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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
(Address of principal executive offices)
(801) 568-7000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes __ No X
The number of shares outstanding of the issuer's common stock, no par value, as
of November 12, 2007 is approximately 13.7 million.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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DYNATRONICS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 2007
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Condensed Consolidated Balance Sheets
September 30, 2007 and June 30, 2007 .........................................1
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2007 and 2006................................2
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2007 and 2006................................3
Notes to Condensed Consolidated Financial Statements.........................4
Item 2. Management's Discussion and Analysis or
Plan of Operation.............................................................9
Item 3. Controls and Procedures..............................................16
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds..............................................................17
Item 6. Exhibits............................................................17
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets
September 30, June 30,
2007 2007
------------- ---------------
Current assets:
Cash $ 289,016 1,301,105
Trade accounts receivable, less
allowance for doubtful accounts
of $303,272 at September 30, 2007
and $330,857 at June 30, 2007 6,041,592 3,757,484
Other receivables 312,849 282,741
Inventories, net 6,663,020 5,313,984
Prepaid expenses 570,276 507,755
Prepaid income taxes 93,249 92,702
Deferred tax asset - current 415,808 396,156
------------- ---------------
Total current assets 14,385,810 11,651,927
Property and equipment, net 3,632,465 3,453,495
Goodwill, net 6,340,211 2,758,572
Intangible asset, net 698,164 356,792
Other assets 353,040 346,830
------------- ---------------
25,409,690 18,567,616
============= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt 315,725 271,979
Line of credit 3,803,984 250,000
Warranty reserve 208,000 208,000
Accounts payable 1,808,830 1,241,030
Accrued expenses 557,886 287,773
Accrued payroll and benefit expenses 339,116 276,754
Acquisition cash obligations 618,500 1,000,000
------------- ---------------
Total current liabilities 7,652,041 3,535,536
Long-term debt, excluding current
installments 3,241,529 3,251,631
Deferred compensation 428,525 420,470
Deferred tax liability - noncurrent 82,385 289,335
------------- ---------------
Total liabilities 11,404,480 7,496,972
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Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 13,672,495
shares at September 30, 2007 and
10,308,522 shares at June 30, 2007 7,873,916 4,227,147
Retained earnings 6,131,294 6,843,497
------------- ---------------
Total stockholders' equity 14,005,210 11,070,644
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$ 25,409,690 18,567,616
============= ===============
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30
2007 2006
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Net sales $ 7,891,430 4,139,057
Cost of sales 4,959,118 2,646,900
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Gross profit 2,932,312 1,492,157
Selling, general, and administrative expenses 3,575,495 1,261,145
Research and development expenses 338,893 478,084
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Operating loss (982,076) (247,072)
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Other income (expense):
Interest income 4,915 6,683
Interest expense (135,246) (47,510)
Other income, net 3,164 3,332
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Total other income (expense) (127,167) (37,495)
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Loss before income taxes (1,109,243) (284,567)
Income tax expense (benefit) (397,040) (109,559)
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Net loss $ (712,203) (175,008)
============= ===============
Basic and diluted net loss per
common share $ (0.05) (0.02)
============= ===============
Weighted average basic and diluted common
shares outstanding 13,607,666 8,976,744
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2007 2006
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Cash flows from operating activities:
Net loss $ (712,203) (175,008)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of
property and equipment 84,927 89,750
Amortization of intangible assets 25,028 1,831
Stock based compensation expense 256,991 2,093
Provision for doubtful accounts 129,900 12,000
Provision for inventory obsolescence 42,000 48,000
Provision for warranty reserve 60,888 70,133
Provision for deferred compensation 8,055 8,055
Change in operating assets and
liabilities:
Receivables (1,047,970) 111,851
Inventories (138,513) (207,835)
Prepaid expenses and other assets (63,949) (81,327)
Deferred tax asset, net (401,790) -
Accounts payable and accrued
expenses (547,121) (118,471)
Prepaid income taxes (547) (109,559)
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Net cash used in operating
activities (2,304,304) (348,487)
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Cash flows from investing activities:
Capital expenditures (60,999) (40,419)
Business acquisitions (1,135,692) -
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Net cash used in investing
activities (1,196,691) (40,419)
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Cash flows from financing activities:
Principal payments on long-term debt (56,490) (63,405)
Net change in line of credit 2,553,984 295,533
Proceeds from issuance of common stock 29,327 21,600
Redemption of common stock (37,915) (41,000)
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Net cash provided by financing
activities 2,488,906 212,728
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Net change in cash (1,012,089) (176,178)
Cash at beginning of period 1,301,105 423,184
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Cash at end of period $ 289,016 247,006
============= ===============
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 115,622 48,018
Cash paid for income taxes 1,000 -
Supplemental disclosure of non-cash investing
and financing activities:
Stock based compensation see note 3 for
details
Business acquisition disclosure see note 9
for details
Capital expenditures financied by long
term debt 90,134 -
Acquisition cash obligation financied by
line of credit 1,000,000 -
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of September 30, 2007 and condensed
consolidated statements of operations and cash flows for the three months ended
September 30, 2007 and 2006 were prepared by Dynatronics Corporation without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. The results of
operations for the respective periods presented are not necessarily indicative
of the results for the respective complete years. The Company has previously
filed with the SEC an annual report on Form 10-KSB which included audited
financial statements for the two years ended June 30, 2007 and 2006. It is
suggested that the financial statements contained in this filing be read in
conjunction with the statements and notes thereto contained in the Company's
10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents. The computation of diluted 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 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 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.
