================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0398434
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
-------------------------------------------------
(Address of principal executive offices, Zip Code)
(801) 568-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of
"large accelerated filer," "accelerated filer" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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 registrant's common stock, no par value,
as of November 10, 2008 is 13,657,207.
DYNATRONICS CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)......................................1
Condensed Consolidated Balance Sheets
September 30, 2008 and June 30, 2008 .........................................1
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2008 and 2007................................2
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2008 and 2007................................3
Notes to Condensed Consolidated Financial Statements.........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15
Item 4. Controls and Procedures..............................................15
PART II. OTHER INFORMATION
Item 1A. Risk Factors........................................................15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........16
Item 6. Exhibits............................................................16
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets September 30, June 30,
2008 2008
------------ -------------
Current assets:
Cash $ 290,679 $ 288,481
Trade accounts receivable, less allowance for
doubtful accounts of $420,551 at September 30,
2008 and $411,057 at June 30, 2008 5,419,183 5,151,235
Other receivables 47,860 63,487
Inventories, net 6,491,823 6,283,068
Prepaid expenses 494,027 619,471
Prepaid income taxes - 98,644
Deferred income tax assets - current portion 482,771 477,300
------------ -------------
Total current assets 13,226,343 12,981,686
Property and equipment, net 3,479,707 3,527,153
Intangible assets, net 608,853 631,181
Other assets 366,120 359,748
Deferred income tax assets, net of current portion 999,324 928,051
------------ -------------
$ 18,680,347 $ 18,427,819
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 255,002 $ 297,413
Line of credit 5,648,780 5,818,320
Warranty reserve 209,168 209,168
Accounts payable 2,123,972 1,423,839
Accrued expenses 513,284 500,145
Accrued payroll and benefits 315,982 411,918
Income tax payable 8,809 -
------------ -------------
Total current liabilities 9,074,997 8,660,803
Long-term debt, net of current installments 3,008,549 3,046,000
Deferred compensation 464,827 455,377
------------ -------------
Total liabilities 12,548,373 12,162,180
------------ -------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 13,657,207
shares at September 30, 2008 and
13,670,807 shares at June 30, 2008 7,871,199 7,865,913
Accumulated deficit (1,739,225) (1,600,274)
------------ -------------
Total stockholders' equity 6,131,974 6,265,639
------------ -------------
$ 18,680,347 $ 18,427,819
============ =============
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30
2008 2007
------------ -------------
Net sales $ 7,996,149 $ 7,891,430
Cost of sales 4,800,508 4,959,118
------------ -------------
Gross profit 3,195,641 2,932,312
Selling, general, and administrative expenses 2,976,647 3,575,495
Research and development expenses 262,029 338,893
------------ -------------
Operating loss (43,035) (982,076)
------------ -------------
Other income (expense):
Interest income 407 4,915
Interest expense (151,071) (135,246)
Other income, net 2,870 3,164
------------ -------------
Net other expense (147,794) (127,167)
------------ -------------
Loss before income taxes (190,829) (1,109,243)
Income tax benefit (51,878) (397,040)
------------ -------------
Net loss $ (138,951) $ (712,203)
============ =============
Basic and diluted net loss per common share $ (0.01) $ (0.05)
============ =============
Weighted average basic and diluted common
shares outstanding 13,659,371 13,607,666
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2008 2007
------------ -------------
Cash flows from operating activities:
Net loss $ (138,951) $ (712,203)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 88,317 84,927
Amortization of intangible assets 22,328 25,028
Stock-based compensation expense 15,424 256,991
Deferred income tax assets, net (76,744) (401,790)
Provision for doubtful accounts 12,000 129,900
Provision for inventory obsolescence 72,000 42,000
Provision for warranty reserve 62,308 60,888
Provision for deferred compensation 9,450 8,055
Change in operating assets and liabilities:
Receivables (264,321) (1,047,970)
Inventories (280,755) (138,513)
Prepaid expenses and other assets 119,072 (63,949)
Accounts payable and accrued expenses 555,028 (547,121)
Prepaid income taxes 98,644 (547)
Income tax payable 8,809 -
------------ -------------
Net cash provided by (used in)
operating activities 302,609 (2,304,304)
------------ -------------
Cash flows from investing activities:
Capital expenditures (40,871) (60,999)
Business acquisitions - (1,135,692)
------------ -------------
Net cash used in investing activities (40,871) (1,196,691)
------------ -------------
Cash flows from financing activities:
Principal payments on long-term debt (79,862) (56,490)
Net change in borrowings under line of credit (169,540) 2,553,984
Proceeds from issuance of common stock - 29,327
Redemption of common stock (10,138) (37,915)
------------ -------------
Net cash provided by (used in)
financing activities (259,540) 2,488,906
------------ -------------
Net change in cash 2,198 (1,012,089)
Cash at beginning of period 288,481 1,301,105
------------ -------------
Cash at end of period $ 290,679 $ 289,016
============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 137,932 $ 115,622
Cash paid for income taxes 16,900 1,000
Supplemental disclosure of non-cash investing
and financing activities:
Capital expenditures financed by long-term debt - 90,134
Acquisition cash obligation financed by line
of credit - 1,000,000
Stock based compensation - see note 3
for details
Business acquisitions disclosure - see note 8
for details
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of September 30, 2008 and June 30,
2008 and the condensed consolidated statements of operations and cash flows for
the three months ended September 30, 2008 and 2007 were prepared by Dynatronics
Corporation without audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. The results of
operations for the quarter ended September 30, 2008 are not necessarily
indicative of the results for the fiscal year ending June 30, 2009. The Company
has previously filed with the SEC an annual report on Form 10-KSB which included
audited financial statements for each of the two years ended June 30, 2008 and
2007. It is suggested that the financial statements contained in this filing be
read in conjunction with the statements and notes thereto contained in the
Company's most recently Form 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents. The computation of diluted earnings per share does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per common share is the amount of
net income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each common stock equivalent
outstanding during the period, unless inclusion of common stock equivalents
would have an anti-dilutive effect.
