UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
-----------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------
(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes __ No X
The number of shares outstanding of the issuer's common stock, no par value, as
of November 8, 2006 is 8,961,398.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
DYNATRONICS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 2006
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Balance Sheets
September 30, 2006 (unaudited) and June 30, 2006 (audited)...................1
Unaudited Statements of Operations
Three Months Ended September 30, 2006 and 2005...............................2
Unaudited Statements of Cash Flows
Three Months Ended September 30, 2006 and 2005...............................3
Notes to Unaudited Financial Statements......................................4
Item 2. Management's Discussion and Analysis or Plan of Operation............8
Item 3. Controls and Procedures.............................................14
PART II. OTHER INFORMATION
Item 6. Exhibits...........................................................14
ii
DYNATRONICS CORPORATION
Balance Sheets
September 30, June 30,
2006 2006
Assets (Unaudited) (Audited)
-------------- ---------------
Current assets:
Cash $ 247,006 423,184
Trade accounts receivable, less
allowance for doubtful accounts
of $258,411 at September 30, 2006
and $244,238 at June 30, 2006 2,919,455 3,022,991
Other receivables 196,532 216,847
Inventories, net 5,142,825 4,982,990
Prepaid expenses 624,081 505,786
Prepaid income taxes 175,428 65,869
Deferred tax asset - current 387,830 387,830
-------------- ---------------
Total current assets 9,693,157 9,605,497
Property and equipment, net 3,621,885 3,671,216
Goodwill, net of accumulated amortization
of $649,792 at September 30, 2006 and
at June 30, 2006 789,422 789,422
Other assets 418,721 457,520
-------------- ---------------
$ 14,523,185 14,523,655
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 246,307 254,518
Line of credit 872,765 577,232
Accounts payable 685,028 593,016
Accrued expenses 523,569 536,131
Accrued payroll and benefit expenses 126,665 254,453
-------------- ---------------
Total current liabilities 2,454,334 2,215,350
Long-term debt, excluding current installments 1,968,216 2,023,410
Deferred compensation 396,305 388,250
Deferred tax liability - noncurrent 225,603 225,603
-------------- ---------------
Total liabilities 5,044,458 4,852,613
-------------- ---------------
Commitments
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 8,975,373
shares at September 30, 2006 and
9,034,566 shares at June 30, 2006 2,727,196 2,746,503
Deferred stock compensation (2,000) (4,000)
Retained earnings 6,753,531 6,928,539
-------------- ---------------
Total stockholders' equity 9,478,727 9,671,042
-------------- ---------------
$ 14,523,185 14,523,655
============== ===============
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Operations
(Unaudited)
Three Months Ended
September 30
2006 2005
-------------- ---------------
Net sales $ 4,139,057 $ 4,358,428
Cost of sales 2,646,900 2,769,844
-------------- ---------------
Gross profit 1,492,157 1,588,584
Selling, general, and administrative expenses 1,261,145 1,243,125
Research and development expenses 478,084 413,605
-------------- ---------------
Operating income (loss) (247,072) (68,146)
-------------- ---------------
Other income (expense):
Interest income 6,683 2,791
Interest expense (47,510) (30,189)
Other income, net 3,332 59,250
-------------- ---------------
Total other income (expense) (37,495) 31,852
-------------- ---------------
Income (loss) before income taxes (284,567) (36,294)
Income tax expense (benefit) (109,559) (13,973)
-------------- ---------------
Net income (loss) $ (175,008) $ (22,321)
============== ===============
Basic and diluted net income (loss)
per common share $ (0.02) $ (0.00)
============== ===============
Weighted average basic and diluted common
shares outstanding (note 2)
Basic and diluted 8,976,744 9,017,771
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2006 2005
-------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (175,008) $ (22,321)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization of
property and equipment 89,750 84,544
Other amortization 1,831 1,831
Provision for doubtful accounts 12,000 12,000
Provision for inventory obsolescence 48,000 63,000
Provision for warranty reserve 70,133 59,451
Provision for deferred compensation 8,055 6,933
Compensation expense on stock and
options 2,093 -
Change in operating assets and
liabilities:
Receivables 111,851 (192,030)
Inventories (207,835) 74,082
Prepaid expenses and other assets (81,327) (168,748)
Accounts payable and accrued
expenses (118,471) (496,878)
Prepaid income tax (109,559) (14,973)
-------------- ---------------
Net cash used in operating
activities (348,487) (593,109)
-------------- ---------------
Cash flows from investing activities:
Capital expenditures (40,419) (27,296)
Proceeds from sale of assets - 1,500
-------------- ---------------
Net cash used in investing
activities (40,419) (25,796)
-------------- ---------------
Cash flows from financing activities:
Principal payments on long-term debt (63,405) (52,890)
Net change in line of credit 295,533 603,994
Proceeds from issuance of common stock 21,600 5,968
Redemption of common stock (41,000) -
-------------- ---------------
Net cash provided by financing
activities 212,728 557,072
-------------- ---------------
Net change in cash (176,178) (61,833)
Cash at beginning of period 423,184 472,899
-------------- ---------------
Cash at end of period $ 247,006 $ 411,066
============== ===============
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 48,018 $ 27,516
Cash paid for income taxes $ - $ 1,000
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 1. PRESENTATION
The balance sheet as of September 30, 2006 and statements of operations and cash
flows for the three months ended September 30, 2006 and 2005 were prepared by
