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 December 31, 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
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- ----------
(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 9,022,014.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
DYNATRONICS CORPORATION
FORM 10-QSB
DECEMBER 31, 2005
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Unaudited Balance Sheets
December 31, 2005 and June 30, 2005............................................1
Unaudited Statements of Operations
Three and Six Months Ended December 31, 2005 and 2004..........................2
Unaudited Statements of Cash Flows
Six Months Ended December 31, 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.............................................................17
DYNATRONICS CORPORATION
Balance Sheets
December 31, 2005 June 30, 2005
Assets (Unaudited) (Audited)
-------------------- ---------------
Current assets:
Cash $ 753,279 $ 472,899
Trade accounts receivable, less allowance for
doubtful accounts of $262,101 at
December 31, 2005 and $252,509 at June 30, 2005 3,438,434 3,006,315
Other receivables 77,856 91,129
Inventories, net 4,761,589 4,712,523
Prepaid expenses 621,021 386,935
Prepaid income taxes 0 21,701
Deferred tax asset-current 384,077 384,077
-------------------- ---------------
Total current assets 10,036,256 9,075,579
Property and equipment, net 3,113,697 3,221,944
Goodwill, net of accumulated amortization of $649,792
at December 31, 2005 and at June 30, 2005 789,422 789,422
Other assets 357,378 372,778
-------------------- ---------------
$ 14,296,753 $ 13,459,723
==================== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 246,456 $ 221,069
Line of credit 270,812 264,761
Accounts payable 538,908 605,788
Accrued expenses 548,023 571,940
Accrued payroll and benefit expenses 268,019 368,167
Income tax payable 16,632 0
-------------------- ---------------
Total current liabilities 1,888,850 2,031,725
Long-term debt, excluding current installments 2,150,357 1,330,325
Deferred compensation 374,384 360,518
Deferred tax liability - noncurrent 223,647 223,647
-------------------- ---------------
Total liabilities 4,637,238 3,946,215
-------------------- ---------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued 9,022,014 shares at December 31,
2005 and 9,015,128 shares at June 30, 2005 2,787,095 2,779,000
Retained earnings 6,872,420 6,734,508
-------------------- ---------------
Total stockholders' equity 9,659,515 9,513,508
-------------------- ---------------
$ 14,296,753 $ 13,459,723
==================== ===============
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2005 2004 2005 2004
---------------- ---------------- --------------- ------------------
Net sales $ 5,230,833 $ 5,322,596 $ 9,589,261 $ 10,241,502
Cost of sales 3,172,671 3,143,577 5,942,515 6,051,004
---------------- ---------------- --------------- ------------------
Gross profit 2,058,162 2,179,019 3,646,746 4,190,498
Selling, general, and administrative expenses 1,328,353 1,468,399 2,571,478 2,955,714
Research and development expenses 432,361 275,364 845,965 529,155
---------------- ---------------- --------------- ------------------
Operating income 297,448 435,256 229,303 705,629
---------------- ---------------- --------------- ------------------
Other income (expense):
Interest income 2,409 929 5,200 1,905
Interest expense (39,880) (38,612) (70,069) (74,402)
Other income, net 562 975 59,811 8,258
---------------- ---------------- --------------- ------------------
Total other income (expense) (36,909) (36,708) (5,058) (64,239)
---------------- ---------------- --------------- ------------------
Income before income taxes 260,539 398,548 224,245 641,390
Income tax expense 100,306 153,441 86,333 246,935
---------------- ---------------- --------------- ------------------
Net income $ 160,233 $ 245,107 $ 137,912 $ 394,455
================ =====--========= =============== ==================
Basic and diluted net income per
common share $ 0.02 $ 0.03 $ 0.02 $ 0.04
================ ================ =============== ==================
Weighted average basic and diluted common shares outstanding (note 2)
Basic 9,020,394 8,959,180 9,019,082 8,958,528
Diluted 9,161,516 9,193,826 9,184,666 9,187,386
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2005 2004
------------ -----------
Cash flows from operating activities:
