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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 March 31, 2011
or
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Cottonwood Heights, UT 84121
----------------------------------------------------
(Address of principal executive offices, Zip Code)
(801) 568-7000
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(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. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). [ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
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 [X] No
The number of shares outstanding of the registrant's common stock, no par value,
as of May 9, 2011 is 13,074,774.
DYNATRONICS CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2011
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2011 and June 30, 2010.........................................1
Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2011 and 2010......................2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, 2011 and 2010................................3
Notes to Condensed Consolidated Financial Statements.....................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
Item 4. Controls and Procedures...........................................14
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......15
Item 5. Other Information.................................................15
Item 6. Exhibits..........................................................15
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
2011 2010
--------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 248,202 383,756
Trade accounts receivable, less
allowance for doubtful accounts of
$321,779 as of March 31, 2011 and
$254,664 as of June 30, 2010 3,882,665 3,735,251
Other receivables 15,161 70,919
Inventories, net 5,549,503 5,766,800
Prepaid expenses and other 292,335 262,577
Prepaid income taxes 32,553 -
Current portion of deferred
income tax assets 464,337 390,510
--------------- -----------------
Total current assets 10,484,756 10,609,813
Property and equipment, net 3,560,245 3,561,271
Intangible assets, net 390,153 452,558
Other assets 297,293 314,790
Deferred income tax assets, net of
current portion - 151,897
--------------- -----------------
Total assets $ 14,732,447 15,090,329
=============== =================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 365,278 381,841
Line of credit 2,664,663 2,768,492
Warranty reserve 186,022 186,022
Accounts payable 1,563,154 1,404,022
Accrued expenses 508,613 462,641
Accrued payroll and benefits expense 364,004 427,326
Income and franchise tax payable - 55,936
--------------- -----------------
Total current liabilities 5,651,734 5,686,280
Long-term debt, net of current portion 2,329,481 2,604,772
Deferred income tax liability 113,633 -
--------------- -----------------
Total liabilities 8,094,848 8,291,052
--------------- -----------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value: Authorized
50,000,000 shares; issued 13,341,832
shares as of March 31, 2011 and
13,591,152 shares as of June 30, 2010 7,508,460 7,872,250
Accumulated deficit (870,861) (1,072,973)
--------------- -----------------
Total stockholders' equity 6,637,599 6,799,277
--------------- -----------------
Total liabilities and
stockholders' equity $ 14,732,447 15,090,329
=============== =================
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2011 2010 2011 2010
--------------- ----------------- ---------------- ----------------
Net sales $ 8,383,842 8,235,060 24,502,477 25,018,960
Cost of sales 5,159,450 5,119,797 15,156,811 15,396,978
--------------- ----------------- ---------------- ----------------
Gross profit 3,224,392 3,115,263 9,345,666 9,621,982
Selling, general and administrative expenses 2,640,053 2,647,417 7,774,848 8,059,143
Research and development expenses 339,258 222,062 1,045,573 644,912
--------------- ----------------- ---------------- ----------------
Operating income 245,081 245,784 525,245 917,927
--------------- ----------------- ---------------- ----------------
Other income (expense):
Interest income 10,735 1,986 14,889 7,049
Interest expense (70,964) (99,947) (224,431) (339,774)
Other income, net 9,985 13,082 21,912 27,679
--------------- ----------------- ---------------- ----------------
Net other expense (50,244) (84,879) (187,630) (305,046)
--------------- ----------------- ---------------- ----------------
Income before income tax provision 194,837 160,905 337,615 612,881
Income tax provision (77,577) (64,806) (135,503) (259,859)
--------------- ----------------- ---------------- ----------------
Net income $ 117,260 96,099 202,112 353,022
=============== ================= ================ ================
Basic and diluted net income per
common share $ 0.01 0.01 0.02 0.03
=============== ================= ================ ================
Weighted-average basic and diluted
common shares outstanding:
Basic 13,419,612 13,606,888 13,413,636 13,647,515
Diluted 13,457,483 13,638,340 13,428,338 13,656,314
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2011 2010
--------------- -----------------
Cash flows from operating activities:
Net income $ 202,112 353,022
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 270,820 217,001
Amortization of intangible assets 62,405 66,984
Stock-based compensation expense 37,096 38,547
Change in deferred income tax assets 191,703 19,101
Provision for doubtful accounts
receivable 81,000 81,000
Provision for inventory obsolescence 60,000 90,000
Change in operating assets and
liabilities:
Receivables (172,656) 57,307
Inventories 157,297 374,671
Prepaid expenses and other assets (65,625) 22,263
Accounts payable and accrued
expenses 141,782 (186,315)
Income tax payable (35,125) 269,290
--------------- -----------------
Net cash provided by
operating activities 930,809 1,402,871
--------------- -----------------
Cash flows from investing activities:
Capital expenditures (269,794) (236,979)
--------------- -----------------
Net cash used in
investing activities (269,794) (236,979)
