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, 2003.
[ ] 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
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(Address of principal executive offices)
(801) 568-7000
--------------
(Issuer's telephone number)
The number of shares outstanding of the issuer's common stock, no par value, as
of November 12, 2003 is 8,791,935.
Transitional Small Business Disclosure Format (Check one): Yes No X
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DYNATRONICS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Unaudited Balance Sheets
September 30, 2003 and June 30, 2003.........................................1
Unaudited Statements of Income
Three Months Ended September 30, 2003 and 2002...............................2
Unaudited Statements of Cash Flows
Three Months Ended September 30, 2003 and 2002...............................3
Notes to Unaudited Financial Statements......................................4
Item 2. Management's Discussion and Analysis or Plan of Operation............8
Item 3. Controls and Procedures.............................................13
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K....................................13
PART 1. FINANCIAL INFORMATION
DYNATRONICS CORPORATION
Balance Sheets
September 30, 2003 June 30, 2003
Assets (Unaudited) (Audited)
------------------- ------------------
Current assets:
Cash $ 179,184 $ 404,276
Trade accounts receivable, less
allowance for doubtful accounts
of $168,570 September 30, 2003
and $145,130 at June 30, 2003 3,470,515 2,283,071
Other receivables 157,810 193,713
Inventories 4,373,796 4,644,489
Prepaid expenses 627,778 480,697
Prepaid income taxes 5,282 105,804
Deferred tax asset-current 312,547 312,547
------------------- ------------------
Total current assets 9,126,912 8,424,597
Property and equipment, net 3,130,173 3,202,553
Goodwill, net of accumulated
amortization of $649,792 at September
30, 2003 and at June 30, 2003 789,422 789,422
Other assets 300,086 296,457
------------------- ------------------
$ 13,346,593 $ 12,713,029
=================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 198,606 $ 198,606
Line of credit 1,673,824 1,382,095
Accounts payable 768,902 597,111
Accrued expenses 519,360 540,258
Accrued payroll and benefit expenses 349,941 189,807
------------------- ------------------
Total current liabilities 3,510,633 2,907,877
Long-term debt, excluding current installments 1,705,427 1,754,066
Deferred compensation 311,996 305,654
Deferred tax liability - noncurrent 144,059 144,059
------------------- ------------------
Total liabilities 5,672,115 5,111,656
------------------- ==----------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 8,793,135
shares at September 30, 2003 and
8,869,335 shares at June 30, 2003 2,391,513 2,478,981
Retained earnings 5,282,965 5,122,392
------------------- ------------------
Total stockholders' equity 7,674,478 7,601,373
------------------- ------------------
$ 13,346,593 $ 12,713,029
=================== ==================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended
September 30
2003 2002
------------------- ------------------
Net sales $ 5,033,415 $ 4,295,720
Cost of sales 3,105,685 2,630,119
------------------- ------------------
Gross profit 1,927,730 1,665,601
Selling, general, and administrative expenses 1,341,435 1,234,416
Research and development expenses 287,971 212,060
------------------- ------------------
Operating income 298,324 219,125
------------------- ------------------
Other income (expense):
Interest income 4,316 10
Interest expense (43,350) (45,876)
Other income, net 1,805 2,783
------------------- ------------------
Total other income (expense) (37,229) (43,083)
------------------- ------------------
Income before income taxes 261,095 176,042
Income tax expense 100,522 67,776
------------------- ------------------
Net income $ 160,573 $ 108,266
=================== ==================
Basic and diluted net income per common share $ 0.02 $ 0.01
=================== ==================
Weighted average basic and diluted common shares
outstanding (note 2)
Basic 8,856,911 8,869,335
Diluted 8,920,653 8,869,335
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2003 2002
------------------- ------------------
Cash flows from operating activities:
Net income $ 160,573 $ 108,266
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 77,891 74,084
Other amortization 1,831 1,831
Provision for doubtful accounts 24,000 18,000
Provision for inventory obsolescence 69,000 60,000
Provision for warranty reserve 32,417 53,411
Provision for deferred compensation 6,342 5,856