Net income $ 137,912 $ 394,455
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 169,109 176,720
Other amortization 3,662 3,662
Provision for doubtful accounts 24,000 48,000
Provision for inventory obsolescence 126,000 138,000
Provision for warranty reserve 129,843 75,205
Provision for deferred compensation 13,866 14,748
Compensation expense on stock options 0 9,900
Change in operating assets and liabilities:
Receivables (442,846) 70,882
Inventories (175,066) 2,531
Prepaid expenses and other assets (222,348) 21,407
Accounts payable and accrued expenses (320,788) (142,926)
Income tax receivable 21,701 (114,484)
Income tax payable 16,632 0
------------ -----------
Net cash (used in) provided by operating
activities (518,323) 698,100
------------ -----------
Cash flows from investing activities:
Capital expenditures (62,362) (144,316)
Proceeds from sale of assets 1,500 0
------------ -----------
Net cash used in investing activities (60,862) (144,316)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,530,000 0
Principal payments on long-term debt (684,581) (104,376)
Net change in line of credit 6,051 (385,782)
Proceeds from issuance of common stock 8,095 4,702
------------ -----------
Net cash provided by (used in) financing
activities 859,565 (485,456)
------------ -----------
Net change in cash 280,380 68,328
Cash at beginning of period 472,899 573,027
------------ -----------
Cash at end of period $ 753,279 $ 641,355
Supplemental disclosures of cash flow information:
Cash paid for interest $ 70,896 $ 74,212
Cash paid for income taxes $ 48,000 $ 361,420
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for consulting services 0 29,700
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2005
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 2005 (unaudited) and June 30, 2005
(audited) and for the three and six months ended December 31, 2005 and 2004 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 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 and six months ended December
31, 2005. A reconciliation between the basic and diluted weighted-average number
of common shares for the three and six months ended December 31, 2005 and 2004
is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2005 2004 2005 2004
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 9,020,394 8,959,180 9,019,082 8,958,528
Weighted average number of dilutive common stock
options outstanding during the period 141,122 234,646 165,584 228,858
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,161,516 9,193,826 9,184,666 9,187,386
============= ============ ============= =============
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
December 31, 2005 December 31, 2004
Net income as reported $ 160,233 $ 245,107
Less: pro forma adjustment for stock based
Compensation, net of income tax (277,912) (9,277)
------------------------ ---------------------------
Pro forma net income (loss) $ (117,679) $ 235,830
Basic net income (loss) per share:
As reported $ 0.02 $ 0.03
Effect of pro forma adjustment (0.03) -
------------------------ ---------------------------
Pro forma (0.01) 0.03
Diluted net income (loss) per share:
As reported 0.02 0.03
Effect of pro forma adjustment (0.03) -
------------------------ ---------------------------
Pro forma $ (0.01) $ 0.03
------------------------ ---------------------------
Six months ended Six months ended
December 31, 2005 December 31, 2004
Net income as reported $ 137,912 $ 394,455
Less: pro forma adjustment for stock based
Compensation, net of income tax (451,474) (18,030)
------------------------ ---------------------------
Pro forma net income (loss) $ (313,562) $ 376,425
Basic net income (loss) per share:
As reported $ 0.02 $ 0.04
Effect of pro forma adjustment (0.05) -
------------------------ ---------------------------
Pro forma (0.03) 0.04
Diluted net income (loss) per share:
As reported 0.02 0.04
Effect of pro forma adjustment (0.05) -
------------------------ ---------------------------
Pro forma $ (0.03) $ 0.04
------------------------ ---------------------------
The Company granted 446,000 options on May 24, 2005 to officers and employees
that had a vesting period of six months and granted 145,000 options on November
22, 2005 to officers and directors that were immediately vested. These vesting
periods were substantially shorter in length than previous vesting periods of
options granted.