--------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 18,630
Principal payments on long-term debt (291,854) (248,960)
Net decrease in line of credit (103,829) (713,086)
Redemption of common stock (400,886) (97,378)
--------------- -----------------
Net cash used in
financing activities (796,569) (1,040,794)
--------------- -----------------
Net change in cash
and cash equivalents (135,554) 125,098
Cash and cash equivalents at beginning
of period 383,756 141,714
--------------- -----------------
Cash and cash equivalents at end of period $ 248,202 266,812
=============== =================
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 225,858 352,958
Cash paid for income and franchise
taxes 51,517 9,241
Supplemental disclosure of non-cash
investing and financing activities:
Capital lease obligations incurred
for property and equipment - 102,313
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheets as of March 31, 2011 and June 30,
2010, the condensed consolidated statements of income for the three and nine
months ended March 31, 2011 and 2010, and the condensed consolidated statements
of cash flows for the nine months ended March 31, 2011 and 2010 were prepared by
Dynatronics Corporation (the "Company") 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 U.S. generally accepted accounting principles 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
Company's financial position, results of operations and cash flows. The results
of operations for the three and nine months ended March 31, 2011 are not
necessarily indicative of the results of operations for the fiscal year ending
June 30, 2011. The Company has previously filed with the SEC an annual report on
Form 10-K which included audited financial statements for each of the two years
ended June 30, 2010 and 2009. It is suggested that the financial statements
contained in this Form 10-Q be read in conjunction with the financial statements
and notes thereto contained in the Company's most recent Form 10-K.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares outstanding and, when appropriate, dilutive common stock
equivalents outstanding during the period. Stock options are considered to be
common stock equivalents. The computation of diluted net income per common share
does not assume exercise or conversion of securities that would have an
anti-dilutive effect.
Basic net income per common share is the amount of net income for the period
available to each weighted-average share of common stock outstanding during the
reporting period. Diluted net income per common share is the amount of net
income for the period available to each weighted-average 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.
The reconciliations between the basic and diluted weighted-average number of
common shares outstanding for the three and nine months ended March 31, 2011 and
2010 are as follows:
Three Months Ended Nine Months Ended
March 31 March 31
2011 2010 2011 2010
--------------- ----------------- ---------------- ---------------
Basic weighted-average number of
common shares outstanding during
the period 13,419,612 13,606,888 13,413,636 13,647,515
Weighted-average number of dilutive
common stock options outstanding during
the period 37,871 31,452 14,702 8,799
--------------- ----------------- ---------------- ---------------
Diluted weighted-average number of
common and common equivalent shares
outstanding during the period 13,457,483 13,638,340 13,428,338 13,656,314
=============== ================= ================ ===============
Outstanding options for common shares not included in the computation of diluted
net income per common share, because they were anti-dilutive, for the
three-month periods ended March 31, 2011 and 2010 totaled 781,120 and 753,748,
respectively, and for the nine-month periods ended March 31, 2011 and 2010
totaled 868,178 and 900,810, respectively.
4
NOTE 3. STOCK-BASED COMPENSATION
Stock-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized over the employee's
requisite service period. The Company recognized $13,020 and $12,863 in
stock-based compensation expense during the three months ended March 31, 2011
and 2010, respectively, and recognized $37,096 and $38,547 in stock-based
compensation expense during the nine months ended March 31, 2011 and 2010,
respectively. These expenses were recorded as selling, general and
administrative expenses in the condensed consolidated statements of income.
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.
As of March 31, 2011, there were 787,595 shares of common stock authorized and
reserved for issuance, but 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
nine-month period ended March 31, 2011.
Weighted-
Number of Average
Options Exercise Price
--------------- -----------------
Outstanding at beginning of period 932,805 $ 1.32
Granted 83,444 .85
Exercised - -
Cancelled (32,628) .85
---------------
Outstanding at end of period 983,621 1.31
===============
Exercisable at end of period 542,336 1.65
===============
The Black-Scholes option-pricing model is used to estimate the fair value of
options granted under the Company's stock option plan. The weighted-average fair
values of stock options granted under the plan for the nine months ended Mach
31, 2011 and 2010 were based on the following assumptions at the date of grant
as follows:
Nine Months Ended March 31,
2011 2010
--------------- -----------------
Expected dividend yield 0% 0%
Expected stock price volatility 60 - 64% 58 - 59%
Risk-free interest rate 2.50 - 3.43% 3.31 - 3.72%
Expected life of options 10 years 10 years
Weighted-average grant date fair value $ 0.53 $0.59
Expected option lives and volatilities are based on historical data of the
Company. The risk-free interest rate is based on the U.S. Treasury Bills 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.
As of March 31, 2011, there was $99,736 of unrecognized stock-based compensation
cost related to grants under the stock option plan that will be expensed over a
weighted-average period of 4.4 years. There was $87,369 of intrinsic value for
options outstanding as of March 31, 2011.
