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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of registrant 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, Cottonwood Heights, UT 84121
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(Address of principal executive offices, Zip Code)
(801) 568-7000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). [ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the registrant's common stock, no par value,
as of May 10, 2010 is 13,591,155.
i
DYNATRONICS CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Condensed Consolidated Balance Sheets
March 31, 2010 and June 30, 2009 (Unaudited) .....................1
Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2010 and 2009...............2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, 2010 and 2009.........................3
Notes to Condensed Consolidated Financial Statements..............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................13
Item 4. Controls and Procedures..........................................13
PART II. OTHER INFORMATION
Item 5. Other Information................................................13
Item 6. Exhibits.........................................................14
ii
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
2010 2009
------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 266,812 141,714
Trade accounts receivable, less allowance
for doubtful accounts of $451,533 as of
March 31, 2010 and $398,610 as of
June 30, 2009 4,608,431 4,739,727
Other receivables 92,099 99,110
Inventories, net 5,734,580 6,199,251
Prepaid expenses 392,115 333,273
Prepaid income taxes - 23,210
Current portion of deferred income
tax assets 514,277 466,783
------------- --------------
Total current assets 11,608,314 12,003,068
Property and equipment, net 3,471,530 3,349,239
Intangible asset, net 474,886 541,870
Other assets 278,066 359,171
Deferred income tax assets, net of
current portion 767,346 833,941
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Total assets $ 16,600,142 17,087,289
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 363,575 323,713
Line of credit 3,889,565 4,602,651
Warranty reserve 191,047 191,047
Accounts payable 1,772,708 1,795,520
Accrued expenses 384,012 446,327
Accrued payroll and benefits expense 325,435 426,623
Income tax payable 246,079 -
------------- --------------
Total current liabilities 7,172,421 7,785,881
Long-term debt, net of current portion 2,713,781 2,881,659
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Total liabilities 9,886,202 10,667,540
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Commitments and contingencies
Stockholders' equity:
Common stock, no par value: Authorized
50,000,000 shares; issued 13,589,439
shares as of March 31, 2010 and
13,675,387 shares as of June 30, 2009 7,857,868 7,916,699
Accumulated deficit (1,143,928) (1,496,950)
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Total stockholders' equity 6,713,940 6,419,749
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Total liabilities and stockholders'
equity $ 16,600,142 17,087,289
============= ==============
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2010 2009 2010 2009
------------- ------------- -------------- --------------
Net sales $ 8,235,060 7,633,419 25,018,960 24,348,461
Cost of sales 5,119,797 4,788,993 15,396,978 14,994,838
------------- ------------- -------------- --------------
Gross profit 3,115,263 2,844,426 9,621,982 9,353,623
Selling, general, and
administrative expenses 2,647,417 2,256,795 8,059,143 8,060,869
Research and development
expenses 222,062 247,293 644,912 775,040
------------- ------------- -------------- --------------
Operating income 245,784 340,338 917,927 517,714
------------- ------------- -------------- --------------
Other income (expense):
Interest income 1,986 2,724 7,049 4,521
Interest expense (99,947) (135,706) (339,774) (426,334)
Other income, net 13,082 5,948 27,679 16,492
------------- ------------- -------------- --------------
Net other income (expense) (84,879) (127,034) (305,046) (405,321)
------------- ------------- -------------- --------------
Income before income tax
provision 160,905 213,304 612,881 112,393
Income tax provision 64,806 71,728 259,859 55,170
------------- ------------- -------------- --------------
Net income $ 96,099 141,576 353,022 57,223
============= ============= ============== ==============
Basic and diluted net income
per common share $ 0.01 0.01 0.03 0.00
============= ============= ============== ==============
Weighted-average basic and
diluted common shares
outstanding
Basic 13,606,888 13,669,933 13,647,515 13,665,423
Diluted 13,638,340 13,671,598 13,656,314 13,665,423
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2010 2009
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Cash flows from operating activities:
Net income $ 353,022 57,223
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
property and equipment 217,001 270,193
Amortization of intangible asset 66,984 66,984
Gain on disposal of assets - (2,182)
Stock-based compensation expense 38,547 45,851
Change in deferred income tax asset 19,101 56,025
Provision for doubtful accounts receivable 81,000 36,000
Provision for inventory obsolescence 90,000 72,000
Provision for warranty reserve 132,083 201,452
Deferred compensation - (455,377)
Change in operating assets and liabilities:
Receivables 57,307 187,222
Inventories 374,671 (358,844)
Prepaid expenses and other assets 22,263 562,004
Accounts payable and accrued expenses (318,398) (380,080)
Prepaid income taxes - 63,212
Income tax payable 269,290 -
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Net cash provided by operating
activities 1,402,871 421,683
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Cash flows from investing activities:
Capital expenditures (236,979) (100,738)
Proceeds from sale of property and equipment - 2,600
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Net cash used in investing
activities (236,979) (98,138)
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 18,630 -
Principal payments on long-term debt (248,960) (208,539)
Net change in line of credit (713,086) (133,754)
Redemption of common stock (97,378) (10,138)
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Net cash used in financing
activities (1,040,794) (352,431)
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Net change in cash and cash
equivalents 125,098 (28,886)
Cash and cash equivalents at beginning of period 141,714 288,481
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Cash and cash equivalents at end of period $ 266,812 259,595
============= ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 352,958 401,991
Cash paid for income taxes 9,241 36,828
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease obligations incurred for
property and equipment 102,313 -
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheets as of March 31, 2010 and June 30,
2009, the condensed consolidated statements of income for the three and nine
months ended March 31, 2010 and 2009, and the condensed consolidated statements
of cash flows for the nine months ended March 31, 2010 and 2009 were prepared by
Dynatronics Corporation without audit pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and
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 Company's financial position, results of operations and cash flows.