5
The per share weighted-average fair value of stock options granted for the three
months ended December 31, 2005 and 2004 was $1.45 and $1.16 per share, and for
the six months ended December 31, 2005 and 2004 was $1.59 and $1.26 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
December 31, 2005 December 31, 2004
---------------------- -----------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.37% 3.92%
Expected volatility 87% 88%
Vesting period 0 - 5 years 5 years
Expected life 7 & 10 years 7 years
Six months ended Six months ended
December 31, 2005 December 31, 2004
---------------------- -----------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.14 - 4.37% 3.31 - 4.34%
Expected volatility 87 - 88% 87 - 89%
Vesting period 0 - 5 years 1 - 5 years
Expected life 7 & 10 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended December 31, 2005 and 2004, comprehensive income was equal
to the net income as presented in the accompanying condensed statements of
income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31, 2005 June 30, 2005
Raw material $ 3,052,086 $ 2,671,255
Finished goods 2,215,137 2,409,435
Inventory reserve (505,634) (368,167)
---------------------- -------------------
$ 4,761,589 4,712,523
====================== ===================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, 2005 June 30, 2005
-------------------- ------------------
Land $ 354,744 $ 354,743
Buildings 2,937,752 2,921,127
Machinery and equipment 1,446,933 1,560,010
Office equipment 1,018,661 1,011,101
Vehicles 94,290 94,290
-------------------- ------------------
5,852,380 5,941,271
Less accumulated depreciation
and amortization 2,738,683 2,719,327
-------------------- ------------------
$ 3,113,697 $ 3,221,944
==================== ==================
6
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, 2005 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 December 31, 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.
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
December 31, 2005 June 30, 2005
----------------- ----------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 39,062 35,400
----------------- ----------------
Net carrying amount $ 34,178 $ 37,840
================= ================
Amortization expense associated with the license agreement was $1,831 and
$3,662, respectively, for the three and six months ended December 31, 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 December 31, 2005
and June 30, 2005. A reconciliation of the changes in the warranty liability is
as follows:
Three months ended Three months ended
December 31, 2005 December 31, 2004
----------------------- ------------------------
Beginning product warranty reserve balance $ 208,000 $ 190,000
Warranty repairs (70,391) (33,734)
Warranties issued 37,255 55,352
Changes in estimated warranty costs 33,136 (15,618)
----------------------- ------------------------
Ending product warranty liability balance $ 208,000 $ 196,000
======================= ========================
7
Six months ended Six months ended
December 31, 2005 December 31, 2004
----------------------- ------------------------
Beginning product warranty reserve balance $ 208,000 $ 184,000
Warranty repairs (129,843) (63,205)
Warranties issued 68,296 106,505
Changes in estimated warranty costs 61,547 (31,300)
----------------------- ------------------------
Ending product warranty liability balance $ 208,000 $ 196,000
======================= ========================
NOTE 9. COMMON STOCK.
The Company received proceeds of $8,095 during the six months ended December 31,
2005 for 6,886 shares of common stock that were issued upon the exercise of
options by employees. During the six months ended December 31, 2004 the Company
received proceeds of $4,702 for 4,278 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.
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 impact 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 second
quarter ended December 31, 2005, for the Company's fiscal year ending June 30,
2006.
Net Sales
During the quarter ended December 31, 2005, the Company generated sales of
$5,230,833, compared to $5,322,596 in the quarter ended December 31, 2004.
During the six months ended December 31, 2005, the Company generated sales of
$9,589,261, compared to $10,241,502 in the six months ended December 31, 2004.
Second quarter results improved significantly over first quarter results,
reflecting solid demand for the Company's new rehab equipment. However, when
compared to the second quarter and six months of the prior year, the sales
increases from new products were offset by lower sales of the Company's
aesthetic equipment and older 50 Series products. Reduced sales of aesthetic
equipment are primarily attributable to certain dealers deciding to drop high
dollar capital equipment from their product offerings. Strategies are being
implemented with the intention of restoring these lost sales.