Dynatronics Corporation without audit pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all necessary adjustments, which consist only of normal
recurring adjustments, to the financial statements have been made to present
fairly the financial position and results of operations and cash flows. The
results of operations for the respective periods presented are not necessarily
indicative of the results for the respective complete years. The Company has
previously filed with the SEC an annual report on Form 10-KSB which included
audited financial statements for the two years ended June 30, 2006 and 2005. It
is suggested that the financial statements contained in this filing be read in
conjunction with the statements and notes thereto contained in the Company's
10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents. The computation of diluted earnings per share does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per common share is the amount of
net income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each common stock equivalent
outstanding during the period, unless inclusion of common stock equivalents
would have an anti-dilutive effect.
In calculating net income (loss) per common share, the net income (loss) was the
same for both the basic and diluted calculation for the three months ended
September 30, 2006 and 2005. A reconciliation between the basic and diluted
weighted-average number of common shares for the three months ended September
30, 2006 and 2005 is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2006 2005
-------------- ---------------
Basic weighted average number of common shares
outstanding during the period 8,976,744 9,017,771
Weighted average number of dilutive common
stock options outstanding during the period 103,432 -
-------------- ---------------
Diluted weighted average number of common and
common equivalent shares outstanding during
the period 9,080,176 9,017,771
============== ===============
4
NOTE 3. EMPLOYEE STOCK COMPENSATION
Effective July 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements using a fair value method of accounting. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
Using the modified prospective method compensation cost recognized in the three
months ended September 30, 2006, includes amounts of compensation cost of all
stock based payments that vested during the period (based on grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
previously presented in the proforma footnote disclosures). In accordance with
the modified prospective method, results for prior periods have not been
restated.
The following table summarizes the effect during the three months ended
September 30, 2006 of adopting SFAS No. 123(R) as of July 1, 2006:
Selling, general, and administrative expenses $ 93
---------------
Total stock option compensation expense recognized 93
Related deferred income tax expense -
---------------
Increase in net loss $ 93
===============
Impact on basic and diluted net income (loss) per
common share $ -
===============
Prior to July 1, 2006, as permitted under SFAS No. 123, the Company accounted
for its stock option plans following the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no stock based
compensation had been reflected in net income (loss) for stock options granted
to directors, officers and employees of the Company as all options granted had
an exercise price equal to the market value of the underlying common stock on
the date of grant and the related number of shares granted was fixed at that
time. 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 for the period ended
September 30, 2005:
Three months ended
September 30, 2005
-------------------
Net income (loss) as reported $ (22,321)
Less: pro forma adjustment for stock based
compensation, net of income tax
(173,562)
-------------------
Pro forma net income (loss) $ (195,883)
===================
Basic and diluted net income (loss) per share:
As reported $ -
Effect of pro forma adjustment (0.02)
-------------------
Pro forma (0.02)
===================
The per share weighted-average fair value of stock options granted for the three
months ended September 30, 2005 was $1.40 on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
5
Three months ended
September 30, 2005
-------------------
Expected dividend yield 0%
Risk-free interest rate 4.14 - 4.20%
Expected volatility 87 - 88%
Vesting period 1 - 5 years
Expected life 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended September 30, 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:
September 30, June 30,
2006 2006
-------------- ---------------
Raw material $ 3,035,136 3,034,919
Finished goods 2,523,648 2,331,563
Inventory reserve (415,959) (383,492)
-------------- ---------------
$ 5,142,825 4,982,990
============== ===============
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, June 30,
2006 2006
-------------- ---------------
Land $ 354,744 354,743
Buildings 3,590,088 3,590,088
Machinery and equipment 1,514,114 1,481,796
Office equipment 1,067,764 1,059,664
Vehicles 94,290 94,290
-------------- ---------------
6,621,000 6,580,581
Less accumulated depreciation
and amortization 2,999,115 2,909,365
-------------- ---------------
$ 3,621,885 3,671,216
============== ===============
NOTE 7. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates. The
product warranty reserve is included in accrued expenses at September 30, 2006
and 2005. A reconciliation of the changes in the warranty liability is as
follows:
6
Three months ended Three months ended
September 30, 2006 September 30, 2005
-------------------- -------------------
Beginning product warranty
reserve balance $ 208,000 208,000
Warranty repairs (70,133) (59,451)
Warranties issued 59,410 31,041
Changes in estimated
warranty costs 10,723 28,410
-------------------- -------------------
Ending product warranty
liability balance $ 208,000 208,000
==================== ===================
NOTE 8. COMMON STOCK.