In calculating net income (loss) per common share, the net income (loss) was the
same for both the basic and diluted calculation for the three months ended
September 30, 2007 and 2006. A reconciliation between the basic and diluted
weighted-average number of common shares for the three months ended September
30, 2007 and 2006 is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2007 2006
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Basic weighted average number of common shares
outstanding during the period 13,607,666 8,976,744
Weighted average number of dilutive common stock
options outstanding during the period -0- -0-
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Diluted weighted average number of common and
common equivalent shares outstanding during the
period 13,607,666 8,976,744
============= ===============
4
NOTE 3. STOCK BASED COMPENSATION
Effective July 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements using a fair value method of accounting. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
Using the modified prospective method, compensation cost recognized in the three
months ended September 30, 2006, includes amounts of compensation cost of all
stock based payments that vested during the period (based on grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
previously presented in the proforma footnote disclosures). In accordance with
the modified prospective method, results for prior periods have not been
restated.
The following table summarizes the effect during the three months ended
September 30, 2007 and 2006 of adopting SFAS No. 123(R) as of July 1, 2006 for
the options granted:
September 30, September 30,
2007 2006
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Selling, general, and administrative expenses $ 494 93
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Total stock option compensation
expense recognized 494 93
Related deferred income tax expense -0- -0-
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Increase in net loss $ 494 93
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Impact on basic and diluted net income (loss)
per common share $ -0- -0-
============= ===============
During the quarter the Company granted 220,000 shares of stock to employees that
fully vested during the quarter resulting in a non-recurring compensation
expense of $238,950, an additional 80,000 shares were issued with a four year
vesting which resulted in an additional $11,250 in compensation expense for the
quarter.
NOTE 4. COMPREHENSIVE INCOME
For the periods ended September 30, 2007 and 2006, comprehensive income was
equal to the net income as presented in the accompanying condensed consolidated
statements of operations.
NOTE 5. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2007 2007
Raw material $ 3,419,887 2,961,653
Finished goods 3,519,698 2,646,141
Inventory reserve
(276,565) (293,810)
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$ 6,663,020 5,313,984
============= ===============
5
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, June 30,
2007 2007
Land $ 354,743 354,743
Buildings 3,613,264 3,603,380
Machinery and equipment 1,622,879 1,521,601
Office equipment 1,227,216 1,147,667
Vehicles 168,310 95,124
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6,986,412 6,722,515
Less accumulated depreciation
and amortization 3,353,947 3,269,020
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$ 3,632,465 3,453,495
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NOTE 7. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates. The
product warranty reserve is included in accrued expenses at September 30, 2007
and 2006. A reconciliation of the changes in the warranty liability is as
follows:
Three months ended Three months ended
September 30, 2007 September 30, 2006
------------------- ------------------
Beginning product warranty
reserve balance $ 208,000 208,000
Warranty repairs (60,888) (70,133)
Warranties issued 119,507 59,410
Changes in estimated
warranty costs (58,619) 10,723
------------------- ------------------
Ending product warranty
liability balance $ 208,000 208,000
=================== ==================
NOTE 8. COMMON STOCK.
The Company received proceeds of $29,326 during the three months ended September
30, 2007 for 29,889 shares of common stock that were issued upon the exercise of
options for services.