The Company began shipping three new products during the second quarter,
including the Dynatron Xp infrared light pad. We believe this innovative product
is 14 times more powerful than infrared light probes currently on the market. It
is capable of treating a much larger area than can be treated by competitors'
devices. Importantly, it makes unattended patient therapy possible, allowing
practitioners to treat multiple patients simultaneously. The other two products
introduced during the second quarter were the Dynatron iBox iontophoresis device
for transdermal drug delivery, and the D880Plus infrared light probe which
produces twice the power of its predecessor model.
Gross Profit
During the quarter ended December 31, 2005, total gross profit was $2,058,162,
or 39.3% of net sales, compared to $2,179,019, or 40.9% of net sales, in the
quarter ended December 31, 2004. For the six months ended December 31, 2005,
total gross profit was $3,646,746, or 38.0% of net sales, compared to
$4,190,498, or 40.9% of net sales, in the similar period ended December 31,
2004. The decreases in gross profit as a percent of sales were primarily
attributable to reduced sales of older 50 Series therapy devices as well as
aesthetic devices which carry above-average margins.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses for the quarter ended
December 31, 2005 were $1,328,353, or 25.4% of net sales, compared to
$1,468,399, or 27.6% of net sales, in the prior year period. SG&A expenses for
the six months ended December 31, 2005 were $2,571,478, or 26.8% of net sales,
compared to $2,955,714, or 28.9% of net sales, in the prior year period.
Total SG&A expenses in the quarter ended December 31, 2005 decreased by
$140,046, or 9.5%, compared to the similar quarter in 2004. The primary
components affecting SG&A expenses in the quarter ended December 31, 2005
compared to 2004 were:
o Approximately $88,000 in lower labor expenses.
o Approximately $78,000 in lower incentive compensation expenses.
o The reduction in SG&A was partially offset by approximately
$36,000 in increased healthcare insurance premiums.
Total SG&A expenses in the six months ended December 31, 2005 decreased by
$384,236, or 13.0%, compared to the similar period in 2004. The primary
components affecting SG&A expenses in the six months ended December 31, 2005
compared to 2004 were:
o Approximately $128,000 in lower labor expenses.
9
o Approximately $146,000 in lower incentive compensation expenses.
o Approximately $91,000 in lower selling expenses primarily related
to our aesthetic product line.
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. 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 profits. R&D expenses during the
quarter ended December 31, 2005 increased approximately $157,000 to $432,361,
compared to $275,364 in the prior year period. R&D expenses during the six
months ended December 31, 2005 increased approximately $316,810 to $845,965,
compared to $529,155 in the prior year period. R&D expenses represented
approximately 8.3% and 5.2% of the net sales of the Company in the quarter and
six months ended December 31, 2005, compared to 8.8% and 5.2% of net sales in
the 2004 periods, respectively. R&D costs are expensed as incurred.
Pre-tax profit
Pre-tax profit for the quarter ended December 31, 2005 was $260,539 compared to
$398,548 in the quarter ended December 31, 2004. Pre-tax profit for the six
months ended December 31, 2005 was $224,245 compared to $641,390 in the six
months ended December 31, 2004. Lower sales and margins generated during the
reporting quarter and six months periods, combined with higher R&D costs,
account for the differences between the comparative periods.
Income Tax
Income tax expense for the quarter ended December 31, 2005 was $100,306 compared
to $153,441 in the quarter ended December 31, 2004. Income tax expense for the
six months ended December 31, 2005 was $86,333 compared to $246,935 in the
similar period ended December 31, 2004. The effective tax rate for all periods
reported was 38.5%.
Net Income
Net income for the quarter ended December 31, 2005 was $160,233 (approximately
$.02 per share), compared to $245,107 (approximately $.03 per share) in the
quarter ended December 31, 2004. Net income for the six months ended December
31, 2005 was $137,912 (approximately $.02 per share), compared to $394,455
(approximately $.04 per share) in the six months ended December 31, 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 periods.
