UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
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(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's common stock, no par value, as
of February 11, 2005 is 8,969,966.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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DYNATRONICS CORPORATION
FORM 10-QSB
DECEMBER 31, 2004
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Unaudited Balance Sheets
December 31, 2004 and June 30, 2004............................................1
Unaudited Statements of Income
Three and Six Months Ended December 31, 2004 and 2003..........................2
Unaudited Statements of Cash Flows
Six Months Ended December 31, 2004 and 2003....................................3
Notes to Unaudited Financial Statements........................................4
Item 2. Management's Discussion and Analysis or Plan of Operation..............9
Item 3. Controls and Procedures...............................................16
PART II. OTHER INFORMATION
Item 6. Exhibits.............................................................16
ii
DYNATRONICS CORPORATION
Balance Sheets
December 31, 2004 June 30, 2004
Assets (Unaudited) (Audited)
--------------------- --------------------
Current assets:
Cash $ 641,355 573,027
Trade accounts receivable, less allowance for doubtful
accounts of $226,581 December 31, 2004 and
$182,941 at June 30, 2004 3,681,844 3,737,420
Other receivables 12,907 76,213
Inventories 4,547,266 4,687,797
Prepaid expenses 345,890 452,754
Deferred tax asset-current 335,000 335,000
-------------------- -------------------
Total current assets 9,564,262 9,862,211
Property and equipment, net 3,277,679 3,310,083
Goodwill, net of accumulated amortization of $649,792 at
December 31, 2004 and June 30, 2004 789,422 789,422
Other assets 412,458 310,863
-------------------- -------------------
$ 14,043,821 14,272,579
===================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 207,019 207,019
Line of credit 1,218,753 1,604,535
Accounts payable 468,128 681,335
Accrued expenses 626,648 444,474
Accrued payroll and benefit expenses 387,284 423,972
Income tax payable 85,810 200,294
-------------------- -------------------
Total current liabilities 2,993,642 3,561,629
Long-term debt, excluding current installments 1,449,456 1,553,832
Deferred compensation 345,770 331,022
Deferred tax liability - noncurrent 150,000 150,000
-------------------- -------------------
Total liabilities 4,938,868 5,596,483
-------------------- -------------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued 8,960,966 shares at December 31, 2004
and 8,956,688 shares at June 30, 2004 2,704,806 2,670,404
Retained earnings 6,400,147 6,005,692
-------------------- -------------------
Total stockholders' equity 9,104,953 8,676,096
-------------------- -------------------
$ 14,043,821 14,272,579
==================== ===================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales $ 5,322,596 5,283,460 10,241,502 10,316,875
Cost of sales 3,143,577 3,199,056 6,051,004 6,304,740
-------------- -------------- -------------- --------------
Gross profit 2,179,019 2,084,404 4,190,498 4,012,135
Selling, general, and administrative expenses 1,468,399 1,358,883 2,955,714 2,700,318
Research and development expenses 275,364 273,147 529,155 561,118
-------------- -------------- -------------- --------------
Operating income 435,256 452,374 705,629 750,699
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 929 3,641 1,905 7,957
Interest expense (38,612) (44,648) (74,402) (87,999)
Other income, net 975 1,349 8,258 3,154
-------------- -------------- -------------- --------------
Total other income (expense) (36,708) (39,658) (64,239) (76,888)
-------------- -------------- -------------- --------------
Income before income taxes 398,548 412,716 641,390 673,811
Income tax expense 153,441 157,932 246,935 258,454
-------------- -------------- -------------- --------------
Net income $ 245,107 254,784 394,455 415,357
============== ============== ============== ==============
Basic and diluted net income
per common share $ 0.03 0.03 0.04 0.05
============== ============== ============== ==============
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,959,180 8,805,369 8,958,528 8,831,140
Diluted 9,193,826 9,121,419 9,187,386 9,013,129
See accompanying notes to financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2004 2003
----------------- ---------------
Cash flows from operating activities:
Net income $ 394,455 415,357
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 176,720 157,052
Other amortization 3,662 3,662
Provision for doubtful accounts 48,000 48,000
Provision for inventory obsolescence 138,000 138,000
Provision for warranty reserve 75,205 75,419
Provision for deferred compensation 14,748 12,684
Compensation expense on stock options 9,900 -
Change in operating assets and liabilities:
Receivables 70,882 (1,637,443)
Inventories 2,531 171,229
Prepaid expenses and other assets 21,407 25,880
Accounts payable and accrued expenses (142,926) 493,650
Prepaid income taxes (114,484) 177,354
----------------- ---------------
Net cash provided by operating activities 698,100 80,844
----------------- ---------------
Cash flows from investing activities:
Capital expenditures (144,316) (19,918)
Cash flows from financing activities:
Principal payments on long-term debt (104,376) (88,298)
Net change in line of credit (385,782) 8,431
Proceeds from issuance of common stock 4,702 29,006
Redemption of common stock - (89,000)
----------------- ---------------
Net cash used in financing activities (485,456) (139,861)
----------------- ---------------