NOTE 9. ACQUISITION AND NON-CASH DISCLOSURE
On July 2, 2007, the Company completed the acquisition of a 100% interest in
five of its key independent distributors, Responsive Providers, Inc. of Houston,
Texas, Therapy and Health Care Products, Inc. of Youngstown, Ohio, Cyman
Therapy, Inc. of Detroit, Michigan, Al Rice and Associates, Inc. of
Jeffersonville, Indiana and Theratech Inc. of Minneapolis, Minnesota. The total
consideration paid for the five separately-negotiated acquisitions was
approximately $5.6 million comprised of approximately $2.3 million in cash and
3,061,591 shares of common stock. As of September 30, 2007 there remains a cash
obligation of $618,500.
6
The acquisition value of the five dealers acquired was accounted for using the
purchase method of accounting. Accordingly, the purchase price was assigned to
the assets acquired and the liabilities assumed based on fair values at the
purchase date. The following table reflects the unaudited estimated fair values
of the assets acquired and the liabilities assumed as of the acquisition date:
Cash $ 651,828
Trade accounts receivable 1,188,583
Inventories 1,252,523
Prepaid expenses 4,782
Property and equipment, net 112,764
Cash surrender value of life insurance 207,563
Intangible assets - weighted average 9 years 366,400
Goodwill 3,251,910
Total assets acquired 7,036,354
Accounts payable and accrued expenses (1,390,199)
Net assets acquired 5,646,155
The acquisition resulted in a $145,462 deferred income tax liability and an
increase to goodwill of $145,462.
Unaudited pro forma results of operations for the three months ended September
30, 2007 and 2006, as though the five dealers had been acquired as of July 1,
2006, are as follows:
September 30, September 30,
2007 2006
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Net sales $ 7,891,430 6,299,539
Net loss (712,203) (140,525)
Basic and diluted net income
(loss) per common share (.05) .02
NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. The cost of acquired companies in excess of the fair value of the net
assets and purchased intangible assets at acquisition date is recorded as
goodwill. As of June 30, 2007, the Company had net goodwill of $2,758,572
arising from the acquisition of Superior Orthopaedic Supplies, Inc. on May 1,
1996, the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983 and the
acquisition of Rajala Therapy Sales Associates, Inc. on June 30, 2007. During
the three months ended September 30, 2007 the Company recorded additional
goodwill in the amount of $3,581,639 in conjunction with the acquisition of
Responsive Providers, Inc., Therapy and Health Care Products, Inc., Cyman
Therapy, Inc., Al Rice and Associates, Inc. and Theratech Inc.
Identifiable Intangibles. Identifiable intangibles assets, included in other
assets, consists of the following:
7
As of As of
September 30, June 30,
2007 2007
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Trade name - 15 years $ 339,400 118,000
Domain name - 15 years 5,400 1,200
Non-compete covenant - 4 years 149,400 114,000
Customer relationships - 7-15 years 120,000 89,000
Trademark licensing agreement - 20 years 45,000 -0-
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 8,700
License agreement - 10 years 73,240 73,240
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Total identifiable intangibles 773,240 406,840
Accumulated amortization 75,077 50,048
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Net carrying amount $ 698,164 356,792
============= ===============
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB No. 109, was issued. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. Accordingly, the Company adopted the
revised standard during the quarter ended September 30, 2007. The adoption of
this standard had no material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
157 defines fair value, establishes a framework for measuring fair value, and
expands disclosure requirements regarding fair value measurement. Where
applicable, this statement simplifies and codifies fair value related guidance
previously issued within United States of America generally accepted accounting
principles. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 for financial assets and November 15,
2008 for non-financial assets, and interim periods within those fiscal years.
The Company is currently reviewing SFAS 157 and has not yet determined the
impact that the adoption of SFAS 157 will have on its results of operations or
financial condition.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the first
quarter ended September 30, 2007, for the Company's fiscal year ending June 30,
2008.
Net Sales
During the quarter ended September 30, 2007, the Company's sales increased 91%
to $7,891,430, compared to $4,139,057 in the quarter ended September 30, 2006.