The results of operations for the three and nine months ended March 31, 2010 are
not necessarily indicative of the results for the fiscal year ending June 30,
2010. The Company has previously filed with the SEC an annual report on Form
10-K which included audited financial statements for each of the two years ended
June 30, 2009 and 2008. It is suggested that the financial statements contained
in this Form 10-Q be read in conjunction with the statements and notes thereto
contained in the Company's most recent Form 10-K.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares outstanding and, when appropriate, dilutive common stock
equivalents outstanding during the period. Stock options are considered to be
common stock equivalents. The computation of diluted net income per common share
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 weighted-average 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 weighted-average share of common stock
outstanding during the reporting period and to each common stock equivalent
outstanding during the period, unless inclusion of common stock equivalents
would have an anti-dilutive effect.
The net income per common share was the same for both the basic and diluted
calculation for the three and nine months ended March 31, 2010 and 2009. The
reconciliation between the basic and diluted weighted-average number of common
shares outstanding for the three and nine months ended March 31, 2010 and 2009
is as follows:
Three Months Ended Nine Months Ended
March 31 March 31
2010 2009 2010 2009
------------- ------------- -------------- --------------
Basic weighted-average number
of common shares outstanding
during the period 13,606,888 13,669,933 13,647,515 13,665,423
Weighted-average number of
dilutive common stock options
outstanding during the period 31,452 1,665 8,799 -
------------- ------------- -------------- --------------
Diluted weighted-average number
of common and common equivalent
shares outstanding during the
period 13,638,340 13,671,598 13,656,314 13,665,423
============= ============= ============== ==============
Outstanding options not included in the computation of diluted net income per
common share, because they were anti-dilutive, for the three-month periods ended
March 31, 2010 and 2009 totaled 753,748 and 999,101, respectively, and for the
nine-month periods ended March 31, 2010 and 2009 totaled 900,810 and 1,020,700,
respectively.
4
NOTE 3. STOCK-BASED COMPENSATION
Stock-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized over the employee's
requisite service period. The Company recognized $12,863 and $14,752 in
stock-based compensation during the three months ended March 31, 2010 and 2009,
respectively, and recognized $38,547 and $45,851 in stock-based compensation
during the nine months ended March 31, 2010 and 2009, respectively, as selling,
general, and administrative expenses in the condensed consolidated statements of
income.
Stock Options. The Company maintains a 2005 equity incentive plan for the
benefit of employees. Incentive and nonqualified stock options, restricted
common stock, stock appreciation rights, and other share-based awards may be
granted under the plan. Awards granted under the plan may be performance-based.
As of March 31, 2010, there were 1,004,088 shares of common stock authorized and
reserved for issuance, but not granted under the terms of the 2005 equity
incentive plan, as amended.
The following table summarizes the Company's stock option activity during the
nine-month period ended March 31, 2010. There were no options granted during the
three-month period ended March 31, 2010.
Weighted-
Average
Number of Exercise
options Price
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Outstanding at beginning of period 960,104 $ 1.39
Granted 58,120 .84
Exercised - -
Cancelled (80,979) 1.21
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Outstanding at end of period 937,245 1.37
=============
Exercisable at end of period 560,108 1.65
=============
The Black-Scholes option-pricing model is used to estimate the fair value of
options granted under the Company's stock option plan. The weighted-average fair
value of stock options granted under the plan for the nine months ended March
31, 2010 and 2009 were based on the following assumptions at the date of grant
as follows:
Nine Months Ended
March 31,
2010 2009
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Expected dividend yield 0% 0%
Expected stock price volatility 58 - 59% 56 - 59%
Risk-free interest rate 3.31 - 3.72% 2.59 - 4.14%
Expected life of options 10 years 10 years
Weighted-average grant date fair value $ 0.59 $0.48
Expected option lives and volatilities are based on historical data of the
Company. The risk-free interest rate is based on the U.S. Treasury Bill rate on
the grant date for constant maturities that correspond with the option life.