Net change in cash and cash equivalents 68,328 (78,935)
Cash at beginning of period 573,027 404,276
----------------- ---------------
Cash at end of period $ 641,355 325,341
================= ===============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 74,212 87,434
Cash paid for income taxes 361,420 181,100
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for consulting services 29,700 -
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2004
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 2004 (unaudited) and June 30, 2004
(audited) and for the three and six months ended December 31, 2004 and 2003 were
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all necessary adjustments, which consist only of normal
recurring adjustments, to the financial statements have been made to present
fairly the financial position and results of operations and cash flows. The
results of operations for the respective periods presented are not necessarily
indicative of the results for the respective complete years. The Company has
previously filed with the SEC an annual report on Form 10-KSB which included
audited financial statements for the two years ended June 30, 2004 and 2003. It
is suggested that the financial statements contained in this filing be read in
conjunction with the statements and notes thereto contained in the Company's
10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three and six months
ended December 31, 2004 and 2003 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 8,959,180 8,805,369 8,958,528 8,831,140
Weighted average number of dilutive common stock
options outstanding during the period 234,646 316,050 228,858 181,989
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,193,826 9,121,419 9,187,386 9,013,129
============= ============ ============= =============
4
NOTE 3. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages
entities to adopt a fair-value-based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to apply the provisions of APB 25; accordingly, no
compensation expense has been recognized for the stock option plan. Had
compensation expense for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
Three months ended Three months ended
December 31, 2004 December 31, 2003
Net income as reported $ 245,107 254,784
Less: pro forma adjustment for stock based
Compensation, net of income tax (9,277) (29,493)
----------------- -------------------
Pro forma net income $ 235,830 225,291
Basic net income per share:
As reported $ 0.03 0.03
Effect of pro forma adjustment - -
----------------- -------------------
Pro forma 0.03 0.03
Diluted net income per share:
As reported 0.03 0.03
Effect of pro forma adjustment - -
----------------- -------------------
Pro forma $ 0.03 0.03
----------------- -------------------
Six months ended Six months ended
December 31, 2004 December 31, 2003
Net income as reported $ 394,455 415,357
Less: pro forma adjustment for stock based
Compensation, net of income tax (18,030) (58,617)
----------------- -------------------
Pro forma net income $ 376,425 356,740
Basic net income per share:
As reported $ 0.04 0.05
Effect of pro forma adjustment - (0.01)
----------------- -------------------
Pro forma 0.04 0.04
Diluted net income per share:
As reported 0.04 0.05
Effect of pro forma adjustment - (0.01)
----------------- -------------------
Pro forma $ 0.04 0.04
----------------- -------------------
The per share weighted-average fair value of stock options granted for the three
months ended December 31, 2004 and 2003 was $1.16 and $1.55 per share, and for
the six months ended December 31, 2004 and 2003 was $1.26 and $.98 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
5
Three months ended Three months ended
December 31, 2004 December 31, 2003
----------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.92% 3.72%
Expected volatility 88% 86%
Expected life 7 years 7 years
Six months ended Six months ended
December 31, 2004 December 31, 2003
----------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.31-4.34% 3.40-3.72%
Expected volatility 87-89% 82-83%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended December 31, 2004 and 2003, comprehensive income was equal
to the net income as presented in the accompanying condensed statements of
income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31, 2004 June 30, 2004
Raw Material $ 2,841,357 2,906,721
Finished Goods 2,186,860 2,115,469
Inventory Reserve
(480,951) (334,393)
----------------------------------------
$ 4,547,266 4,687,797
========================================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, 2004 June 30, 2004
----------------------------------------
Land $ 354,744 354,743
Buildings 2,918,837 2,899,729
Machinery and equipment 1,763,222 1,753,220
Office equipment 916,502 801,297
Vehicles 80,680 80,680
----------------------------------------
6,033,985 5,889,669
Less accumulated depreciation
and amortization 2,756,306 2,579,586
----------------------------------------
$ 3,277,679 3,310,083
========================================
6
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of July
1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 2004 and determined there was not an indication
of impairment. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Goodwill. As of December 31, 2004, the Company had goodwill, net, of $789,422
from the acquisition of Superior Orthopaedic Supplies, Inc. on May 1, 1996 and
the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983. Through June 30,
2002, goodwill from these transactions was amortized over a period of 15 and 30
years, respectively, on a straight-line basis.
