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 September 30, 2005.
[ ] 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 November 9, 2005 is 9,020,339.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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i
DYNATRONICS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 2005
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Unaudited Balance Sheets
September 30, 2005 and June 30, 2005.........................................1
Unaudited Statements of Operations
Three Months Ended September 30, 2005 and 2004...............................2
Unaudited Statements of Cash Flows
Three Months Ended September 30, 2005 and 2004...............................3
Notes to Unaudited Financial Statements......................................4
Item 2. Management's Discussion and Analysis or Plan of Operation............9
Item 3. Controls and Procedures.............................................16
PART II. OTHER INFORMATION
Item 6. Exhibits...........................................................16
ii
DYNATRONICS CORPORATION
Balance Sheets
June 30,
September 30, 2005 2005
Assets (Unaudited) (Audited)
-------------------- -------------
Current assets:
Cash $ 411,066 $ 472,899
Trade accounts receivable, less allowance for doubtful accounts
of $250,101 at September 30, 2005 and $252,509 at
June 30, 2005 3,177,811 3,006,315
Other receivables 99,663 91,129
Inventories, net 4,575,441 4,712,523
Prepaid expenses 573,337 386,935
Prepaid income taxes 36,674 21,701
Deferred tax asset-current 384,077 384,077
-------------------- -------------
Total current assets 9,258,069 9,075,579
Property and equipment, net 3,163,196 3,221,944
Goodwill, net of accumulated amortization of $649,792 at
September 30, 2005 and at June 30, 2005 789,422 789,422
Other assets 353,293 372,778
-------------------- -------------
$ 13,563,980 $ 13,459,723
==================== =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 224,453 $ 221,069
Line of credit 868,755 264,761
Accounts payable 498,435 605,788
Accrued expenses 483,538 571,940
Accrued payroll and benefit expenses 126,495 368,167
-------------------- -------------
Total current liabilities 2,201,676 2,031,725
Long-term debt, excluding current installments 1,274,051 1,330,325
Deferred compensation 367,451 360,518
Deferred tax liability - noncurrent 223,647 223,647
-------------------- -------------
Total liabilities 4,066,825 3,946,215
-------------------- -------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 9,020,339 shares at September 30, 2005 and
9,015,128 shares at June 30, 2005 2,784,968 2,779,000
Retained earnings 6,712,187 6,734,508
-------------------- -------------
Total stockholders' equity 9,497,155 9,513,508
-------------------- -------------
$ 13,563,980 $ 13,459,723
==================== =============
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Operations
(Unaudited)
Three Months Ended
September 30
2005 2004
----------------- -----------------
Net sales $ 4,358,428 $ 4,918,884
Cost of sales 2,769,844 2,907,405
----------------- -----------------
Gross profit 1,588,584 2,011,479
Selling, general, and administrative expenses 1,243,125 1,487,314
Research and development expenses 413,605 253,792
----------------- -----------------
Operating income (loss) (68,146) 270,373
----------------- -----------------
Other income (expense):
Interest income 2,791 976
Interest expense (30,189) (35,789)
Other income, net 59,250 7,283
----------------- -----------------
Total other income (expense) 31,852 (27,530)
----------------- -----------------
Income (Loss) before income taxes (36,294) 242,843
Income tax expense (13,973) 93,495
----------------- -----------------
Net income (loss) $ (22,321) $ 149,348
================= =================
Basic and diluted net income (loss)
per common share $ (0.00) $ 0.02
================= =================
Weighted average basic and diluted common
shares outstanding (note 2)
Basic 9,017,771 8,957,876
Diluted 9,017,771 9,181,387
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (22,321) $ 149,348
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 84,544 86,026
Other amortization 1,831 1,831
Provision for doubtful accounts 12,000 24,000
Provision for inventory obsolescence 63,000 69,000
Provision for warranty reserve 59,451 35,472
Provision for deferred compensation 6,933 7,374
Change in operating assets and liabilities:
Receivables (192,030) (81,481)
Inventories 74,082 96,124
Prepaid expenses and other assets (168,748) (112,997)
Income tax receivable (14,973) (101,576)
Accounts payable and accrued expenses (496,878) 220,975
------------- -------------
Net cash (used in) provided by operating
activities (593,109) 394,096
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Cash flows from investing activities:
Capital expenditures (27,296) (108,607)
Proceeds from sale of assets 1,500
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Net cash used in investing activities (25,796) (108,607)
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Cash flows from financing activities:
Principal payments on long-term debt (52,890) (52,845)
Net change in line of credit 603,994 (352,647)
Proceeds from issuance of common stock 5,968 2,633
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Net cash provided by (used in) financing
activities 557,072 (402,859)
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Net change in cash (61,833) (117,370)
Cash at beginning of year 472,899 573,027
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Cash at end of year $ 411,066 $ 455,657
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 27,516 $ 36,879
Cash paid for income taxes $ 1,000 $ 195,070
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of September 30, 2005 (unaudited) 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. 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, 2005 and 2004. 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 (LOSS) 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.