NOTE 4. COMPREHENSIVE INCOME
For the three and nine months ended March 31, 2011 and 2010, comprehensive
income was equal to the net income as presented in the accompanying condensed
consolidated statements of income.
5
NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2011 2010
--------------- -----------------
Raw materials $ 2,315,416 2,256,197
Finished goods 3,679,009 3,841,674
Inventory obsolescence reserve (444,922) (331,071)
--------------- -----------------
$ 5,549,503 5,766,800
=============== =================
NOTE 6. RELATED-PARTY TRANSACTIONS
The Company leases office and warehouse space in Girard, Ohio; Detroit,
Michigan; Hopkins, Minnesota; and Pleasanton, California from four significant
stockholders and former independent distributors on an annual basis under
operating lease arrangements. Management believes the lease agreements are on an
arms-length basis and the terms are equal to or more favorable than would be
available to third parties. The expense associated with these related-party
transactions totaled $57,000 and $51,300 for the three months ended March 31,
2011 and 2010, respectively, and $171,300 and $153,952 for the nine months ended
March 31, 2011 and 2010, respectively.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (FASB
ASU 09-14), Certain Revenue Arrangements That Include Software Elements--a
consensus of the FASB Emerging Issues Task Force, that reduces the types of
transactions that fall within the current scope of software revenue recognition
guidance. Existing software revenue recognition guidance requires that its
provisions be applied to an entire arrangement when the sale of any products or
services containing or utilizing software when the software is considered more
than incidental to the product or service. As a result of the amendments
included in FASB ASU 09-14, many tangible products and services that rely on
software will be accounted for under the multiple-element arrangements revenue
recognition guidance rather than under the software revenue recognition
guidance. Under this new guidance, the following components would be excluded
from the scope of software revenue recognition guidance: the tangible element of
the product, software products bundled with tangible products where the software
components and non-software components function together to deliver the
product's essential functionality, and undelivered components that relate to
software that are essential to the tangible product's functionality. FASB ASU
09-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). This guidance was effective for revenue
arrangements entered into or materially modified in the fiscal year beginning on
July 1, 2010. The adoption of this pronouncement had no significant effect on
the Company's financial statements.
NOTE 8. SUBSEQUENT EVENTS
On April 13, 2011, the Company received notification from NASDAQ that
Dynatronics Corporation had regained compliance with Listing Rule 5550(a)(2)
since its stock price had been at $1.00 per share or greater for more than 10
consecutive days during the period March 30, 2011 through April 12, 2011.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Our principal business is the design, manufacture, marketing, distribution
and sale of physical medicine and aesthetic products. We manufacture and
distribute a broad line of medical equipment including therapy devices, medical
supplies and soft goods, treatment tables and rehabilitation equipment. Our
physical medicine and rehabilitation products are sold to and used primarily by
physical therapists, chiropractors, and sports medicine practitioners. Our line
of aesthetic products includes aesthetic massage, microdermabrasion and light
therapy devices, as well as skin care products. These products are sold to and
used primarily by aestheticians, plastic surgeons, dermatologists, and other
aesthetic services providers.
We have a fiscal year ending June 30. For example, reference to fiscal
year 2011 refers to the year ending June 30, 2011.
Recent Developments
In January and February 2011, we announced the signing of contracts with
three group purchasing organizations ("GPOs"): Premier, Inc., Amerinet and First
Choice. A GPO is an entity formed by a group of businesses, primarily hospitals
and integrated health care delivery networks, to leverage their collective
purchasing power with vendors and service providers to obtain better pricing.
These new contracts provide us access to tens of thousands of healthcare
facilities across the United States that are members of these buying groups. We
estimate that annual purchases of physical medicine products by members
associated with these GPOs exceed $50 million. These contracts became effective
March 1, 2011 and permit us to now solicit the business from the members of
these GPOs. We expect sales under these contracts will begin to have an effect
on revenues and net profits in the fourth quarter of fiscal year 2011 with the
most material benefits coming in the next fiscal year beginning July 1, 2011.
Results of Operations
The following discussion and analysis of our financial condition and
results of operations for the three and nine months ended March 31, 2011, should
be read in conjunction with the condensed consolidated financial statements and
notes thereto appearing in Part I, Item 1 of this report, and our Annual Report
on Form 10-K for the year ended June 30, 2010, which includes our annual audited
financial statements for the year then ended. Results of operations for the
three and nine months ended March 31, 2011, are not necessarily indicative of
the results that will be achieved for the full fiscal year ending June 30, 2011.
Net Sales
Net sales increased to $8,383,842 in the quarter ended March 31, 2011,
compared to $8,235,060 in the quarter ended March 31, 2010. The 1.8% increase
was reflective of increases with legacy customers. Although the GPO contracts
began on March 1, 2011, they did not contribute materially to sales during this
quarter. We did begin the process of introducing Dynatronics' branded products
to GPO member facilities in March 2011. While the process of converting business
to our brand will take time, management is optimistic about the potential of
this new market for the Company.