In calculating net income (loss) per common share, the net income (loss) was the
same for both the basic and diluted calculation for the three months ended
September 30, 2008 and 2007. A reconciliation between the basic and diluted
weighted-average number of common shares for the three months ended September
30, 2008 and 2007 is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2008 2007
------------ -------------
Basic weighted average number of common shares 13,659,371 13,607,666
outstanding during the period
Weighted average number of dilutive common stock
options outstanding during the period -0- -0-
------------ -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 13,659,371 13,607,666
============ =============
Outstanding options not included in the computation of diluted net loss per
common share for the three-month periods ended September 30, 2008 and 2007
totaled 1,085,553 and 594,662 respectively, because to do so would have been
anti-dilutive.
4
NOTE 3. STOCK-BASED COMPENSATION
Common Stock. Stock-based compensation cost is measured at grant date, based on
the fair value of the award, and is recognized over the employee requisite
service period. The Company recognized $15,424 and $256,991 in stock-based
compensation expense during the three months ended September 30, 2008 and 2007,
respectively, as selling, general, and administrative expenses in the condensed
consolidated statements of operations.
On July 1, 2007, the Company granted 220,000 shares of common stock to employees
with an estimated value of $1.08 per share, which vested over a ninety-day
period. The Company recognized $238,950 in stock-based compensation during the
three months ended September 30, 2007 from these shares. On July 1, 2007, the
Company also granted 80,000 shares of common stock with an estimated value of
$1.08 per share, which vested over a four-year period in annual installments of
20,000 shares per year. The Company recognized $5,850 and $11,250 in stock-based
compensation expense during the three months ended month September 30, 2008 and
2007, respectively, from these shares. As of September 30, 2008, $35,550 in
unrecognized stock-based compensation from the unvested shares is expected to be
recognized over the remainder of the four-year period.
Stock Options. The Company maintains a 2005 equity incentive plan for the
benefit of employees. Incentive and nonqualified stock options, restricted
common stock, stock appreciation rights, and other share-based awards may be
granted under the plan. Awards granted under the plan may be performance-based.
Effective November 27, 2007, the plan was amended to increase the number of
shares available by one million shares as approved by the shareholders votes. At
September 30, 2008, 947,944 shares of common stock were authorized and reserved
for issuance, but were not granted under the terms of the 2005 equity incentive
plan as amended.
The following table summarizes the Company's stock option activity during the
period ended September 30, 2008:
Weighted
-Average
Number of Exercise
options Price
------------ -------------
Outstanding at beginning of period 1,141,603 $ 1.40
Granted 39,502 .60
Exercised -0- -0-
Cancelled 79,266 1.64
------------ -------------
Outstanding at end of period 1,101,839 1.46
============ =============
Exercisable at end of period 711,879 1.69
===========================
The Black-Scholes option pricing model is used to estimate the fair value of
options under the Company's stock option plan. The weighted average value of
stock options granted under the plan, as well as the assumptions used in
calculating these values for the three months ended September 30, 2008 and 2007
were based on estimates at the date of grant as follows:
Three Months Ended
---------------------------
September 30, September 30,
2008 2007
------------ -------------
Expected dividend yield 0% 0%
Expected stock price volatility 57 - 59% 56%
Risk-free interest rate 3.85 - 4.14% 4.8%
Expected life of options 10 years 7 years
Expected option lives and volatilities are based on historical data of the
Company. The risk free interest rate is based on the US Treasury bill rate on
the grant date for constant maturities that correspond with the option life.