The Company received proceeds of $21,600 during the three months ended September
30, 2006 for 20,000 shares of common stock that were issued upon the exercise of
options for services.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB No. 109, was issued. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. Accordingly, the Company will implement
the revised standard in the first quarter of fiscal year 2008.
7
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the first
quarter ended September 30, 2006, for the Company's fiscal year ending June 30,
2007.
Net Sales
The Company began shipping two new products during the quarter ended September
30, 2006, including the Dynatron X3 light therapy device and the Dynatron DX2
combination decompression/light therapy device. The new Dynatron X3 is the most
powerful infrared light therapy device offered by the Company. It is capable of
powering any of the Company's infrared light probes and two infrared light pads
simultaneously. The new Dynatron DX2 Decompression System combines the benefits
of infrared light therapy with traction and decompression therapy into one
unique device. The Company generated only limited sales of the DX2 during the
quarter ended September 30, 2006, as it was only available for sale the last two
weeks of the quarter.
During the quarter ended September 30, 2006, the Company generated sales of
$4,139,057, compared to $4,358,428 in the quarter ended September 30, 2005.
Sales increases from new Dynatron X3 and DX2 decompression/light therapy units
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. Sales of wood tables and metal tables, as well as certain other
supplies, were also lower compared to the same period last year.
The months of July and August are traditionally slow sales months due to summer
vacations of both dealers and distributors as well as practitioners.
Additionally, there appears to be a general softening in demand for capital
equipment and supplies broadly reported by our dealer network. These factors
also contributed to decreased sales compared to last year.
Gross Profit
During the quarter ended September 30, 2006, total gross profit was $1,492,157,
or 36.1% of net sales, compared to $1,588,584, or 36.4% of net sales, in the
quarter ended September 30, 2005. The decrease in gross profit is primarily due
to the lower sales generated during the reporting quarter compared to the prior
year period. The decrease in gross profit as a percent of sales was mainly
attributable to reduced sales of high-margin aesthetic devices as well as
reduced sales of legacy 50 Series products. Lower than expected gross margins on
the new X3 and DX2 products also contributed to overall lower gross margin
percentages.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
September 30, 2006 were $1,261,145, or 30.5% of net sales, compared to
$1,243,125, or 28.5% of net sales in the prior year period. Overall SG&A
expenses for the quarter ended September 30, 2006 were within 2% of last year's
amount.
Research and Development
During the quarter ended September 30, 2006, the Company incurred heavy R&D
expenses in completing the development of the Dynatron X3 light therapy device
and the DX2 combination decompression/light therapy device. R&D expenses during
the quarter ended September 30, 2006 increased 16% to $478,084, compared to
$413,605 in the prior year period. R&D expenses represented approximately 11.6%
and 9.5% of the net sales of the Company in the quarters ended September 30,
2006 and 2005, respectively. R&D costs are expensed as incurred. Management
anticipates that future R&D expenses will return to more normal levels now that
the development of the new X-series products has been completed. However, the
Company remains committed to a strong R&D program in order to develop
state-of-the-art products for future growth.
8
Other income
The Company recorded a one-time, $57,000 gain from the sale of an investment
last year during the quarter ended September 30, 2005.
Pre-tax loss
Pre-tax loss for the quarter ended September 30, 2006 was $284,567 compared to a
pre-tax loss of $36,294 in the quarter ended September 30, 2005. Lower sales
generated during the current quarter, combined with higher R&D costs and the
one-time gain on the asset sale last year, account for the differences between
the comparative periods.
