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, 2006.
[ ] 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
---- ----------
(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
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes __ No X
The number of shares outstanding of the issuer's common stock, no par value, as
of May 9, 2006 is 9,034,566.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
DYNATRONICS CORPORATION
FORM 10-QSB
MARCH 31, 2006
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Unaudited Balance Sheets
March 31, 2006 and June 30, 2005.............................................1
Unaudited Statements of Operations
Three and Nine Months Ended March 31, 2006 and 2005..........................2
Unaudited Statements of Cash Flows
Nine Months Ended March 31, 2006 and 2005....................................3
Notes to Unaudited Financial Statements......................................5
Item 2. Management's Discussion and Analysis or Plan of Operation...........10
Item 3. Controls and Procedures.............................................17
PART II. OTHER INFORMATION
Item 6. Exhibits...........................................................17
DYNATRONICS CORPORATION
Balance Sheets
March 31, 2006 June 30, 2005
Assets (Unaudited) (Audited)
----------------------- ----------------------
Current assets:
Cash $ 543,251 $ 472,899
Trade accounts receivable, less
allowance for doubtful accounts of
$260,484 at March 31, 2006 and
$252,509 at June 30, 2005 3,651,464 3,006,315
Other receivables 96,662 91,129
Inventories, net 5,116,331 4,712,523
Prepaid expenses 458,117 386,935
Prepaid income taxes - 21,701
Deferred tax asset-current 384,077 384,077
----------------------- ----------------------
Total current assets 10,249,902 9,075,579
Property and equipment, net 3,776,760 3,221,944
Goodwill, net of accumulated amortization of
$649,792 at March 31, 2006
and at June 30, 2005 789,422 789,422
Other assets 365,827 372,778
----------------------- ----------------------
$ 15,181,911 $ 13,459,723
======================= ======================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 254,887 $ 221,069
Line of credit 1,271,982 264,761
Accounts payable 599,735 605,788
Accrued expenses 488,048 571,940
Accrued payroll and benefit expenses 174,628 368,167
Income tax payable 17,561 -
----------------------- ----------------------
Total current liabilities 2,806,841 2,031,725
Long-term debt, excluding current installments 2,085,452 1,330,325
Deferred compensation 381,317 360,518
Deferred tax liability - noncurrent 223,647 223,647
----------------------- ----------------------
Total liabilities 5,497,257 3,946,215
----------------------- ----------------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 9,028,014
shares at March 31, 2006 and
9,015,128 shares at June 30, 2005 2,801,215 2,779,000
Deferred stock compensation (6,000) -
Retained earnings 6,889,439 6,734,508
----------------------- ----------------------
Total stockholders' equity 9,684,654 9,513,508
----------------------- ----------------------
$ 15,181,911 $ 13,459,723
======================= ======================
1
DYNATRONICS CORPORATION
Condensed Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2006 2005 2006 2005
---------------- ----------------- -------------------- ------------------
Net sales $ 4,979,697 $ 5,048,108 $ 14,568,959 $ 15,289,610
Cost of sales 3,175,172 3,031,174 9,117,687 9,082,178
---------------- ---------------- ------------------ -----------------
Gross profit 1,804,525 2,016,934 5,451,272 6,207,432
Selling, general, and
administrative expenses 1,312,920 1,372,927 3,884,398 4,328,640
Research and development expenses 430,363 356,313 1,276,329 885,467
---------------- ---------------- ------------------ -----------------
Operating income 61,242 287,694 290,545 993,325
---------------- ---------------- ------------------ -----------------
Other income (expense):
Interest income 2,982 2,753 8,182 4,657
Interest expense (38,856) (33,247) (108,926) (107,649)
Other income, net 2,580 10,705 62,392 18,963
---------------- ---------------- ------------------ -----------------
Total other income (expense) (33,294) (19,789) (38,352) (84,029)
---------------- ---------------- ------------------ -----------------
Income before income taxes 27,948 267,905 252,193 909,296
Income tax expense 10,929 103,143 97,262 350,079
---------------- ---------------- ------------------ -----------------
Net income $ 17,019 $ 164,762 $ 154,931 $ 559,217
================ ================ ================== =================
Basic and diluted net income
per common share $ 0.00 $ 0.02 $ 0.02 $ 0.06
================ ================ =================== ===================
Weighted average basic and diluted
common shares outstanding (note 2)
Basic 9,022,214 8,974,707 9,020,111 8,963,842
Diluted 9,163,714 9,261,151 9,182,231 9,213,259
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2006 2005
---------------------- -----------------------