Historically, the Company has not declared dividends and there are no future
plans to do so.
5
No options were exercised during the three months ended September 30, 2008. As
of September 30, 2008, there was approximately $132,136 of total unrecognized
stock-based compensation cost related to grants under our stock option plan that
will be expensed over a weighted-average period of 5 years.
Stock-based compensation expense under SFAS No 123(R) for the three months ended
September 30, 2008 and 2007 was $7,574 and $494, respectively and is included in
the amount shown above.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
For the three-month ended September 30, 2008 and 2007, comprehensive income
(loss) was equal to the net income (loss) as presented in the accompanying
condensed consolidated statements of operations.
NOTE 5. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2008 2008
------------ -------------
Raw material $ 2,863,420 $ 2,984,189
Finished goods 4,029,368 $ 3,636,597
Inventory reserve (400,965) (337,718)
------------ -------------
$ 6,491,823 $ 6,283,068
============ =============
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, June 30,
2008 2008
------------ -------------
Land $ 354,743 $ 354,743
Buildings 3,682,504 3,682,504
Machinery and equipment 1,672,910 1,661,962
Office equipment 1,313,744 1,283,821
Vehicles 188,148 188,148
---------------------------
7,212,049 7,171,178
Less accumulated depreciation
and amortization 3,732,342 3,644,025
---------------------------
$ 3,479,707 $ 3,527,153
===========================
NOTE 7. PRODUCT WARRANTY RESERVE
The Company accrues the estimated costs to be incurred in connection with its
manufactured product warranty programs as products are sold based on historical
warranty claims. A reconciliation of the changes in the warranty reserve is as
follows:
Three Three
months ended months ended
September 30, September 30,
2008 2007
------------ -------------
Beginning product warranty reserve $ 209,168 $ 208,000
Warranty repairs (62,308) (60,888)
Warranty reserve additions 61,242 119,507
Changes in estimated warranty costs 1,066 (58,619)
------------ -------------
Ending product warranty reserve $ 209,168 $ 208,000
===========================
6
NOTE 8. ACQUISITION AND NON-CASH DISCLOSURE
On July 2, 2007, the Company completed the acquisition of a 100% interest in
five of its key independent distributors; namely, Responsive Providers, Inc. of
Houston, Texas, Therapy and Health Care Products, Inc. of Youngstown, Ohio,
Cyman Therapy, Inc. of Detroit, Michigan, Al Rice and Associates, Inc. of
Jeffersonville, Indiana and Theratech Inc. of Minneapolis, Minnesota. The total
consideration paid for the five separately-negotiated acquisitions was
approximately $5,700,000, comprised of approximately $2,300,000 in cash and
3,061,591 shares of the Company's common stock.
The acquisition value of the five dealers acquired was accounted for using the
purchase method of accounting. Accordingly, the purchase price was assigned to
the assets acquired and the liabilities assumed based on estimated fair values
at the purchase date. The following table reflects the estimated fair values of
the assets acquired and the liabilities assumed as of the acquisition date:
Cash $ 651,828
Trade accounts receivable 1,160,976
Inventories 1,192,639
Prepaid expenses 4,782
Property and equipment 112,764
Cash surrender value of life insurance 207,563
Intangible assets 366,400
Goodwill 3,512,779
-------------
Total assets acquired 7,209,731
Accounts payable and accrued expenses (1,496,800)
-------------
Net assets acquired $ 5,712,931
=============
NOTE 9. INTANGIBLE ASSETS OTHER THAN GOODWILL
Identifiable intangibles assets consists of the following:
Asset and Useful Life September 30, June 30,
2008 2008
------------ -------------
Trade name - 15 years $ 339,400 $ 339,400
Domain name - 15 years 5,400 5,400
Non-compete agreement - 4 years 149,400 149,400
Customer relationships - 7-15 years 120,000 120,000
Trademark licensing agreement - 20 years 45,000 45,000
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 38,100
License agreement - 10 years 73,240 73,240
------------ -------------
Total identifiable intangibles 773,240 773,240
Less accumulated amortization 164,387 142,059
------------ -------------
Net carrying amount $ 608,853 $ 631,181
============ =============
7
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosure
requirements regarding fair value measurement. Where applicable, this statement
simplifies and codifies fair value related guidance previously issued within
United States of America generally accepted accounting principles. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 for financial assets and November 15, 2008 for non-financial
assets, and interim periods within those fiscal years. The Company adopted SFAS
157 on July 1, 2008 for its financial assets and liabilities with no material
impact on its consolidated financial statements. The Company will adopt SFAS 157
on July 1, 2009 for non-financial assets, and does not expect that it will have
a material impact on its consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards. EITF 06-11 requires companies to recognize the income tax benefit
realized from dividends or dividend equivalents that are charged to retained
earnings and paid to employees for non-vested equity-classified employee
share-based payment awards as an increase to additional paid-in capital. EITF
06-11 is effective for fiscal years beginning after September 15, 2007. The
Company does not expect EITF 06-11 to have a material impact on its financial
statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life
of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on its consolidated results of operation, cash flows and
financial condition.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles for
nongovernmental. SFAS No. 162 is effective 60 days following SEC approval of the
Public Company Accounting Oversight Board Auditing amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company does not expect adoption of SFAS No. 162 will have a
material impact on the Company's consolidated financial statements.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements (unaudited) and notes thereto appearing in Part I, Item 1
of this report on Form 10-Q.
