UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
(Address of principal executive offices)
(801) 568-7000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's common stock, no par value, as
of May 11, 2004 is 8,954,920.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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DYNATRONICS CORPORATION
FORM 10-QSB
MARCH 31, 2004
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Unaudited Balance Sheets
March 31, 2004 and June 30, 2003...............................................1
Unaudited Statements of Income
Three and Nine Months Ended March 31, 2004 and 2003............................2
Unaudited Statements of Cash Flows
Nine Months Ended March 31, 2004 and 2003......................................3
Notes to Unaudited Financial Statements........................................4
Item 2. Management's Discussion and Analysis or Plan of Operation..............9
Item 3. Controls and Procedures...............................................15
PART II. OTHER INFORMATION
Item 2. Changes in Securities ...............................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
10
PART I. FINANCIAL INFORMATION
DYNATRONICS CORPORATION
Balance Sheet
March 31, 2004
Assets (Unaudited) June 30, 2003
-------------------- -------------------
Current assets:
Cash $ 293,010 404,276
Trade accounts receivable, less allowance for doubtful accounts
of $220,955 and $145,130, respectively 4,173,831 2,283,071
Other receivables 93,514 193,713
Inventories 4,750,691 4,644,489
Prepaid expenses 378,836 480,697
Prepaid income taxes - 105,804
Deferred tax asset-current 312,547 312,547
-------------------- -------------------
Total current assets
10,002,429 8,424,597
Property and equipment, net 3,238,551 3,202,553
Goodwill, net of accumulated amortization of $649,792 at
March 31, 2004 and at June 30, 2003 789,422 789,422
Other assets 307,344 296,457
-------------------- -------------------
$14,337,746 12,713,029
==================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 211,800 198,606
Line of credit 1,691,671 1,382,095
Accounts payable 744,271 597,111
Accrued expenses 556,602 540,258
Accrued payroll and benefit expenses 502,459 189,807
Income tax payable 103,870 -
-------------------- -------------------
Total current liabilities
3,810,673 2,907,877
Long-term debt, excluding current installments 1,601,109 1,754,066
Deferred compensation 324,680 305,654
Deferred tax liability - noncurrent 144,059 144,059
-------------------- -------------------
Total liabilities
5,880,521 5,111,656
-------------------- -------------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 8,951,436 shares at March 31, 2004 and
8,869,335 shares at June 30, 2003 2,609,774 2,478,981
Retained earnings 5,847,451 5,122,392
-------------------- -------------------
Total stockholders' equity
8,457,225 7,601,373
-------------------- -------------------
$14,337,746 12,713,029
==================== ===================
See accompanying notes to financial statements.
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2004 2003 2004 2003
--------------- --------------- ---------------- --------------
Net sales $ 5,246,044 4,376,353 15,562,919 13,016,705
Cost of sales 3,106,290 2,781,299 9,411,030 8,165,101
--------------- --------------- ---------------- --------------
Gross profit 2,139,754 1,595,054 6,151,889 4,851,604
Selling, general, and admin. expenses 1,446,932 1,245,921 4,147,250 3,707,654
Research and development expenses 275,910 271,344 837,028 725,426
--------------- --------------- ---------------- --------------
Operating income 416,912 77,789 1,167,611 418,524
--------------- --------------- ---------------- --------------
Other income (expense):
Interest income 3,275 973 11,232 1,839
Interest expense (42,376) (41,921) (130,375) (131,591)
Other income, net 2,811 795 5,965 5,404
--------------- --------------- ---------------- --------------
Total other income (expense) (36,290) (40,153) (113,178) (124,348)
--------------- --------------- ---------------- --------------
Income before income taxes 380,622 37,636 1,054,433 294,176
Income tax expense 70,920 14,383 329,374 113,151
--------------- --------------- ---------------- --------------
Net income $ 309,702 23,253 725,059 181,025
=============== =============== ================ ==============
Basic net income per common share $ 0.03 0.00 0.08 0.02
--------------- --------------- ---------------- --------------
Diluted net income per common share $ 0.03 0.00 0.08 0.02
--------------- --------------- ---------------- --------------
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,868,201 8,869,335 8,843,404 8,869,335
Diluted 9,344,707 8,869,335 9,143,746 8,869,335
See accompanying notes to financial statements.