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
December 31, 2004 June 30, 2004
----------------------------------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 31,738 28,076
----------------------------------------
Net carrying amount $ 41,502 $ 45,164
========================================
Amortization expense associated with the license agreement was $1,831 and
$3,662, respectively, for the three and six months ended December 31, 2004 and
2003. Estimated amortization expense for the existing license agreement is
expected to be $7,324 for each of the fiscal years ending June 30, 2005 through
June 30, 2010. The license agreement is included in other assets.
NOTE 8. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates. The
product warranty reserve is included in accrued expenses at December 31, 2004
and June 30, 2004. A reconciliation of the changes in the warranty liability is
as follows:
7
Three months ended Three months ended
December 31, 2004 December 31, 2003
--------------------- -----------------------
Beginning product warranty reserve balance $ 190,000 $ 166,000
Warranty repairs (33,734) (37,003)
Warranties issued 55,352 54,945
Changes in estimated warranty costs (15,618) (11,942)
--------------------- ----------------------
Ending product warranty liability balance $ 196,000 $ 172,000
===================== ======================
Six months ended Six months ended
December 31, 2004 December 31, 2003
--------------------- ----------------------
Beginning product warranty reserve balance $ 184,000 $ 160,000
Warranty repairs (63,206) (63,419)
Warranties issued 106,505 107,289
Changes in estimated warranty costs (31,299) (31,870)
--------------------- ----------------------
Ending product warranty liability balance $ 196,000 $ 172,000
==================== ======================
NOTE 9. COMMON STOCK.
The Company received proceeds of $4,702 during the six months ended December 31,
2004 for 4,278 shares of common stock that were issued upon the exercise of
options by employees. During the six months ended December 31, 2003 the Company
received proceeds of $29,006 for 27,144 shares of common stock that were issued
upon the exercise of options by employees. The Company also acquired and retired
77,400 shares of common stock at a cost of $89,000 under the Company's
open-market share repurchase program that was approved July 15, 2003.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after December 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2006. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard and the effect
of the adoption of SFAS 123R will have on our financial position, results of
operations, or cash flow.
In November of 2004, the FASB issued SFAS No. 151, Inventory Costs - An
Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies treatment of
abnormal amounts of idle facility expense, freight, handling costs and spoilage,
specifying that such costs should be expensed as incurred and not included in
overhead. The new statement also requires that allocation of fixed production
overheads to conversion costs should be based on normal capacity of the
production facilities. The provisions in SFAS 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Companies must
apply the standard prospectively. The Company does not believe that the impact
of this new standard will have a material effect on our financial statements or
results of operations.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the second
quarter ended December 31, 2004, for the Company's fiscal year ending June 30,
2005.
Net Sales
During the quarter ended December 31, 2004, the Company set a new record for
quarterly sales of $5,322,596, surpassing the previous record of $5,283,460
established during the quarter ended December 31, 2003. Sales for the six-month
period ended December 31, 2004, were $10,241,502, compared to $10,316,875 for
the same period in 2003. The Solaris line of light therapy devices was
introduced last year with initial product shipments beginning on September 30,
2003. Typically there is a spike in sales with any new product introduction as
we fill the distribution pipeline. That spike is usually followed by a leveling
off in subsequent quarters. The continued strong performance this quarter shows
that demand for Solaris products has remained consistent one year after their
introduction.
Synergie sales during the quarter ended December 31, 2004 were also strong, with
product sales more than double the same period last year. The increase is due in
part to the addition of an aesthetic light therapy device to the Synergie line
of spa and beauty products and to increasing international demand for the entire
product line.
The success of the Solaris products caused an expected decrease in the demand
for 50 Series Plus combination electrotherapy devices. We also experienced a
small decline in the sales of medical supplies and soft goods during the quarter
ended December 31, 2004.
