dynt10q20090930.htm
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 September 30, 2009
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
(Exact
name of registrant as specified in its charter)
Utah
|
87-0398434
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
7030 Park Centre Drive,
Cottonwood Heights, UT 84121
(Address
of principal executive offices, Zip Code)
(801)
568-7000
(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 (§232.405 of this
chapter) 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 November 10, 2009 is 13,659,387.
DYNATRONICS
CORPORATION
FORM
10-Q
QUARTER
ENDED SEPTEMBER 30, 2009
TABLE
OF CONTENTS
|
Page Number
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
1
|
|
|
Condensed
Consolidated Balance Sheets
|
|
September
30, 2009 and June 30, 2009
|
1
|
|
|
Condensed
Consolidated Statements of Operations
|
|
Three
Months Ended September 30, 2009 and 2008
|
2
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
Three
Months Ended September 30, 2009 and 2008
|
3
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
8
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
15
|
|
|
Item
4. Controls and Procedures
|
15
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
5. Other Information
|
16
|
|
|
Item
6. Exhibits
|
16
|
DYNATRONICS
CORPORATION
|
|
Condensed
Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
September
30, 2009
|
|
June
30, 2009
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
385,153 |
|
|
|
141,714 |
|
Trade
accounts receivable, less allowance for doubtful accounts of
$422,058 as of September 30, 2009 and $398,610 as of June 30,
2009
|
|
|
4,818,809 |
|
|
|
4,739,727 |
|
Other
receivables
|
|
|
107,287 |
|
|
|
99,110 |
|
Inventories,
net
|
|
|
6,312,906 |
|
|
|
6,199,251 |
|
Prepaid
expenses
|
|
|
277,440 |
|
|
|
333,273 |
|
Prepaid
income taxes
|
|
|
31,899 |
|
|
|
23,210 |
|
Deferred
income tax asset - current
|
|
|
455,772 |
|
|
|
466,783 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
12,389,266 |
|
|
|
12,003,068 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,394,582 |
|
|
|
3,349,239 |
|
Intangible
asset, net
|
|
|
519,542 |
|
|
|
541,870 |
|
Other
assets
|
|
|
354,377 |
|
|
|
359,171 |
|
Deferred
income tax asset - noncurrent
|
|
|
755,029 |
|
|
|
833,941 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
17,412,796 |
|
|
|
17,087,289 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
installments of long-term debt
|
|
$ |
330,788 |
|
|
|
323,713 |
|
Line
of credit
|
|
|
5,027,943 |
|
|
|
4,602,651 |
|
Warranty
reserve
|
|
|
191,047 |
|
|
|
191,047 |
|
Accounts
payable
|
|
|
1,843,377 |
|
|
|
1,795,520 |
|
Accrued
expenses
|
|
|
462,980 |
|
|
|
446,327 |
|
Accrued
payroll and benefit expenses
|
|
|
266,615 |
|
|
|
426,623 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,122,750 |
|
|
|
7,785,881 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current installments
|
|
|
2,795,637 |
|
|
|
2,881,659 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,918,387 |
|
|
|
10,667,540 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, no par value. Authorized 50,000,000 shares; issued
13,667,387 shares as of September 30, 2009 and 13,675,387 shares as
of June 30, 2009
|
|
|
7,922,734 |
|
|
|
7,916,699 |
|
Accumulated
deficit
|
|
|
(1,428,325 |
) |
|
|
(1,496,950 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
6,494,409 |
|
|
|
6,419,749 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
17,412,796 |
|
|
|
17,087,289 |
|
See
accompanying notes to condensed consolidated financial
statements.
DYNATRONICS
CORPORATION
|
|
Condensed
Consolidated Statements of Operations
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
September
30
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
8,282,463 |
|
|
|
7,996,149 |
|
Cost
of sales
|
|
|
5,103,121 |
|
|
|
4,800,508 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,179,342 |
|
|
|
3,195,641 |
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
2,712,368 |
|
|
|
2,976,647 |
|
Research
and development expenses
|
|
|
215,968 |
|
|
|
262,029 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
251,006 |
|
|
|
(43,035 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,800 |
|
|
|
407 |
|
Interest
expense
|
|
|
(118,994 |
) |
|
|
(151,071 |
) |
Other
income, net
|
|
|
6,963 |
|
|
|
2,870 |
|
|
|
|
|
|
|
|
|
|
Total
other expense, net
|
|
|
(109,231 |
) |
|
|
(147,794 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
141,775 |
|
|
|
(190,829 |
) |
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit
|
|
|
(73,150 |
) |
|
|
51,878 |
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
68,625 |
|
|
|
(138,951 |
) |
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
$ |
0.01 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share
|
|
$ |
0.01 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic and diluted common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,675,257 |
|
|
|
13,659,371 |
|
Diluted
|
|
|
13,690,303 |
|
|
|
13,659,371 |
|
See
accompanying notes to condensed consolidated financial statements.