Cash flows from operating activities:
Net income $ 154,931 $ 559,217
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of property
and equipment 247,015 272,315
Other amortization 5,493 5,493
Provision for doubtful accounts 36,000 72,000
Provision for inventory obsolescence 189,000 207,000
Provision for warranty reserve 205,305 121,541
Provision for deferred compensation 20,799 22,122
Compensation expense on stock and options 2,000 19,800
Change in operating assets and liabilities:
Receivables (686,682) (28,199)
Inventories (592,808) (166,403)
Prepaid expenses and other assets (69,724) 73,352
Accounts payable and accrued expenses (488,788) 256,395
Income tax receivable 21,701 (160,791)
Income tax payable 17,561 -
---------------------- -----------------------
Net cash (used in) provided by
operating activities (938,197) 1,253,842
---------------------- -----------------------
Cash flows from investing activities:
Capital expenditures (803,331) (270,675)
Proceeds from sale of assets 1,500 (31)
---------------------- -----------------------
Net cash used in investing
activities (801,831) (270,706)
---------------------- -----------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,530,000 -
Principal payments on long-term debt (741,056) (157,127)
Net change in line of credit 1,007,221 (1,013,299)
Proceeds from issuance of common stock 14,215 33,100
---------------------- -----------------------
Net cash provided by (used in)
financing activities 1,810,380 (1,137,326)
---------------------- -----------------------
Net change in cash 70,352 (154,190)
Cash at beginning of period 472,899 573,027
---------------------- -----------------------
Cash at end of period $ 543,251 $ 418,837
====================== =======================
3
Supplemental disclosures of cash flow information:
Cash paid for interest $ 101,368 $ 109,656
Cash paid for income taxes $ 57,000 $ 510,870
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for consulting services - 29,700
Common stock issued for directors fees 8,000 -
See accompanying notes to financial statements.
4
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 2006 (unaudited) and June 30, 2005
(audited) and for the three and nine months ended March 31, 2006 and 2005 were
prepared by Dynatronics Corporation (the "Company") without audit (except as
noted) 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, 2005 and 2004. 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.
The computation of diluted earnings per share does not assume exercise or
conversion of securities that would have an anti-dilutive effect.
Basic net income 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 for the three and nine months ended March 31,
2006. A reconciliation between the basic and diluted weighted-average number of
common shares for the three and nine months ended March 31, 2006 and 2005 is
summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 9,022,214 8,974,707 9,020,111 8,963,842
Weighted average number of dilutive common stock
options outstanding during the period 141,500 286,444 162,120 249,417
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,163,714 9,261,151 9,182,231 9,213,259
============= ============ ============= =============
5
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 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. The period of vesting for options granted
during the nine months ended March 31, 2006 is shorter than the period of
vesting in previous years. 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, 2006 March 31, 2005
Net income as reported $ 17,019 164,762
Less: pro forma adjustment for stock based
Compensation, net of income tax (10,065) (11,095)
------------------------ ---------------------------
Pro forma net income $ 6,954 153,667
Basic net income per share:
As reported $ 0.00 0.02
Effect of pro forma adjustment 0.00 0.00
------------------------ ---------------------------
Pro forma 0.00 0.02
Diluted net income per share:
As reported 0.00 0.02
Effect of pro forma adjustment 0.00 0.00
------------------------ ---------------------------
Pro forma $ 0.00 0.02
------------------------ ---------------------------
Nine months ended Nine months ended
March 31, 2006 March 31, 2005
Net income as reported $ 154,931 559,217
Less: pro forma adjustment for stock based
Compensation, net of income tax (461,539) (32,595)
------------------------ ---------------------------
Pro forma net income (loss) $ (306,608) 526,622
Basic net income (loss) per share:
As reported $ 0.02 0.06
Effect of pro forma adjustment (0.05) 0.00
------------------------ ---------------------------
Pro forma (0.03) 0.06
Diluted net income (loss) per share:
As reported 0.02 0.06
Effect of pro forma adjustment (0.05) 0.00
------------------------ ---------------------------
Pro forma $ (0.03) 0.06
------------------------ ---------------------------
6
The per share weighted-average fair value of stock options granted for the three
