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 March 31, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
-----------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------
(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 ___
The number of shares outstanding of the issuer's common stock, no par value, as
of May 13, 2005 is 9,007,568.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
------
DYNATRONICS CORPORATION
FORM 10-QSB
MARCH 31, 2005
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Unaudited Balance Sheets
March 31, 2005 and June 30, 2004..............................................1
Unaudited Statements of Income
Three and Nine Months Ended March 31, 2005 and 2004...........................2
Unaudited Statements of Cash Flows
Nine Months Ended March 31, 2005 and 2004.....................................3
Notes to Unaudited Financial Statements.......................................4
Item 2. Management's Discussion and Analysis or Plan of Operation.............9
Item 3. Controls and Procedures..............................................15
PART II. OTHER INFORMATION
Item 6. Exhibits............................................................16
DYNATRONICS CORPORATION
Balance Sheets
March 31, 2005 June 30, 2004
Assets (Unaudited) (Audited)
------------------ ------------------
Current assets:
Cash $ 418,837 573,027
Trade accounts receivable, less allowance for
doubtful accounts of $245,559 at
March 31, 2005 and $182,941 at
June 30, 2004 3,597,245 3,737,420
Other receivables 172,587 76,213
Inventories 4,647,200 4,687,797
Prepaid expenses 258,781 452,754
Deferred tax asset-current 335,000 335,000
------------------ ------------------
Total current assets 9,429,650 9,862,211
Property and equipment, net 3,308,474 3,310,083
Goodwill, net of accumulated amortization
of $649,792 at March 31, 2005
and at June 30, 2004 789,422 789,422
Other assets 435,891 310,863
------------------ ------------------
$ 13,963,437 14,272,579
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 204,474 207,019
Line of credit 591,236 1,604,535
Accounts payable 982,278 681,335
Accrued expenses 465,630 444,474
Accrued payroll and benefit expenses 479,809 423,972
Income tax payable 39,503 200,294
------------------ ------------------
Total current liabilities 2,762,930 3,561,629
Long-term debt, excluding current installments 1,399,250 1,553,832
Deferred compensation 353,144 331,022
Deferred tax liability - noncurrent 150,000 150,000
------------------ ------------------
Total liabilities 4,665,324 5,596,483
------------------ ------------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 8,992,568
shares at March 31, 2005 and
8,956,688 shares at June 30, 2004 2,733,204 2,670,404
Retained earnings 6,564,909 6,005,692
------------------ ------------------
Total stockholders' equity 9,298,113 8,676,096
------------------ ------------------
$ 13,963,437 14,272,579
================== ==================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2005 2004 2005 2004
--------------- --------------- ----------------- -----------------
Net sales $ 5,048,108 5,246,044 15,289,610 15,562,919
Cost of sales 3,031,174 3,106,290 9,082,178 9,411,030
--------------- --------------- ----------------- -----------------
Gross profit 2,016,934 2,139,754 6,207,432 6,151,889
Selling, general, and admin.
