Accounts receivable are from the dealer network and are
generally considered to be within term.
All accounts payable are within term. The Company continues to take advantage of
available payment discounts when possible.
The Company has a revolving line of credit facility with a commercial bank in
the amount of $4,500,000. Borrowing limitations are based on 30% of eligible
inventory and up to 80% of eligible accounts receivable. The outstanding balance
on the line of credit at March 31, 2002 was $2,451,671 compared to $2,871,024 at
June 30, 2001. The line of credit is secured by inventory and accounts
receivable and bears interest at the bank's "Prime Rate," which was 4.75% per
annum at March 31, 2002. This line is subject to annual renewal and matures on
December 1, 2002. Accrued interest is payable monthly.
Inventory levels, net of reserves, totaled $4,341,539 at March 31, 2002,
compared to $4,746,323 at June 30, 2001. The Company expects inventory levels to
continue to decline over the course of the year as inventories are managed more
8
closely, and as sales of the new STS devices accelerate as a result of new
marketing plans and initiatives. Sustained sales of aesthetic devices will also
contribute to a reduction in overall inventories.
Long-term debt excluding current installments totaled $1,702,755 at March 31,
2002, compared to $1,834,903 at June 30, 2001. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.8 million with monthly principal and interest payments of $26,900.
Critical Accounting Policies
The Company has disclosed in Note 1 to the consolidated financial statements
included in its Annual Report on Form 10-KSB for the year ended June 30, 2001
those accounting policies that it considers to be significant in determining the
results of operations and its financial position. In all material respects, the
accounting principles utilized by the Company are in conformity with generally
accepted accounting principles in the United States of America.
The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, the Company evaluates
its estimates, including those related to bad debts, inventories, intangible
assets, warranty obligations, product liability, revenue, and income taxes. The
Company bases its estimates on historical experience and other facts and
circumstances that are believed to be reasonable, and the results form the basis
for making judgments about the carrying value of assets and liabilities. The
actual results may differ from these estimates under different assumptions or
conditions.
With respect to inventory reserves, revenue recognition and allowance for
doubtful accounts, the Company applies the following critical accounting
policies in the preparation of its financial statements:
Inventory Reserves
The nature of Dynatronics' business requires it to maintain sufficient inventory
on hand at all times to meet the requirements of its customers. Dynatronics
records finished goods inventory at the lower of standard cost, which
approximates actual costs (first-in, first-out) or market. Raw materials are
stated at the lower of cost (first-in, first-out), or market. General inventory
reserves are maintained for the possible impairment of the inventory. Impairment
may be a result of slow moving or excess inventory, product obsolescence or
changes in the valuation of the inventory. In determining the adequacy of its
reserves, Dynatronics analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
9
Any modifications to Dynatronics' estimates of its reserves are reflected in the
cost of goods sold within the statement of operations during the period in which
such modifications are determined necessary by management.
Revenue Recognition
The Company's products are sold primarily through a network of independent
distributors. Sales revenues are generally recorded at the time the products are
shipped to the distributor or customer. The distributors, who sell the products
to other customers, take title to the products, have no special rights of
return, and assume the risk for credit and obsolescence.
Allowance for Doubtful Accounts
Dynatronics must make estimates of the collectibility of accounts receivables.
In doing so, management analyzes accounts receivable and historical bad debts,
customer credit-worthiness, current economic trends and changes in customer
payment patterns when evaluating the adequacy of the allowance for doubtful
accounts.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 Business Combinations, and SFAS
No. 142 Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the
pooling-of-interests method of accounting and requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001 and is applicable to all purchase method business combinations completed
after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet in order to be
recognized and reported apart from goodwill. Effective for the Company beginning
July 1, 2002, SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in acceptance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and review for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
As of the date of adoption, we expect to have unamortized goodwill and other
intangibles in the amount of approximately $849,000, which will be subject to
the transition provision of SFAS Nos. 141 and 142. Amortization expense related
to goodwill and other intangibles was $70,905 for the nine-month period ended
March 31, 2002. Because of the extensive effort needed to comply with adopting
SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact
of adopting these Statements on our financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principles.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
10
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset.