Income Tax Benefit
Income tax benefit for the quarter ended September 30, 2006 was $109,559
compared to $13,973 in the quarter ended September 30, 2005. The effective tax
rate for both periods reported was 38.5%.
Net Loss
Net loss for the quarter ended September 30, 2006 was $175,008 ($.02 per share),
compared to a net loss of $22,321 ($.00 per share) in the quarter ended
September 30, 2005. The lower sales generated during the reporting quarter,
combined with higher R&D expenses and the absence of a gain on the sale of
assets as occurred last year, led to the increase in net loss compared to the
prior year period.
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 $7,238,823 at September 30, 2006, inclusive of
the current portion of long-term obligations and credit facilities, as compared
to working capital of $7,390,147 at June 30, 2006. The Company believes that it
has sufficient liquidity and working capital to meet its operational
requirements.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, decreased
$103,536 to $2,919,455 at September 30, 2006 compared to $3,022,991 at June 30,
2006. The Company's trade accounts receivable fluctuate each quarter based on
the level of sales generated during the reporting period, and on the timing of
payments received from its dealers, medical practitioners and clinics who are
its primary customers. 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.
Inventories
Inventories, net of reserves, at September 30, 2006 increased $159,835 to
$5,142,825 compared to $4,982,990 at June 30, 2006. This increase reflects the
introduction of two new products during the quarter. Management expects that
inventories will likely be maintained at current levels or reduce somewhat over
the upcoming quarters as inventory levels for the new products are normalized.
Prepaid Expenses
Prepaid expenses increased $118,295 to $624,081 at September 30, 2006 compared
to $505,786 at June 30, 2006, due primarily to increases in advances made to
suppliers for various component parts.
Goodwill
Goodwill at September 30, 2006 and June 30, 2006 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, 2006, the
9
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, 2006. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter of fiscal 2006.
Accounts Payable
Accounts payable increased by $92,012 to $685,028 at September 30, 2006 compared
to $593,016 at June 30, 2006. All accounts payable are within term. We continue
to take advantage of available early payment discounts when offered.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $127,788 to $126,665 at
September 30, 2006 compared to $254,453 at June 30, 2006. The decrease in
accrued payroll & benefit expenses is related to 1) timing differences resulting
in lower accrued payroll at September 30, 2006 compared to June 30, 2006, and 2)
lower accrued bonuses for employees and officers and corresponding payroll
taxes.
Cash
The Company's cash position decreased $176,178 to $247,006 at September 30, 2006
compared to $423,184 at June 30, 2006, due to higher inventory levels and the
operating loss generated during the quarter. 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 $295,533 to $872,765 at September 30, 2006 compared to $577,232 at
June 30, 2006. Interest on the line of credit is based on the bank's prime rate,
which at September 30, 2006, was 8.25%. The line of credit is collateralized by
accounts receivable and inventories. Borrowing limitations are based on 30% of
eligible inventory and up to 80% of eligible accounts receivable. The line of
credit is renewable biennially in December of each odd numbered year, and
includes covenants requiring the Company to maintain certain financial ratios.
As of September 30, 2006, the Company was in compliance with all loan covenants.
The current ratio was 3.9 to 1 at September 30, 2006 compared to 4.3 to 1 at
June 30, 2006. Current assets represented 67% of total assets at September 30,
2006.
Debt
Long-term debt excluding current installments totaled $1,968,216 at September
30, 2006 compared to $2,023,410 at June 30, 2006. 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 $2.2 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. During fiscal 2006, the Company purchased $59,000 of stock. In the first
quarter of fiscal 2007, the Company purchased $41,000 of stock, leaving over
$300,000 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.
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.
10
The Company's business operations are not materially affected by seasonality
factors, although traditionally July and August experience slower sales due to
summer related activities on the part of dealers, distributors and
practitioners.
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, 2006. 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 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:
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 September
30, 2006 and June 30, 2006, our inventory valuation reserve balance was $415,959
and $383,492, respectively, and our inventory balance was $5,142,825 and
$4,982,990 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 $2,919,455 and $3,022,991, net of allowance for doubtful accounts of
$258,411 and $244,238, at September 30, 2006 and June 30, 2006, respectively.
11
Business Plan and Outlook
-------------------------
During fiscal year 2007, management began implementing a four-fold strategy to
improve overall operations. This strategy focused on (1) boosting marketing
efforts through new sales incentive programs; (2) reducing labor expenses; (3)
enhancing product profit margins through improved manufacturing processes; and
(4) continuing development of new, state-of-the-art products for future growth.