months ended March 31, 2006 and 2005 was $1.16 and $1.29 per share,
respectively, and for the nine months ended March 31, 2006 and 2005 was $1.23
and $1.27 per share, respectively, on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
Three months ended Three months ended
March 31, 2006 March 31, 2005
-------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.34 - 4.79% 3.72 - 4.45%
Expected volatility 80 - 81% 86 - 89%
Vesting period 1 - 5 years 1 - 5 years
Expected life 7 & 10 years 5 & 7 years
Nine months ended Nine months ended
March 31, 2006 March 31, 2005
-------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.14 - 4.79% 3.66 - 4.45%
Expected volatility 80 - 88% 86 - 89%
Vesting period 0 - 5 years 1 - 5 years
Expected life 7 & 10 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended March 31, 2006 and 2005, 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, 2006 June 30, 2005
Raw material $ 3,373,482 2,671,255
Finished goods 2,325,111 2,409,435
Inventory reserve
(582,262) (368,167)
------------------- ----------------
$ 5,116,331 4,712,523
=================== ================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31, 2006 June 30, 2005
----------------- ------------------
Land $ 354,744 354,743
Buildings 3,617,127 2,921,127
Machinery and equipment 1,472,822 1,560,010
Office equipment 1,054,367 1,011,101
Vehicles
94,290 94,290
----------------- ------------------
6,593,350 5,941,271
Less accumulated depreciation
and amortization 2,816,590 2,719,327
----------------- ------------------
$ 3,776,760 3,221,944
================= ==================
7
NOTE 7. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates. The
product warranty reserve is included in accrued expenses at March 31, 2006 and
June 30, 2005. A reconciliation of the changes in the warranty liability is as
follows:
Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------------ ---------------------------
Beginning product warranty reserve balance $ 208,000 $ 196,000
Warranty repairs (75,462) (40,334)
Warranties issued 35,466 52,497
Changes in estimated warranty costs 39,996 (6,163)
------------------------ ---------------------------
Ending product warranty liability balance $ 208,000 $ 202,000
======================== ===========================
Nine months ended Nine months ended
March 31, 2006 March 31, 2005
------------------------ ---------------------------
Beginning product warranty reserve balance $ 208,000 $ 184,000
Warranty repairs (205,305) (109,540)
Warranties issued 103,762 159,002
Changes in estimated warranty costs 101,543 (31,462)
------------------------ ---------------------------
Ending product warranty liability balance $ 208,000 $ 202,000
======================== ===========================
NOTE 8. COMMON STOCK.
The Company received proceeds of $14,215 during the nine months ended March 31,
2006 for 12,886 shares of common stock that were issued upon the exercise of
options by employees. During the nine months ended March 31, 2005 the Company
received proceeds of $33,100 for 35,880 shares of common stock that were issued
upon the exercise of options by employees.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published SFAS 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
of the registrant's first fiscal year beginning on or after December 15, 2005.
Accordingly, the Company will implement the revised standard in the first
quarter of fiscal year 2007. 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
that adoption of SFAS 123R will have on our financial position, results of
operations, and cash flow.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" an interpretation of FASB No. 143
("FIN No. 47"). FIN No. 47 addresses the obligation of a business enterprise to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. An entity is required to recognize a liability for the
fair value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The Company evaluated the criteria of
this pronouncement and concluded that it has no conditional asset retirement
obligation, and therefore the adoption of FIN No. 47 had no impact on the
Company's financial statements.
8
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3." This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine the period-specific effects or the cumulative effect of the change.
This pronouncement became effective December 15, 2005. Currently, the Company
does not have changes in accounting principle; the adoption of SFAS No. 154 will
not impact the Company's financial position or results of operations.
9
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, 2006, for the Company's fiscal year ending June 30,
2006.
Net Sales
During the quarter ended March 31, 2006, the Company generated sales of
$4,979,697, compared to $5,048,108 in the quarter ended March 31, 2005. During
the nine months ended March 31, 2006, the Company generated sales of
$14,568,959, compared to $15,289,610 in the nine months ended March 31, 2005.