The Solaris family of advanced technology combination therapy devices
incorporates seven electrotherapy waveforms and/or ultrasound therapy in
combination with an optional infrared light therapy or laser therapy probe.
Infrared light or laser therapy is commonly used for treating muscle and joint
pain as well as arthritis pain and stiffness. Hundreds of independent research
studies have proven the efficacy of light and laser therapy in clinics around
the world. Recent concerns about the safety of traditional arthritis medications
are expected to boost interest in our non-invasive Solaris devices for treating
arthritis pain. The Company has embarked on a national campaign to increase
awareness among practitioners of the benefits of using light and laser therapy
for both osteoarthritis and rheumatoid arthritis patients.
Light therapy is also popular in the spa and beauty market. The Company
introduced the Synergie LT device specifically for the aesthetic market and is
developing and plans to introduce additional light therapy probes for aesthetic
as well as medical applications. In addition, we are exploring new applications
for light therapy beyond our current markets. For example, excellent results are
being reported using light therapy for relief of dental pain and in accelerating
wound healing. This type of success provides an opportunity to develop light
therapy products specifically for new markets.
Gross Profit
During the quarter ended December 31, 2004, total gross profit was $2,179,019 or
40.9% of net sales compared to $2,084,404 or 39.5% of net sales in the quarter
ended December 31, 2003. For the six months ended December 31, 2004, total gross
profit was $4,190,498 or 40.9% of net sales compared to $4,012,135 or 38.9% of
net sales in the similar period ended December 31, 2003. The increase in gross
margin in the current reporting periods reflects a shift in product mix toward
sales of higher margin Solaris and Synergie devices. This shift resulted in
gross margins as a percentage of net sales increasing 1.4 and 2.0 percentage
points during the quarter and six months ended December 31, 2004, respectively,
compared to the prior year periods.
9
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the quarter ended
December 31, 2004, were $1,468,399 or 27.6% of net sales compared to $1,358,883
or 25.7% of net sales in the quarter ended December 31, 2003. SG&A expenses for
the six months ended December 31, 2004, were $2,955,714 or 28.9% of net sales
compared to $2,700,318 or 26.2% of net sales in the period ended December 31,
2003. Total SG&A expenses for the quarter ended December 31, 2004 increased by
$109,516 or 8% over the prior year period. Total SG&A expenses for the six
months ended December 31, 2004 increased by $255,396 or 9% over the prior year
period. There were three primary components which increased SG&A expenses during
the quarter and six-month periods:
o Approximately $49,800 and $155,700 in increased selling expenses
primarily for tradeshow activity and advertising related to the
Company's Synergie products for the quarter and six months
periods, respectively.
o Approximately $29,800 for the quarter and $52,168 for the
six-month period in new software system costs including increased
support personnel and depreciation expense for the Company's new,
enterprise-wide software system designed to increase operating
efficiencies through the integration of the functionality of three
previous software systems into one system. These amounts were
partially offset by a reduction of depreciation expenses for
equipment that was fully depreciated in the prior year.
o Approximately $18,300 and $60,600 in increased healthcare
insurance and worker's compensation insurance premiums for the
quarter and six-month periods, respectively; the costs of health
and dental insurance continue to be one of the fastest growing
costs for the Company.
Research and Development
The Company places great emphasis on developing innovative products such as the
new Solaris Series line of therapy devices in order to fuel future growth. As a
result of the heightened interest in light therapy, Dynatronics has increased
its engineering staff and budgeted a record amount for research and development
in fiscal 2005. Several new light therapy products as well as other medical and
aesthetic products are scheduled for introduction beginning in the summer of
2005. Designing innovative new products is a strategic philosophy that allows
the Company to maintain a leadership position in the physical medicine market.
Research and development expenses were $275,364 during the quarter ended
December 31, 2004 compared to $273,147 for the similar period in 2003. R&D
expenses represented approximately 5.2% of the net sales of the Company in both
the 2004 and 2003 quarterly periods. Research and development expenses were
$529,155 during the six months ended December 31, 2004 compared to $561,118 for
the similar period in 2003. These R&D expenses represented approximately 5.2%
and 5.4% of the net sales of the Company in the 2004 and 2003 periods,
respectively. R&D costs are expensed as incurred.