DYNATRONICS
CORPORATION
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
|
|
|
September
30
|
|
|
2009
|
|
2008
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
68,625 |
|
|
|
(138,951 |
) |
Adjustments
to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
69,333 |
|
|
|
88,317 |
|
Amortization
of intangible asset
|
|
|
22,328 |
|
|
|
22,328 |
|
Stock-based
compensation expense
|
|
|
12,638 |
|
|
|
15,424 |
|
Change
in deferred income tax asset, net
|
|
|
89,923 |
|
|
|
(76,744 |
) |
Provision
for doubtful accounts
|
|
|
27,000 |
|
|
|
12,000 |
|
Provision
for inventory obsolescence
|
|
|
30,000 |
|
|
|
72,000 |
|
Provision
for warranty reserve
|
|
|
48,858 |
|
|
|
62,308 |
|
Provision
for deferred compensation
|
|
|
- |
|
|
|
9,450 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(114,259 |
) |
|
|
(264,321 |
) |
Inventories
|
|
|
(143,655 |
) |
|
|
(280,755 |
) |
Prepaid
expenses and other assets
|
|
|
60,627 |
|
|
|
119,072 |
|
Accounts
payable and accrued expenses
|
|
|
(144,356 |
) |
|
|
555,028 |
|
Prepaid
income taxes
|
|
|
(8,688 |
) |
|
|
98,644 |
|
Income
tax payable
|
|
|
- |
|
|
|
8,809 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
18,374 |
|
|
|
302,609 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(114,676 |
) |
|
|
(40,871 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(114,676 |
) |
|
|
(40,871 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(78,948 |
) |
|
|
(79,862 |
) |
Net
change in line of credit
|
|
|
425,292 |
|
|
|
(169,540 |
) |
Redemption
of common stock
|
|
|
(6,603 |
) |
|
|
(10,138 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
339,741 |
|
|
|
(259,540 |
) |
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
243,439 |
|
|
|
2,198 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
141,714 |
|
|
|
288,481 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
385,153 |
|
|
|
290,679 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
121,110 |
|
|
|
137,932 |
|
Cash
paid for income taxes
|
|
|
4,400 |
|
|
|
16,900 |
|
See accompanying notes to condensed consolidated financial statements.
DYNATRONICS
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. PRESENTATION
The
condensed consolidated balance sheets as of September 30, 2009 and June 30,
2009, the condensed consolidated statements of operations for the three months
ended September 30, 2009 and 2008, and the condensed consolidated statements of
cash flows for the three months ended September 30, 2009 and 2008 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
months ended September 30, 2009 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
filing be read in conjunction with the statements and notes thereto contained in
the Company’s most recent Form 10-K filing.
NOTE
2. NET INCOME (LOSS) PER COMMON SHARE
Net
income (loss) per common share is computed based on the weighted-average number
of common shares outstanding and, as appropriate, dilutive common stock
equivalents outstanding during the period. Stock options are
considered to be common stock equivalents. The computation of diluted
earnings per share does not assume exercise or conversion of securities that
would have an anti-dilutive effect.