Sales increases from new products, metal treatment tables and certain other
medical supplies were offset by lower sales of the Company's aesthetic equipment
and legacy 50 Series products. Reduced sales of aesthetic equipment are
primarily attributable to certain dealers determining to drop high-dollar
capital equipment from their product offerings. Efforts are underway to find new
dealers or sales strategies in the territories where these dealers have
discontinued carrying the product line. Sales of older 50 Series products have
declined as a result of customers preferring to purchase the Company's newer
Solaris products with infrared light therapy.
The Company began shipping two new products during the third quarter, including
the Dynatron 702 infrared light therapy device and the DX9 Decompression System.
The new Dynatron 702 is the Company's first stand-alone infrared light therapy
device. It simplifies infrared light therapy treatments and is capable of
powering not only the Company's light probes, but also our new light pad for
treating larger areas of the body. The new Dynatron DX9 Decompression System
combines the benefits of infrared light therapy with traction and decompression
therapy by packaging the Dynatron 702 with our TX900 traction/decompression
device and a new DT4X therapy table specifically designed for this application.
This novel approach is not only effective in treating back pain but offers the
practitioner an economical approach to acquiring the necessary equipment for
offering this type of therapy.
Gross Profit
During the quarter ended March 31, 2006, total gross profit was $1,804,525, or
36.2% of net sales, compared to $2,016,934, or 40.0% of net sales, in the
quarter ended March 31, 2005. For the nine months ended March 31, 2006, total
gross profit was $5,451,272, or 37.4% of net sales, compared to $6,207,432, or
40.6% of net sales, in the similar period ended March 31, 2005. The decreases in
gross profit as a percent of sales were mainly attributable to reduced sales of
high-margin aesthetic devices as well as reduced sales of legacy 50 Series
products. Another contributing factor is that the new products introduced this
quarter, the Dynatron 702 and the DX9 Decompression Package, carry lower margins
than the Solaris line of products. In addition, during the quarter and nine
months ended March 31, 2006, the Company enjoyed higher sales of certain lower
margin products such as metal treatment tables and other medical supplies. This
shift in product mix had the effect of lowering margins for the reporting
period.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 2006 were $1,312,920, or 26.4% of net sales, compared to $1,372,927,
or 27.2% of net sales, in the prior year period. SG&A expenses for the nine
months ended March 31, 2006 were $3,884,398, or 26.7% of net sales, compared to
$4,328,640, or 28.3% of net sales, in the prior year period.
Total SG&A expenses in the quarter ended March 31, 2006 decreased by $60,007, or
4.4%, compared to the similar quarter in 2005. The decrease in SG&A expenses in
the quarter ended March 31, 2006 compared to 2005 is attributable to
approximately $62,000 in lower incentive compensation expenses due to the
reduced profits generated during the quarter.
Total SG&A expenses in the nine months ended March 31, 2006 decreased by
$444,242, or 10.3%, compared to the similar period in 2005. The primary
components affecting SG&A expenses in the nine months ended March 31, 2006
compared to 2005 were:
10
o Approximately $157,000 in lower labor expenses.
o Approximately $208,000 in lower incentive compensation expenses.
o Approximately $89,000 in lower selling expenses related to our
aesthetic product line.
Research and Development
The Company has expanded its research and development ("R&D") capabilities by
increasing its staff of engineers in order to develop new products at a more
rapid pace. The first of these new products began shipping in October 2005.
While this effort has increased short term costs, we believe it will also
position the Company to generate future growth in both sales and profits,
although there can be no assurance this will happen. R&D expenses during the
quarter ended March 31, 2006 increased 21% to $430,363, compared to $356,313 in
the prior year period. R&D expenses during the nine months ended March 31, 2006
increased 44% to $1,276,329, compared to $885,467 in the prior year period. R&D
expenses represented approximately 8.6% and 8.8% of the net sales of the Company
in the quarter and nine months ended March 31, 2006, compared to 7.1% and 5.8%
of net sales in the 2005 periods, respectively. R&D costs are expensed as
incurred.
Pre-tax profit
Pre-tax profit for the quarter ended March 31, 2006 was $27,948 compared to
$267,905 in the quarter ended March 31, 2005. Pre-tax profit for the nine months
ended March 31, 2006 was $252,193 compared to $909,296 in the nine months ended
March 31, 2005. Lower margins generated during the quarter and nine month
periods, combined with higher R&D costs, account for the differences between the
comparative periods.