The computation of diluted EPS does not assume exercise or conversion of
securities that would have an anti-dilutive effect.
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 for the three months ended September 30, 2004.
Stock options exercisable of 204,812 at September 30, 2005 were not included in
the calculation of diluted net loss per share because their effect was
anti-dilutive. A reconciliation between the basic and diluted weighted-average
number of common shares for the three months ended September 30, 2005 and 2004
is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2005 2004
------------- -----------
Basic weighted average number of common shares
outstanding during the period 9,017,771 8,957,876
Weighted average number of dilutive common stock
options outstanding during the period - 223,511
------------- -----------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,017,771 9,181,387
============= ===========
4
NOTE 3. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard (" SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages
entities to adopt a fair-value-based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to apply the provisions of APB 25; accordingly, no
compensation expense has been recognized for the stock option plan. Had
compensation expense for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
Three months ended Three months ended
September 30, 2005 September 30, 2004
Net income (loss) as reported $ (22,321) $ 149,348
Less: pro forma adjustment for stock based
Compensation, net of income tax (173,562) (8,752)
--------------- ----------------
Pro forma net income (loss) $ (195,883) $ 140,596
Basic net income (loss) per share:
As reported $ - $ 0.02
Effect of pro forma adjustment (0.02) -
--------------- ----------------
Pro forma $ (0.02) $ 0.02
Diluted net income (loss) per share:
As reported $ - $ 0.02
Effect of pro forma adjustment (0.02) -
--------------- ----------------
Pro forma $ (0.02) $ 0.02
--------------- ----------------
The per share weighted-average fair value of stock options granted for the three
months ended September 30, 2005 and 2004 was $1.40 and $1.29 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
Three months ended Three months ended
September 30, 2005 September 30, 2004
------------------------- --------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.14 - 4.20% 3.66 - 3.68%
Expected volatility 87 - 88% 87 - 88%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended September 30, 2005 and 2004, comprehensive income was
equal to the net income (loss) as presented in the accompanying condensed
statements of operations.
5
NOTE 5. INVENTORIES
Inventories consisted of the following:
September 30, 2005 June 30, 2005
-------------------- -----------------
Raw Material $ 2,626,849 2,671,255
Finished Goods 2,373,299 2,409,435
Inventory Reserve (424,707) (368,167)
-------------------- -----------------
$
4,575,441 4,712,523
==================== =================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, 2005 June 30, 2005
-------------------- --------------
Land $ 354,744 $ 354,743
Buildings 2,921,127 2,921,127
Machinery and equipment 1,570,817 1,560,010
Office equipment 1,026,089 1,011,101
Vehicles 94,290 94,290
----------------- ---------------
5,967,067 5,941,271
Less accumulated depreciation
and amortization 2,803,871 2,719,327
----------------- ---------------
$ 3,163,196 $ 3,221,944
================= ===============
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of
July 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 2004 and determined there was not an indication
of impairment. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Goodwill. As of September 30, 2005, the Company had goodwill, net, of $789,422
from the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and
the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983. Through June 30,
2002, goodwill from these transactions was amortized over a period of 15 and 30
years, respectively, on a straight-line basis.