Change in operating assets and liabilities:
Receivables (1,175,541) (322,057)
Inventories 201,693 (139,255)
Prepaid expenses and other assets (152,541) (35,878)
Accounts payable and accrued expenses 278,610 209,266
Income taxes payable 100,522 67,776
------------------- ------------------
Net cash provided by
operating activities (375,203) 101,300
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (5,511) (51,023)
------------------- ------------------
Cash flows from financing activities:
Principal payments on long-term debt (48,639) (54,172)
Net change in line of credit 291,729 (66,427)
Redemption of common stock (87,468) -
------------------- ------------------
Net cash provided by (used in)
financing activities 155,622 (120,599)
------------------- ------------------
Net increase in cash and cash equivalents (225,092) (70,322)
Cash at beginning of period 404,276 396,803
------------------- ------------------
Cash at end of period $ 179,184 $ 326,481
=================== ==================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 42,715 $ 49,179
Cash paid for income taxes - 49,000
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of September 30, 2003 and June 30, 2003 and for the
three months ended September 30, 2003 and 2002 were prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. The results of
operations for the respective periods presented are not necessarily indicative
of the results for the respective complete years. The Company has previously
filed with the SEC an annual report on Form 10-KSB which included audited
financial statements for the years ended June 30, 2003 and 2002. It is suggested
that the financial statements contained in this filing be read in conjunction
with the statements and notes thereto contained in the Company's 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three months ended
September 30, 2003 and 2002 is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2003 2002
----------------- --------------
Basic weighted average number of
common shares outstanding
during the period 8,856,911 8,869,335
Weighted average number of dilutive
common stock options
outstanding during the period 63,742 -
----------------- --------------
Diluted weighted average number
of common and common equivalent
shares outstanding during the period 8,920,653 8,869,335
================= ==============
NOTE 3. COMPREHENSIVE INCOME
For the periods ended September 30, 2003 and 2002, comprehensive income was
equal to the net income as presented in the accompanying condensed statements of
income.
4
NOTE 4. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2003 2003
----------------- ----------------
Raw Material $ 2,658,871 $ 2,487,435
Finished Goods 2,073,861 2,446,990
Inventory Reserve (358,936) (289,936)
----------------- ---------------
$ 4,373,796 $ 4,644,489
================= ===============
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, 2003 June 30, 2003
----------------- ---------------
Land $ 354,743 $ 354,743
Buildings 2,898,319 2,897,447
Machinery and equipment 1,729,589 1,728,106
Office equipment 418,505 415,349
Vehicles 65,487 65,487
----------------- --------------
5,466,643 5,461,132
Less accumulated depreciation
and amortization 2,336,470 2,258,579
----------------- --------------
$ 3,130,173 $ 3,202,553
================= ==============
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of
July 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 2003 and determined there was not an indication
of impairment. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Goodwill. As of September 30, 2003, the Company had goodwill, net, of $789,422
from the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and
the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983. Through June 30,
2002, goodwill from these transactions was amortized over a period of 15 and 30
years, respectively, on a straight-line basis.
5
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
September 30, 2003 June 30, 2003
------------------ ---------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 22,583 20,752
----------------- --------------
Net carrying amount $ 50,657 $ 52,488
================= ===============
Amortization expense associated with the license agreement was $1,831 for both
the three months ended September 30, 2003 and 2002. Estimated amortization
expense for the existing license agreement is expected to be $7,324 for each of
the fiscal years ending June 30, 2004 through June 30, 2010. The license
agreement is included in other assets.
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, for the quarter ended September 30, 2003.