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 $8,147,406 at December 31, 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
$432,119 to $3,438,434 at December 31, 2005 compared to $3,006,315 at June 30,
2005. Management anticipates accounts receivable could increase modestly in
future periods due to the planned introduction of new products in the second
half of fiscal year 2006 which is 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.
10
Inventories
Inventories, net of reserves, at December 31, 2005 increased $49,066 to
$4,761,589 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 $234,086 to $621,021 at December 31, 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 December 31, 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.
Accounts Payable
Accounts payable decreased by $66,880 to $538,908 at December 31, 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 $23,917 to $548,023 at December 31, 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 $100,148 to $268,019 at December
31, 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 increased $280,380 to $753,279 at December 31, 2005
compared to $472,899 at June 30, 2005. During the quarter ended December 31,
2005, the Company borrowed $1,530,000, secured by its facility in Tennessee, in
order to refinance an existing adjustable rate mortgage and to construct a
10,000 sq. ft. addition to the existing warehouse. The proceeds from the loan
not used in the refinancing increased the Company's cash position and reduced
the outstanding balance on the Company's line of credit. As the Company pays for
the construction of the new building, the balance of the loan proceeds will be
used, thereby reducing cash balances from current levels. It is anticipated that
the construction of the new facility will be completed in February or March
2006.
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 up to a
maximum amount of $4,500,000. The outstanding balance on our line of credit was
$270,812 at December 31, 2005 compared to $264,761 at June 30, 2005. Interest on
the line of credit is based on the bank's prime rate, which at December 31,
2005, equaled 7.25%. The line of credit is collateralized by accounts receivable
11
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
bi-annually on December 1st and includes covenants requiring the Company to
maintain certain financial ratios. As of December 31, 2005, the Company was in
compliance with all loan covenants.
The current ratio was 5.3 to 1 at December 31, 2005 compared to 4.5 to 1 at June
30, 2005. Current assets represent 70% of total assets at December 31, 2005.
Debt
Long-term debt excluding current installments totaled $2,150,357 at December 31,
2005 compared to $1,330,325 at June 30, 2005. During the quarter ended December
31, 2005, the Company borrowed approximately $1.53 million at a fixed interest
rate of 6.4% to refinance its adjustable rate mortgage on the Tennessee facility
and construct a 10,000 sq. ft. warehouse at that facility. Long-term debt is
comprised primarily of the mortgage loans on our office and manufacturing
facilities in Utah and Tennessee. The current principal balance on the mortgage
loans is approximately $2.3 million with monthly principal and interest payments
of $29,006.
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 six months ended December 31,
2005.
Stock Options
The Company granted 156,816 stock options to employees, officers and directors
during the quarter ended December 31, 2005. The options granted to officers and
directors were fully vested upon grant. In prior years, the Company has granted
options to officers and directors with a vesting period ranging between six
months and one year.
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.
12
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 December 31,
2005 and June 30, 2005, our inventory valuation reserve balance, which
established a new cost basis, was $505,634 and $368,167, respectively, and our
inventory balance was $4,761,589 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.
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 $3,438,434 and $3,006,315, net of allowance for doubtful accounts of
$262,101 and $252,509, at December 31, 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 infrared 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 Light Pad provides 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 allows 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.
13
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. Alone, sales of this
device do not contribute significantly. However, the iBox is strategically
important in our plans to leverage sales of the iontophoresis electrodes we
distribute. Over the coming six to twelve months, we intend to introduce a new
iontophoresis electrode program that will utilize the iBox device as a focal
point of this strategy.
In January 2006, we began shipping the Dynatron 702, a stand-alone light therapy
device that not only simplifies infrared light therapy treatments, but can be
combined with our traction device for dual traction and light therapy
treatments. 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.