Results of Operations
The Company's fiscal year ends on June 30th. This report covers the three months
ended September 30, 2008, for the Company's fiscal year ending June 30, 2009.
The operating results of the Company include the operations of entities acquired
by the Company in June and July 2007. On June 30, 2007, Dynatronics acquired its
largest independent distributor, Rajala Therapy Sales Associates of Pleasanton,
California. On July 2, 2007, the Company acquired five additional independent
distributors; namely, Responsive Providers, Inc. of Houston, Texas; Therapy and
Health Care Products, Inc. of Girard, Ohio; Cyman Therapy, Inc. of Detroit,
Michigan; Al Rice and Associates, Inc. of Jeffersonville, Indiana; and
Theratech, Inc. of Minneapolis, Minnesota. The effect of these acquisitions was
to expand Dynatronics' distribution capabilities from purely wholesale
distribution to direct retail distribution. Subsequent to these acquisitions
additional direct sales representatives have been added, bringing the total
number of direct sales representatives to 38 covering 26 states. Dynatronics
continues to support and expand its network of wholesale distributors and
dealers that provide coverage in other states.
Net Sales
During the quarter ended September 30, 2008, the Company's sales were
$7,996,149, compared to $7,891,430 in the quarter ended September 30, 2007. In
mid - September 2008, we began shipping our new product catalog containing over
500 pages of products - more than double the size of the Company's previous
catalog. The acquisition of six distributors last year has allowed us to greatly
expand our product offering. The new catalog is a major step in presenting the
Company's new image to the market after a year of assimilation and change. In
conjunction with the new catalog, we implemented pricing incentives to reward
customers for placing larger orders. The initial impact of the new catalog is
partly reflected by orders taken during October 2008, which generated the
highest level of monthly sales in the Company's history.
Gross Profit
During the quarter ended September 30, 2008, gross profit increased 9.0% to
$3,195,641, or 40.0% of net sales, compared to $2,932,312, or 37.2% of net
sales, in the quarter ended September 30, 2007. In the quarter ended September
30, 2007 gross profit as a percent of sales was lower than the current period
due to inventories of Dynatronics manufactured products in stock at the six
acquired independent dealers. Those inventories had a higher cost basis because
they were held in the dealer inventory at wholesale cost instead of manufactured
cost. This accounted for the approximately 2.8 percentage point difference
between gross profit in the current quarter and the similar period last year.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
September 30, 2008 decreased $598,848 to $2,976,647, or 37.2% of net sales,
compared to $3,575,495, or 45.3% of net sales in the prior year period. The
decrease in SG&A expenses for the quarter ended September 30, 2008 is related to
the following:
o $267,000 in lower labor and operating costs
o $368,500 in lower general and administrative expenses
o $37,000 in higher selling expenses related primarily to our new
product catalog
The reduction in SG&A in the quarter ended September 30, 2008 resulted primarily
from cost-saving measures implemented by the Company as part of the assimilation
of the acquired entities during fiscal year 2008. Specifically, with the
assimilation process substantially completed, management implemented measures in
March 2008 and July 2008 designed to reduce annual operating expenses by more
than $2.1 million. These measures included a reduction of approximately 20
percent of the Company's workforce and the elimination of duplicative overhead
expense. In addition, the Company consolidated operations from eight
distribution points to three. Many of these changes had been contemplated as
part of the planning for the acquisition and assimilation of the distributors in
2007. We believe these measures, while resulting in reductions in operating
expenses will not negatively impact the Company's sales or operations as they
represent primarily the elimination of unnecessary duplicate costs associated
with the acquisitions.
9
Research and Development
Research and Development ("R&D") expense during the quarter ended September 30,
2008 was $262,029, compared to $338,893 in the similar quarter in 2007. R&D
expense represented approximately 3.3% and 4.3% of the net sales of the Company
in the quarters ended September 30, 2008 and 2007, respectively. Management
anticipates R&D expense will increase in future quarters based on new products
that are under development. R&D costs are expensed as incurred. Dynatronics
intends to continue its commitment to developing innovative products for the
physical medicine market in fiscal year 2009 and beyond in order to position the
Company for growth.