The Company accrues the estimated costs to be incurred in connection with the
Company's product warranty programs as products are sold based on historical
warranty rates. A reconciliation of the changes in the warranty liability is as
follows:
Three months ended Three months ended
September 30, 200 September 30, 2002
------------------ ---------------
Beginning product warranty reserve balance $ 154,000 $ 136,000
Warranty repairs (26,417) (47,411)
Warranties issued 52,344 59,050
Changes in estimated warranty costs (13,927) (5,639)
----------------- ---------------
Ending product warranty liability balance $ 166,000 $ 142,000
================= ===============
NOTE 8. COMMON STOCK.
During the three months ended September 30, 2003 the Company redeemed 76,200
shares of common stock at a cost of $87,468.
NOTE 9. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard (" SFAS") No. 123, Accounting for Stock-Based Compensation
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages
entities to adopt a fair-value-based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to apply the provisions of APB 25, accordingly, no
compensation expense has been recognized for the stock option plan. Had
compensation expense for the company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the company's results of operations would have been reduced to the
pro forma amounts indicated below:
6
Three months ended Three months ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income as reported $ 160,573 $ 108,266
Less: pro forma adjustment for stock based
compensation, net of income tax (29,124) (9,763)
----------------- ---------------
Pro forma net income $ 131,449 $ 98,503
================= ===============
Basic net income per share:
As reported 0.02 0.01
Effect of pro forma adjustment (0.01) -
Pro forma 0.01 0.01
Diluted net income per share:
As reported 0.02 0.01
Effect of pro forma adjustment (0.01) -
Pro forma 0.01 0.01
The per share weighted-average fair value of stock options granted for the three
months ended September 30, 2003 and 2002 was $.61 and $.65 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
Three months ended Three months ended
September 30, 2003 September 30, 2002
------------------ ------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.40 - 3.72% 3.49 - 4.42%
Expected volatility 82-83% 91%
Expected life 5 & 7 years 5 & 7 years
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, 2003, for the Company's fiscal year ending June 30,
2004. During the quarter ended September 30, 2003, net sales increased 17% to
$5,033,415, compared to $4,295,720 during the same quarter of the previous year.
Net income for the quarter ended September 30, 2003, increased 48% to $160,573,
compared to $108,266 in the same quarter in 2002. Strong demand for the
Company's new Solaris product line gave a boost to sales and profits for the
quarter ended September 30, 2003. The Dynatron Solaris Series is a family of
advanced technology combination therapy devices incorporating seven
electrotherapy waveforms, ultrasound therapy or a combination of both. In
addition, each Solaris device offers an optional infrared light therapy probe.
Infrared light therapy is commonly used for treating muscle and joint pain as
well as arthritis pain and stiffness. More than twenty years of international
and domestic clinical studies using various forms of infrared light therapy
makes it one of the most researched applications in physical medicine. As the
only line of combination therapy devices on the market that includes infrared
light therapy, our new Solaris Series products are rapidly gaining acceptance
and popularity in the physical medicine market.
Sales of physical medicine products represented 89% and 86% of total revenues
for the quarters ended September 30, 2003 and 2002, respectively while sales of
aesthetic products accounted for 5% and 8% of total revenues for the quarters
ended September 30, 2003 and 2002, respectively. Chargeable repairs, billable
freight revenue and other miscellaneous revenue accounted for 6% of total
revenues for each of the quarters ended September 30, 2003 and 2002. The new
Solaris Series products accounted for the majority of the 17% sales increase
reported for the first fiscal quarter of 2004.
During the quarter ended September 30, 2003 total gross profit was $1,927,730 or
38.3% of net sales compared to $1,665,601 or 38.8% of net sales in the quarter
ended September 30, 2002. The $262,129 increase in gross margin reflects the
added sales of the new Solaris products. These units carry an average gross
margin of approximately 50%. Gross margins as a percentage of net sales for the
quarter ended September 30, 2003, were reduced by 0.5% due to slightly lower
margins on medical supplies and treatment table products and lower sales of
high-margin Synergie units during the quarter ended September 30, 2003 compared
to the prior year period.