The Company is required and plans to adopt the provisions of SFAS No. 143 for
the quarter ending September 30, 2002. To accomplish this, the Company must
identify legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. Because
of the effort necessary to comply with the adoption of SFAS No. 143, it is not
practicable for management to estimate the impact of adopting this Statement at
the date of this report.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. SFAS No. 144 retains the basic provisions of APB
Opinion 30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity rather than a
segment of a business.
The Company is required and plans to adopt the provisions of SFAS No. 144 for
the quarter ending September 30, 2002. Management does not expect the adoption
of SFAS No. 144 for long-lived assets held for use to have a material impact on
the Company's financial statements because the impairment assessment under SFAS
No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement
for assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS No. 144 will have on the Company's financial statements.
Business Plan
Over the past seven years, Dynatronics' annual net sales have more than tripled
from $4.9 million in fiscal year 1994 to $16.8 million in fiscal year 2001. The
Company believes that this growth is the result of many factors including
acquisitions, strategic alliances, the introduction of new products and
increasing market share. During the quarter ended March 31, 2002, the Company
continued to implement a strategy of expanding product lines, strengthening
channels of distribution, and developing new products for the rehabilitation and
aesthetic markets.
As part of this strategy, in August 2000, the Company announced the signing of
an agreement with Alan Neuromedical Technologies (ANT) granting Dynatronics the
exclusive license for ANT's patented technology for treating chronic pain. Two
devices incorporating the new technology - the Dynatron STS clinical unit and
the Dynatron STS Rx prescription unit for home use - were introduced in February
2001 to distributors from around the world at meetings held in Salt Lake City,
Utah. Currently, many medical professionals are using STS therapy to treat
11
chronic pain associated with a variety of conditions in patients who had
previously experienced only marginal results with traditional therapy regimens.
According to the American Pain Foundation, millions of people around the world
suffer from chronic pain. The associated costs in the United States alone are
estimated to exceed $100 billion annually. There is great demand for an
effective treatment in the battle against chronic pain.
In a research study published in the January, 2002 edition of the American
Journal of Pain Management, test results showed 85% of chronic pain patients
receiving STS treatments realized some reduction of pain -- with 50% of the
patients becoming totally pain-free. The Company believes that the fact these
results were achieved with patients who had suffered on average for eight years
with their chronic pain condition further attests to the effectiveness of this
therapy. Additional research studies are planned to further validate the
efficacy of this innovative technology. Having the study published in a
peer-reviewed medical journal has been an important factor in improving
acceptance among medical practitioners and insurance carriers.
As with any new medical therapy or technology, we expect that insurance
reimbursement may influence the rate of growth of the STS technology. Presently,
limited reimbursement is available for STS treatments or home units. Most are
reviewed on a case-by-case basis. However, as medical practitioners experience
positive outcomes and further research supports the efficacy of this therapy, it
is anticipated that reimbursements will be more broadly established. It will
take time, perhaps years, to obtain broad acceptance and reimbursement for this
new therapy. Notably, this technology potentially holds the key to not only
relieving suffering for many chronic pain patients, but significantly reducing
the long-term costs of supporting chronic pain patients through reducing intake
of expensive narcotic medications or avoiding costly invasive procedures. We
believe that as these potential cost savings are realized, insurance companies
should begin to view STS treatments as an economical alternative to the
traditional treatments for chronic pain sufferers. STS treatments are not a
panacea and do not help every chronic pain sufferer. However, it seems to be
particularly effective with pain conditions that present with a sympathetic
bias.
Interest in STS technology is experiencing particular growth in the workers
compensation market. Workers' compensation carriers in several states have
adopted or are considering offering an STS trial program to their clients.
Management believes the development of the workers compensation market
represents an important step in expanding STS treatment programs because a
significant number of chronic pain patients are covered under workers'
compensation plans.
During the reporting quarter, the Company made application to Medicare seeking
coverage for STS treatments. While this process can often take years to obtain
final approval, Medicare patients represent a major segment of chronic pain
sufferers.
Dynatronics began selling the Dynatron STS clinical device during the quarter
ended March 31, 2001, and the Dynatron STS Rx home unit during the fourth
quarter of fiscal year 2001. The home unit is available to patients by
prescription from their medical practitioner with financing terms available
through third party finance companies.