Income Tax
Income tax expense for the quarter ended March 31, 2006 was $10,929 compared to
$103,143 in the quarter ended March 31, 2005. Income tax expense for the nine
months ended March 31, 2006 was $97,262 compared to $350,079 in the similar
period ended March 31, 2005. The effective tax rate for all periods reported
ranged between 38.5% and 39.1%.
Net Income
Net income for the quarter ended March 31, 2006 was $17,019 (approximately $.00
per share), compared to $164,762 (approximately $.02 per share) in the quarter
ended March 31, 2005. Net income for the nine months ended March 31, 2006 was
$154,931 (approximately $.02 per share), compared to $559,217 (approximately
$.06 per share) in the nine months ended March 31, 2005. The lower margins
generated during the reporting quarter, combined with higher R&D expenses, led
to the reduction in net income compared to the prior year periods.
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 $7,443,061 at March 31, 2006, inclusive of the
current portion of long-term obligations and credit facilities, as compared to
working capital of $7,043,854 at June 30, 2005.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$645,149 to $3,651,464 at March 31, 2006 compared to $3,006,315 at June 30,
2005. The Company's trade accounts receivable fluctuate each quarter based on
the timing of payments received from our dealers. These receivables will
continue to fluctuate in the future and will likely increase as we introduce the
planned new products 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 relationships with these customers. Accounts receivable are generally
collected within 30 days of the agreed terms.
11
Inventories
Inventories, net of reserves, at March 31, 2006 increased $403,808 to $5,116,331
compared to $4,712,523 at June 30, 2005. This increase reflects the introduction
of new products during the fiscal year as well as the timing of delivery of
medical supplies from international suppliers. Management expects that
inventories will likely increase modestly over the upcoming quarters based on
the Company's planned new product introductions.
Prepaid Expenses
Prepaid expenses increased $71,182 to $458,117 at March 31, 2006 compared to
$386,935 at June 30, 2005, due primarily to increases in advances made to
suppliers for various component parts.
Goodwill
Goodwill at March 31, 2006 and June 30, 2005 was $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, 2005, 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, 2005. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter of fiscal 2005.
Accounts Payable
Accounts payable decreased by $6,053 to $599,735 at March 31, 2006 compared to
$605,788 at June 30, 2005. All accounts payable are within term. We continue to
take advantage of available early payment discounts when offered.
Accrued Expenses
Accrued expenses decreased by $83,892 to $488,048 at March 31, 2006 compared to
$571,940 at June 30, 2005. Accrued expenses at June 30, 2005 were higher due to
the timing of our June 2005 national dealer meeting and accrued expenses for
sales incentive programs.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $193,539 to $174,628 at March
31, 2006 compared to $368,167 at June 30, 2005. The decrease in accrued payroll
& benefit expenses is related to 1) timing differences resulting in lower
accrued payroll at March 31, 2006 compared to June 30, 2005, and 2) lower
accrued bonuses for employees, officers, and directors and corresponding payroll
taxes.
Cash
The Company's cash position increased $70,352 to $543,251 at March 31, 2006
compared to $472,899 at June 30, 2005. 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 up to a
maximum amount of $4,500,000. The outstanding balance on our line of credit
increased $1,007,221 to $1,271,982 at March 31, 2006 compared to $264,761 at
June 30, 2005. Higher inventory and accounts receivable levels are the primary
factors contributing to the increase in the outstanding balance on the line of
credit. Interest on the line of credit is based on the bank's prime rate, which
at March 31, 2006, was 7.75%. The line of credit is collateralized by accounts
receivable and inventories. Borrowing limitations are based on 30% of eligible
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inventory and up to 80% of eligible accounts receivable. The line of credit is
renewable biennially in December and includes covenants requiring the Company to
maintain certain financial ratios. As of March 31, 2006, the Company was in
compliance with all loan covenants.
The current ratio was 3.7 to 1 at March 31, 2006 compared to 4.5 to 1 at June
30, 2005. Current assets represented 68% of total assets at March 31, 2006.