Management's goal in implementing this four-fold strategy is to enable the
Company to address short-term profitability without jeopardizing long-term
growth.
During the quarter ended September 30, 2006, the Company introduced several new
sales incentive programs for dealers and distributors including an incentive
cruise for fiscal 2007. In addition, management identified a number of
improvements that can be made to lower manufacturing costs and thus improve
profit margins, particularly for the new X-Series products recently introduced
that do not enjoy the gross profit margin originally anticipated. Labor cost
reductions are being achieved through improved production efficiencies and
reductions in R&D labor which had been ramped up the past year to accelerate
development of the X-Series products. Finally, the Company continues development
of new products for both the rehabilitation and aesthetic markets.
During the reporting quarter, we introduced the Dynatron X3, a powerful light
therapy device capable of powering a light probe and two light pads
simultaneously. This device incorporates touch screen technology for easy
interface with the practitioner. We also introduced the DX2 combination traction
and light therapy device. The DX2 is Dynatronics' first proprietary traction
device and incorporates not only touch screen technology, but other unique and
proprietary technology that will facilitate traction and decompression therapy.
We believe it is the only unit on the market that offers traction and infrared
light therapy from the same device.
The introductions of the new T3 and T4 treatment tables are scheduled for the
third fiscal quarter ending March 31, 2007. These tables are designed with a
higher lift capacity and several unique features. The T4 therapy table is
specially designed for performing traction and decompression therapies with the
DX2 unit.
Another important part of our strategic plan is the further expansion of
worldwide marketing efforts. Over the past two years, international sales have
been maintained above the $1 million level, or approximately 5% 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, STS devices, light therapy and Synergie products are
manufactured, is certified to ISO 13485, an internationally recognized standard
of excellence in medical device manufacturing. This designation is an important
requirement in obtaining the CE Mark certification, which allows us to market
our products in the European Union and other foreign countries.
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. In September 2006, we hired a
new, experienced sales manager for the aesthetic department. During fiscal year
2007, we plan to redesign our Synergie product line and make it more attractive
to the international market. We also plan to develop and introduce additional
products for the aesthetic market. In addition, we are considering new methods
of distribution to boost sales that have lagged due to reduced dealer interest
in capital equipment.
Dynatronics continues to look for strategic business opportunities that would
enhance shareholder value. Such opportunities could take the form of
acquisitions, exclusive marketing agreements, mergers or asset acquisitions.
Such opportunities are unique and often difficult to structure. Nevertheless,
Dynatronics considers this an important potential avenue for growth.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Reinforcing our position in the physical medicine market through
an aggressive marketing and advertising plan which includes
several new sales incentive programs.
o Reducing labor and certain other expenses through improved
production efficiencies and reductions in R&D labor costs which
had been increased over the past year to accelerate the
introduction of the X-Series products.
o Enhancing product profit margins through improved manufacturing
processes, particularly for the recently introduced X-Series
products.
12
o Continuing development of new, state-of-the-art products, both
high tech and commodity, in fiscal year 2007, for both the
rehabilitation and aesthetic markets.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more products into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o 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;
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;
13
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 for small companies continue to evolve. Therefore,
we can give no assurances that our systems will satisfy the new regulatory
requirements. In addition, in order to maintain and improve the effectiveness of
our disclosure controls and procedures and internal controls over financial
reporting, significant resources and management oversight will be required.
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officers have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There were no changes in our internal control over
financial reporting that occurred during the quarter ended September 30, 2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Small Business Issuer Purchases of Equity Securities*
Approximate
Total # of Shares Dollar Value of
Total # of Purchased as part Shares that May
Shares Average Price of Publicly Announced Yet be Purchased
Period Purchased Paid per Share Plans or Programs Under Plan/Program
7/1/06 to
7/31/06 13,600 $1.18 13,600 $335,437
8/1/06 to
8/31/06 8,300 $1.31 8,300 $324,578
9/1/06 to
9/30/06 10,900 $1.29 10,900 $310,551
* The Company's repurchase program was announced on September 3, 2003. At that
time, the Company approved repurchases aggregating $500,000.
Item 6. Exhibits
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser
Corporation. Incorporated by reference to a Registration
Statement on Form S-1 (No. 2-85045) filed with the SEC and
effective November 2, 1984
14
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 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)
10.8 Form of Option Agreement for the 2005 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 2005 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)
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 11/13/06 /s/ Kelvyn H. Cullimore, Jr.
------------- -----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 11/13/06 /s/ Terry M. Atkinson, CPA
------------- -----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
16