Basic net
income (loss) per common share is the amount of net income (loss) for the period
available to each weighted-average share of common stock outstanding during the
reporting period. Diluted net income (loss) per common share is the amount of
net income (loss) 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 basic
and diluted net income (loss) per common share was the same for the three months
ended September 30, 2009 and 2008. A reconciliation between the basic and
diluted weighted-average number of common shares outstanding for the three
months ended September 30, 2009 and 2008 is summarized as follows:
|
|
Three
Months Ended
|
|
|
September
30,
|
|
|
2009
|
|
2008
|
Basic
weighted-average number of common shares outstanding during the
period
|
|
|
13,675,257 |
|
|
|
13,659,371 |
|
Weighted-average
number of dilutive common stock options outstanding during the
period
|
|
|
15,046 |
|
|
|
- |
|
Diluted
weighted-average number of common and common equivalent shares outstanding
during the period
|
|
|
13,690,303 |
|
|
|
13,659,371 |
|
Outstanding
options not included in the computation of diluted net income (loss) per common
share for the three-month periods ended September 30, 2009 and 2008, because
they were anti-dilutive, totaled 923,302 and 1,085,553,
respectively.
NOTE
3. STOCK-BASED COMPENSATION
Stock-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized over the employee’s requisite service period. The
Company recognized $12,638 and $15,424 in stock-based compensation during the
three months ended September 30, 2009 and 2008, respectively, as selling,
general, and administrative expenses in the condensed consolidated statements of
operations.
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 September 30, 2009, there were 1,010,405 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
three-month period ended September 30, 2009:
|
|
Number
of
options
|
|
Weighted-
Average
Exercise
Price
|
Outstanding
at beginning of period
|
|
|
960,104 |
|
|
$ |
1.39 |
|
Granted
|
|
|
58,120 |
|
|
|
.84 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
(55,697 |
) |
|
|
1.35 |
|
Outstanding
at end of period
|
|
|
962,527 |
|
|
|
1.38 |
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
553,108 |
|
|
|
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 three months ended September 30,
2009 and 2008 were based on the following assumptions at the date of grant as
follows:
|
|
Three
Months Ended September 30,
|
|
|
2009
|
|
2008
|
Expected
dividend yield
|
|
0% |
|
0% |
Expected
stock price volatility
|
|
58
– 59% |
|
57
– 59% |
Risk-free
interest rate
|
|
3.31
– 3.72% |
|
3.85
– 4.14% |
Expected
life of options
|
|
10
years
|
|
10
years
|
Weighted-average
grant date fair value
|
|
$ |
.59 |
|
|
.45 |
Expected
option lives and volatilities are based on historical data of the Company. The
risk-free interest rate is based on the US 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 months ended September 30, 2009. As of
September 30, 2009, there was approximately $115,519 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 no
aggregate intrinsic value for options outstanding as of September 30,
2009.
NOTE
4. COMPREHENSIVE INCOME (LOSS)
For the
three months ended September 30, 2009 and 2008, comprehensive income (loss) was
equal to the net income (loss) as presented in the accompanying condensed
consolidated statements of operations.
NOTE
5. INVENTORIES
Inventories
consisted of the following:
|
|
September
30, 2009
|
|
June
30, 2009
|
Raw
materials
|
|
$ |
2,328,806 |
|
|
|
2,523,375 |
|
Finished
goods
|
|
|
4,313,442 |
|
|
|
4,014,664 |
|
Inventory
obsolescence reserve
|
|
|
(329,342 |
) |
|
|
(338,788 |
) |
|
|
$ |
6,312,906 |
|
|
|
6,199,251 |
|
NOTE
6. RELATED PARTY TRANSACTIONS
The
Company leases office and warehouse space in Girard, Ohio, Detroit, Michigan and
Pleasanton, California from three significant shareholders 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 other third
parties. The expense associated with these related party transactions total
$49,500 for the three months ended September 30, 2009.
NOTE
7. RECENT ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Standards
In April
2009, the Financial Accounting Standards Board (FASB) issued new standards to
address concerns about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions and (2) recording impairment charges on investments
in debt securities. The FASB also issued a third standard to require disclosures
of fair values of certain financial instruments in interim financial
statements.
Topic
820, “Fair Value Measurements and Disclosures,” provides additional guidance to
highlight and expand on the factors that should be considered in estimating fair
value when there has been a significant decrease in market activity for a
financial asset. This standard also requires new disclosures relating to fair
value measurement inputs and valuation techniques (including changes in inputs
and valuation techniques).
Topic
320, “Investments - Debt and Equity Securities,” will change (1) the
trigger for determining whether an other-than-temporary impairment exists and
(2) the amount of an impairment charge to be recorded in earnings. To
determine whether an other-than-temporary impairment exists, an entity will be
required to assess the likelihood of selling a security prior to recovering its
cost basis. This is a change from the current requirement for an entity to
assess whether it has the intent and ability to hold a security to recovery or
maturity. This standard also expands and increases the frequency of existing
disclosure about other-than-temporary impairments and requires new disclosures
of the significant inputs used in determining a credit loss, as well as a
roll-forward of that amount each period.