6
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
September 30, 2005 June 30, 2005
------------------ --------------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 37,231 35,400
------------------ --------------------
Net carrying amount $ 36,009 $ 37,840
================== ====================
Amortization expense associated with the license agreement was $1,831 for both
the three months ended September 30, 2005 and 2004. Estimated amortization
expense for the existing license agreement is expected to be $7,324 for each of
the fiscal years ending June 30, 2006 through June 30, 2010. The license
agreement is included in other assets.
NOTE 8. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates. The
product warranty reserve is included in accrued expenses at September 30, 2005
and June 30, 2005. A reconciliation of the changes in the warranty liability is
as follows:
Three months ended Three months ended
September 30, 2005 September 30, 2004
------------------ ----------------------
Beginning product warranty reserve balance $ 208,000 $ 184,000
Warranty repairs (59,451) (29,472)
Warranties issued 31,041 51,153
Changes in estimated warranty costs 28,410 (15,681)
---------------- -----------------------
Ending product warranty liability balance $ 208,000 $ 190,000
================ =======================
NOTE 9. COMMON STOCK.
The Company received proceeds of $5,968 during the three months ended September
30, 2005 for 5,211 shares of common stock that were issued upon the exercise of
options by employees. During the three months ended September 30, 2004 the
Company received proceeds of $2,633 for 2,250 shares of common stock that were
issued upon the exercise of options by employees
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after December 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2006. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard and the effect
of the adoption of SFAS 123R will have on our financial position, results of
operations, or cash flow.
7
In March 2005, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations"
an interpretation of FASB No. 143 ("FIN No. 47"). FIN No. 47 addresses the
obligation of a business enterprises to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future event
that may or may not be within the control of the entity. An entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. The
Company evaluated the criteria of this pronouncement and concluded that it has
no conditional asset retirement obligation, and therefore the adoption of FIN
No. 47 had no impact on the Company's financial statements.
In May 2005, the Financial Accounting Standard Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No.
20 and FASB Statement No. 3". This Statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine the period-specific effects or the
cumulative effect of the change. This pronouncement will be effective December
15, 2005. Currently, the Company does not have changes in accounting principle,
the adoption of SFAS No. 154 will not have impact on the Company's financial
position or results of operations.
8
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 Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the first
quarter ended September 30, 2005, for the Company's fiscal year ending June 30,
2006.
Net Sales
During the quarter ended September 30, 2005, the Company generated sales of
$4,358,428, compared to $4,918,884 in the quarter ended September 30, 2004. The
11.4% decrease in revenue in this first quarter of fiscal 2006 compared to the
same quarter last year is a direct result of delays in the release of previously
announced new products. Dealers postponed purchases of existing Solaris and 50
Series combination devices anticipating the introduction of the new Dynatron Xp
Light Pad, Dynatron X3 Light Therapy device and the Dynatron DX2 combination
traction and light therapy device, as well as two new Solaris light therapy
probes and proprietary treatment tables. Lower device sales during the quarter
ended September 30, 2005 were partially offset by increased sales of the
Company's wood and metal treatment tables during the reporting period.
The Dynatron Xp Light Pad was released in late October 2005 and release of the
Dynatron X3 and DX1 are now anticipated in the third quarter of fiscal 2006.
Gross Profit
During the quarter ended September 30, 2005, total gross profit was $1,588,584,
or 36.4% of net sales, compared to $2,011,479, or 40.9% of net sales, in the
quarter ended September 30, 2004. This 4.5 percentage point decrease was
primarily attributable to the reduced sales of above average margin products.