Historically, the Company has not declared dividends and there are no future
plans to do so.
No options were exercised during the three and nine months ended March 31, 2010.
As of March 31, 2010, there was approximately $95,893 of total unrecognized
stock-based compensation cost related to grants under the stock option plan that
will be expensed over a weighted-average period of 5 years. There was $27,276 of
intrinsic value for options outstanding as of March 31, 2010.
NOTE 4. COMPREHENSIVE INCOME
For the three and nine months ended March 31, 2010 and 2009, comprehensive
income was equal to the net income as presented in the accompanying condensed
consolidated statements of income.
5
NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2010 2009
------------- --------------
Raw materials $ 2,387,076 2,523,375
Finished goods 3,801,142 4,014,664
Inventory obsolescence reserve (453,638) (338,788)
------------- --------------
$ 5,734,580 6,199,251
============= ==============
NOTE 6. RELATED-PARTY TRANSACTIONS
The Company leases office and warehouse space in Girard, Ohio; Detroit,
Michigan; Hopkins, Minnesota; and Pleasanton, California from four significant
stockholders and former independent distributors on an annual basis under
operating lease arrangements. Management believes the lease agreements are on an
arms-length basis and the terms are equal to or more favorable than would be
available to third parties. The expense associated with these related-party
transactions totaled $51,300 and $144,952 for the three and nine months ended
March 31, 2010, respectively.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB
ASU 09-13), "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force)." FASB ASU
09-13 updates the existing multiple-element arrangement guidance currently in
FASB Topic 605-25 (Revenue Recognition - Multiple-Element Arrangements). This
new guidance eliminates the requirement that all undelivered elements have
objective evidence of fair value before a company can recognize the portion of
the overall arrangement fee that is attributable to the items that have already
been delivered. Further, companies will be required to allocate revenue in
arrangements involving multiple deliverables based on the estimated selling
price of each deliverable, even though such deliverables are not sold separately
by either the Company itself or other vendors. This new guidance also
significantly expands the disclosures required for multiple-element revenue
arrangements. The revised guidance will be effective for the first annual period
beginning on or after June 15, 2010. The Company may elect to adopt the
provisions prospectively to new or materially modified arrangements beginning on
the effective date or retrospectively for all periods presented. The Company is
currently evaluating the impact FASB ASU 09-13 will have on its consolidated
financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (FASB
ASU 09-14), "Certain Revenue Arrangements That Include Software Elements--a
consensus of the FASB Emerging Issues Task Force," that reduces the types of
transactions that fall within the current scope of software revenue recognition
guidance. Existing software revenue recognition guidance requires that its
provisions be applied to an entire arrangement when the sale of any products or
services containing or utilizing software when the software is considered more
than incidental to the product or service. As a result of the amendments
included in FASB ASU No. 2009-14, many tangible products and services that rely
on software will be accounted for under the multiple-element arrangements
revenue recognition guidance rather than under the software revenue recognition
guidance. Under this new guidance, the following components would be excluded
from the scope of software revenue recognition guidance: the tangible element of
the product, software products bundled with tangible products where the software
components and non-software components function together to deliver the
product's essential functionality, and undelivered components that relate to
software that is essential to the tangible product's functionality. FASB ASU
09-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). This guidance will be effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company may elect to adopt the
provisions prospectively to new or materially modified arrangements beginning on
the effective date or retrospectively for all periods presented. However, the
Company must elect the same transition method for this guidance as that chosen
for FASB ASU No. 2009-13. The Company is currently evaluating the impact FASB
ASU 09-14 will have on its consolidated financial statements.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Our principal business is the design, manufacture, marketing, distribution
and sale of physical medicine products and aesthetic products. We manufacture
and distribute a broad line of medical equipment including therapy devices,
medical supplies and soft goods, treatment tables and rehabilitation equipment.
Our line of aesthetic equipment includes aesthetic massage and microdermabrasion
devices, as well as skin care products. Our products are sold to and used
primarily by physical therapists, chiropractors, sports medicine practitioners,
podiatrists, plastic surgeons, dermatologists, aestheticians and other aesthetic
services providers. We operate using a fiscal year ending June 30. For example,
reference to fiscal year 2010 refers to the year ending June 30, 2010.
Results of Operations
The following discussion and analysis of our financial condition and
results of operations for the three and nine months ended March 31, 2010, should
be read in conjunction with the condensed consolidated financial statements and
notes thereto appearing in Part I, Item 1 of this report, and our Annual Report
on Form 10-K for the year ended June 30, 2009, which includes audited financial
statements for the year then ended. Results of operations for the partial year
ended March 31, 2010 are not necessarily indicative of the results that will be
achieved for the full fiscal year ending June 30, 2010.