Topic
825, “Financial Instruments,” increases the frequency of fair value disclosures
from annual to quarterly to provide financial statement users with more timely
information about the effects of current market conditions on their financial
instruments.
The
provisions of these three standards became effective during the quarter ended
September 30, 2009. The adoption of these three standards did not have a
material effect on our consolidated financial position or results of
operations.
In
May 2009, the FASB issued Topic 855, “Subsequent Events,” which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Topic 855 also requires entities to
disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. Topic 855 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, we adopted this
standard during the fiscal year ended June 30, 2009. Topic 855 requires that
public entities evaluate subsequent events through the date that the financial
statements are issued. We evaluated subsequent events through the time of filing
these financial statements with the SEC on November 13, 2009.
In June
2009, the FASB issued Topic 105, “Generally Accepted Accounting Principles.”
This standard establishes the FASB Accounting Standards Codification™ (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective
date, all existing accounting standard documents will be superseded. The
Codification was effective in the quarter ended September 30, 2009. The adoption
of this guidance had no effect on the Company’s consolidated financial position
or results of operations.
Recent
Accounting Standards 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.
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 on a
fiscal year ending June 30. For example, reference to fiscal year
2009 refers to the year ended June 30, 2009.
Recent
Developments
In the
first quarter of fiscal year 2009, we introduced the 2009-2010 product catalog,
our first comprehensive catalog since acquiring our top six distributors in June
and July 2007. With thousands of new products added to the catalog,
we have experienced an increase in medical supply sales as we have positioned
the company to be a full line supplier of both capital and non-capital
products. It was the acquisition of six of our top distributors that
allowed us to greatly expand our product offering. The new catalog
contains over 400 pages of products – more than double our previous catalog
offerings.
We
introduced the new V-Force vibration therapy device to the market in the fourth
fiscal quarter of fiscal year 2009. This new unit employs powerful, whole-body
vibration technology, which provides neuromuscular training to increase
strength, improve balance and enhance flexibility. Whole-body
vibration therapy has been the subject of extensive research for many years with
numerous clinical studies demonstrating its effectiveness in the areas of
balance/fall prevention, circulation, knee rehabilitation, low back pain, range
of motion and a host of other neuromuscular conditions.
We
expanded our direct sales team from 36 sales representatives in fiscal year 2008
to 50 sales representatives by September 2009. Our expanded sales force now
consists of 27 direct sales employees and 23 independent sales representatives,
helping extend our reach and increase market share. We intend to
recruit additional independent distributors and seasoned direct sales
representatives in geographical areas where distribution has been diminished due
to the consolidation activities in our industry.
During
fiscal year 2009, we undertook an aggressive internal campaign to improve
operating efficiencies. We identified a number of opportunities to
improve cash flows and operational efficiencies, as well as to strengthen
margins and reduce manufacturing and other costs. These changes were
specifically targeted at lowering transaction costs, obtaining better pricing
and terms from vendors and service providers, streamlining customer service and
production processes, and improving our sales support
functions. Implementation of all ideas generated through this
campaign is projected to yield net economic benefits of approximately $2,000,000
annually by the end of fiscal year 2010.
Results
of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and notes thereto appearing elsewhere in this
report.
Net sales
increased 3.6% to $8,282,463 for the quarter ended September 30, 2009 compared
to $7,996,149 for the quarter ended September 30, 2008. This increase
in sales was generated despite the ongoing economic recession in the United
States, which is our primary market. Sales of medical supplies and
soft goods increased as a percentage of overall sales to 53.4% for the quarter
ended September 30, 2009, from 47.1% of sales in the prior year
period. We believe that the introduction of our new product catalog
in fiscal year 2009 along with the increase in sales representatives contributed
to the increase in medical supply sales. Sales of capital equipment
for both rehabilitation and aesthetics markets experienced a reduction in the
quarter ended September 30, 2009 compared to September 30, 2008. This
decrease was due primarily to the general downturn in the economy and reduced
availability of credit facilities to our customers. The decrease in capital
equipment sales was more than offset by higher sales of the expanded offering of
catalog products as well as non-capital manufactured products.