The probes being offered with the Dynatron 702 include not only the Dynatron 880
and 890 probes, but also two new probes - the D880Plus which generates twice the
power output of its predecessor model, and the D405 which produces a combination
infrared and blue wavelength output.
In January 2006, we also introduced the DX9 combination traction and light
therapy system. 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
DX9 traction system one of the most unique products of its kind on the market.
It is designed to provide practitioners a more effective way to relieve pain
using combination therapy. The DX9 package is a combination of the new Dynatron
702 device, our existing Dynatron TX900 Traction Device, and a revised version
of our HLT4 Traction table, together with key accessories to accommodate
decompression therapy.
We anticipate introducing the following new products and product combinations
before the end of the fiscal year or shortly thereafter:
o Dynatron X3 - This is a multi-channel infrared light therapy
device. It will be capable of accommodating two Xp Infrared Light
Pads as well as the practitioner's choice of probe. It will
incorporate touch screen technology for easy interface with the
practitioner.
o Dynatron DX2 - This device is a combination traction and infrared
light therapy device. It will be Dynatronics' first proprietary
traction device and will incorporate not only touch screen
technology, but other unique and proprietary technology that will
facilitate traction and decompression therapy. It will be the only
unit on the market that offers traction and infrared light therapy
from the same device.
o T4 Therapy Table - The T4 therapy table is designed to be used
specifically in traction and decompression therapy. It will offer
unique features that more fully accommodate the delivery of
traction and decompression therapy.
o DX1 package - The DX1 will combine the DX2 and the T4 table in a
package along with additional accessories needed for decompression
therapy.
Another important part of our strategic plan is the further expansion of
worldwide marketing efforts. Over the past two years, international sales have
doubled to approximately 6% of net sales 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. We plan to develop and
introduce additional light therapy devices for the aesthetic market. 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. We are also
considering new methods of distribution to boost sales that have lagged due to
reduced dealer interest in capital equipment.
14
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 a record number of new products, both high
tech and commodity, in fiscal year 2006.
o Increasing sales of Solaris devices through the 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.
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;
15
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.
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.
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 were no changes in our internal control over
financial reporting that occurred during the quarter ended December 31, 2005
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the company's Annual Meeting of Shareholders held on November 22, 2005, the
shareholders of the company voted on the following proposals:
Proposal 1 - To elect six directors, each to serve until the next
annual meeting of shareholders and until his successor is elected and shall have
qualified. Those nominated were all currently serving as directors of the
company, i.e., Kelvyn H. Cullimore, Jr., Larry K. Beardall, E. Keith Hansen MD,
Howard L. Edwards, Joseph H. Barton and Val J. Christensen.
Proposal 2 - To approve the proposed 2005 Equity Incentive Award Plan.
Proposal 3 - To approve the Audit Committee's selection of Tanner LC as
the company's independent auditors for the year ending June 30, 2006.
Each of the proposals was approved by the requisite majority of the
shares cast at the annual meeting. The following table summarizes the voting
results:
16
For Against Abstain
Proposal 1:
-----------
Mr. Cullimore, Jr. 7,314,610 34,285 139,292
Mr. Beardall 7,338,765 10,130 139,292
Dr. Hansen 7,342,865 6,030 139,292
Mr. Christensen 7,334,302 14,593 139,292
Mr. Barton 7,327,432 21,463 139,292
Mr. Edwards 7,335,965 12,930 139,292
For Against Abstain
Proposal 2*:
------------
1,810,269 426,435 59,850
* Excludes 5.2 million broker non-votes
For Against Abstain
Proposal 3:
-----------
7,400,163 42,569 45,455
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 (previously filed)
10.6 1992 Amended and Restated Stock Option Plan (previously
filed)
10.7 Dynatronics Corporation 2005 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive
Proxy Statement on Schedule 14A filed on October 27, 2005)
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)
17
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 2/13/05 /s/ Kelvyn H. Cullimore, Jr.
----------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive
Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date 2/13/05 /s/ Terry M. Atkinson, CPA
--------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
18