expenses 1,372,927 1,446,932 4,328,640 4,147,250
Research and development
expenses 356,313 275,910 885,467 837,028
--------------- --------------- ----------------- -----------------
Operating income 287,694 416,912 993,325 1,167,611
--------------- --------------- ----------------- -----------------
Other income (expense):
Interest income 2,753 3,275 4,657 11,232
Interest expense (33,247) (42,376) (107,649) (130,375)
Other income, net 10,705 2,811 18,963 5,965
--------------- --------------- ----------------- -----------------
Total other income (expense) (19,789) (36,290) (84,029) (113,178)
--------------- --------------- ----------------- -----------------
Income before income taxes 267,905 380,622 909,296 1,054,433
Income tax expense 103,143 70,920 350,079 329,374
--------------- --------------- ----------------- -----------------
Net income $ 164,762 309,702 559,217 725,059
=============== =============== ================= =================
Basic and diluted net income per
common share $ 0.02 0.03 0.06 0.08
=============== =============== ================= =================
Weighted average basic and diluted common shares outstanding
Basic 8,974,707 8,868,201 8,963,842 8,843,404
Diluted 9,261,151 9,344,707 9,213,259 9,143,746
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2005 2004
----------------- -------------------
Cash flows from operating activities:
Net income $ 559,217 725,059
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 272,315 237,065
Other amortization 5,493 5,493
Provision for doubtful accounts 72,000 72,000
Provision for inventory obsolescence 207,000 207,000
Provision for warranty reserve 121,541 120,249
Provision for deferred compensation 22,122 19,026
Compensation expense on stock options 19,800 -
Change in operating assets and liabilities:
Receivables (28,199) (1,862,561)
Inventories (166,403) (313,202)
Prepaid expenses and other assets 73,352 85,481
Accounts payable and accrued expenses 256,395 355,907
Prepaid income taxes (160,791) 209,674
----------------- -------------------
Net cash provided by (used in) operating
activities 1,253,842 (138,809)
----------------- -------------------
Cash flows from investing activities:
Capital expenditures (270,675) (273,063)
Proceeds from sale of assets (31) -
----------------- -------------------
Net cash used in investing activities (270,706) (273,063)
----------------- -------------------
Cash flows from financing activities:
Principal payments on long-term debt (157,127) (139,763)
Net change in line of credit (1,013,299) 309,576
Proceeds from issuance of common stock 33,100 219,793
Redemption of common stock - (89,000)
----------------- -------------------
Net cash (used in) provided by
financing activities (1,137,326) 300,606
----------------- -------------------
Net change in cash and cash equivalents (154,190) (111,266)
Cash at beginning of period 573,027 404,276
----------------- -------------------
Cash at end of period $ 418,837 293,010
================= ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 109,656 128,719
Cash paid for income taxes 510,870 219,700
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
March 31, 2005
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 2005 (unaudited) 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 nine months
ended March 31, 2005 and 2004 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 8,974,707 8,868,201 8,963,842 8,843,404
Weighted average number of dilutive common stock
options outstanding during the period 286,444 476,506 249,417 300,342
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,261,151 9,344,707 9,213,259 9,134,746
============= ============ ============= =============
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
March 31, 2005 March 31, 2004
Net income as reported $ 164,762 309,702
Less: pro forma adjustment for stock based
compensation, net of income tax (11,095) (28,203)
----------------- --------------------
Pro forma net income $ 153,667 281,499
Basic net income per share:
As reported $ 0.02 0.03
Effect of pro forma adjustment - -
----------------- --------------------
Pro forma 0.02 0.03
Diluted net income per share:
As reported 0.02 0.03
Effect of pro forma adjustment - -
----------------- --------------------
Pro forma $ 0.02 0.03
----------------- --------------------
Nine months ended Nine months ended
March 31, 2005 March 31, 2004
Net income as reported $ 559,217 725,059
Less: pro forma adjustment for stock based
compensation, net of income tax (32,595) (86,820)
----------------- --------------------
Pro forma net income $ 526,622 638,239
Basic net income per share:
As reported $ 0.06 0.08
Effect of pro forma adjustment - (0.01)
----------------- --------------------
Pro forma 0.06 0.07
Diluted net income per share:
As reported 0.06 0.08
Effect of pro forma adjustment - (0.01)
----------------- --------------------
Pro forma $ 0.06 0.07
----------------- --------------------
The per share weighted-average fair value of stock options granted for the three
months ended March 31, 2005 and 2004 was $1.29 and $2.07 per share, and for the
nine months ended March 31, 2005 and 2004 was $1.27 and $1.42 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
March 31, 2005 March 31, 2004
-----------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.72 - 4.45% 3.31 - 3.65%
Expected volatility 86 - 89% 86 - 88%
Expected life 5 & 7 years 5 & 7 years
Nine months ended Nine months ended
March 31, 2005 March 31, 2004
-----------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.66 - 4.45% 3.31 - 3.72%
Expected volatility 86 - 89% 82 - 88%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended March 31, 2005 and 2004, comprehensive income was equal to
the net income as presented in the accompanying condensed statements of income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2005 2004
Raw Material $ 2,869,826 2,906,721
Finished Goods 2,310,490 2,115,469
Inventory Reserve (533,116) (334,393)
-------------------------------
$
4,647,200 4,687,797
===============================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31, 2005 June 30, 2004
----------------- ---------------
Land $ 354,744 354,743
Buildings 2,921,127 2,899,729
Machinery and equipment 1,558,429 1,753,220
Office equipment 999,616 801,297
Vehicles 101,837 80,680
----------------- ---------------
5,935,753 5,889,669
Less accumulated depreciation
and amortization 2,627,279 2,579,586
----------------- ---------------
$ 3,308,474 3,310,083
================= ===============
6
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of
July 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 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 March 31, 2005, the Company had goodwill, net, of $789,422 from
the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and the
exchange of Dynatronics Laser Corporation common stock for a minority interest
in Dynatronics Marketing Corporation on June 30, 1983. Through June 30, 2002,
goodwill from these transactions was amortized over a period of 15 and 30 years,
respectively, on a straight-line basis.