Gross
profit was $3,179,342, or 38.4% of net sales, for the quarter ended September
30, 2009, compared to $3,195,641, or 40.0% of net sales, for the quarter ended
September 30, 2008. The decrease in gross margin as a percentage of
sales in the quarter ended September 30, 2009 is wholly attributable to a shift
in product mix favoring the increased sale of lower margin catalog products and
supplies. Although sales of higher margin therapy and aesthetic
devices have slowed due to general economic pressures, as the economy begins to
improve, we expect to see increased sales of these higher margin products, with
margin percentages returning to more traditional levels.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative (“SG&A”) expenses decreased $264,279, or 8.9%,
to $2,712,368, or 32.7% of net sales, for the quarter ended September 30, 2009,
from $2,976,647, or 37.2% of net sales, for the fiscal first quarter ended
September 30, 2008. The decrease in SG&A expenses for the first quarter of
fiscal year 2010 is primarily the result of our internal aggressive cost
reduction campaign to improve efficiencies. We targeted lowering
transaction costs, obtaining better pricing and terms from service providers,
streamlining customer service and production processes, and improving our sales
support functions. The impact of these changes on SG&A expenses
for the quarter ended September 30, 2009 included:
· $208,006
in lower selling expenses
· $120,132
in lower labor and operating costs
· $63,859
in higher general and administrative expenses (primarily related to fees paid to
Vici Capital)
Research
and Development Expenses
Research
and development (“R&D”) expenses decreased $46,061, or 17.6%, to $215,968
for the quarter ended September 30, 2009, from $262,029 for the quarter ended
September 30, 2008. R&D expenses also decreased as a percentage
of net sales for the quarter ended September 30, 2009, to 2.6 % from 3.3% of net
sales for the quarter ended September 30, 2008. R&D costs are
expensed as incurred. During fiscal year 2009, we introduced the
V-Force vibration therapy device and began an important redesign of our main
line of therapy products which is scheduled for completion next
summer. 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 modestly in
2010 based on the schedule of new products currently under
development.
Income
(Loss) Before Income Taxes
Pre-tax
income improved significantly for the quarter ended September 30, 2009, to
$141,775 compared to a pre-tax loss of $190,829 for the quarter ended September
30, 2008. The improvement in pre-tax income was primarily a result of
the reduction in SG&A expenses of $264,279. Lower R&D and
interest expenses also contributed to the improved operating results for the
quarter ended September 30, 2009 compared to the prior year period.
Income
Tax Provision (Benefit)
Income
tax provision was $73,150 for the quarter ended September 30, 2009, compared to
income tax benefit of $51,878 for the quarter ended September 30,
2008. The effective tax rate for the current quarter was 51.6%
compared to 27.2% for the prior year period. The higher effective tax
rate for the quarter ended September 30, 2009 is a result of a decrease in the
refund received for carrying back losses to prior year profits compared to the
amount of refund that was originally expected.
Net
Income (Loss)
Net
income increased to $68,625 ($.01 per share) for the quarter ended September 30,
2009, compared to a net loss of $138,951 ($.01 per share) for the quarter ended
September 30, 2008. The main factors contributing to the improvement
in the current quarter’s results were the reduction in SG&A expenses of
$264,279, and lower R&D and interest expenses.
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 $4,266,516 as of September
30, 2009, 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, increased $79,082,
or 1.7%, to $4,818,809 as of September 30, 2009, 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 and relationship with
these customers. Accounts receivable are generally collected within
30 days of the agreed terms.
As a
result of increased distribution activity following the distributor acquisitions
completed in fiscal years 2007 and 2008, the character of the accounts
receivable and collection patterns have changed from prior years. We
will continue to carefully monitor our collection practices to ensure the
allowance estimates are adequate. Allowances for the retail accounts
assumed in the distributor acquisitions include consideration of the historical
experience of the acquired companies.
Inventories,
net of reserves, increased $113,655, or 1.8%, to $6,312,906 as of September 30,
2009, compared to $6,199,251 as of June 30, 2009. The amount of
inventory we carry fluctuates each period based on the timing of large inventory
purchases from overseas suppliers.