Pre-tax Loss
Pre-tax loss for the quarter ended September 30, 2008 was $190,829 compared to a
pre-tax loss of $1,109,243 in the quarter ended September 30, 2007. The 83%
improvement in pre-tax loss in 2008 is primarily related to the reduction in
SG&A expenses totaling $598,848 discussed above, lower R&D expenses and the
improvement in gross profit for reasons discussed above.
Income Tax Benefit
Income tax benefit for the quarter ended September 30, 2008 was $51,878 compared
to income tax benefit of $397,040 in the quarter ended September 30, 2007. The
effective tax rate for 2008 was 27.2% compared to 35.8% in 2007. The lower
effective rate in 2008 is a result of franchise taxes that are required in
certain states which offsets the deferred tax benefits.
Net Loss
Net loss for the quarter ended September 30, 2008 was $138,951 ($.01 per share),
compared to net loss of $712,203 ($.05 per share) in the quarter ended September
30, 2007. Major components contributing to the improvement in net loss during
the quarter ended September 30, 2008 in comparison to the quarter ended
September 30, 2007, were the reduction in SG&A expenses, lower R&D expenses and
the improvement in gross profit described in this section, above.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through available cash reserves and
borrowings under its line of credit. The Company had working capital of
$4,151,346 at September 30, 2008, inclusive of the current portion of long-term
obligations and credit facilities, compared to working capital of $4,320,883 at
June 30, 2008.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$267,948 to $5,419,183 at September 30, 2008, compared to $5,151,235 at June 30,
2008. Trade accounts receivable represent amounts due from the Company's dealer
network, medical practitioners and clinics. We estimate that the allowance for
doubtful accounts is adequate based on our historical knowledge and relationship
with these customers. Accounts receivable are generally collected within 30 days
of the agreed terms. However, as a result of the recent acquisitions, the
character of the accounts receivable and collection patterns have changed and
will be carefully monitored over the coming year to ensure the allowance
estimates are adequate. Allowances for the retail accounts assumed in the
acquisitions include consideration of the historical experience of the acquired
companies.
Inventories
Inventories, net of reserves, at September 30, 2008 increased $208,755 to
$6,491,823 compared to $6,283,068 at June 30, 2008. This increase is partly a
result of required adjustments in inventory levels to accommodate the expansion
of the number of stocked items associated with the new catalog. Other factors
are related to timing of large inventory purchases from overseas suppliers.
Inventories are expected to reduce modestly now that we have consolidated
distribution facilities.
10
Accounts Payable
Accounts payable increased $700,133 to $2,123,972 at September 30, 2008,
compared to $1,423,839 at June 30, 2008. The increase in accounts payable is a
result of the timing of our weekly payments to suppliers and the timing of
purchases of product components. Accounts payable are generally within term. We
strive to take advantage of available early payment discounts when offered.
Accrued Payroll and Benefits
Accrued payroll and benefits decreased $95,936 to $315,982 at September 30,
2008, compared to $411,918 at June 30, 2008. The decrease in accrued payroll and
benefits is related to timing differences as well as the reduction in force
implemented over the past six months, resulting in lower accrued payroll at
September 30, 2008 compared to June 30, 2008.
Cash
The Company's cash position at September 30, 2008 was $290,679, compared to
$288,481 at June 30, 2008. The Company believes that improved cash flows from
operating activities through higher sales, improving management of accounts
receivable, maintaining current inventory levels and reduced operating expenses
will further reduce operating losses and expedite a return to profitability.
This improved cash flows combined with the available line of credit is expected
to be sufficient to cover 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 terms favorable to the Company.
Line of Credit
The Company has an $8,000,000 revolving line of credit with a commercial bank.
At September 30, 2008, the Company owed $5,648,780 compared to $5,818,320 at
June 30, 2008. Interest on the line of credit is based on the bank's prime rate
plus 1%, which at September 30, 2008 equaled 6.0% per annum. The line of credit
is collateralized by accounts receivable and inventories of the Company as well
as a security interest in the Company's headquarters facility in Salt Lake City,
Utah. Borrowing limitations are based on approximately 45% of eligible inventory
and up to 80% of eligible accounts receivable. Interest payments on the line are
due monthly. The line of credit is renewable biennially on December 15th and
includes covenants requiring the Company to maintain certain financial ratios.
As of September 30, 2008, the Company was in compliance with its loan covenants
or had received waivers for any noncompliance.
The current ratio was 1.5 to 1 at September 30, 2008 and 1.5 to 1 at June 30,
2008. Current assets represented 71% of total assets at September 30, 2008,
compared to 70% at June 30, 2007.