Net sales for the nine months ended March 31, 2011 decreased 2.1% to
$24,502,477, compared to $25,018,960 for the same period in 2010. The decrease
in sales for the nine-month period is a reflection of lower sales of capital
equipment during the first half of the fiscal year. This slight diminishment in
sales of capital equipment is attributable to lower demand associated with
ongoing general economic weakness. Historically, uncertain economic times limit
growth and expansion that typically create the demand for capital equipment.
Better comparative sales of capital equipment in the last three months may be an
indicator that demand is increasing.
Gross Profit
Gross profit increased to $3,224,392, or 38.5% of net sales, in the
quarter ended March 31, 2011, compared to $3,115,263, or 37.8% of net sales, in
the quarter ended March 31, 2010. The 3.5% increase in gross profit during the
current quarter is the result of higher net sales discussed above, as well as
the mix of sales favoring exercise and therapy equipment together with
high-margin revenue from the Company's new Stream software service. We expect
sales of higher margin capital equipment will increase along with a
corresponding improvement in gross profit margins as product sales begin to GPO
members and as general economic conditions improve in the United States. Gross
profit was $9,345,666, or 38.1% of net sales, for the nine months ended March
31, 2011, compared to $9,621,982, or 38.5% of net sales, for the nine months
ended March 31, 2010. This decline in gross profit for the nine-month period is
due to the lower net sales in the period, as indicated above together with an
increase in sales of non-capital medical supplies which carry lower gross
margins as a percentage of sales compared to capital equipment products.
7
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $7,364 to
$2,640,053, or 31.5% of net sales, in the quarter ended March 31, 2011, from
$2,647,417, or 32.1% of net sales, in the quarter ended March 31, 2010. For the
nine-month period ended March 31, 2011, SG&A expenses decreased $284,295, to
$7,774,848, or 31.7% of net sales, compared to $8,059,143, or 32.2% of net
sales, for the nine months ended March 31, 2010. The reduction in SG&A expenses
in the third quarter of 2011 resulted from the following factors:
o $129,628 in lower selling expenses;
o $4,154 in lower general expenses.
These improvements were offset, in part, by $126,418 of higher labor,
medical insurance and depreciation expenses in the period.
The following factors contributed to the reduction in SG&A expenses for
the nine months ended March 31, 2011:
o $362,052 in lower selling expenses;
o $201,487 in lower general expenses primarily related to lower
professional fees.
These lower expenses were offset, in part, by $279,244 of higher labor,
medical insurance and depreciation expenses during the nine months ended March
31, 2011 compared with the same period in the prior fiscal year.
Research and Development Expenses
Research and development ("R&D") expenses increased 52.8% or $117,196 to
$339,258, or 4.0% of sales, in the quarter ended March 31, 2011, compared to
$222,062, or 2.7% of sales in the quarter ended March 31, 2010. R&D expenses
increased $400,661, or 62.1%, to $1,045,573 for the nine months ended March 31,
2011, from $644,912 for the nine months ended March 31, 2010. We are developing
a number of important new products that are expected to be introduced during
calendar 2011 and early calendar 2012. These development efforts are directly
responsible for the increase in R&D expenses. It is anticipated that R&D
expenses will continue to exceed prior year levels for the next three quarters.
We believe that developing new products is a key element in our growth strategy.
R&D costs are expensed as incurred.
Income Before Income Tax Provision
Pre-tax income for the quarter ended March 31, 2011, increased 21.1% to
$194,837 compared to $160,905 for the quarter ended March 31, 2010. We believe
that generating a 21.1% increase in pre-tax income for the quarter ended March
31, 2011, despite the sizeable increase in R&D expense is indicative of the
significant improvement in base operating results during the quarter. Pre-tax
income also improved, in part, due to a $28,983 reduction in interest expense
resulting from reducing borrowings on our line of credit by $1,200,000 over the
past year.
Pre-tax income for the nine months ended March 31, 2011, totaled $337,615
compared to $612,881 for the nine months ended March 31, 2010. This reduction in
pre-tax income for the nine-month period is due to lower net sales in the period
as well as the significant increase in R&D expense related to our new products.
We expect to bring those products to market by the end of calendar 2011 or early
calendar 2012, which we expect will improve net sales.
Income Tax Provision
The income tax provision was $77,577 for the quarter ended March 31, 2011,
compared to $64,806 for the quarter ended March 31, 2010. The income tax
provision was $135,503 for the nine months ended March 31, 2011, compared to
$259,859 for the nine months ended March 31, 2010. The effective tax rate for
the third quarter of fiscal year 2011 was 39.8% compared to 40.3% for the same
period in fiscal year 2010. The effective tax rate for the nine months ended
March 31, 2011, was 40.1% compared to 42.4% for the prior year nine-month
period. The difference in the effective tax rates is attributable to certain
permanent book to tax differences. While these items are not significant,
substantive changes in the tax rate can occur based on our level of
profitability.