Accounts
Payable
Accounts
payable increased $47,857, or 2.7%, to $1,843,377 as of September 30, 2009,
compared to $1,795,520 as of June 30, 2009. The increase 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 increased $16,653, or 3.7%, to $462,980 as of September 30, 2009,
compared to $446,327 as of June 30, 2009. Accrued expenses consist of
accrued real property taxes 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 Benefit Expenses
Accrued
payroll and benefit expenses decreased $160,008, or 37.5%, to $266,615 as of
September 30, 2009, compared to $426,623 as of June 30, 2009. The
decrease in accrued payroll and benefit 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 September 30, 2009 was $385,153, an increase of 171.8%, or
$243,439, from cash of $141,714 as of June 30, 2009. We believe that
improved cash flows from operating activities will continue to be generated
through higher sales, 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.
Line
of Credit
The
outstanding balance on our line of credit with a bank increased $425,292, to
$5,027,943 as of September 30, 2009, compared to $4,602,651 as of June 30,
2009. Interest on the line of credit is based on the 90-day LIBOR
rate (0.29% as of September 30, 2009) plus 4%, which as of September 30, 2009
equaled 4.29% 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
$8,000,000. Interest payments on the line are due
monthly. As of September 30, 2009, the borrowing base was
approximately $6,600,000, resulting in approximately $1,600,000 available on the
line. The line of credit is renewable in December 2009 and includes
covenants requiring us to maintain certain financial ratios. As of
September 30, 2009, we were in compliance with the loan covenants.
The
current ratio was 1.5 to 1 as of September 30, 2009 and June 30, 2009. Current
assets represented 71% and 70% of total assets as of September 30, 2009 and June
30, 2009, respectively.
Debt
Long-term
debt, excluding current installments, totaled $2,795,637 as of September 30,
2009, 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 $2,911,000 with monthly principal and interest payments of
$32,039.
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
following discussion and analysis should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in our Annual Report on Form 10-K for the year ended June
30, 2009, as well as with the financial statements and related notes and the
other information appearing elsewhere in this report. The preparation
of these financial statements requires estimates and judgments that affect the
reported amounts of our assets, liabilities, net sales and expenses. Management
bases 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 higher degree
of judgment and complexity. The following 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 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:
|
·
|
Current
inventory quantities on hand;
|
|
·
|
Product
acceptance in the marketplace;
|
|
·
|
Technological
innovations; and
|
|
·
|
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 operations during the period in which
such modifications are determined necessary by management. As of
September 30, 2009 and June 30, 2009, our inventory valuation reserve balance,
which established a new cost basis, was $329,342 and $338,788, respectively, and
our inventory balance was $6,312,906 and $6,199,251, net of reserves,
respectively.
Revenue
Recognition
Historically,
the majority of our product sales were to customers who were independent
distributors. 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 accounts
receivable balance was $4,818,809 and $4,739,727, net of allowance for doubtful
accounts of $422,058 and $398,610, as of September 30, 2009 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 will continue to pursue a focused strategy to improve sales and
overall operations that includes the following elements:
|
·
|
strengthening
distribution channels by adding direct sales representatives and dealers
in key locations
|
|
·
|
developing
sales with large national accounts and group purchasing
organizations
|
|
·
|
refining
operations by continuing to reduce overhead costs and automating
processes
|
|
·
|
enhancing
product profit margins through improved manufacturing processes and
negotiating better pricing of components with
vendors
|
|
·
|
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 further reduce competition in our
market. These consolidations combined with prior year consolidations
and continuing declines in the number of independent distributors has
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 23 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
combined 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 the best sales representatives and
dealers.
The
September 2008 introduction of our first consolidated catalog and pricing
schedule provided a powerful sales tool that is helping our sales efforts with
direct sales representatives as well as independent distributors who use either
a private labeled version or the proprietary version of the
catalog. We are focusing specific efforts on recruiting additional
independent distributors and seasoned direct sales representatives in
geographical areas where distribution has been diminished due to consolidation
within our industry.
With the
broad line of products we now offer and 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 Group Purchasing Organizations (GPO’s) and large
chains of hospitals and clinics 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 the best 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 second quarter of fiscal year 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.