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
March 31, 2005 June 30, 2004
--------------- ----------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 33,569 28,076
--------------- ----------------
Net carrying amount $ 39,671 $ 45,164
=============== ================
Amortization expense associated with the license agreement was $1,831 and
$5,493, respectively, for the three and nine months ended March 31, 2005 and
2004. Estimated amortization expense for the existing license agreement is
expected to be $7,324 for each of the fiscal years ending June 30, 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:
Three months ended Three months ended
March 31, 2005 March 31, 2004
------------------------------------------------
Beginning product warranty reserve balance $ 196,000 $ 172,000
Warranty repairs (40,334) (38,830)
Warranties issued 52,497 54,556
Changes in estimated warranty costs (6,163) (9,726)
------------------ -----------------
Ending product warranty liability balance $ 202,000 $ 178,000
================== =================
7
Nine months ended Nine months ended
March 31, 2005 March 31, 2004
----------------- ------------------
Beginning product warranty reserve balance $ 184,000 $ 160,000
Warranty repairs (109,540) (102,249)
Warranties issued 159,002 161,844
Changes in estimated warranty costs (31,462) (41,595)
----------------- -----------------
Ending product warranty liability balance $ 202,000 $ 178,000
================= =================
NOTE 9. COMMON STOCK.
The Company received proceeds of $33,100 during the nine months ended March 31,
2005 for 35,880 shares of common stock that were issued upon the exercise of
options by employees. During the nine months ended March 31, 2004 the Company
received proceeds of $184,205 for 157,317 shares of common stock that were
issued upon the exercise of options by employees. During the period ended March
31, 2004, the Company also acquired and retired 77,400 shares of common 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
the adoption of SFAS 123R will have on our financial position, results of
operations, or cash flow. See Stock-Based Compensation in Note 3 of our Notes to
Consolidated Financial Statements for more information related to the proforma
effects on our reported net income and net income per share of applying the fair
value recognition provisions of the previous SFAS 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
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 third
quarter ended March 31, 2005, for the Company's fiscal year ending June 30,
2005.
Net Sales
During the quarter ended March 31, 2005, the Company generated sales of
$5,048,108, compared to $5,246,044 in the quarter ended March 31, 2004. Sales
for the nine-month period ended March 31, 2005, were $15,289,610, compared to
$15,562,919 for the same period in 2004. The decrease in revenue for the quarter
and nine months ended March 31, 2005 compared to the prior year periods is due
entirely to lower sales of the Company's predecessor `50 Series' devices and
other older product lines. The decrease was partially offset by sales of the
Company's newer Solaris light therapy products which were higher than last
year's levels.
The Solaris family of advanced technology combination therapy devices introduced
in the first quarter of fiscal year 2004 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.
Consistent with its reputation as a leading innovator in the field of physical
medicine products, the Company has significantly expanded its R&D efforts and
has several new light therapy and other products under development which are
expected to increase Company sales beginning in July 2005.