The Company generated lower sales of therapy and aesthetic devices which carry
above average margins while slightly increasing sales of below-average margin
treatment tables during the reporting quarter. Another contributing factor was
the update of labor and overhead cost allocations to cost of goods sold
implemented during the quarter ended June 30, 2005. This adjustment allocated
more SG&A costs to Cost of Goods Sold to more accurately reflect actual cost of
manufacturing each product. The quarter ended September 30, 2005 was the first
full quarter to reflect this change. The increase in Cost of Goods Sold
attributable to this adjustment was offset by lower SG&A expenses.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses for the quarter ended
September 30, 2005 were $1,243,125, or 28.5% of net sales, compared to
$1,487,314, or 30.2% of net sales, in the prior year period. Total SG&A expenses
in the 2005 quarter decreased by $244,189 or 16.4% compared to the similar
quarter in 2004. The three primary components affecting SG&A expenses in the
first quarter ended September 30, 2005 compared to 2004 were:
o Approximately $81,000 in lower labor expenses which is partly
related to the reallocation of costs to cost of goods sold as
explained above.
o Approximately $93,000 in decreased selling expenses including
tradeshow activities, sales commissions, dealer incentive programs
and advertising.
o Approximately $68,000 in lower incentive compensation expenses.
Research and Development
The Company has expanded its R&D capabilities by increasing its staff of
engineers in order to develop new products at a more rapid pace. A record number
of new products are currently under development. The first of these new products
began shipping in October 2005. While this effort has increased short term
costs, we believe it will also position the Company to generate future growth in
both sales and profitability. R&D expenses during the quarter ended September
30, 2005 increased approximately $160,000 to $413,605, compared to $253,792 in
the prior year period. R&D expenses represented approximately 9.5% and 5.2% of
the net sales of the Company in the 2005 and 2004 quarterly periods,
respectively. R&D costs are expensed as incurred.
9
Pre-tax profit
Pre-tax loss for the quarter ended September 30, 2005 was $36,294 compared to
pre-tax profit of $242,843 in the quarter ended September 30, 2004. Lower sales
and margins generated during the reporting quarter, combined with higher R&D
costs, account for the difference between the comparative periods.
Income Tax
Income tax benefit for the quarter ended September 30, 2005 was $13,973 compared
to income tax expense of $93,495 in the quarter ended September 30, 2004. The
effective tax rate for the quarters ended September 30, 2005 and September 30,
2004 was 38.5%.
Net Income
Net loss for the quarter ended September 30, 2005 was $22,321 (approximately
$.00 per share), compared to net income of $149,348 (approximately $.02 per
share) in the quarter ended September 30, 2004. The lower sales and margins
generated during the reporting quarter, combined with higher R&D expenses, led
to the reduction in net income compared to the prior year period.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its line of credit, and from cash provided by operations. The
Company had working capital of $7,056,393 at September 30, 2005, inclusive of
the current portion of long-term obligations and credit facilities, as compared
to working capital of $7,043,854 at June 30, 2005.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$171,496 to $3,177,811 at September 30, 2005 compared to $3,006,315 at June 30,
2005. Management anticipates accounts receivable could increase in future
periods due to the planned introduction of eight new products in fiscal year
2006 which are expected to increase sales.
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the agreed terms.
Inventories
Inventories, net of reserves, at September 30, 2005 decreased $137,082 to
$4,575,441 compared to $4,712,523 at June 30, 2005. Management expects that
inventories will likely increase during the current fiscal year based on the
Company's planned new product introductions.
Prepaid Expenses
Prepaid expenses increased $186,402 to $573,337 at September 30, 2005 compared
to $386,935 at June 30, 2005, due primarily to increases in advances made to
suppliers for various component parts.