8
Net Income
Net income increased 22.0% to $117,260 ($.01 per common share) in the
quarter ended March 31, 2011, compared to $96,099 ($.01 per common share) in the
quarter ended March 31, 2010. The increase in earnings for the quarter ended
March 31, 2011 compared to the prior year period was a result of higher sales,
improved gross profit margins, and lower interest expense. Management
anticipates that the addition of business from the GPO contracts will increase
net sales and profits in coming quarters.
Net income decreased to $202,112, or $.02 per common share, for the nine
months ended March 31, 2011, compared to $353,022, or $.03 per common share, for
the nine months ended March 31, 2010. The lower net income in the nine-month
period was caused by lower net sales and increased R&D expense during the
period, offset in part by improved gross profit margins, reduced SG&A expenses
and lower interest expense. We expect that R&D expense will continue at present
or higher levels over the next six to nine months as the development on new
products is completed and the products are introduced to the market.
Liquidity and Capital Resources
We have financed operations through available cash reserves and borrowings
under a line of credit with a bank. Working capital was $4,833,022 as of March
31, 2011, inclusive of the current portion of long-term obligations and credit
facilities, compared to working capital of $4,923,533 as of June 30, 2010.
The current ratio held constant at 1.9 to 1 as of March 31, 2011, the same
level as of June 30, 2010. Current assets represented 71% of total assets as of
March 31, 2011 and 70% of total assets as of June 30, 2010.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
increased $147,414, or 3.9%, to $3,882,665 as of March 31, 2011, compared to
$3,735,251 as of June 30, 2010. Trade accounts receivable represent amounts due
from our customers including medical practitioners, clinics, hospitals, colleges
and universities and sports teams as well as dealers and distributors that
purchase our products for redistribution. We believe that our estimate of 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.
Inventories
Inventories, net of reserves, decreased $217,297, or 3.8%, to $5,549,503
as of March 31, 2011, compared to $5,766,800 as of June 30, 2010. The amount of
inventories we carry fluctuates each period. A main contributor to those
fluctuations is inventory purchases from overseas suppliers which are typically
larger purchases.
Accounts Payable
Accounts payable increased $159,132, or 11.3%, to $1,563,154 as of March
31, 2011, from $1,404,022 as of June 30, 2010. 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 not aged beyond
the terms of our suppliers. We take advantage of available early payment
discounts when offered by our vendors.
Cash and Cash Equivalents
Our cash and cash equivalents position as of March 31, 2011 was $248,202,
a decrease of 35.3%, from cash of $383,756 as of June 30, 2010. Our cash
position varies from quarter to quarter, but typically stays within a normal
range of $150,000 to $400,000. We expect that cash flows from operating
activities, together with amounts available through an existing line of credit
facility, will be sufficient to cover operating needs in the ordinary course of
business for at least the next twelve months. If we experience an adverse
operating environment, including a further worsening of the general economy in
the United States, or unusual capital expenditure requirements, additional
financing may be required. No assurance can be given that additional financing,
if required, would be available on terms favorable to us, or at all.
9
Line of Credit
The outstanding balance on our line of credit was $2,664,663 as of March
31, 2011, compared to $2,768,492 as of June 30, 2010. The current balance on the
line of credit is approximately $3,500,000 below its highest point in fiscal
year 2009 following the acquisition of six of our dealers in June and July 2007.
Interest on the line of credit is based on the 90-day LIBOR rate (0.30% as
of March 31, 2011) plus 4%, with a minimum interest rate of 4.5%. The line of
credit is collateralized by accounts receivable and inventories. Borrowing
limitations are based on approximately 45% of eligible inventory and up to 80%
of eligible accounts receivable, up to a maximum credit facility of $7,000,000.
Interest payments on the line are due monthly. As of March 31, 2011, the
borrowing base was approximately $5,190,000, resulting in approximately
$1,810,000 available on the line. The line of credit includes covenants
requiring us to maintain certain financial ratios. As of March 31, 2011, we were
in compliance with the loan covenants. The line of credit expires on December
15, 2012.
Debt
Long-term debt excluding current installments totaled $2,329,481 as of
March 31, 2011, compared to $2,604,772 as of June 30, 2010. 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 $2,500,000 with monthly principal and interest payments of
$46,304.
Inflation and Seasonality
Our revenues and net income have not been unusually affected by inflation
or price increases for raw materials and parts from vendors.
While our business operations are not materially affected by seasonality
factors, our fiscal first quarter which ends September 30th is typically a
slower quarter due in part to practitioners taking summer vacations.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and
Results of Operations is based upon our condensed consolidated financial
statements. The preparation of these financial statements requires estimates and
judgments that affect the reported amounts of our assets, liabilities, net sales
and expenses. Management bases estimates on historical experience and other
assumptions it believes to be reasonable given the circumstances and evaluates
these estimates on an ongoing basis. Actual results may differ from these
estimates.