Gross Profit
During the quarter ended March 31, 2005, total gross profit was $2,016,934 or
40.0% of net sales compared to $2,139,754 or 40.8% of net sales in the quarter
ended March 31, 2004. For the nine months ended March 31, 2005, total gross
profit was $6,207,432 or 40.6% of net sales compared to $6,151,889 or 39.5% of
net sales in the similar period ended March 31, 2004. The 0.8 percentage point
reduction in gross profit in the current reporting quarter reflects lower sales
of `50 Series' devices which carry above average margins. The 1.1 percentage
point increase in gross margins for the nine months ended March 31, 2005
reflects increased sales of higher-margin Solaris and Synergie devices compared
to the prior year period.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the quarter ended March
31, 2005, were $1,372,927 or 27.2% of net sales compared to $1,446,932 or 27.6%
of net sales in the quarter ended March 31, 2004. SG&A expenses for the nine
months ended March 31, 2005, were $4,328,640 or 28.3% of net sales compared to
$4,147,250 or 26.6% of net sales in the period ended March 31, 2004. SG&A
expenses for the quarter ended March 31, 2005 decreased by $74,005 or 5%
compared to the prior year period due primarily to approximately $44,000 in
lower selling expenses related to reduced sales commissions and tradeshow
activity for the Company's Synergie products as well as lower cost of sales
incentive programs for rehabilitation products. In addition, the variable
compensation amount paid to employees was approximately $43,000 lower in the
quarter ended March 31, 2005 compared to the similar period in 2004. These
amounts were partly offset by higher healthcare insurance premiums in 2005
compared to 2004.
SG&A expenses for the nine months ended March 31, 2005 increased by $181,390 or
4% over the prior year period due primarily to approximately $73,000 in
increased labor costs, approximately $64,000 in higher healthcare insurance
premiums, and approximately $103,000 in costs primarily associated with the
Company's new enterprise-wide software system including increased support
personnel and related depreciation expense. This new system is 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 reduced expenses for rehabilitation sales incentive programs during
the nine months ended March 31, 2005 compared to 2004.
9
Research and Development
The Company is currently developing a number of innovative products using its
light therapy technology. In addition to light therapy products, the Company is
developing new motorized treatment tables, a state-of-the-art traction device
and an iontophoresis device for non-invasive drug delivery. To accelerate the
development process, we have increased our engineering staff and budgeted a
company record amount for research and development in fiscal 2005. The new
products currently under development are scheduled for introduction beginning in
the summer of 2005. Designing innovative new products is a strategic philosophy
that we believe allows the Company to maintain a leadership position in the
physical medicine market.
Research and development expenses were $80,403 higher at $356,313 during the
quarter ended March 31, 2005 compared to $275,910 for the similar period in
2004. R&D expenses represented approximately 7.1% and 5.3% of the net sales of
the Company in the 2005 and 2004 quarterly periods, respectively. Research and
development expenses were $885,467 during the nine months ended March 31, 2005
compared to $837,028 for the similar period in 2004. These R&D expenses
represented approximately 5.8% and 5.4% of the net sales of the Company in the
2005 and 2004 periods, respectively. R&D costs are expensed as incurred.
Pre-tax Profit
Pre-tax profit for the quarter ended March 31, 2005 was $267,905 compared to
$380,622 during the same period of the prior year. Pre-tax profit for the nine
months ended March 31, 2005 was $909,296 compared to $1,054,433 during the same
period of the prior year. Lower sales of the Company's older product lines,
together with higher R&D expenses, resulted in a reduction in pre-tax profits
for the quarter and nine months ended March 31, 2005 compared to the prior year
periods. In addition, higher SG&A expenses related to increased labor expense
and the installation of a new enterprise-wide software system contributed to the
decrease in pre-tax profit for the nine months ended March 31, 2005 compared to
the prior year period.
Income Tax
Income tax expense for the three months ended March 31, 2005 was $103,143
compared to $70,920 in the three months ended March 31, 2004. The effective tax
rates were 38.5% and 18.6% for the quarters ended March 31, 2005 and 2004,
respectively. Income tax expense for the nine months ended March 31, 2005 was
$350,079 compared to $329,374 in the nine months ended March 31, 2004. The
effective tax rates were 38.5% and 31.2% for the nine month periods ended March
31, 2005 and 2004, respectively. The estimated tax rate was higher in the
quarter and nine months ended March 31, 2005 than in the comparable periods in
2004 due to a change in the Company's tax estimates.