Net Sales
Net sales for the quarter ended March 31, 2010 increased 7.9% to
$8,235,060, compared to $7,633,419 for the quarter ended March 31, 2009. Net
sales for the nine months ended March 31, 2010 increased 2.8% to $25,018,960,
compared to $24,348,461 for the same period in 2009. Despite the difficult
economic conditions in the United States, we generated increased sales of both
rehabilitation capital equipment and medical supplies ahead of last year's
results for the quarter and nine month periods. This is a positive indicator
attributable to the aggressive marketing efforts in which we have been engaged
and which have been announced over the past six months as well as possible
lessening of recessionary pressures. Sales of aesthetic equipment continue to be
sluggish as the market for discretionary aesthetic procedures continues to show
weakness over the last nine months. It should be noted, however, that sales of
these products in the quarter ended March 31, 2010 showed signs of gradual
improvement compared to the prior two quarters.
Gross Profit
Gross profit for the quarter ended March 31, 2010 increased by $270,837 to
$3,115,263, or 37.8% of net sales, compared to $2,844,426, or 37.3% of net
sales, for the quarter ended March 31, 2009. Gross profit was $9,621,982, or
38.5% of net sales, for the nine months ended March 31, 2010, compared to
$9,353,623, or 38.4% of net sales, for the nine months ended March 31, 2009. The
increase in gross margin as a percentage of sales for the quarter ended March
31, 2010 is attributable to product mix more favorable to some of our
higher-margin medical devices, including the new V-Force device and our top
selling Solaris products, together with certain medical supply products and
treatment tables. As economic conditions gradually improve, demand for higher
margin capital products is expected to increase, which we expect would further
improve gross margins in future periods.
Selling, General, and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses for the quarter
ended March 31, 2010 increased $390,622, or 17.3%, to $2,647,417, or 32.1% of
net sales compared to $2,256,795, or 29.6% of net sales, for the third quarter
ended March 31, 2009. SG&A expenses decreased $1,726, to $8,059,143, or 32.2% of
net sales, for the nine months ended March 31, 2010, from $8,060,869, or 33.1%
of net sales, for the nine months ended March 31, 2009. SG&A expenses in the
quarter ended March 31, 2009 benefited from a one-time reversal of an accrued
liability of $472,398 resulting from the cancellation of retirement benefits
previously provided by contract to two executive officers, Kelvyn Cullimore, Jr.
and Larry Beardall. This one time reversal had the effect of lowering operating
expenses for the quarter ended March 31, 2009 by an equivalent amount. The
benefits were cancelled when the employment agreements in which they were
granted were terminated in March 2009. Both executives subsequently entered into
new agreements with the Company in June 2009. The new agreements do not include
retirement benefits such as those that had been a part of the terminated
agreements.
7
In addition to the effects of the reversal of $472,398 in accrued
retirement benefits, which was the primary factor in the difference between SG&A
expense in the quarter ended March 31, 2009 and the quarter ended March 31,
2010, the following factors also impacted SG&A expenses for the quarter ended
March 31, 2010, as compared to the same period in 2009:
o $113,703 of lower costs related to labor, depreciation and
other operating costs.
o $86,483 in increased selling expenses due primarily to sales
commissions associated with higher sales for the quarter
o $54,556 in lower general and administrative expenses
Research and Development Expenses
Research and development ("R&D") expenses decreased $25,231, or 10.2%, to
$222,062 for the quarter ended March 31, 2010, from $247,293 for the quarter
ended March 31, 2009. R&D expenses also decreased as a percentage of net sales
for the quarter ended March 31, 2010, to 2.7 % from 3.2% of net sales for the
quarter ended March 31, 2009. R&D expenses decreased $130,128, or 16.8%, to
$644,912 for the nine months ended March 31, 2010, from $775,040 for the nine
months ended March 31, 2009. R&D costs are expensed as incurred. We expect to
continue our commitment to developing innovative products for the physical
medicine market in fiscal year 2010 and in future periods in order to position
us for growth. We anticipate that R&D expenses as a percentage of net sales and
in absolute terms will increase over the coming quarters based on the schedule
of new products currently under development. Current year decreases reflect a
strategy shift to outsourcing some R&D functions, thus eliminating some
personnel costs.
Income Before Income Tax Provision
Pre-tax income for the quarter ended March 31, 2010, totaled $160,905
compared to $213,304 for the quarter ended March 31, 2009. As noted above, the
quarter ended March 31, 2009 included the one time gain related to the reversal
of $472,398 in accrued retirement liability. Pre-tax income for the nine months
ended March 31, 2010, increased to $612,881 compared to $112,393 for the nine
months ended March 31, 2009. This improvement in pre-tax income was a result of
higher sales and margins and lower R&D and interest expenses for the nine months
ended March 31, 2010 compared to the nine months ended March 31, 2009.
Income Tax Provision
Income tax provision was $64,806 for the quarter ended March 31, 2010,
compared to $71,728 for the quarter ended March 31, 2009. Income tax provision
was $259,859 for the nine months ended March 31, 2010, compared to $55,170 for
the nine months ended March 31, 2009. The effective tax rate for the third
quarter of 2010 was 40.3% compared to 33.6% for the same period in fiscal 2009.