The increase in sales reflects the acquisition of six of the Company's top
distributors of physical medicine products. On June 30, 2007, we acquired our
largest independent distributor, Rajala Therapy Sales Associates of Pleasanton,
California. On July 2, 2007, Dynatronics acquired five additional independent
distributors: Responsive Providers, Inc. of Houston, Texas; Therapy and Health
Care Products, Inc. of Girard, Ohio; Cyman Therapy, Inc. of Detroit, Michigan;
Al Rice and Associates, Inc. of Jeffersonville, Indiana; and Theratech, Inc. of
Minneapolis, Minnesota. The vertical integration of these distributors is a key
strategic step toward strengthening our distribution channels. We believe that
these acquisitions, as they are fully assimilated into our business operations,
will provide Dynatronics with more effective direct distribution of our products
and result in better margins on each product sold at the retail level compared
to the wholesale level. Subsequent to these acquisitions, we have added six new
direct sales persons in other territories including Southern California,
Louisiana, Kansas, Oklahoma, and Wisconsin, expanding our direct sales channels
to now cover 23 states.
The dealers acquired at the beginning of the quarter ended September 30, 2007,
sold products from many manufacturers, including Dynatronics. As a result of the
transactions described above, the mix between sales of manufactured and
distributed products during the quarter covered by this report shifted toward
distributed products with 42% of sales attributed to sales of distributed
products and the remaining 58% being manufactured products. We anticipate the
mix between manufactured and distributed products in future periods will be
similar to the mix experienced during the first quarter of fiscal year 2008.
Sales of the Company's aesthetic products increased 81% during the quarter ended
September 30, 2007 compared to the prior year period. The Company is
experiencing a renewed emphasis in sales of its Synergie brand of aesthetic
products and plans to expand and update this product line during fiscal year
2008.
Gross Profit
During the quarter ended September 30, 2007, total gross profit increased 97% to
$2,932,312, or 37.2% of net sales, compared to $1,492,157, or 36.1% of net
sales, in the quarter ended September 30, 2006. The increase in gross profit was
primarily a result of the increased sales from the recent acquisitions. For the
quarter ended September 30, 2007, gross profit as a percent of sales improved
one percentage point to 37.2% due to the higher margins associated with selling
at the retail level compared to the wholesale level, as well as the increase in
sales of high-margin aesthetic products.
Non-recurring items affecting gross profit for the quarter ended September 30,
2007 totaled approximately $330,000 and were related to inventories of
Dynatronics manufactured products acquired from the six independent dealers
which had a higher cost basis because they were based on the dealer's cost of
acquiring those products from us. After the higher cost basis inventory is sold
over the course of the next quarter, gross profit is expected to improve.
Additionally, it should be noted that sales of distributed items typically carry
lower margins than those that are manufactured. A change in the mix of product
sales toward a greater percentage of distributed products reduces gross profit
margins as a percent of sales.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
September 30, 2007 increased $2,314,350 to $3,575,495, or 45.3% of net sales,
compared to $1,261,145, or 30.5% of net sales in the prior year period.
Substantially all of the increase in SG&A expenses is related to the recent
acquisitions and includes the following:
9
o $1,116,200 in higher selling expenses related to commissions to
the new direct sales force
o $621,500 in higher general and administrative expenses associated
with the acquired companies
o $569,800 in higher labor and operating costs to support the higher
sales volume
o $7,000 of other miscellaneous items
Non-recurring expense items along with other costs related primarily to the
assimilation of the Company's six acquisitions totaled approximately $750,000
during the quarter ended September 30, 2007 and are itemized as follows:
o Stock Grant expenses $250,000
o Reserve adjustments for bad debt $118,000
o Personnel related costs* $306,000
o Other assimilation expenses $ 76,000
* Personnel related costs related to the assimilation of the Company's six
acquisitions include overtime costs, severance costs, one-time bonuses, and
other personnel costs.
Research and Development
R&D expenses during the quarter ended September 30, 2007 decreased to $338,893,
compared to $478,084 in the prior year period. R&D expenses represented
approximately 4.3% and 11.6% of the net sales of the Company in the quarters
ended September 30, 2007 and 2006, respectively. R&D expenditures as a
percentage of sales were lower due to the 91% increase in sales during the
quarter. R&D costs are expensed as incurred. Development of the new X-Series
products resulted in higher R&D expenses in the 2006 period. With the
development effort for the new X-Series products now completed, R&D expenses for
the first quarter decreased to standard levels experienced in prior years.
Dynatronics intends to continue its commitment to developing innovative products
for the physical medicine market in fiscal year 2008 and beyond in order to
position the Company for growth.
Pre-tax Loss
Pre-tax loss for the quarter ended September 30, 2007 was $1,109,243 compared to
a pre-tax loss of $284,567 in the quarter ended September 30, 2006.