Net Income
Net income for the quarter ended March 31, 2005 was $164,762 (approximately $.02
per share) compared to $309,702 (approximately $.03 per share) for the quarter
ended March 31, 2004. Net income for the nine months ended March 31, 2005 was
$559,217 (approximately $.06 per share) compared to $725,059 (approximately $.08
per share) for the similar period ended March 31, 2004. The decrease in sales
related to older product lines together with higher R&D expenses and higher
estimated tax rates in the current reporting periods lead to a decrease in net
income for the quarter and nine months ended March 31, 2005 when compared to the
similar periods one year ago. In addition, higher SG&A expenses in the nine
months ended March 31, 2005 contributed to the decrease in net income compared
to the similar period in 2004.
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 $6,666,720 at March 31, 2005, 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
$140,175 to $3,597,245 at March 31, 2005 compared to $3,737,420 at June 30,
2004. Management anticipates accounts receivable will likely remain at current
levels or increase modestly in future periods due to continuing demand for the
Company's Solaris Series products and the several new products anticipated for
release in the summer of 2005 which are expected to increase sales.
10
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 March 31, 2005 decreased $40,597 to $4,647,200
compared to $4,687,797 at June 30, 2004. Management expects that inventories
will increase modestly in coming months as a result of several planned new
product introductions.
Prepaid Expenses
Prepaid expenses decreased $193,973 to $258,781 at March 31, 2005 compared to
$452,754 at June 30, 2004 due to a reduction in prepayments to suppliers as well
as a reclassification of approximately $100,000 of prepaid expenses to Other
Assets.
Goodwill
Goodwill at March 31, 2005 and June 30, 2004 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 increased by $300,943 to $982,278 at March 31, 2005 compared to
$681,335 at June 30, 2004. The increase in accounts payable is a result of the
timing of our weekly invoice payments to suppliers and the timing of purchases
of product components. The Company continues to take advantage of available
early payment discounts when offered.
Cash
The Company's cash position at March 31, 2005 was $418,837 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.
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 by
$1,013,299 to $591,236 at March 31, 2005 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
March 31, 2005, was 5.75%. 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 March 31, 2005, the
maximum borrowing base was calculated to be approximately $3.9 million. The line
of credit is renewable annually on December 1st and includes covenants requiring
the Company to maintain certain financial ratios. As of March 31, 2005, the
Company was in compliance with all loan covenants.
The current ratio at March 31, 2005 increased to 3.4 to 1 compared to 2.8 to 1
at June 30, 2004. Current assets represent 68% of total assets at March 31,
2005.
11
Debt
Long-term debt excluding current installments totaled $1,399,250 at March 31,
2005 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:
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 March 31,
2005 and June 30, 2004, our inventory valuation reserve balance, which
established a new cost basis, was $533,116 and $334,393, respectively, and our
inventory balance was $4,647,200 and $4,687,797 net of reserves, respectively.
12
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 $3,597,245 and $3,737,420, net of allowance for doubtful accounts of
$245,559 and $182,941, at March 31, 2005 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 continue to focus our efforts on fueling and sustaining growth through the
development of new products for the rehabilitation and aesthetics markets while,
at the same time, strengthening our channels of distribution and improving
operating efficiencies.
In September 2003, we introduced the Solaris 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 various types of pain. The Solaris product line
is designed to accommodate additional light therapy probes as they are
developed. 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.
In fiscal 2005, the Company expanded its R&D program by hiring additional
engineers to accelerate the development of new products and increase the breadth
of products being developed. As a result, the Company plans to introduce a
record number of new products during fiscal year 2006 beginning in July 2005. Of
the new products scheduled for introduction, several are based on Dynatronics'
light therapy technology. Other new products include newly designed treatment
tables, an innovative traction device and an iontophoresis device for
non-invasive drug delivery.
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. 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 making them eligible for
marketing in Europe. The attractive features of the Solaris Series products are
expected to make foreign distribution channels more accessible. Interest in our
aesthetic products under the Synergie brand is presently leading the way for
international expansion with the establishment of new distributors in Japan,
South Africa, Europe and Southeast Asia.
13
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 year. 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 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 year.
o Increasing sales of Solaris Series devices through the
introduction of new light therapy accessories and by developing
new markets for light therapy applications.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices 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,
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, and the 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;
14
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.
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 or material
weaknesses.
15
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 5/13/05 /s/ Kelvyn H. Cullimore, Jr.
------------------ ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
Date 5/13/05 /s/ Terry M. Atkinson, CPA
------------------ ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
17