The following critical accounting policies involve a high degree of
judgment and complexity and require significant estimates and judgments used in
the preparation of our condensed consolidated financial statements.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory
on hand at all times to meet the requirements of our customers. We record
finished goods inventory at the lower of standard cost, which approximates
actual costs (first-in, first-out) or market. Raw materials are recorded at the
lower of cost (first-in, first-out) or market. Inventory valuation reserves are
maintained for the estimated impairment of the inventory. Impairment may be a
result of slow-moving or excess inventory, product obsolescence or changes in
the valuation of the inventory. In determining the adequacy of reserves, we
analyze the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence;
o Technological innovations; and
o Character of the inventory as a distributed item, finished
manufactured item or raw material.
10
Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statement of income during the
period in which such modifications are determined necessary by management. As of
March 31, 2011 and June 30, 2010, our inventory valuation reserve balance, which
established a new cost basis, was $444,922 and $331,071, respectively, and our
inventory balance was $5,549,503 and $5,766,800, net of reserves, respectively.
Revenue Recognition
Sales revenues are recorded when products are shipped, title has 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 $3,882,665 and $3,735,251, net of allowance for doubtful accounts of
$321,779 and $254,664, as of March 31, 2011 and June 30, 2010, respectively.
Deferred Income Tax Assets
At each reporting date, our management performs an analysis of the
deferred income tax assets and their recoverability. Based on several factors,
including our strong earnings history of pre-tax profit averaging over $500,000
per year in 18 of the last 21 fiscal years, we believe that it is more likely
than not that all of the net deferred income tax assets will be realized. During
fiscal year 2010, $501,465 of the deferred income tax assets were utilized to
carry back against profits from 2004 and 2005, reducing the deferred income tax
asset by 39%.
Business Plan and Outlook
In January and February 2011, we announced the signing of contracts with
three GPOs: Premier, Inc., Amerinet and First Choice. These GPOs represent tens
of thousands of clinics and hospitals around the nation. With the broader
offering of products now available through our catalog and e-commerce website,
we are better able to compete for this high volume business. Over the past two
years, we have also seen success in becoming the preferred vendor to many
national and regional accounts. We believe these contract signings represent
important milestones toward our goal of expanding our customer base and
increasing our market share.
The contracts with the GPOs represent a license to solicit business
directly from the members of the respective GPOs. The GPOs do not order any
product directly. They serve the function of negotiating favorable pricing terms
on behalf of their members. Most GPO members are loyal to the GPOs in which they
have membership and will not typically consider vendors that are not on
contract.
Our contract with Premier, Inc. is to provide products to their members in
the "Colleges and Universities and Alternate Markets" category. We expect to
realize broader benefits under the agreement, however, as our involvement with
the GPO generally will expose our products to all of the GPO's "Healthcare"
category members, which we anticipate will create interest and possibilities for
additional business. Several Premier Healthcare members are negotiating
contracts with us directly to obtain access to our products. Amerinet has placed
us on contract for capital equipment, available to all their membership. Capital
equipment typically includes non-commodity products over $150 in price. While we
are welcome to solicit supply type business from Amerinet customers, we are not
under contract to do so. Our contract with First Choice covers all products that
we offer. These three contracts present us with significant opportunities for
increasing sales that have previously been unavailable to us. Cultivating
business through these GPO contracts and seeking additional contracts with other
GPOs will be a major focal point for us in the coming year.
In December 2010, we introduced to the physical medicine market a new
electronic patient communications platform called Stream. Stream is an automated
service that leverages the latest technologies to connect practitioners with
their patients via e-mail, text messaging and social networking tools to provide
state-of-the-art communications and marketing tools for practitioners. The
system reduces patient "no shows," reactivates past patients and generates new
patients. In addition, it provides a wide range of analytics and delivers
automated appointment reminders - all while improving staff efficiency. The
launch of this product has been slower than expected, but the reviews from those
who are using the product are mostly very favorable. The continued development
of Stream represents an opportunity to significantly improve overall gross
margins and profitability for the Company as each sale creates a recurring
monthly revenue stream. Our efforts over the next year to work with our partner,
Smile Reminder, to refine the presentation and implementation of this very
unique and valuable service will be critical to significantly realizing the full
potential of this program.
11
Over the past few years, consolidations in our market have changed the
landscape of our industry's distribution channels. At the present time, we
believe that there remain only two companies with a national direct sales force
selling proprietary and distributed products: Dynatronics and Patterson Medical
(through its Sammons Preston subsidiary). All other distribution in our market
is directed through catalog companies with no direct sales force, or through
independent local dealers. However, the network of local independent dealers is
rapidly diminishing due to consolidation in the market and the resulting
increased competition from Dynatronics, Sammons Preston and catalog companies.