Goodwill
Goodwill at September 30, 2005 and June 30, 2005 was $789,422. Beginning July 1,
2002, the Company adopted the provisions of SFAS No. 142 Goodwill and other
Intangible Assets. In compliance with SFAS 142, management utilized standard
principles of financial analysis and valuation including: transaction value,
market value and income value methods to arrive at a reasonable estimate of the
fair value of the Company in comparison to its book value. The Company has
determined it has one reporting unit. As of July 1, 2002 and June 30, 2005, the
fair value of the Company exceeded the book value of the Company. Therefore,
there was no indication of impairment upon adoption of SFAS No. 142 or at June
30, 2005. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter.
10
Accounts Payable
Accounts payable decreased by $107,353 to $498,435 at September 30, 2005
compared to $605,788 at June 30, 2005. The decrease in accounts payable is a
result of the timing of our weekly payments to suppliers and the timing of
purchases of product components. All accounts payable are within term. We
continue to take advantage of available early payment discounts when offered.
Accrued Expenses
Accrued expenses decreased by $88,402 to $483,538 at September 30, 2005 compared
to $571,940 at June 30, 2005. Accrued expenses at June 30, 2005 were higher due
to the timing of our June 2005 national dealer meeting and accrued expenses for
sales incentive programs.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $241,672 to $126,495 at
September 30, 2005 compared to $368,167 at June 30, 2005. The decrease in
accrued payroll & benefit expenses is related to lower accrued payroll and
bonuses for employees, officers, and directors and corresponding payroll taxes.
Cash
The Company's cash position was $411,066 at September 30, 2005 compared to
$472,899 at June 30, 2005. The Company believes that its current cash balances,
amounts available under its line of credit and cash provided by operations will
be sufficient to cover its operating needs in the ordinary course of business
for the next twelve months. If we experience an adverse operating environment or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on favorable terms.
Line of Credit
The Company maintains a revolving line of credit with a commercial bank in the
amount of $4,500,000. The outstanding balance on our line of credit was $868,755
at September 30, 2005 compared to $264,761 at June 30, 2005. The $603,994
increase in the outstanding balance of the line of credit was attributable
primarily to the payment of accounts payable and accrued expenses during the
reporting quarter. Interest on the line of credit is based on the bank's prime
rate, which at September 30, 2005, equaled 6.75%. The line of credit is
collateralized by accounts receivable and inventories. Borrowing limitations are
based on 30% of eligible inventory and up to 80% of eligible accounts
receivable. The line of credit is renewable annually on December 1st and
includes covenants requiring the Company to maintain certain financial ratios.
As of September 30, 2005, the Company was in compliance with all loan covenants.
The current ratio was 4.2 to 1 at September 30, 2005 compared to 4.5 to 1 at
June 30, 2005. Current assets represent 68% of total assets at September 30,
2005.
Debt
Long-term debt excluding current installments totaled $1,274,051 at September
30, 2005 compared to $1,330,325 at June 30, 2005. 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
$1.5 million with monthly principal and interest payments of $21,370.
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. During fiscal 2004, the Company purchased $89,000 of
stock, leaving over $400,000 of authorized funds for future stock repurchases.
The stock repurchase program is conducted pursuant to safe harbor regulations
under Rule 10b-18 of the Exchange Act for the repurchase by an issuer of its own
shares. No shares were repurchased during the quarter ended September 30, 2005.
11
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed in this Management's
Discussion and Analysis where such policies affect our reported and expected
financial results. For a detailed discussion of the application of these and
other accounting policies, see Notes to the Audited Financial Statements
contained in the Company's annual report on Form 10-KSB for the year ended June
30, 2005. In all material respects, management believes that the accounting
principles that are utilized conform to accounting principles generally accepted
in the United States of America.
The preparation of this quarterly report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our unaudited financial statements. By their
nature, these judgments are subject to an inherent degree of uncertainty. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, intangible assets, warranty obligations, product liability,
revenue, and income taxes. We base our 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.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out) or market. Inventory valuation reserves are maintained for
the estimated 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 reserves, we analyze 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.
o Technological innovations.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At September
30, 2005 and June 30, 2005, our inventory valuation reserve balance, which
established a new cost basis, was $424,707 and $368,167, respectively, and our
inventory balance was $4,575,441 and $4,712,523 net of reserves, respectively.