The effective tax rate for the nine months ended March 31, 2010, was 42.4%
compared to 49.1% for the prior year period. The differences in the effective
tax rates are attributable to certain permanent book to tax differences. While
these items are not significant, substantive changes in the tax rate can occur
based on the Company's level of profitability.
Net Income
Net income for the quarter ended March 31, 2010 was $96,099, or $.01 per
share, compared to $141,576, or $.01 per share, for the quarter ended March 31,
2009. Net income increased to $353,022, or $.03 per share, for the nine months
ended March 31, 2010, compared to $57,223, or $.00 per share, for the nine
months ended March 31, 2009. The decrease in net income in the quarter ended
March 31, 2010 compared to the quarter ended March 31, 2009, is due to the
reversal of the accrual for retirement benefits described above. The results of
operations for the quarter and nine months ended March 31, 2009 included the
one-time gain related to the reversal of $472,398 in accrued retirement
liability described above. Factors contributing to the improvement in net income
for the nine months ended March 31, 2010 were improved sales and margins and the
reductions in R&D and interest expenses.
8
Liquidity and Capital Resources
We have financed operations through available cash reserves and borrowings
under a line of credit with a bank. Working capital was $4,435,893 as of March
31, 2010 inclusive of the current portion of long-term obligations and credit
facilities, compared to working capital of $4,217,187 as of June 30, 2009.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
decreased $131,296, or 2.8%, to $4,608,431 as of March 31, 2010, compared to
$4,739,727 as of June 30, 2009. Trade accounts receivable represent amounts due
from our dealer network as well as from medical practitioners and clinics. We
believe that our estimate of the allowance for doubtful accounts is adequate
based on our historical knowledge of and relationship with these customers.
Accounts receivable are generally collected within 30 days of the agreed terms.
Inventories
Inventories, net of reserves, decreased $464,671, or 7.5%, to $5,734,580
as of March 31, 2010, compared to $6,199,251 as of June 30, 2009. While the
amount of inventory we carry fluctuates each period based on the timing of large
inventory purchases from overseas suppliers, the Company is working to reduce
inventory levels modestly while still meeting customer needs.
Accounts Payable
Accounts payable decreased $22,812, or 1.3%, to $1,772,708 as of March 31,
2010, compared to $1,795,520 as of June 30, 2009. 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. Accounts payable are generally not
aged beyond the terms of our suppliers. We take advantage of available early
payment discounts when offered by our vendors.
Accrued Expenses
Accrued expenses decreased $62,315, or 14.0%, to $384,012 as of March 31,
2010, compared to $446,327 as of June 30, 2009. Accrued expenses consist of
accrued real and personal property taxes, sales tax liabilities, accrued
royalties, commissions, professional fees, directors fees, product liability
deductions, interest expense and miscellaneous other expenses.
Accrued Payroll and Benefits Expenses
Accrued payroll and benefits expenses decreased $101,188, or 23.7%, to
$325,435 as of March 31, 2010, compared to $426,623 as of June 30, 2009. The
decrease in accrued payroll and benefits expenses is related to the number of
days within a pay period that require accrual as of the end of our reporting
period and a decrease in personnel as part of our cost reduction initiatives.
Cash and Cash Equivalents
Our cash position as of March 31, 2010 was $266,812, an increase of 88.3%,
or $125,098, from cash of $141,714 as of June 30, 2009. We believe that improved
cash flows from operating activities will continue through higher sales and
margins, improved management of accounts receivable, reduction of current
inventory levels and reduction of operating expenses. We expect that cash flows
from operating activities, together with amounts available through an existing
line of credit facility, will be sufficient to cover operating needs in the
ordinary course of business for the next twelve months. If we experience an
adverse operating environment, including a further worsening of the general
economy in the United States, 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 terms favorable to the
Company, or at all.
9
Line of Credit
The outstanding balance on our line of credit with a bank decreased
$713,086, to $3,889,565 as of March 31, 2010, compared to $4,602,651 as of June
30, 2009, and $6,208,338 as of March 31, 2009. Interest on the line of credit is
based on the 90-day LIBOR rate (0.29% as of March 31, 2010) plus 4% with a
minimum interest rate of 4.5% per annum. The line of credit is collateralized by
accounts receivable and inventories, as well as a security interest in our
headquarters facility in Cottonwood Heights, Utah. Borrowing limitations are
based on approximately 45% of eligible inventory and up to 80% of eligible
accounts receivable, up to a maximum credit facility of $7,000,000. Interest
payments on the line are due monthly. As of March 31, 2010, the borrowing base
was approximately $6,142,000, resulting in approximately $2,250,000 available on
the line. The line of credit is renewable in December 2010 and includes
covenants requiring us to maintain certain financial ratios. As of March 31,
2010, we were in compliance with the loan covenants.