In the past year, we have reinforced our direct sales team to include over 50
direct sales employees and independent sales representatives. In addition to
these direct sales representatives, we continue to enjoy a strong relationship
with scores of local dealers. We believe we have the best trained and most
knowledgeable sales force in the industry. The recent changes within our market
provide a unique opportunity for us to grow market share in the coming years
through recruitment of high-quality sales representatives and dealers.
To further our efforts to recruit high-quality direct sales
representatives and dealers as well as to better appeal to the large GPOs and
national customers, we intend to continue to improve efficiencies of our
operations and the sales support for the industry. Chief among the steps we are
taking to make these improvements was the introduction of our first true
e-commerce solution on July 6, 2010. With the introduction of this e-commerce
solution, customers are able to more easily place orders and obtain information
about their accounts. Sales representatives are increasing their effectiveness
with the abundance of information available to them electronically through our
e-quote system which is a companion to the e-commerce solution introduced. Not
only is our e-commerce solution easy and efficient to use, it should also
facilitate reducing transactional costs thus enabling us to accommodate higher
sales without significantly increasing overhead.
The passage in 2010 of the Patient Protection and Affordable Care Act
along with the Health Care and Educational Reconciliation Act will affect our
future operations. The addition of millions to the rolls of the insured will
increase demand for services. That increased demand is expected to lead to
increased sales of our products. The magnitude of those increases is difficult
to assess at this time. A negative impact of this legislation as enacted is its
imposition of an excise tax on all manufacturers of medical devices. Our current
estimate is that this tax would exceed $500,000 annually for Dynatronics,
barring a change in the statute. Because of the phase-in of various provisions
in the legislation, the full effects on our business and industry are not
expected to be felt until 2013 at the earliest. This makes it difficult to
project the full impact this legislation will have on our business in future
periods. There is also a possibility that future Congresses will amend the
legislation prior to it becoming fully effective. In addition, rule-making under
the law is not yet complete. In the meantime, we are working to take full
advantage of every opportunity presented by this legislation to increase sales
and to offset any negative effects that may accompany those opportunities.
We continue to focus research and development efforts on new product
innovation and enhancing existing products. Several products are currently under
development and are scheduled for introduction in the latter part of calendar
2011. The commitment to innovation of high-quality products has been a hallmark
of Dynatronics and will continue throughout the coming year. This renewed
emphasis on R&D has reduced profits during the current fiscal year as R&D costs
are expensed as incurred. Through the first three quarters of fiscal year 2011,
we have incurred $400,000 more in R&D expenses than in the same period in fiscal
year 2010, which contributed in large part to lower profitability in the period.
R&D costs for us have been cyclical in nature. The current higher R&D costs are
reflective of the fact we are in a more intense part of the development cycle.
Once the new products are introduced, R&D costs are expected to cycle back to a
lower level until the next new products are further advanced in the development
cycle. Management is confident the short term costs associated with the more
intense part of the development cycle will yield long-term benefits and are
important to assuring that we maintain our reputation for being an innovator and
leader in product development in the industry.
Economic pressures from the recent recession in the United States have
affected available credit that would facilitate large capital purchases, and
have also reduced demand for discretionary services such as those provided by
the purchasers of our aesthetic products. As a result, we trimmed back our
expenses in the Synergie division. The Synergie Elite aesthetic product line
introduced in April 2008 continues to have appeal due to its design and price
point. We believe that our aesthetic devices remain the best value on the market
and we are seeking innovative ways to market these products, including strategic
partnerships, both domestic and international, to help regain sales momentum. As
the economy begins to improve, we expect to see increased sales of these higher
margin products.
12
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. Over the coming year, our efforts will be focused on
partnering with key manufacturers and distributors interested in our product
line or technology. Our Utah operation, where all electrotherapy, ultrasound,
traction, light therapy and Synergie products are manufactured, is certified to
ISO 13485:2003, 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 international locations.
Refining our business model for supporting sales representatives and
distributors also will be a focal point of operations. We will continue to
evaluate the most efficient ways to maintain our satellite sales offices and
warehouses. In addition, more emphasis is being placed on pricing management to
protect margins for both manufactured and distributed products. The ongoing
refinement of this model is expected to yield further efficiencies that will
better achieve sales goals while at the same time reduce expenses.
With the sale of our manufactured capital equipment being the largest
contributor to margin generation, we have placed renewed emphasis on improving
manufacturing operations, including considering more offshore manufacturing of
components as well as streamlining manufacturing operations in Utah and
Tennessee. Past experience has shown that when recessionary pressures start to
subside, there has been a pent up demand for capital equipment which can be
significant. Our recent efforts to prudently reduce costs during the difficult
times have made us a leaner operation and well positioned for a continued ramp
up in demand.