Non-recurring items along with costs related primarily to the Company's six
acquisitions totaled approximately $1.1 million during the current period and
was a significant factor in the increase in pre-tax loss in the quarter ended
September 30, 2007 compared to the prior year period. Absent these non-recurring
and acquisition related expenses, we believe we achieved a virtual operational
break-even during the quarter compared to the reported loss in the same quarter
last year.
Income Tax Benefit
Income tax benefit for the quarter ended September 30, 2007 was $397,040
compared to income tax benefit of $109,559 in the quarter ended September 30,
2006. The effective tax rate for the quarter ended September 30, 2007 was 35.8%
compared to 38.5% for the prior year period. The lower tax rate for this quarter
reflects the assumption of certain anticipated tax benefits that will be earned
during the year.
Net Loss
Net loss for the quarter ended September 30, 2007 was $712,203 ($.05 per share),
compared to net loss of $175,008 ($.02 per share) in the quarter ended September
30, 2006. As previously explained, non-recurring items along with costs related
primarily to the Company's six acquisitions totaled approximately $1.1 million
during the current period and contributed to the increase in net loss in the
quarter ended September 30, 2007 compared to the prior year period.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through available cash reserves and
available borrowings under its line of credit. The Company had working capital
of $6,733,769 at September 30, 2007, inclusive of the current portion of
long-term obligations and credit facilities, as compared to working capital of
$8,116,391 at June 30, 2007. The $1.4 million decrease in working capital is a
direct result of an increase in the line of credit required to pay the
consideration associated with the recent acquisitions. Current assets during the
quarter ended September 30, 2007 increased $2.7 million while current
liabilities increased $4.1 million. The assumption of the dealers' assets and
liabilities increased our net assets by $2.1 million, but it also increased
liabilities by $1.4 million.
10
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$2,284,108 to $6,041,592 at September 30, 2007 compared to $3,757,484 at June
30, 2007. The majority of this increase in trade accounts receivable was a
result of the recent acquisitions concluded during the quarter.
Trade accounts receivable represent amounts due from the Company's dealer
network, from medical practitioners and clinics. We estimate that the allowance
for doubtful accounts is adequate based on our historical knowledge and
relationship with these customers. Accounts receivable are generally collected
within 30 days of the agreed terms. However, as a result of the recent
acquisitions, the character of the accounts receivable and collection patterns
are anticipated to change and will be carefully monitored over the coming year
to ensure the allowances are adequate.
Inventories
Inventories, net of reserves, at September 30, 2007 increased $1,349,036 to
$6,663,020 compared to $5,313,984 at June 30, 2007. This increase is primarily a
result of the inventories acquired in connection with the recent acquisitions.
Inventories are expected to generally remain at current levels during fiscal
year 2008 as we consolidate the inventories of the companies acquired into
central warehouses. However, should the Company make additional acquisitions
during fiscal year 2008, inventory levels would likely increase.
Goodwill
Goodwill at September 30, 2007 increased to $6,340,211 compared to $2,758,572 at
June 30, 2007, due to the acquisition of the distributors on July 2, 2007.
Beginning July 1, 2002, the Company adopted the provisions of SFAS No. 142
Goodwill and other Intangible Assets. In compliance with SFAS No. 142,
management utilized standard principles of financial analysis and valuation
including: transaction value, market value and income value methods to arrive at
a reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002
and June 30, 2007, the fair value of the Company exceeded the book value of the
Company. Therefore, there was no indication of impairment upon adoption of SFAS
No. 142 or at June 30, 2007. Management is primarily responsible for the SFAS
No. 142 valuation determination and performed the annual impairment assessment
during the Company's fourth quarter.
Accounts Payable
Accounts payable increased $567,800 to $1,808,830 at September 30, 2007 compared
to $1,241,030 at June 30, 2007, primarily as a result of the recent
acquisitions. All accounts payable are within term. We continue to take
advantage of available early payment discounts when offered.
Accrued Expenses and Acquisition Cash Obligation
Accrued expenses increased $270,113 to $557,886 at September 30, 2007 compared
to $287,773 at June 30, 2007. Acquisition cash obligations decreased $381,500 to
$618,500 at September 30, 2007 compared to $1,000,000 at June 30, 2007. This
obligation reflects certain cash amounts that were placed into escrow in
conjunction with the acquisitions made on June 30, 2007 and July 2, 2007.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses remained relatively constant at $339,116 at
September 30, 2007 compared to $276,754 at June 30, 2007.