Debt
Long-term debt, net of current portion, totaled $3,008,549 at September 30,
2008, compared to $3,046,000 at June 30, 2008. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$3,200,000 million with monthly principal and interest payments of $40,707.
Inflation and Seasonality
The Company's revenues and net income 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
an understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed where such policies
affect our reported and expected financial results. In all material respects,
management believes that the accounting principles that are utilized conform to
accounting principles generally accepted in the United States of America.
11
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 the condensed consolidated 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, deferred income tax assets, and revenue
recognition. We base our estimates on historical experience and other facts and
circumstances that are believed to be reasonable, and the results form the basis
for making judgments about the carrying value of assets and liabilities. The
actual results may differ from these estimates under different assumptions or
conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out) or market. Inventory valuation reserves are maintained for
the estimated impairment of the inventory. Impairment may be a result of slow
moving or excess inventory, product obsolescence or changes in the valuation of
the inventory. In determining the adequacy of reserves, we analyze the
following, among other things:
o Current inventory quantities on hand.
o Product acceptance in the marketplace.
o Customer demand.
o Historical sales.
o Forecasted sales.
o Product obsolescence.
o Technological innovations.
o Character of the inventory as either a distributed item, finished
manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of sales within the statements of operations during the period in which
such modifications are determined necessary by management. At September 30, 2008
and June 30, 2008, our inventory valuation reserve, which established a new cost
basis, was $400,965 and $337,718, respectively, and our inventories totaled
$6,491,823 and $6,283,068 net of reserves, respectively.
Revenue Recognition
Historically, the majority of our product sales were to independent
distributors. In fiscal 2008, as a result of acquiring six of our top
distributors, a significant portion of our sales were generated through our
in-house direct sales force. Our sales force and distributors sell our products
to end users, including physical therapists, professional trainers, athletic
trainers, chiropractors, medical doctors and aestheticians. With the acquisition
of the key distributors, we expanded our distribution options to include direct
distribution of products in some territories while supporting independent dealer
efforts in others.
Sales revenues are recorded when products are shipped FOB shipping point under
an agreement with a customer, risk of loss and title have passed to the
customer, and collection of any resulting receivable is reasonably assured.
Amounts billed for shipping and handling of products are recorded as sales
revenue. Costs for shipping and handling of products to customers are recorded
as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $5,419,183 and $5,151,235, net of allowance for doubtful accounts of
$420,551 and $411,057, at September 30, 2008 and June 30, 2008, respectively.
The expansion of our customer base associated with more direct sales will spread
bad debt risk over a broader base of customers and reduce the concentration of
large dealer balances. At the same time, the management of more customer
accounts presents a higher risk. These risks will be evaluated over the coming
year to determine if current estimate policies are still applicable. In the
meantime, allowance for doubtful accounts associated with these acquired
customers is based on the historical experience of the dealers acquired as well
as the one year of experience of the Company since the acquisition of these
dealers.
12
Business Plan and Outlook
During fiscal year 2009, we will focus on a strategy to improve overall
operations and sales that includes the following elements: (1) strengthening
distribution channels; (2) developing new, state-of-the-art products for future
growth; (3) refining operations associated with the acquired companies and
continued reduction of overhead costs; and (4) enhancing product profit margins
through improved manufacturing processes and better pricing management. Our goal
in implementing this four-fold strategy is to enable the Company to address
short-term profitability without jeopardizing long-term growth.
Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. The main challenge presented by this
consolidation was the loss of independent dealers and the narrowing of
distribution channels. In order to compete more favorably and effectively, we
moved aggressively to strengthen our channels of distribution by acquiring key
distributors. We identified six key distributors with operations in 20 states.
On June 30, 2007, we acquired our largest independent distributor headquartered
in California. On July 2, 2007, we acquired five additional key independent
distributors headquartered in Texas, Ohio, Michigan, Indiana and Minnesota. We
also began hiring direct sales representatives in key locations around the
country resulting in 38 direct sales representatives now in 26 states. The
creation of a direct distribution channel through these key acquisitions and
hiring direct sales representatives provides Dynatronics with expanded ability
to sell at the retail level, which we believe improves gross profit margins and
enhances the Company's control over the distribution process.
The September 2008 introduction of our first consolidated catalog and pricing
schedule provides a powerful sales tool that is expected to help strengthen
sales efforts by direct sales reps. We believe that it will also be an effective
tool for independent dealers who use either a private labeled version or the
proprietary version of the catalog. This tool should further enhance efforts to
strengthen distribution channels. Specific efforts will be focused on recruiting
additional independent dealers and seasoned direct sales reps in geographical
areas where distribution has been lost or diminished due to consolidation
efforts within the industry. With the broad line of products now offered by the
Company, we will undertake to develop relationships with Group Purchasing
Organizations (GPO's) and large chains of hospitals and clinics that purchase
only on contract. This is a segment of business the Company has not heretofore
pursued but represents a large segment of business from which it has previously
been foreclosed because it was not an approved vendor with the various GPO's and
national or regional chains of care facilities.