Pre-tax Profit
Pre-tax profit for the quarter ended December 31, 2004 was $398,548 compared to
$412,716 during the same period of the prior year. Pre-tax profit for the six
months ended December 31, 2004 was $641,390 compared to $673,811 during the same
period of the prior year. Increased sales and gross margins of the new Solaris
line and Synergie devices were offset by higher selling expenses for Synergie,
higher healthcare insurance and increased depreciation expenses resulting in a
slight reduction in profits for the quarter and six months ended December 31,
2004 compared to the prior year periods.
Income Tax
Income tax expense for the three months ended December 31, 2004 was $153,441
compared to $157,932 in the three months ended December 31, 2003. The effective
tax rates were 38.5% and 38.3% for the quarters ended December 31, 2004 and
2003, respectively. Income tax expense for the six months ended December 31,
2004 was $246,935 compared to $258,454 in the six months ended December 31,
2003. The effective tax rates were 38.5% and 38.4% for the six month periods
ended December 31, 2004 and 2003, respectively.
Net Income
Net income for the quarter ended December 31, 2004 was $245,107 (approximately
$.03 per share) compared to $254,784 (approximately $.03 per share) for the
quarter ended December 31, 2003. Net income for the six months ended December
31, 2004 was $394,455 (approximately $.04 per share) compared to $415,357
(approximately $.05 per share) for the similar period ended December 31, 2003.
Higher gross profits in the current reporting period were offset by increased
expenses as previously explained which lead to a small decrease in net income
for the quarter and six months ended December 31, 2004 when compared to the same
period a year ago.
10
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its line of credit, and from cash provided by operations. The
Company had working capital of $6,570,620 at December 31, 2004, inclusive of the
current portion of long-term obligations and credit facilities, as compared to
working capital of $6,300,582 at June 30, 2004.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, decreased
$55,576 to $3,681,844 at December 31, 2004 compared to $3,737,420 at June 30,
2004. Management anticipates accounts receivable will likely remain at current
levels or increase in future periods due to continuing demand for the Company's
new Solaris Series products and other new products anticipated for future
release which are expected to increase sales.
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the terms extended.
Inventories
Inventories, net of reserves, at December 31, 2004 decreased $140,531 to
$4,547,266 compared to $4,687,797 at June 30, 2004. Management expects that
inventories will fluctuate somewhat over the course of this fiscal year, as
optimum inventory levels are determined based on ongoing sales demand for the
Solaris Series and other new products.
Prepaid Expenses
Prepaid expenses decreased $106,864 to $345,890 at December 31, 2004 compared to
$452,754 at June 30, 2004 due primarily to a reduction in prepayments to
suppliers.
Goodwill
Goodwill at June 30, 2004 and June 30, 2003 totaled $789,422. Beginning July 1,
2002, the Company adopted the provisions of SFAS No. 142 Goodwill and other
Intangible Assets. In compliance with SFAS 142, management utilized standard
principles of financial analysis and valuation including: transaction value,
market value and income value methods to arrive at a reasonable estimate of the
fair value of the Company in comparison to its book value. The Company has
determined it has one reporting unit. As of July 1, 2002 and June 30, 2004, 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, 2004. Management is primarily responsible for the FAS 142 valuation
determination and performs the annual impairment assessment each year during the
Company's fourth quarter.
Accounts Payable
Accounts payable decreased by $213,207 to $468,128 at December 31, 2004 compared
to $681,335 at June 30, 2004. The decrease in accounts payable is a result of
the timing of our weekly invoice payments to suppliers and the timing of
purchases of product components. All accounts payable are within term. We
continue to take advantage of available early payment discounts when offered.
Cash
The Company's cash position at December 31, 2004 was $641,355 compared to
$573,027 at June 30, 2004. The Company believes that its current cash balances,
amounts available under its line of credit and cash provided by operations will
be sufficient to cover its operating needs in the ordinary course of business
for the next twelve months. If we experience an adverse operating environment or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on favorable terms.
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Line of Credit
The Company maintains a revolving line of credit with a commercial bank in the
amount of $4,500,000. The outstanding balance on our line of credit decreased
$385,782 to $1,218,753 at December 31, 2004 compared to $1,604,535 at June 30,
2004. Interest on the line of credit is based on the bank's prime rate, which at
December 31, 2004, was 5.25%. The line of credit is collateralized by accounts
receivable and inventories. Borrowing limitations are based on 30% of eligible
inventory and up to 80% of eligible accounts receivable. At December 31, 2004,
the maximum borrowing base was calculated to be approximately $3.8 million. The
line of credit is renewable annually on December 1st and includes covenants
requiring the Company to maintain certain financial ratios. As of December 31,
2004, the Company was in compliance with all loan covenants.