Cash
The Company's cash position decreased to $289,016 compared to $1,301,105 at June
30, 2007 as a result of payments related to the acquisitions made on June 30,
2007 and July 2, 2007. The Company had deposited the financing proceeds in
anticipation of the acquisitions, which temporarily increased cash balances at
June 30, 2007. The Company believes that its current cash balances, amounts
11
available under its line of credit and cash provided by operations will be
sufficient to cover its operating needs in the ordinary course of business for
the next twelve months. If we experience an adverse operating environment or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on favorable terms.
Line of Credit
In June 2007, the Company increased its revolving line of credit with a
commercial bank to $6,000,000 in anticipation of making acquisitions. At
September 30, 2007, the Company owed $3,803,984 compared to $250,000 at June 30,
2007. The Company used approximately $3.3 million under the line of credit to
finance the recent acquisitions. Interest on the line of credit is based on the
bank's prime rate, which at September 30, 2007, equaled 8.25%. The line of
credit is collateralized by accounts receivable and inventories of the Company.
Borrowing limitations are based on 35% of eligible inventory and up to 80% of
eligible accounts receivable. Interest payments on the line are due monthly. The
line of credit is renewable biennially on December 15th and includes covenants
requiring the Company to maintain certain financial ratios. As of September 30,
2007, the Company was in compliance with all loan covenants or had received
waivers due to acquisition activity unrelated to operating expenses.
The current ratio was 1.9 to 1 at September 30, 2007 compared to 3.3 to 1 at
June 30, 2007. Current assets represented 57% of total assets at September 30,
2007 compared to 63% at June 30, 2007.
Debt
Long-term debt excluding current installments totaled $3,241,529 at September
30, 2007 compared to $3,251,631 at June 30, 2007. In June 2007, we obtained $1.5
million of long-term mortgage financing used to finance our acquisitions in June
and July 2007. The funding of this loan temporarily increased our cash balances
at the end of June 2007. 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 $3.7 million with
monthly principal and interest payments of $40,707.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed in this Management's
Discussion and Analysis where such policies affect our reported and expected
financial results. In all material respects, management believes that the
accounting principles that are utilized conform to accounting principles
generally accepted in the United States of America.
The preparation of this quarterly report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our unaudited financial statements. By their
nature, these judgments are subject to an inherent degree of uncertainty. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, and revenue recognition. We base our estimates on historical
experience and other facts and circumstances that are believed to be reasonable,
and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under
different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out) or market. Inventory valuation reserves are maintained for
the estimated impairment of the inventory. Impairment may be a result of slow
moving or excess inventory, product obsolescence or changes in the valuation of
the inventory. In determining the adequacy of reserves, we analyze the
following, among other things:
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o Current inventory quantities on hand.
o Product acceptance in the marketplace.
o Customer demand.
o Historical sales.
o Forecast sales.
o Product obsolescence.
o Technological innovations.
o Character of the inventory whether it is a distributed item,
finished manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At September
30, 2007 and June 30, 2007, our inventory valuation reserve balance, which
established a new cost basis, was $276,565 and $293,810, respectively, and our
inventory balance was $6,663,020 and $5,313,984 net of reserves, respectively.
Revenue Recognition
The majority of our product sales for the past two fiscal years were to
customers who are independent distributors. Beginning in the quarter ended
September 30, 2007, a portion of our sales were generated through our new direct
sales force which covers 23 states. 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
recent acquisition of six of our independent distributors, we have reduced our
dependence on distributor sales. Sales revenues are recorded when products are
shipped FOB shipping point under an agreement with a customer, risk of loss and
title have passed to the customer, and collection of any resulting receivable is
reasonably assured. Amounts billed for shipping and handling of products are
recorded as sales revenue. Costs for shipping and handling of products to
customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $6,041,592 and $3,757,484, net of allowance for doubtful accounts of
$303,272 and $330,857, at September 30, 2007 and June 30, 2007, respectively.
The expansion of our customer base associated with more direct sales will spread
bad debt risk over a broader base of customers and reduce the concentration of
large dealer balances. At the same time, the management of more customer
accounts presents a higher risk. These risks will be evaluated over the coming
year to determine if current estimate policies are still applicable.
Business Plan and Outlook
During fiscal year 2008, management will continue to implement a four-fold
strategy to improve overall operations. This strategy focuses on (1)
strengthening distribution channels; (2) developing new, state-of-the-art
products for future growth; (3) refining operations associated with the acquired
companies; and (4) enhancing product profit margins through improved
manufacturing processes. Management's goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth.
Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. In order to compete more favorably and
effectively, our management moved aggressively to strengthen the Company's
channels of distribution by acquiring key distributors. We identified six key
distributors with operations in 20 states. On June 30, 2007, Dynatronics
acquired its largest independent distributor headquartered in California. On
July 2, 2007, Dynatronics acquired five additional key independent distributors
headquartered in Texas, Ohio, Michigan, Indiana and Minnesota. Dynatronics also
began hiring direct sales representatives in key locations around the country
resulting in direct sales representatives now in 23 states. The creation of a
direct distribution channel through these key acquisitions and hiring direct
sales representatives provides Dynatronics with expanded ability to sell at the
retail level, which will improve gross profit margins and enhance the Company's
control over the distribution process. We expect these changes will open new
opportunities for improving future sales as we continue to pursue our strategy
of strengthening our distribution channels through consideration of additional
acquisitions, the expansion of our direct sales force, and maximizing our
relationships with strong independent dealers.
13
Over the past fiscal year, we introduced some important new products including
the Dynatron X3, a powerful light therapy device capable of powering a light
probe and two light pads simultaneously. This device incorporates touch screen
technology for easy interface with the practitioner. We also introduced the DX2
combination traction and light therapy device. The DX2 is Dynatronics' first
proprietary traction device and incorporates not only touch screen technology,
but other unique and proprietary technology that will facilitate traction and
decompression therapy. We believe it is the only unit on the market that offers
traction and infrared light therapy from the same device.
The introduction of the new T4 motorized treatment table in March 2007 and the
introduction of the new T3 treatment table in July 2007 round out the full
traction package concept originally conceived. These tables are designed with a
higher lift capacity and several unique features. The T4 therapy table is
specially designed for performing traction and decompression therapies with the
DX2 unit and has been very well received in the market.
In June 2007, we introduced the Dynatron X-5 Oscillation Therapy device. The
unique product effectively reduces pain through the creation of an electrostatic
field within the patient by combining the concepts of electrotherapy with
therapeutic massage. Initial sales of this product exceeded management's
projections. The X5 unit's gross profit margin as a percent of sales is one of
the highest of any of the therapy devices produced by Dynatronics.
The assimilation of the six acquired distributors remains the current focus of
management. Since the acquisitions were completed, two of the six local
operations have been closed and fully assimilated. Three of the four remaining
distributors are being reduced in scope relative to operations and should be
mostly assimilated by the end of December or January. Sales and sales support
staff are being maintained at the four remaining operations, but warehousing
functions are being consolidated to our facilities in Tennessee and Utah as well
as the new facility established in California that was associated with the
acquisition of Rajala Therapy Sales Associates. The ability to timely service
west coast customers was deemed a critical point of service and warranted the
continuance of the Rajala operations. Other areas of the country could be
adequately served from these warehouse operations. The non-recurring items along
with costs related primarily to the Company's six acquisitions totaled
approximately $1.1 million during the first quarter. We believe the process of
full integration will be ongoing for the next year, but the elimination of most
duplicative expenses and the achievement of economies of scale are anticipated
to be more fully realized during the third quarter of this fiscal year. We
believe the second quarter of the fiscal year will show a significant decrease
in non-recurring and acquisition related items, but not a total elimination.
International sales is viewed as having untapped potential for growth and
expansion. Adding new distributors in several countries will be the key to this
expansion effort. 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. The Company's Salt
Lake City operation, where all electrotherapy, ultrasound, STS devices, light
therapy and Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European Union
and other foreign countries.
Marketing efforts are being increased to promote our aesthetic products which
include the Synergie AMS device for dermal massage, the Synergie MDA device for
microdermabrasion, and the Synergie LT device, an infrared light therapy unit
designed specifically for aesthetic applications. In addition, we are
redesigning our Synergie product line to give it a fresh appearance and greater
functionality. We also plan to develop and introduce additional products for the
aesthetic market. Kelvyn Cullimore Sr., who managed the Synergie branded
products until departing two years ago on a humanitarian mission to Asia, has
returned to again manage the department. Under his leadership, sales momentum of
Synergie branded products has continued to mount with sales for the quarter
ended September 30, 2007 up 81% compared to the similar quarter of the prior
year. Numerous strategic partnerships, both domestic and international, are
currently under consideration that would help maintain the sales momentum that
is being built.