The Company's Synergie brand line of aesthetic products received a boost this
past year with the introduction of the Elite Synergie line, the first redesign
of the popular aesthetic products since their original introduction almost 10
years ago. We believe that this new line of products remains the best value on
the market. With the new product line in place, the Company intends to leverage
its stable of direct sales representatives to further promote the sale of
Synergie brand products. With no mature distribution channels in the aesthetics
market, we believe that the availability of these direct sales representatives
provides an advantage for enhancing the distribution of these products. To
assist in that effort, a unique aesthetic products catalog is contemplated that
selects products already offered in the Company's proprietary rehab products
catalog that would have applicability to the aesthetics market. In addition, the
Company will seek strategic partnerships, both domestic and international, to
help maintain the sales momentum from the introduction of this revised product
line.
We have long believed that international markets present an untapped potential
for growth and expansion. Adding new distributors in several countries will be
the key to this expansion effort. Our past efforts to improve international
marketing have yielded only marginal improvements. We remain committed, however,
to finding the most cost effective ways to expand our markets internationally.
Our Salt Lake City facilities, where all electrotherapy, ultrasound, traction,
light therapy and Synergie products are manufactured, are certified to ISO
13485, an internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European Union
and other foreign countries.
Strengthening our distribution channels domestically and internationally for
both the rehab and aesthetic lines is our top priority for this new fiscal year.
A second priority is the introduction of new products.
During fiscal year 2007 and 2008, significant investments were made in research
and development to bring important new products to market. In April 2008,
Dynatronics introduced the DynaPro Spinal Health System, a non-surgical
treatment for back and neck pain. This innovative system combines the benefits
of decompression and light therapy with core-stabilization exercises and
nutrition forming a very effective tool for relieving pain associated with a
host of back problems including herniated discs, degenerative disc disease,
sciatica and pinched nerves. The DynaPro Spinal Health System features our
Dynatron DX2, T4 treatment table and other packaged accessories incorporating a
state-of-the-art marketing and patient-awareness program to help practitioners
promote this proven, non-surgical pain relief treatment.
13
Another new product introduced in April 2008 was the new Dynatron X5 "Turbo"
soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times more
powerful than the original X5 device and we belive it is a highly effective
treatment for various orthopedic and sports injuries, and is gaining popularity
in sports medicine.
Also as discussed above, in April 2008 we introduced the new "Synergie Elite"
product line. The new "Synergie Elite" line of aesthetic treatment devices is
comprised of cellulite treatment devices, microdermabrasion units and
bio-stimulation light therapy equipment. The market's response to the new
Synergie Elite equipment has been promising. The new updated design and
additional features make the Synergie Elite products not only visually
attractive, but functionally enhanced positioning us to better compete in the
aesthetic markets.
This commitment to product innovation will continue through the coming fiscal
year. Many new products are under development. Most new products currently under
development are targeted for introduction in the latter half of the current
fiscal year or the first half of the following fiscal year. The commitment to
innovation of high quality products has been a hallmark of Dynatronics and will
continue to be throughout the coming year.
Refining our business model for supporting sales reps and dealers also will be a
focal point of operations during fiscal year 2009. We will continue to evaluate
the most efficient ways to maintain the satellite sales offices and warehouses.
The ongoing refinement of this model is expected to yield further efficiencies
that will better achieve sales goals while at the same time reducing expenses.
While sales have shifted more to distributed products, the sale of the Company's
manufactured products remains the largest contributor to margin generation.
Therefore, renewed emphasis is being placed on improving manufacturing
operations including considering more offshore manufacturing of components as
well as streamlining manufacturing operations in Utah and Tennessee. With
thousands of new products now being distributed by the company, refinements in
the methods of price management will be implemented throughout the coming year
to ensure margins are properly maintained.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Reinforcing our position in the domestic physical medicine market
by securing channels of distribution through a strategy of
recruiting direct sales representatives and working closely with
the most successful dealers of capital equipment in areas where
distribution is limited.
o Improving sales by focusing on development of new sales strategies
and promotional programs including the introduction of the most
comprehensive catalog in our history and leveraging that tool in
achieving the goals of strengthening our distribution channels.
o Expanding distribution of our redesigned Synergie product line
through leveraging our current direct sales force, seeking
additional independent distributors and creating new sales tools
such as a catalog of products targeted just for aesthetics.
o Renewing emphasis of international sales by identifying key
distributors who could represent the product line particularly in
Europe.
o Continuing development of new, state-of-the-art products, both
high-tech and commodity, in fiscal year 2009, for both the
rehabilitation and aesthetic markets.
o Examining ways to reduce costs of manufacturing including
exploring more overseas manufacturing of components.
o Further refining the operational model for supporting field sales
and satellite operations including more aggressive management of
product pricing.
o Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase market
reach and supplement capital resources.