Selling, general and administrative (SG&A) expenses for the quarter ended
September 30, 2003, were $1,341,435 or 26.6% of net sales compared to $1,234,416
or 28.7% of net sales in the quarter ended September 30, 2002. SG&A expense as a
percentage of total sales decreased 2.1%. Total SG&A expenses for the quarter
increased by $107,019 or 8.7%. The material components of this increase were
approximately $46,200 in higher selling expenses related to the introduction of
the new Solaris Series product line, $20,100 in additional investor relations
costs, and $17,800 in higher premiums for medical insurance.
In order to maintain our leadership role in the physical medicine market, we
recognize the importance of developing state-of-the-art products such as the new
Solaris Series line of therapy devices. Primarily as a result of the development
of the Solaris product line, research and development expenses increased 36% to
$287,971 during the quarter ended September 30, 2003, compared to $212,060 in
the quarter ended September 30, 2002. R&D expenses represented approximately
5.7% and 4.9% of the revenues of the Company in the 2003 and 2002 periods,
respectively. R&D costs are expensed as incurred. R&D expenses are expected to
continue at approximately their current level through the remainder of fiscal
year 2004 as we continue to work on additional new products for the future.
Pre-tax profit for the quarter ended September 30, 2003 increased 48% to
$261,095 compared to $176,042 during the same period of the prior year. The
large increase in sales of Solaris devices was the primary reason for increased
profits for the quarter ended September 30, 2003.
Income tax expense for the three months ended September 30, 2003 was $100,522
compared to $67,776 in the three months ended September 30, 2002. The effective
tax rate for both quarters ended September 30, 2003 and 2002 was 38.5%.
8
Net income for the quarter ended September 30, 2003, was $160,573 (approximately
$.02 per share), compared to $108,266 (approximately $.01 per share) in the same
quarter in 2002. Higher sales, particularly as a result of the introduction of
the Solaris Series products, together with the containment in growth of SG&A
expenses as compared to the growth in sales, resulted in a 48% increase in net
income for the quarter ended September 30, 2003 over the prior year period.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its credit line facility, and from cash provided by operations.
The Company had working capital of $5,616,279 at September 30, 2003, inclusive
of the current portion of long-term obligations and credit facilities, as
compared to working capital of $5,516,720 at June 30, 2003.
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the terms extended.
With the introduction of the Solaris product line and the associated high demand
for these products, trade accounts receivable increased over $1,187,444 at
September 30, 2003 compared to June 30, 2003. Management anticipates accounts
receivable will likely remain at current levels in future periods due to
continuing demand for the Company's new Solaris Series products and other new
products anticipated for future release.
Inventories, net of reserves, decreased during the quarter by $270,693 to
$4,373,796 at September 30, 2003 compared to $4,644,489 at June 30, 2003 as a
result of the large sales volume generated during the most recent quarter.
Management expects that inventories will continue to decrease gradually over the
course of the current fiscal year as optimum inventory levels are determined
based on ongoing sales demand.
Prepaid expenses increased to $627,778 at September 30, 2003 compared to
$480,697 at June 30, 2002 primarily as a result of advances paid to suppliers
related to components for the new Solaris Series product line. Other
miscellaneous prepaid items also contributed to the increase.
Goodwill at September 30, 2003 and June 30, 2003 totaled $789,422. Beginning
July 1, 2002, the Company adopted the provisions of SFAS No. 142. In compliance
with FAS 142 Goodwill and other Intangible Assets, 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. As of July 1, 2002
and June 30, 2003, the fair value of the Company exceeded the book value of the
Company. Therefore, there was no indication of impairment upon adoption of SFAS
No. 142 or at June 30, 2003. Management is primarily responsible for the FAS 142
valuation determination and performed the annual impairment assessment during
the Company's fourth quarter.
Accounts payable increased by $171,791 to $768,902 at September 30, 2003
compared to $597,111 at June 30, 2003. The fluctuation in accounts payable is a
result of the timing of our weekly payments. All accounts payable are within
term. We continue to take advantage of available early payment discounts when
offered.