Based on our defined strategic initiatives, we are focusing our
resources in the following areas:
o Reinforcing our position in the physical medicine market by securing
channels of distribution through a strategy of acquiring dealers,
recruiting direct sales representatives and working closely with the
most successful dealers of capital equipment.
o Continuing development of new, state-of-the-art products, both high
tech and commodity, in fiscal year 2008, for both the rehabilitation
and aesthetic markets.
o Improving efficiencies in conjunction with the assimilation of the
companies acquired.
14
o Improving distribution of aesthetic products domestically and exploring
the opportunities to introduce more products into the aesthetics
market.
o Expanding distribution of both rehabilitation and aesthetic products
internationally.
o Establishing strategic business alliances that will leverage and
complement the Company's competitive strengths.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Part I Item 2, Management's Discussion and Analysis or
Plan of Operation, that are not purely historical, are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act.
These statements refer to our expectations, hopes, beliefs, anticipations,
commitments, intentions and strategies regarding the future. They may be
identified by the use of the words or phrases "believes," "expects,"
"anticipates," "should," "plans," "estimates," "intends," and "potential," among
others. Forward-looking statements include, but are not limited to, statements
contained in Management's Discussion and Analysis or Plan of Operation regarding
product development, market acceptance, financial performance, revenue and
expense levels in the future and the sufficiency of its existing assets to fund
future operations and capital spending needs. Actual results could differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements for the reasons detailed in our Annual Report on Form
10-KSB under the headings "Description of Business" and "Risk Factors." The fact
that some of the risk factors may be the same or similar to past reports filed
with the SEC means only that the risks are present in multiple periods. We
believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o Assimilating acquired companies in a timely and effectively manner
including specific risks of:
o Failure to realize expected economies of scale and
efficiencies of operations
o Inability to achieve sales targets
o Loss of key sales personnel
o Inefficiencies in management of receivables
o Lack of controlling inventories and consolidation of
inventories
o Operational inefficiencies resulting in unmet customer
expectations
o market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, and the Solaris
infrared light therapy products;
o failure to timely release new products against market
expectations;
o the ability to hire and retain the services of trained personnel
at cost-effective rates;
o rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o reliance on key management personnel;
o foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o economic and political risks related to expansion into
international markets;
o failure to sustain or manage growth, including the failure to
continue to develop new products or to meet demand for existing
products;
o reliance on information technology;
15
o the timing and extent of research and development expenses;
o the ability to keep pace with technological advances, which can
occur rapidly;
o the loss of product market share to competitors;
o potential adverse effect of taxation;
o additional terrorist attacks on U.S. interests and businesses;
o the ability to obtain required financing to meet changes or other
risks;
o escalating costs of raw materials, particularly steel and
petroleum based materials; and
o increased competition from a consolidating market that could put
pressure on pricing and margin realization.
As a public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These
requirements may place a strain on our systems and resources. The Securities
Exchange Act requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal controls over financial
reporting. We are currently reviewing and further documenting our internal
control procedures. However, the guidelines for the evaluation and attestation
of internal control systems for small companies continue to evolve. Therefore,
we can give no assurances that our systems will satisfy the new regulatory
requirements. In addition, in order to maintain and improve the effectiveness of
our disclosure controls and procedures and internal controls over financial
reporting, significant resources and management oversight will be required.
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officers have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There were no changes in our internal control over
financial reporting that occurred during the quarter ended September 30, 2007
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
16
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes purchases of the Company's common stock made by
the Company during the quarter ended September 30, 2007, under a stock
repurchase program approved by the board of directors of the Company in
September 2003.
Small Business Issuer Purchases of Equity Securities*
Total # of Approximate
Shares Purchased Dollar Value of
Total # of as part of Shares that May
Shares Average Price Publicly Announced Yet be Purchased
Period Purchased Paid per Share Plans or Programs Under Plan/Program
7/1/07 to
7/31/07 -0- N/A N/A $106,869
8/1/07 to
8/31/07 9,900 $1.35 9,900 $93,516
9/1/07 to
9/30/07 17,607 $1.39 17,607 $68,954
* The Company's repurchase program was announced on September 3, 2003. At
that time, the Company approved repurchases aggregating $500,000.
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)
17
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)
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 11/19/07 /s/ Kelvyn H. Cullimore, Jr.
------------------- ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 11/19/07 /s/ Terry M. Atkinson, CPA
------------------- ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
19
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