Debt
Long-term debt excluding current installments totaled $2,085,452 at March 31,
2006 compared to $1,330,325 at June 30, 2005. During the quarter ended December
31, 2005, the Company borrowed approximately $1.53 million at a fixed interest
rate of 6.4% to refinance its adjustable rate mortgage on the Tennessee facility
and construct a 10,000 sq. ft. warehouse addition at that facility. Long-term
debt is comprised primarily of the mortgage loans on our office and
manufacturing facilities in Utah and Tennessee. The current principal balance on
the mortgage loans is approximately $2.3 million, with monthly principal and
interest payments of $29,320.
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 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. No shares were repurchased during the nine months ended March 31, 2006.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed in this Management's
Discussion and Analysis where such policies affect our reported and expected
financial results. 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 annual report on Form 10-KSB for the year ended June
30, 2005. In all material respects, management believes that the accounting
principles that are utilized conform to accounting principles generally accepted
in the United States of America.
The preparation of this quarterly report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our unaudited financial statements. By their
nature, these judgments are subject to an inherent degree of uncertainty. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, 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 Reserve
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 March 31,
2006 and June 30, 2005, our inventory valuation reserve balance, which
established a new cost basis, was $582,262 and $368,167, respectively, and our
inventory balance was $5,116,331 and $4,712,523 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, typically 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 $3,651,464 and $3,006,315, net of allowance for doubtful accounts of
$260,484 and $252,509, at March 31, 2006 and June 30, 2005, respectively.
Business Plan and Outlook
-------------------------
Over the past seven years, annual net sales have grown from $12.6 million in
fiscal year 1998 to $20.4 million in 2005. During fiscal year 2006, we will
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.
The benefits of our focused R&D campaign were initially manifest in September
2005 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 infrared light therapy. Light therapy is
becoming widely recognized for its successful treatment of painful conditions.
In July 2005, we announced that we would be introducing eight new products over
the coming months. While delays in the introduction of certain products has
hampered the achievement of some sales goals and increased R&D costs, many
successes have been achieved. However, until the full release of the new
products, sales and profits are expected to remain consistent with recent past
performance.
The first of the announced products, the Dynatron Xp Infrared Light Pad, began
shipping to customers in October 2005. The Dynatron Xp Light Pad provides
practitioners with a tool that allows unattended therapy of large segments of
the body such as the back, thigh or shoulder.
In October 2005, we also began shipping the Dynatron iBox, a new transdermal
drug delivery device for iontophoresis that we believe is the most
technologically advanced product of its kind on the market. While sales of this
device do not contribute significantly to our total sales, the iBox is
strategically important in our plans to leverage sales of the iontophoresis
electrodes we distribute. Over the coming nine to twelve months, we intend to
introduce a new iontophoresis electrode program that will utilize the iBox
device as a focal point of this strategy.
14
In January 2006, we began shipping the Dynatron 702, a stand-alone light therapy
device that not only simplifies infrared light therapy treatments, but can be
combined with our traction device for dual traction and light therapy
treatments. The original Solaris series devices offered light therapy as an
added accessory to our popular combination electrotherapy/ultrasound technology.
However, there has been increasing market demand for a stand-alone unit.
The probes being offered with the Dynatron 702 include not only the Dynatron 880
and 890 probes, but also two new probes - the D880Plus, which generates twice
the power output of its predecessor model, and the D405, which produces a
combination infrared and blue wavelength output. The D880 Plus probe began
shipping in November, 2005, while the D405 probe became available in January
2006.
In January 2006, we also introduced the DX9 combination traction and infrared
light therapy system. We believe that combining the pain relieving
characteristics of infrared light therapy as offered through our new Xp Light
Pad, with the traditional benefits of decompression therapy through traction,
will make our DX9 traction system one of the most unique products of its kind on
the market. The DX9 traction system is designed to provide practitioners a more
effective way to relieve pain using combination therapy. The DX9 package
incorporates three of our devices along with numerous accessories. The devices
are the new Dynatron 702 device, our existing Dynatron TX900 Traction Device,
and the new DT4X traction table, a revised version of our HLT4 Traction table.
The devices and accessories are combined into an economically priced package.