The current ratio was 1.6 to 1 as of March 31, 2010, compared to 1.5 to 1
as of June 30, 2009. Current assets represented 70% of all assets as of March
31, 2010 and June 30, 2009.
Debt
Long-term debt, excluding current portion, totaled $2,713,781 as of March
31, 2010, compared to $2,881,659 as of June 30, 2009. 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 $2,783,000 with monthly principal and interest payments of
$40,706.
Inflation and Seasonality
Our revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
Our business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of our assets,
liabilities, net sales and expenses. Management bases these estimates on
historical experience and other assumptions it believes to be reasonable given
the circumstances and evaluates these estimates on an ongoing basis. Actual
results may differ from these estimates. We believe that the following critical
accounting policies involve a high degree of judgment and complexity. They
reflect the significant estimates and judgments used in the preparation of our
condensed consolidated financial statements.
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 cost (first-in, first-out method) or market. Raw materials are recorded
at the lower of cost (first-in, first-out method) 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 Forecasted sales;
o Product obsolescence;
o Technological innovations; and
o Character of the inventory as a distributed item, finished
manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are
reflected in cost of goods sold within the statements of income during the
period in which such modifications are determined necessary by management. As of
March 31, 2010 and June 30, 2009, our inventory valuation reserve balance, which
established a new cost basis, was $453,638 and $338,788, respectively, and our
inventory balance was $5,734,580 and $6,199,251, net of reserves, respectively.
10
Revenue Recognition
Prior to fiscal year 2008, the majority of our product sales were to
customers who were independent distributors. Beginning in fiscal year 2008, as a
result of acquiring six of our top distributors, a significant portion of our
sales were generated through our new direct sales force. Our sales force and
distributors sell our products to end users, including physical therapists,
professional trainers, athletic trainers, chiropractors, medical doctors and
aestheticians. With the acquisition of the key distributors, we effectively
reduced our dependence on sales by independent distributors. 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 collectability 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 trade accounts
receivable balance was $4,608,431 and $4,739,727, net of allowance for doubtful
accounts of $451,533 and $398,610, as of March 31, 2010 and June 30, 2009,
respectively.
Deferred Income Tax Assets
In August 2009 and August 2008, our management performed an in-depth
analysis of the deferred income tax assets and their recoverability. Based on
several factors, including our history of income before income taxes averaging
over $500,000 per year in 16 of the last 19 fiscal years and the fact that the
principal causes of the loss in fiscal year 2008 (goodwill impairment and
expenses resulting from six acquisitions) are considered to be unusual and are
not expected to recur in the near future, we believe that it is more likely than
not that all of the net deferred income tax assets will be realized.
Business Plan and Outlook
In fiscal year 2010, we continue to pursue a focused strategy to improve
sales and overall operations that includes the following elements:
o strengthening distribution channels by adding direct sales
representatives and dealers in key locations
o pursuing sales with large chains of clinics and national
accounts
o developing tools such as e-commerce solutions and other IT
related methodologies to reduce cost of operations and enhance
the reach of our sales efforts
o enhancing product profit margins through improved
manufacturing processes and negotiating better pricing with
all vendors
o developing and introducing new, state-of-the-art products for
future growth
Our goal in implementing this strategy is to improve short-term
profitability without jeopardizing long-term growth.
The landscape of our primary market, the physical medicine marketplace,
continues to change. Past years saw consolidation among manufacturers and
distributors including our own acquisitions completed in fiscal years 2007 and
2008. More recently, two additional significant changes have taken place.
According to its filings under the Securities Exchange Act of 1934, DJO, Inc.
has closed its Chattanooga Group operations and undertaken the redistribution of
those manufacturing, R&D and support functions to other DJO facilities, in and
out of the United States. Chattanooga Group has been a primary competitor of the
Company for many years. The effect of this announcement is that the full
operations of the former Chattanooga Group have been reduced to a product brand
sold by DJO through non-proprietary distribution channels. In addition, DJO,
Inc. has disclosed that it has sold its Empi Therapy Solutions catalog division
to Patterson Medical (Sammons Preston), another competitor of the Company. This
will essentially eliminate Empi as a significant catalog competitor and may
further reduce competition in our market.
11
These consolidations combined with prior year consolidations and
continuing declines in the number of independent distributors have significantly
narrowed distribution channels in our market. At the present time, we believe
that there remain only two companies with a national direct sales force selling
proprietary and distributed products: Dynatronics and Patterson Medical (through
its Sammons Preston subsidiary). All other distribution in our market is
directed through catalog companies with no direct sales force, or through
independent local dealers. However, the network of local independent dealers is
rapidly diminishing due to consolidation efforts and increased competition from
Dynatronics, Sammons Preston and catalog companies. In the past year, we have
reinforced our direct sales team to include 27 direct sales employees and 24
independent sales representatives. In addition to these direct sales
representatives, we continue to enjoy a strong relationship with scores of local
dealers. We believe we have the best trained and most knowledgeable sales force
in the industry. The recent changes within our market provide a unique
opportunity for us to grow market share in the coming years through recruitment
of high-quality sales representatives and dealers.