The current ratio at December 31, 2004 increased to 3.2 to 1 compared to 2.8 to
1 at June 30, 2004. Current assets represent 68% of total assets at December 31,
2004.
Debt
Long-term debt excluding current installments totaled $1,449,456 at December 31,
2004 compared to $1,553,832 at June 30, 2004. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.5 million with monthly principal and interest payments of $21,345.
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. During fiscal year 2004, the Company purchased
$89,000 of stock, leaving over $400,000 of authorized funds for future stock
repurchases. The stock repurchase program is conducted pursuant to safe harbor
regulations under Rule 10b-18 of the Exchange Act for the repurchase by an
issuer of its own shares.
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 of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results. For a detailed
discussion of the application of these and other accounting policies, see Notes
to the Audited Financial Statements contained in the Company's 10-KSB report for
the year ended June 30, 2004. 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. By their nature, these judgments are subject to an
inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out) or market. Inventory valuation reserves are maintained for
the estimated impairment of the inventory. Impairment may be a result of slow
moving or excess inventory, product obsolescence or changes in the valuation of
the inventory. In determining the adequacy of reserves, we analyze the
following, among other things:
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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.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At December 31,
2004 and June 30, 2004, our inventory valuation reserve balance, which
established a new cost basis, was $480,951 and $334,393, respectively, and our
inventory balance was $4,547,266 and $4,687,797 net of reserves, respectively.
Revenue Recognition
Our products are sold primarily to customers who are independent distributors
and equipment dealers. These distributors resell the products to end users
including physical therapists, professional trainers, athletic trainers,
chiropractors, medical doctors and aestheticians. Sales revenues are recorded
when products are shipped FOB shipping point under an agreement with a customer,
risk of loss and title have passed to the customer, and collection of any
resulting receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for shipping and
handling of products to customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit-worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $3,681,844 and $3,737,420, net of allowance for doubtful accounts of
$226,581 and $182,941, at December 31, 2004 and June 30, 2004, respectively.
Business Plan and Outlook
-------------------------
Over the past six years, annual net sales have grown from $12.6 million in
fiscal year 1998 to $20.6 million in fiscal year 2004. During fiscal year 2005,
we will continue to focus our efforts on fueling and sustaining future growth
through the development of new products for the rehabilitation and aesthetics
markets while, at the same time, strengthening our channels of distribution and
improving operating efficiencies.
The results of our focused R&D campaign begun in 2002 were manifest in September
2003 when we introduced the Solaris Series, a new product line of advanced
technology electrotherapy/ultrasound products featuring an infrared light
therapy probe. This new family of products has quickly become our top selling
line, due largely to the popularity of light therapy. Light therapy is becoming
widely recognized for its successful treatment of painful conditions. The
Solaris product line is designed to accommodate additional light therapy probes
that will be introduced in the future. This design insures that practitioners
can, over time, economically accumulate multiple light therapy probes for
various therapeutic purposes - all powered by the same Solaris device.
Consistent with that design, in June 2004 the Company received FDA marketing
clearance for the Dynatron 890, a low-power laser accessory probe for the
Solaris Series products. Laser technology takes the Company back to its origin
25 years ago when the Company first attempted to gain FDA approval for a laser
therapy device. However, the Dynatron 890 is 500 times more powerful than the
original devices 25 years ago, which enhances efficacy and significantly reduces
treatment times for patients. Shipment of the new Dynatron 890 probe began in
August, 2004.
The FDA has granted marketing clearance for the Solaris light therapy devices
for treating not only muscle and joint pain, but also pain and stiffness
associated with arthritis. More than 40 million people in the United States
suffer from arthritis at an estimated cost of $64 billion annually. It is a
major cause of disabilities in America today. In light of recent disclosures
regarding concerns with traditional medications for arthritis, th Company has
embarked on a nation-wide campaign to educate practitioners on the benefits of
light therapy for arthritis sufferers.
13
The Company's R&D efforts are not limited to developing just high-tech products.
A number of other new products, including a new line of metal treatment tables,
are currently under development and targeted for introduction in the next 12
months.