Revenue Recognition
Our products are sold primarily to customers who are independent distributors
and equipment dealers. These distributors resell the products, typically to end
users, including physical therapists, professional trainers, athletic trainers,
chiropractors, medical doctors and aestheticians. Sales revenues are recorded
when products are shipped FOB shipping point under an agreement with a customer,
risk of loss and title have passed to the customer, and collection of any
resulting receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for shipping and
handling of products to customers are recorded as cost of sales.
12
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $3,177,811and $3,006,315, net of allowance for doubtful accounts of $250,101
and $252,509, at September 30, 2005 and June 30, 2005, respectively.
Business Plan and Outlook
-------------------------
Over the past seven years, annual net sales have grown from $12.6 million in
fiscal year 1998 to $20.4 million in 2005. During fiscal year 2006, we will
continue to focus our efforts on fueling and sustaining growth through the
development of new products for the rehabilitation and aesthetics markets while,
at the same time, strengthening our channels of distribution and improving
operating efficiencies.
The fruits of our focused R&D campaign begun in 2002 were initially manifest in
September 2004 when we introduced the Solaris Series, a new product line of
advanced technology electrotherapy/ultrasound products featuring an infrared
light therapy probe. This new family of products has quickly become our top
selling line, due largely to the popularity of light therapy. Light therapy is
becoming widely recognized for its successful treatment of painful conditions.
In July 2005, we announced that we would be introducing eight new products over
the coming months. The first of those products, the Dynatron Xp Infrared Light
Pad and Dynatron XpB, or Booster Box, began shipping to customers in October
2005. The Dynatron Xp and XpB provide practitioners with a tool that allows
unattended therapy of large segments of the body such as the back, thigh or
shoulder.
The Dynatron XpB is an accessory that will allow the thousands of Solaris unit
owners to add the new Xp Infrared Light Pad as an accessory to their existing
Solaris device. This compatibility of technology not only opens a significant
market segment for the new Xp Infrared Light Pad, but assures users of
Dynatronics' products that we are working to make these technologies affordable
for them.
In October 2005, we also began shipping the Dynatron iBox, a new transdermal
drug delivery device for iontophoresis that we believe is the most
technologically advanced product of its kind on the market. We intend to use
this device to leverage sales of the iontophoresis electrodes we distribute.
In the third quarter of fiscal year 2006, we plan to begin shipping the Dynatron
Solaris X3, a powerful unit offering multiple applications of light therapy. The
original Solaris series devices offered light therapy as an added accessory to
our popular combination electrotherapy/ultrasound technology. However, there has
been increasing market demand for a stand-alone unit that expands light therapy
capabilities. The X3 has been designed to provide the ability to operate two Xp
Infrared Light Pads or two light therapy probes simultaneously.
The probes being offered with the X3 include not only the existing Dynatron 880
and 890 probes but also two new probes - one with a much higher output of
infrared wavelength light and the other a combination infrared and blue
wavelength output.
In the third quarter of fiscal year 2006, we also anticipate introducing the DX2
combination traction and light therapy device. We believe that combining the
pain relieving characteristics of infrared light therapy as offered through our
new Xp Light Pad, with the traditional benefits of decompression therapy through
traction, will make our DX2 traction device one of the most unique devices of
its kind on the market. It is designed to provide practitioners a more
efficacious way to relieve pain using combination therapy. We anticipate this
unique combination of modalities together with the benefits of touch screen
technology will create significant demand for this product.
To support this product, we also plan to introduce a new traction therapy table,
the Dynatron T4, which we expect to be one of the best value tables on the
market for traction and decompression therapy. The T4 and DX2 will typically be
sold together as a package.