The remaining products yet to be introduced that were announced July 2005 are
listed below. Increased R&D expenditures have been incurred over the past two
quarters to overcome unanticipated development delays of these products and to
accelerate their introduction. These increased expenditures are expected to
continue until the products are released. We are targeting introduction of the
following new products and product combinations in the first quarter of fiscal
2007:
o Dynatron X3 - This is a multi-channel infrared light therapy
device. It will be capable of accommodating two Xp Infrared Light
Pads as well as the practitioner's choice of probe.
o Dynatron DX2 - This concept combines into a single device traction
and infrared light therapy capabilities. It will be Dynatronics'
first proprietary traction device and will incorporate not only
touch screen technology, but other unique and proprietary
technology that will facilitate traction and decompression
therapy. We believe it will be the only unit on the market that
offers traction and infrared light therapy from the same device.
o T4 Therapy Table - The T4 therapy table is designed to be used
specifically in traction and decompression therapy. It will offer
unique features that more fully accommodate the delivery of
traction and decompression therapy.
o DX1 package - The DX1 will combine the DX2 and the T4 table in a
package along with additional accessories needed for decompression
therapy.
o T3 Therapy Table - The T3 therapy table is designed as an enhanced
version of our popular T3 therapy table.
Another important part of our strategic plan is the further expansion of
worldwide marketing efforts. Over the past two years, international sales have
doubled to approximately 6% of net sales, and we continue to press forward
seeking additional opportunities for international expansion. The Company's Salt
Lake City operation, where all electrotherapy, ultrasound, light therapy and
Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European Union
and other foreign countries.
We continue efforts to promote our line of aesthetic equipment which includes
the Synergie AMS device for dermal massage, the Synergie MDA device for
microdermabrasion, and the Synergie LT device, an infrared light therapy unit
designed specifically for aesthetic applications. We plan to develop and
introduce additional light therapy devices for the aesthetic market. Recent
interest by medical spas in the use of other physical therapy modalities such as
electrotherapy, ultrasound and light therapy in aesthetic applications has
opened new potential for crossover of physical medicine modalities into the
aesthetics market. This presents a unique opportunity for us to grow sales of
new aesthetic products with little additional R&D effort since the products have
already been developed for the physical medicine markets. We are also
considering new methods of distribution to boost sales that have lagged due to
reduced dealer interest in capital equipment.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
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o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of several new products, both high tech and
commodity, in fiscal years 2006 and 2007.
o Increasing sales of Solaris 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 and versions of our physical therapy modalities 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 Part 1 Item 2, Management's Discussion and Analysis or
Plan of Operation, that are not purely historical are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act.
These statements refer to our expectations, hopes, beliefs, anticipations,
commitments, intentions and strategies regarding the future. They may be
identified by the use of the words or phrases "believes," "expects,"
"anticipates," "should," "plans," "estimates," "intends," and "potential," among
others. Forward-looking statements include, but are not limited to, statements
contained in Management's Discussion and Analysis or Plan of Operation regarding
product development, market acceptance, financial performance, revenue and
expense levels in the future and the sufficiency of its existing assets to fund
future operations and capital spending needs. Actual results could differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements for the reasons detailed in our Annual Report on Form
10-KSB under the headings "Description of Business" and "Risk Factors." The fact
that some of the risk factors may be the same or similar to past reports filed
with the SEC means only that the risks are present in multiple periods. We
believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, and the Solaris
infrared light therapy products;
o failure to timely release new products against market
expectations;
o the ability to hire and retain the services of trained personnel
at cost-effective rates;
o rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o reliance on key management personnel;
o foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o economic and political risks related to expansion into
international markets;
16
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.
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 were no changes in our internal control over
financial reporting that occurred during the quarter ended March 31, 2006 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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 SEC 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 Zions Bank (previously filed)
10.5 Amended Loan Agreement with Zions Bank (previously filed)
17
10.6 1992 Amended and Restated Stock Option Plan (previously
filed)
10.7 Dynatronics Corporation 2005 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive
Proxy Statement on Schedule 14A filed on October 27, 2005)
11 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of principal
financial officer (filed herewith)
32 Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. SECTION 1350) (filed herewith)
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
-----------------------
Registrant
Date 5/12/06 /s/ Kelvyn H. Cullimore, Jr.
------------ ----------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 5/12/06 /s/ Terry M. Atkinson, CPA
------------ --------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
19