In April 2004, we introduced our new product catalog featuring over 2,000
products. Over the years, our product catalog has been an important sales tool
for our nationwide network of dealers. It provides important information about
the new Solaris product line as well as many other products that we manufacture
and/or distribute.
Going forward, we intend to continue to strengthen our manufacturing
capabilities with the goal of improving margins and gaining greater pricing
advantages over competitors. To that end, some products previously purchased
from other manufacturers are being converted to in-house manufacturing. Other
products are being sourced from overseas manufacturers or moved to more
competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. Similar efforts over the past few years have had limited
success. Despite this experience, we continue to press forward seeking
opportunities for international expansion. The Company's Salt Lake City
operation, where all electrotherapy, ultrasound, STS devices, light therapy and
Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an essential requirement to obtain CE Mark
certification, an approval which allows us to market our products in the
European Union. In January 2005, the Company obtained the CE Mark certification
for the Solaris product line and can therefore begin selling these products in
Europe. The attractive features of the Solaris Series products will hopefully
make foreign distribution channels more accessible. Interest in Synergie
products is presently leading the way for international expansion with the
recent establishment of new distributors in Japan, South Africa, Europe and
Southeast Asia.
In January 2004, we introduced the Synergie LT device, an infrared light therapy
unit designed specifically for aesthetic applications. Interest in light therapy
applications among aestheticians has been an important factor in increasing
sales of our Synergie products over the past four quarters. The introduction of
the Synergie LT device is positioning Dynatronics to compete more fully in the
spa and beauty market, both domestically and internationally. We plan to develop
and introduce additional light therapy probes for the aesthetic market using
different wavelengths of light. For instance, in September 2004, we introduced
the Synergie 470 probe, a therapy probe compatible with the Synergie LT base
unit that emits light in the blue spectrum.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Increasing sales of Solaris devices through the introduction of
new light therapy accessories and by developing new markets for
light therapy applications.
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of more new products, both high tech and
commodity, over the coming two years.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices into the aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in 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,
14
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, clinical results, market acceptance, financial performance,
revenue and expense levels in the future and the sufficiency of its existing
assets to fund future operations and capital spending needs. Actual results
could differ materially from the anticipated results or other expectations
expressed in such forward-looking statements for the reasons detailed in our
Annual Report on Form 10-KSB under the headings "Description of Business" and
"Risk Factors." The fact that some of the risk factors may be the same or
similar to past reports filed with the Securities and Exchange Commission means
only that the risks are present in multiple periods. We believe that many of the
risks detailed here and in our other SEC filings are part of doing business in
the industry in which we operate and compete and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, Dynatron STS
products, and the new Solaris infrared light therapy products;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o Additional terrorist attacks on U.S. interests and businesses;
o The ability to obtain required financing to meet changes or other
risks; and
o Escalating costs of raw materials, particularly steel and
petroleum based materials.
o As a public company, we are subject to the reporting requirements
of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act
of 2002. These requirements may place a strain on our systems and
resources. The Securities Exchange Act requires, among other
things, that we file annual, quarterly and current reports with
respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal controls
over financial reporting. We are currently reviewing and further
documenting our internal control procedures. However, the
guidelines for the evaluation and attestation of internal control
systems have only recently been finalized, and the evaluation and
attestation processes are new and untested. Therefore, we can give
no assurances that our systems will satisfy the new regulatory
requirements. In addition, in order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting, significant resources
and management oversight will be required.
15
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officers have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There have been no significant changes in internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser
Corporation. Incorporated by reference to a Registration Statement
on Form S-1 (No. 2-85045) filed with the Securities and Exchange
Commission and effective November 2, 1984, as amended by Articles
of Amendment dated November 18, 1993.
3.2 Articles of Amendment dated November 21, 1988 (previously filed).
10.1 Employment contract with Kelvyn H. Cullimore, Jr. (previously
filed)
10.2 Employment contract with Larry K. Beardall (previously filed)
10.3 Loan Agreement with Zion Bank (previously filed)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn Cullimore,
Sr. (previously filed)
10.5 Amended Loan Agreement with Zions Bank (December 2003)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer
31.2 Certification under Rule 13a-14(a)/15d-14(a) of principal
financial officer
32 Certification under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. SECTION 1350)
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 2/14/05 /s/ Kelvyn H. Cullimore, Jr.
------------------ ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)
Date 2/14/05 /s/ Terry M. Atkinson, CPA
------------------ ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
17