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. The decision to initiate the program was based on
management's confidence in the Company's future growth - a confidence bolstered
in part by the introduction of the Solaris line - combined with a languishing
stock price deemed to be undervalued. During the quarter ended September 30,
2003, we had purchased 76,200 shares of stock on the open market at total price
of $87,468. The stock repurchase program is conducted to take advantage of a
safe harbor under Rule 10b-18 of the Exchange Act for the repurchase by an
issuer of its own shares.
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.
9
The Company maintains a revolving line of credit facility with a commercial bank
in the amount of $4,500,000. The outstanding balance on our line of credit
facility was $1.67 million at September 30, 2003 compared to $1.38 million at
June 30, 2003. Interest on the line of credit is based on the bank's prime rate,
which at September 30, 2003, equaled 4.00%. 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 agreement is renewable annually on December 1st and includes covenants
requiring the Company to maintain certain financial ratios. As of September 30,
2003, we were in compliance with all loan covenants.
The current ratio at September 30, 2003 was 2.6 to 1 compared to 2.9 to 1 at
June 30, 2003. Current assets represent 68% of total assets at September 30,
2003.
Long-term debt excluding current installments totaled $1,705,427 at September
30, 2003, compared to $1,754,066 at June 30, 2003. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.8 million with monthly principal and interest payments of $21,409.
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any risks related
to these policies on our business operations are discussed in Management's
Discussion and Analysis or Plan of Operations where such policies affect our
reported and expected financial results. For a detailed discussion of the
application of these and other accounting policies, see Notes to the Financial
Statements contained in the 10-KSB report for the period ended June 30, 2003. In
all material respects, management believes that the accounting principles that
are utilized conform to generally accepted accounting principles in the United
States of America.
The preparation of this quarterly report on Form 10-QSB requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are stated 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; and
o Technological innovations.
10
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, 2003 and June 30, 2003, our inventory valuation reserve balance, which
established a new cost basis, was $358,936 and $289,936, respectively and our
inventory balance was $4,373,796 and $4,644,489 net of reserves, respectively.
Revenue Recognition
Our products are sold primarily through a network of independent distributors.
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 accounts receivable and historical bad debts, 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 $3,470,515 and $2,283,071, net of allowance
for doubtful accounts of $168,570 and $145,130, at September 30, 2003 and June
30, 2003, respectively.
Business Plan
-------------
Over the past five years, annual net sales have grown from $12.6 million in
fiscal year 1998 to $16.9 million in fiscal year 2003. During fiscal year 2004,
we will continue to focus our efforts on fueling and sustaining future growth
through the development of new products for the rehabilitation market while, at
the same time, strengthening our channels of distribution and improving
operating efficiencies.
As part of our ongoing R&D campaign, in September 2003 we introduced the new
Solaris Series line of advanced technology electrotherapy/ultrasound products
featuring an infrared light therapy probe. This new product line has quickly
become our top selling line. During fiscal year 2004, we expect to submit an
application to FDA for clearance of a low-power laser accessory probe to the
Solaris Series products. Other probes will be developed in the future as market
needs are identified.
The Dynatron Solaris 701 device will be introduced in fiscal year 2004. This
device will complete the family of combination therapy devices that make up the
Solaris Series. The 701 will be a combination device featuring ultrasound and
infrared light therapy.
R&D efforts have not been limited to high tech products. During fiscal year
2003, Dynatronics introduced a new, more price-competitive powered treatment
table. Demand for this table has remained high since its introduction. At least
two more powered treatment table models are scheduled for introduction during
fiscal year 2004.