We will
also 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. It is expected that V-Force will be an important
contributor to sales and profits in fiscal year 2010. Several new
products are currently under development and are scheduled for introduction in
the summer of 2010. 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 have not only affected available credit
that would facilitate large capital purchases, but it has 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 Cottonwood Heights facilities, where
all electrotherapy, ultrasound, traction, light therapy and Synergie products
are manufactured, are 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.
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 either have already been implemented or that we plan to
implement during fiscal year 2010 to drive greater
profitability. This is particularly important given the slow market
for capital products associated with the weak national economy.
Though
recent sales trends have favored non-capital equipment and supplies while the
demand for capital equipment has been soft, the sale of our manufactured capital
equipment remains the largest contributor to margin
generation. Therefore, 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 may be
significant. Expectations of the recessionary grip loosening during
calendar 2010 leads us to a belief that capital equipment sales will start to
rebound toward the end of fiscal year 2010. Our efforts to prudently
reduce costs during these difficult times should make us a leaner operation when
demand ramps up once again.
Based on
our defined strategic initiatives, we are focusing our resources in the
following areas:
|
·
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Reinforcing
distribution through a strategy of recruiting direct sales representatives
and working closely with the most successful distributors of capital
equipment.
|
|
·
|
Improving
sales by focusing sales strategies on pursuing business opportunities with
Group Purchasing Organizations and large national and regional
accounts.
|
|
·
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Introducing
and refining our first e-commerce solution in order to facilitate business
opportunities and reduce transactional
costs.
|
|
·
|
Significantly
improving operational efficiencies through implementation of ideas
generated by the recently completed operational analysis. These
ideas include lowering manufacturing and transactional costs, automating
processes, redefining policies and procedures and working to make every
customer a profitable customer.
|
|
·
|
Strengthening
pricing management and procurement
methodologies.
|
|
·
|
Minimizing
expense associated with the Synergie product line until the economy
improves and demand for capital equipment re-emerges. In the
meantime, seeking additional independent distributors and strategic
partnerships.
|
|
·
|
Focusing
international sales efforts on identifying key distributors and strategic
partners who could represent the product line, particularly in
Europe.
|
|
·
|
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.
|
|
·
|
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.
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
September 30, 2009, although the weak general economy is expected to lead to
greater discounting market-wide to stimulate sales in a declining economic
environment. We believe the current general economic conditions could
lead to significantly diminished demand for the Company’s higher margin
manufactured capital products in coming quarters. In addition,
further weakening of the general economy could result in greater risks of
collections of accounts receivable.
Our
primary market risk exposure is interest rate risk. As of September 30, 2009,
approximately $5,000,000 of our debt bore interest at variable rates.
Accordingly, our net income (loss) 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
$50,000.
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
September 30, 2009.
There has been no change in our
internal control over financial reporting during the quarter ended September 30,
2009 that has materially affected, or that is reasonably likely to materially
affect, our internal controls over financial reporting and we believe that our
internal controls over financial reporting are effective.
PART
II. OTHER INFORMATION
Item
5. Other Information
NASDAQ
Minimum Bid Requirement
On
October 13, 2009, we received a Deficiency Letter from the NASDAQ Stock Market,
notifying us that we failed to comply with the minimum bid requirement for
continued inclusion under Marketplace Rule 4310(c)(4). Under that
rule, our common stock is required to maintain a minimum bid price of
$1.00. In accordance with Marketplace Rules, we have appealed this
decision and a panel hearing has been set by NASDAQ where we will request an
additional 180 days, or until April 11, 2010, to regain compliance with the bid
price deficiency rule. The hearing will take place on November 19, 2009, in
Washington, D.C.
We intend
to use our best efforts to regain compliance with NASDAQ's minimum bid
requirement. However, there can be no assurance that compliance with the minimum
bid requirement will be achieved given the overall current condition of
financial and capital markets in the United States. If compliance is
not achieved, our stock could be delisted from NASDAQ and begin trading on the
OTC bulletin board.
Related
Party Transaction
We lease
office and distribution facilities in California owned by John Rajala, our
national sales manager. Mr. Rajala also 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.
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)
|
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
November
13,
2009
|
/s/
Kelvyn H. Cullimore,
Jr.
|
|
Kelvyn
H. Cullimore, Jr.
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date
November
13,
2009
|
/s/
Terry M. Atkinson,
CPA
|
|
Terry
M. Atkinson, CPA
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|