12
Another important part of our strategic plan is the expansion of worldwide
marketing efforts, particularly into the European Community. In March 2001,
Dynatronics' Salt Lake operations, where all electrotherapy, ultrasound, STS
devices and Synergie products are manufactured, was designated an ISO 9001
certified facility. With this designation in place, the Company can market
products manufactured in this facility in any country that recognizes the CE
Mark. We are now working to establish effective distribution of these products
in the European Community.
A third strategic component of our growth plan is further expansion into the
aesthetics market. The Synergie Peel microdermabrasion device was developed as a
companion to the Synergie AMS (aesthetic massage system). Microdermabrasion
technology is very popular in the aesthetics industry because of its distinct
advantages over chemical and laser peels. The Synergie Peel device has unique
competitive advantages in the market due to its patent-pending design, which
eliminates clogging. Furthermore, the combination of the Synergie AMS and
Synergie Peel make it not only unique, but the most affordable combination
device of its kind on the market.
To take full advantage of the opportunities of the aesthetics market,
Dynatronics has continued efforts to establish effective distribution for its
aesthetic products. The Company's Chairman, Kelvyn H. Cullimore, is personally
managing the effort to establish this distribution. We recently shifted our
distribution strategy to establishing dealers who are uniquely focused on the
aesthetics market and also to cultivating national accounts. Previously, we had
attempted to establish a direct sales force for Synergie products. We changed
our strategy because we believe that the dealer strategy requires less overhead
expense, is more easily managed and will result in better local control of
sales. Controlling and expanding the channels of distribution for these products
is expected to ultimately increase sales and allow us to more fully access the
potential of the aesthetics products market. We perceive this market to be both
lucrative and expanding, particularly as aging baby boomers continue to look for
ways to retain a youthful appearance.
Over the past year, we have allocated resources to enhance the Company's
presence in the e-business arena. Dynatronics has undertaken to improve the
appearance and application of its corporate website and is researching ways to
apply electronic media and Internet solutions to better serve customer needs,
access new business opportunities, reduce cost of operations, and stay
technologically current in the way business is conducted. We believe the
allocation of resources to developing e-business capabilities is critical to
improving future performance and have made the establishment of these
capabilities a focal strategy for the next fiscal year. The site may be viewed
at www.dynatronics.com. This reference to the Company's website is not intended
to incorporate the contents of the website into or as a part of this report.
Based on these strategic initiatives, we are focusing the Company's resources in
the following areas:
o Introducing the new Dynatron STS and Dynatron STS Rx therapy products
to the billion-dollar chronic pain market. This includes efforts to
maximize sales in the face of limited reimbursement by focusing on
specific target markets that will embrace STS treatments such as
workers compensation programs and thus better educate the medical and
insurance communities on the efficacy of STS treatments. Additional
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research and other related efforts will also be evaluated to obtain
broader support of the medical and insurance communities.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Expanding distribution of both rehabilitation and aesthetic products
internationally.
o Introducing other new rehabilitation products and aesthetic products
that fit the Dynatronics distribution system.
o Applying e-commerce solutions to improving overall performance.
Cautionary Statement Concerning Forward-Looking Statements
The statements contained in this Report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis or Plan
of Operation regarding product development, clinical results, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in our Annual Report on Form 10-KSB under the headings
"Description of Business" and "Risk Factors." The fact that some of the risk
factors may be the same or similar to past reports filed with the Securities and
Exchange Commission means only that the risks are present in multiple periods.
We believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this Report are made as of the date
of this Report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o The terrorist attacks in New York and Washington, D.C. on
September 11, 2001, and the subsequent anthrax attacks on the East
Coast of the United States appear to be having an adverse effect
on business, financial and general economic conditions in the
United States. At this time we cannot predict the nature, extent,
or duration of these effects on overall economic conditions
generally, or on our business and operations specifically.
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o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line and the new
Dynatron STS and Dynatron STS Rx products;
o Insurance company reimbursement for STS treatments or the home
prescription Dynatron STS Rx device not materializing as
expected;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense
of expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The ability to obtain required financing to meet changes or other
risks described above;
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 5/14/02 /s/ Kelvyn H. Cullimore, Jr.
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Kelvyn H. Cullimore, Jr.
President, Chief Executive Officer and
Principal Accounting Officer
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