Going forward, we will continue to seek to strengthen our manufacturing
capabilities with the goal of improving margins and gaining greater pricing
advantages over competitors. To that end, some products previously purchased
from other manufacturers are being converted to in-house manufacturing. Other
products are being purchased from overseas manufacturers or moved to more
competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. In July 2002, our ISO 9001 certification was renewed for our
Salt Lake City operation, where all electrotherapy, ultrasound, STS devices,
light therapy and Synergie products are manufactured. With this designation, we
can market products manufactured in this facility in any country that recognizes
the CE Mark. We are now working to establish effective distribution of these
products in the European Community. The European version of the Solaris Series
products will include an additional electrotherapy waveform known as Diadynamic
that is popular in Europe. Combining this feature with the availability of light
therapy products in combination with traditional electrotherapy and ultrasound
modalities positions the Solaris devices for greater acceptance in the European
markets than its predecessor devices. It is expected that these attractive
features will make foreign distribution channels more accessible.
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We continue efforts to promote our line of aesthetic products. Controlling and
expanding the channels of distribution for these products is expected to
ultimately increase sales of these high margin products and allow us to more
fully access the potential of the aesthetics products market. We perceive this
market to be both lucrative and expanding, particularly as aging baby boomers
continue to look for ways to retain a youthful appearance. Despite the expansion
of the beauty and spa market, this is a segment of our business that seems to be
more directly impacted by general economic slowdown as spa and beauty services
are purchased with discretionary dollars not as readily available in slower
economic times. Recent interest by medical spas in the use of physical therapy
modalities such as electrotherapy, ultrasound and light therapy in aesthetic
applications has opened new potential for crossover of physical medicine
modalities into the aesthetics market. This presents a unique opportunity for us
to grow sales of new aesthetic products with little R&D effort since the
products have already been developed for the physical medicine markets.
Over the past two years, we have undertaken to improve the appearance and
application of our corporate website and are researching ways to apply
electronic media and Internet solutions to better serve customer needs, access
new business opportunities, reduce cost of operations, and stay technologically
current in the way business is conducted. Our website may be viewed at
www.dynatronics.com. This reference to our website is not intended to
incorporate the contents of the website into or as a part of this report.
Based on these strategic initiatives, we are focusing our resources in the
following areas:
o Increasing our share of the therapy device market with the
introduction of the new line of Solaris products. We will also
educate the market on the benefits of infrared light therapy for
treating pain.
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of several more new products over the coming
year.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Developing a channel for distribution of aesthetic products
domestically and exploring the opportunities to introduce versions
of our physical therapy modalities into the aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Applying e-commerce solutions to improving overall performance.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis or Plan
of Operation regarding product development, clinical results, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in our Annual Report on Form 10-KSB under the headings
"Description of Business" and "Risk Factors." The fact that some of the risk
factors may be the same or similar to past reports filed with the Securities and
Exchange Commission means only that the risks are present in multiple periods.
We believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
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o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, Dynatron STS
products, and the new Solaris infrared light therapy products;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The potential continued spread of the SARS outbreak which may
affect overseas sales as well as overseas manufacturing;
o Continued terrorist attacks on U.S. interests and businesses; and
o The ability to obtain required financing to meet changes or other
risks described above.
Item 3. Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and principal accounting officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser Corporation.
Incorporated by reference to a Registration Statement on Form S-1 (No.
2-85045) filed with the Securities and Exchange Commission and effective
November 2, 1984, as amended by Articles of Amendment dated November 18,
1993.
3.2 Articles of Amendment dated November 21, 1988 (previously filed).
13
10.1 Employment contract with Kelvyn H. Cullimore, Jr. (previously filed)
10.2 Employment contract with Larry K. Beardall (previously filed)
10.3 Loan Agreement with Zion Bank (previously filed)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn Cullimore, Sr.
(previously filed)
31.1 Certification of President and Chief Executive Officer under Section 302
of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. None.
-------------------
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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 11/13/03 /s/ Kelvyn H. Cullimore, Jr.
----------------------- -------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
Date 11/13/03 /s/ Terry M. Atkinson, CPA
----------------------- -------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
15