Based on our defined strategic initiatives, we are focusing our resources
in the following areas:
o Improving sales by pursuing business opportunities with GPOs
and large chains of clinics, including national and regional
accounts.
o Pursuing opportunities to introduce the Stream software
service to large groups of clinics and buying groups in
addition to making it available to individual practitioners.
o Reinforcing distribution through a strategy of recruiting
direct sales representatives and working closely with the most
successful distributors of capital equipment.
o Using our first e-commerce solution in order to facilitate
business opportunities and reduce transactional costs.
o Significantly improving operational efficiencies by lowering
manufacturing and transactional costs, automating processes,
redefining policies and procedures and working to make every
customer a profitable customer.
o Strengthening pricing management and procurement
methodologies.
o Minimizing expense associated with the Synergie product line
until the economy improves and demand for capital equipment
re-emerges, and, in the meantime, seeking additional
independent distributors and strategic partnerships.
o Focusing international sales efforts on identifying key
distributors and strategic partners who could represent the
Company's product line, particularly in Europe.
o Continuing development of new state-of-the-art products, both
high-tech and commodity, in fiscal year 2011, for both the
rehabilitation and aesthetic markets.
o Exploring strategic business alliances that will leverage and
complement our competitive strengths, increase market reach
and supplement capital resources.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this 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 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 words or phrases such as "believes," "expects,"
13
"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. 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, except as required by law.
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 March 31, 2011, although the general weakness in the U.S. economy
is expected to lead to greater discounting market-wide to stimulate sales in a
declining economic environment. In addition, further weakening of the economy
could result in greater risks of collections of accounts receivable.
Our primary market risk exposure is interest rate risk. As of March 31,
2011, approximately $3,829,000 of our debt bore interest at variable rates.
Accordingly, our net income 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 $38,290.
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. Recent efforts to reduce the balances on our operating line of credit
have mitigated this risk.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness, as of March 31, 2011, of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. The purpose of this evaluation was to determine whether as of the
evaluation date our disclosure controls and procedures were effective to provide
reasonable assurance that the information we are required to disclose in our
filings with the Securities and Exchange Commission, or SEC, under the Exchange
Act (i) is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation, our management has concluded, that our disclosure
controls and procedures were effective as of March 31, 2011.
There has been no change in our internal control over financial reporting
during the quarter ended March 31, 2011 that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting.
14
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes certain information concerning purchases of
our common stock by the Company during the quarter ended March 31, 2011.
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------------------------------
(c) (d)
(a) (b) Total number of shares (or Maximum number (or approximate
Total number of Average price units) purchased as part dollar value) of shares (or units)
shares (or paid per share of publicly announced that may yet be purchased under the
Period units) purchased (or unit) plans or programs plans or programs
--------------------------------------------------------------------------------------------------------------------
January 1 to January 51,401 $0.87 51,401 $1,024,415
31, 2011
--------------------------------------------------------------------------------------------------------------------
February 1 to 56,300 $0.92 56,300 $972,855
February 28, 2011
--------------------------------------------------------------------------------------------------------------------
March 1 to March 31, 197,700 $1.04 197,700 $768,027
2011
--------------------------------------------------------------------------------------------------------------------
Total 305,401 $0.99 305,401 $768,027
--------------------------------------------------------------------------------------------------------------------
Item 5. Other Information
NASDAQ Minimum Bid Requirement
On April 13, 2011, we received a Letter of Compliance from the NASDAQ
Stock Market, notifying us that the prior deficiency in the minimum bid
requirement has been cured and we are now in compliance with the minimum bid
requirement for continued inclusion under Marketplace Rule 4310(c)(4).
Related-Party Transactions
We lease office and distribution facilities in California owned by John
Rajala, a stockholder and Territorial Sales Manager. Mr. Rajala also
beneficially owns 8.6% of our outstanding common stock. The rental amount paid
to Mr. Rajala for the leased facilities is $108,000 per year under a written
lease agreement. Management believes the lease agreement is on an arms-length
basis and the terms are equal to or more favorable than would be available to a
third party. This transaction with a related party has been approved by our
Board of Directors.
In addition, we lease office and warehouse space in Girard, Ohio; Detroit,
Michigan; and Hopkins, Minnesota; from three stockholders and former independent
distributors on an annual basis under operating lease arrangements. Management
believes the lease agreements are on an arms-length basis and the terms are
equal to or more favorable than would be available to third parties. The expense
associated with these related-party transactions totaled $57,000 for the three
months ended March 31, 2011.
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)
15
10.1 Loan Agreement with Zions Bank (previously filed)
10.2 Amended Loan Agreement with Zions Bank (previously filed)
10.3 1992 Amended and Restated Stock Option Plan (previously filed)
10.4 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)
10.5 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)
10.6 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)
10.7 Building Lease Agreement with The Rajala Family Trust dated June 30,
2009
10.8 Executive Employment Agreement (Beardall) (previously filed as exhibit
to Current Report on Form 8-K, filed with the Commission on March 7,
2011)
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 May 16, 2011 /s/ Kelvyn H. Cullimore, Jr
------------ ------------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date May 16, 2011 /s/ Terry M. Atkinson, CPA
------------ ------------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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