The technological complexity of these new devices has delayed their introduction
by 3-5 months. These delays are attributable to many factors including sourcing
of critical parts & components, completing designs and operating software, and
complying fully with all internal quality processes for new product development
and release. While the delays in release have diminished sales and profits for
13
the reporting quarter and will likely have a similar effect on the quarter
ending December 31, 2005, demand for these products remain strong and we remain
confident that once released these new products will be reliable and spark new
growth in sales and profits during the last half of fiscal year 2006.
Another important part of our strategic plan is the further expansion of
worldwide marketing efforts. Over the past two years, international sales have
more than doubled and we continue to press forward seeking additional
opportunities for international expansion. The Company's Salt Lake City
operation, where all electrotherapy, ultrasound, STS devices, light therapy and
Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European Union
and other foreign countries.
We continue efforts to promote our line of aesthetic equipment which includes
the Synergie AMS device for dermal massage, the Synergie MDA device for
microdermabrasion, and the Synergie LT device, an infrared light therapy unit
designed specifically for aesthetic applications. The introduction of the
Synergie LT device is positioning Dynatronics to compete more fully in the spa
and beauty market. We plan to develop and introduce additional light therapy
probes for the aesthetic market using different wavelengths of light. Recent
interest by medical spas in the use of other physical therapy modalities such as
electrotherapy, ultrasound and light therapy in aesthetic applications has
opened new potential for crossover of physical medicine modalities into the
aesthetics market. This presents a unique opportunity for us to grow sales of
new aesthetic products with little additional R&D effort since the products have
already been developed for the physical medicine markets.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of eight new products, both high tech and
commodity, in fiscal year 2006.
o Increasing sales of Solaris devices through introduction of new
light therapy accessories and by developing new markets for light
therapy applications.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices and versions of our physical therapy modalities into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Part 1 Item 2. Management's Discussion and Analysis or
Plan of Operation, 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, 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.
14
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 Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, and the Solaris
infrared light therapy products;
o Failure to timely release new products against market
expectations;
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 Additional terrorist attacks on U.S. interests and businesses;
o The ability to obtain required financing to meet changes or other
risks; and
o Escalating costs of raw materials, particularly steel and
petroleum based materials.
o As a public company, we are subject to the reporting requirements
of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act
of 2002. These requirements may place a strain on our systems and
resources. The Securities Exchange Act requires, among other
things, that we file annual, quarterly and current reports with
respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal controls
over financial reporting. We are currently reviewing and further
documenting our internal control procedures. However, the
guidelines for the evaluation and attestation of internal control
systems have only recently been finalized, and the evaluation and
attestation processes are new and untested. Therefore, we can give
no assurances that our systems will satisfy the new regulatory
requirements. In addition, in order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting, significant resources
and management oversight will be required.
15
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officers have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There have been no significant changes in internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies or material
weaknesses.
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of
Dynatronics Laser Corporation. Incorporated by
reference to a Registration Statement on Form S-1
(No. 2-85045) filed with the Securities and
Exchange Commission and effective November 2,
1984, as amended by Articles of Amendment dated
November 18, 1993
3.2 Articles of Amendment dated November 21, 1988
(previously filed)
10.1 Employment contract with Kelvyn H. Cullimore, Jr.
(previously filed)
10.2 Employment contract with Larry K. Beardall
(previously filed)
10.3 Loan Agreement with Zions Bank (previously filed)
10.5 Amended Loan Agreement with Zions Bank (December
2003)
10.6 1992 Amended and Restated Stock Option Plan
(previously filed)
11 Computation of Net Income per Share (included in
Notes to Consolidated Financial Statements)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of
principal executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of
principal financial officer (filed herewith)
32 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. SECTION
1350) (filed herewith)
16
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 11/11/05 /s/ Kelvyn H. Cullimore, Jr.
----------------- ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date 11/11/05 /s/ Terry M. Atkinson, CPA
----------------- ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
17