14
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-Q, particularly the foregoing
discussion in Part I Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not purely historical, are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of 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 regarding product development, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of existing assets to fund future operations and capital spending
needs. Actual results could differ materially from the anticipated results or
other expectations expressed in such forward-looking statements for the reasons
detailed under the headings "Risk Factors" in our Annual Report on Form 10-KSB
for the year ended September 30, 2008 and Part II, Item 1A "Risk Factors" in
this report on Form 10-Q. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks. Market risk is the potential risk of
loss arising from adverse changes in market prices and rates. We do not enter
into derivative or other financial instruments for trading or speculative
purposes. There have been no material changes in our market risk during the
quarter ended September 30, 2008.
Our primary market risk exposure is interest rate risk. As of September 30,
2008, approximately $5,650,000 of our debt bore interest at variable rates.
Accordingly, our net income (loss) is affected by changes in interest rates. For
every one hundred basis point change in the average interest rate under our
existing debt, our annual interest expense would change by approximately
$56,500.
In the event of an adverse change in interest rates, we could take actions to
mitigate our exposure. However, due to the uncertainty of the actions that would
be taken and their possible effects, this analysis assumes no such actions.
Item 4. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the
period covered by this report, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective.
There has been no change in our internal control over financial reporting during
the quarter ended September 30, 2008 that has materially affected, or that is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Various risk factors associated with our business are included under the heading
"Risk Factors" in our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2008. In addition, the Company notes the following risk:
General economic conditions may affect our revenue and harm our business.
As widely reported, financial markets in the United States, Europe and Asia have
been experiencing extreme disruption in recent months. Unfavorable changes in
economic conditions, including declining consumer confidence, inflation,
recession or other changes, may lead our customers to delay or reduce purchases
of our products and our results of operations and financial condition could be
adversely affected thereby. Challenging economic conditions also may impair the
ability of our customers or distributors to pay for products they have
purchased, and as a result, our reserves for doubtful accounts and write-offs of
accounts receivable could increase. Our cash flows may be adversely affected by
delayed payments or underpayments by our customers. We are unable to predict the
duration and severity of the current disruption in financial markets and adverse
economic conditions in the U.S. and other countries.
15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities. The following table summarizes purchases of
Dynatronics common stock made by the Company during the quarter ended September
30, 2008, under a stock repurchase program approved by the board of directors of
the Company in September 2003.
Issuer Purchases of Equity Securities*
Total #
of shares Maxim Numbe
purchased (or approximate
as part dollar value) of
Total # Average of publicly shares that may
of shares price paid announced plans yet be purchased
Period purchased per share or programs under the plan
--------------------------------------------------------------------------------
July 2008 13,600 $.75 13,600 $66,300
August 2008 - N/A - $66,300
September 2008 - N/A - $66,300
----------------
* The Company's repurchase program was announced on September 3, 2003. At that
time, the Company approved repurchases aggregating $500,000. In November 2007,
the Company added an additional $250,000 to the repurchase plan.
Item 6. Exhibits
(a) Exhibits
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser
Corporation. Incorporated by reference to a Registration Statement
on Form S-1 (No. 2-85045) filed with the SEC and effective
November 2, 1984
3.2 Articles of Amendment dated November 21, 1988 (previously filed)
3.3 Articles of Amendment dated November 18, 1993 (previously filed)
10.1 Employment contract with Kelvyn H. Cullimore, Jr. (previously
filed)
10.2 Employment contract with Larry K. Beardall (previously filed)
10.3 Loan Agreement with Zions Bank (previously filed)
10.5 Amended Loan Agreement with Zions Bank (previously filed)
10.6 1992 Amended and Restated Stock Option Plan (previously filed)
10.7 Dynatronics Corporation 2006 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive Proxy
Statement on Schedule 14A filed on October 27, 2006)
10.8 Form of Option Agreement for the 2006 Equity Incentive Plan for
incentive stock options (previously filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2006)
10.9 Form of Option Agreement for the 2006 Equity Incentive Plan for
non-qualified options (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2006)
11 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of principal
financial officer (filed herewith)
32 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. SECTION 1350) (filed herewith)
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATRONICS CORPORATION
Registrant
Date 11/13/08 /s/ Kelvyn H. Cullimore, Jr.
----------------- ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 11/13/08 /s/ Terry M. Atkinson, CPA
----------------- ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
--------------------------------------------------------------------------------