With the broad line of products we now offer and with a strong sales force
that we expect will only grow stronger in the coming year, we believe that we
are well positioned to develop relationships with large chains of clinics and
hospitals, national accounts and Group Purchasing Organizations (GPO's) that
purchase only on contract. This is a segment of business which was previously
closed to us because we were not an approved vendor with the various GPO's and
national or regional chains of care facilities. With the broader offering of
products now available through our catalog, we are better able to compete for
this high volume business.
To further our efforts to recruit high-quality direct sales
representatives and dealers as well as to better appeal to the large GPO's and
national customers, we will continue to improve efficiencies of our operations
and the sales support for the industry. Chief among those changes will be the
introduction of our first true e-commerce solution. This launch is scheduled to
occur in the summer of 2010. With the introduction of this e-commerce solution,
customers will be able to more easily place orders and obtain information about
their accounts. Sales representatives will be more effective with an abundance
of information available to them electronically. Not only is our e-commerce
solution expected to improve sales, but it will significantly reduce our
transactional costs thus enabling us to accommodate higher sales without
significantly increasing overhead.
The recent passage of the Patient Protection and Affordable Care Act along
with the Health Care and Educational Reconciliation Act is sure to have an
effect on our future operations. The addition of millions to the rolls of the
insured will undoubtedly increase demand for services. That increased demand is
expected to translate into increased sales of our products. The magnitude of
those increases is difficult to assess at this time. At the same time, this
legislation will impose an excise tax on all manufacturers of medical devices
which we estimate will exceed $500,000 annually for Dynatronics. Because the
effects of this legislation will not be felt until 2013 at the earliest, it is
difficult to project the full impact this legislation will have, especially
since there is a likelihood of amendments to the legislation prior to it
becoming fully effective. In the meantime, we are working to take full advantage
of every opportunity presented by this legislation to increase sales and to
offset any negative effects that may accompany those opportunities.
We will continue to focus on new product innovation. The introduction of
V-Force in fiscal year 2009 once again demonstrates our commitment to innovation
as we are the first to introduce this technology to the rehabilitation markets
we serve. Several new products are currently under development and are scheduled
for introduction in the next 12 to 15 months. The commitment to innovation of
high-quality products has been a hallmark of Dynatronics and will continue
throughout the coming year.
Economic pressures from the current recession not only have affected
available credit that would facilitate large capital purchases, but have also
reduced demand for discretionary services such as those provided by our
aesthetic products. As a result, we trimmed back our expenses in the Synergie
division to be more reflective of the current environment. Fortunately, the
Synergie Elite aesthetic product line introduced in April 2008 continues to have
appeal due to its design and price point. We believe that our aesthetic devices
remain the best value on the market. We are seeking innovative ways to market
our products including strategic partnerships, both domestic and international,
to help regain sales momentum. As the economy begins to improve over the coming
year, we expect to see increased sales of these higher margin products.
We have long believed that international markets present an untapped
potential for growth and expansion. Adding new distributors in several countries
will be the key to this expansion effort. Our past efforts to improve
international marketing have yielded only marginal improvements. We remain
committed, however, to finding the most cost effective ways to expand our
markets internationally. Over the coming year our efforts will be focused on
partnering with key manufacturers and distributors interested in our product
line or technology. Our Utah operation, where all electrotherapy, ultrasound,
traction, 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 international locations.
12
Refining our business model for supporting sales representatives and
distributors also will be a focal point of operations. We will continue to
evaluate the most efficient ways to maintain our satellite sales offices and
warehouses. In addition, more emphasis is being placed on pricing management to
protect margins for both manufactured and distributed products. The ongoing
refinement of this model is expected to yield further efficiencies that will
better achieve sales goals while at the same time reduce expenses. We have
identified over $2,000,000 of efficiency improvements that have already been
implemented or that we plan to implement over the coming quarters to drive
greater profitability.
With the sale of our manufactured capital equipment being the largest
contributor to margin generation, we have placed renewed emphasis on improving
manufacturing operations, including considering more offshore manufacturing of
components as well as streamlining manufacturing operations in Utah and
Tennessee. Past experience has shown that when recessionary pressures start to
subside, the pent up demand for capital equipment can be significant. With the
recent increase in capital equipment sales, we believe we are seeing the
beginning of this positive trend. Our recent efforts to prudently reduce costs
during the difficult times have made us a leaner operation and well positioned
for a continued ramp up in demand.
Based on our defined strategic initiatives, we are focusing our resources
in the following areas:
o Reinforcing distribution through a strategy of recruiting
direct sales representatives and working closely with the most
successful distributors of capital equipment.
o Improving sales by focusing sales strategies on pursuing
business opportunities with large chains of clinics, national
and regional accounts, and Group Purchasing Organizations. o
Introducing and refining our first e-commerce solution in
order to facilitate business opportunities and reduce
transactional costs.
o Significantly improving operational efficiencies through
implementation of ideas generated by the recently completed
operational analysis conducted with the help of Vici Capital
Partners. These ideas include lowering manufacturing and
transactional costs, automating processes, redefining policies
and procedures and working to make every customer a profitable
customer.
o Strengthening pricing management and procurement
methodologies.
o Minimizing expense associated with the Synergie product line
until the economy improves and demand for capital equipment
re-emerges, and, in the meantime, seeking additional
independent distributors and strategic partnerships.
o Focusing international sales efforts on identifying key
distributors and strategic partners who could represent the
Company's product line, particularly in Europe.
o Continuing development of new, state-of-the-art products, both
high-tech and commodity, in fiscal year 2010, for both the
rehabilitation and aesthetic markets.
o Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase
market reach and supplement capital resources.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this Form 10-Q, particularly the foregoing
discussion in Part I, Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not purely historical, are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," "intends,"
and "potential," among others. Forward-looking statements include, but are not
limited to, statements regarding product development, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of 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 under the headings "Risk Factors" in our Annual Report on Form 10-K for
the year ended June 30, 2009. 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, except as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks. Market risk is the potential risk
of loss arising from adverse changes in market prices and rates. We do not enter
into derivative or other financial instruments for trading or speculative
purposes. There have been no material changes in our market risk during the
quarter ended March 31, 2010, although the general weakness in the U.S. economy
is expected to lead to greater discounting market-wide to stimulate sales in a
declining economic environment. In addition, further weakening of the economy
could result in greater risks of collections of accounts receivable.
Our primary market risk exposure is interest rate risk. As of March 31,
2010, approximately $5,160,000 of our debt bore interest at variable rates.
Accordingly, our net income is affected by changes in interest rates. For every
one hundred basis point change in the average interest rate under our existing
debt, our annual interest expense would change by approximately $51,600.
In the event of an adverse change in interest rates, we could take actions
to mitigate our exposure. However, due to the uncertainty of the actions that
would be taken and their possible effects, this analysis assumes no such
actions.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by SEC Rule 13a-15(b), an evaluation was performed under the
supervision and with the participation of our management, including our
principal executive officer and our principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of
March 31, 2010.
There has been no change in our internal control over financial reporting
during the quarter ended March 31, 2010 that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting and we believe that our internal control over financial reporting is
effective.
PART II. OTHER INFORMATION
Item 5. Other Information
NASDAQ Minimum Bid Requirement
On January 29, 2010, we received a Letter of Compliance from the NASDAQ
Stock Market, notifying us that the prior deficiency in the minimum bid
requirement has been cured and we are now in compliance with the minimum bid
requirement for continued inclusion under Marketplace Rule 4310(c)(4).
13
Related-Party Transaction
We lease office and distribution facilities in California owned by John
Rajala, a stockholder and our director of business development. Mr. Rajala also
beneficially owns 9.6% of our outstanding common stock. The rental paid to Mr.
Rajala for the leased facilities is $120,000 per year under a written lease
agreement. The term of the lease is 12 months with annual renewal periods and we
believe that the rental payments are in line with the market prices for similar
facilities in the area in which the leased premises are located. This
transaction with a related party has been approved by the audit committee of the
Company's Board of Directors.
In addition, the Company leases office and warehouse space in Girard,
Ohio; Detroit, Michigan; and Hopkins, Minnesota; from three stockholders and
former independent distributors on an annual basis under operating lease
arrangements. Management believes the lease agreements are on an arms-length
basis and the terms are equal to or more favorable than would be available to
third parties. The expense associated with these related-party transactions
totaled $21,300 and $54,952 for the three and nine months ended March 31, 2010,
respectively.
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 SEC and effective November 2, 1984
3.2 Articles of Amendment dated November 21, 1988 (previously filed)
3.3 Articles of Amendment dated November 18, 1993 (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 2006 Equity Incentive Award Plan (previously filed
as Annex A to the Company's Definitive Proxy Statement on Schedule 14A
filed on October 27, 2006)
10.8 Form of Option Agreement for the 2006 Equity Incentive Plan for incentive
stock options (previously filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2006)
10.9 Form of Option Agreement for the 2006 Equity Incentive Plan for
non-qualified options (previously filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006)
10.10 Building Lease Agreement with The Rajala Family Trust dated June 30, 2009
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 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350) (filed herewith)
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATRONICS CORPORATION
-----------------------
Registrant
Date May 17, 2010 /s/ Kelvyn H. Cullimore, Jr.
------------- ----------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date May 17, 2010 /s/ Terry M. Atkinson, CPA
------------ --------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
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