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2004 2003
---------------- --------------
Cash flows from operating activities:
Net income $ 725,059 181,025
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization of property and
equipment 237,065 262,811
Other amortization 5,493 5,493
Provision for doubtful accounts 72,000 54,000
Provision for inventory obsolescence 207,000 180,000
Provision for warranty reserve 120,249 154,960
Provision for deferred compensation 19,026 17,568
Change in operating assets and liabilities:
Receivables (1,862,561) 43,482
Inventories (313,202) (587,694)
Prepaid expenses and other assets 85,481 (173,644)
Accounts payable and accrued expenses 355,907 284,970
Income taxes payable 209,674 (30,804)
---------------- --------------
Net cash (used in) provided by
operating activities (138,809) 392,167
---------------- --------------
Cash flows from investing activities:
Capital expenditures (273,063) (168,502)
---------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt (139,763) (168,021)
Net change in line of credit 309,576 (24,513)
Purchase and retirement of common stock (89,000) -
Proceeds from sale of common stock 219,793 -
---------------- --------------
Net cash provided by (used in)
financing activities 300,606 (192,534)
---------------- --------------
Net (decrease) increase in cash and cash equivalents (111,266) 31,131
Cash at beginning of period 404,276 396,803
---------------- --------------
Cash at end of period $ 293,010 427,934
================ ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 128,719 139,381
Cash paid for income taxes 219,700 144,059
See accompanying notes to financial statements.
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 2004 and June 30, 2003 and for the
three and nine months ended March 31, 2004 and 2003 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 and nine months
ended March 31, 2004 and 2003 is summarized as follows:
(Unaudited)
(Unaudited) Three Months
Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 8,868,201 8,869,335 8,843,404 8,869,335
Weighted average number of dilutive common stock
options outstanding during the period 476,506 - 300,342 -
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,344,707 8,869,335 9,143,746 8,869,335
============= ============ ============= =============
NOTE 3. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard (" SFAS") No. 123, Accounting for Stock-Based Compensation
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS 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) for
options issued to employees. 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:
Three months ended Three months ended
March 31, 2004 March 31, 2003
----------------------- -------------------------
----------------------- -------------------------
Net income as reported $ 309,702 23,253
Less: pro forma adjustment for stock based
Compensation, net of income tax (28,203) (8,614)
Pro forma net income $ 281,499 14,639
Basic net income per share:
As reported 0.03 -
Effect of pro forma adjustment - -
Pro forma 0.03 -
Diluted net income per share:
As reported 0.03 -
Effect of pro forma adjustment - -
Pro forma 0.03 -
Nine months ended Nine months ended
March 31, 2004 March 31, 2003
----------------------- -------------------------
----------------------- -------------------------
Net income as reported $ 725,059 181,025
Less: pro forma adjustment for stock based
Compensation, net of income tax (86,820) (27,931)
Pro forma net income $ 638,239 153,094
Basic net income per share:
As reported 0.08 0.02
Effect of pro forma adjustment (0.01) -
Pro forma 0.07 0.02
Diluted net income per share:
As reported 0.08 0.02
Effect of pro forma adjustment (0.01) -
Pro forma 0.07 0.02
The per share weighted-average fair value of stock options granted for the three
months ended March 31, 2004 and 2003 was $2.07 and $.51 per share, and for the
nine months ended March 31, 2004 and 2003 was $1.42 and $.56 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
Three months ended Three months ended
March 31, 2004 March 31, 2003
---------------------------- ----------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 2.79-3.65% 3.46-3.66%
Expected volatility 86-88% 89-90%
Expected life 5 & 7 years 5 & 7 years
Nine months ended Nine months ended
March 31, 2004 March 31, 2003
---------------------------- ----------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 2.79 - 3.72% 3.46 - 4.42%
Expected volatility 82-88% 89-91%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended March 31, 2004 and 2003, comprehensive income was equal to
the net income as presented in the accompanying condensed statements of income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2004 2003
------------------- ------------------
Raw Material $ 3,301,564 $ 2,487,435
Finished Goods 1,946,326 2,446,990
Inventory Reserve (497,199) (289,936)
------------------- ------------------
$ 4,750,691 $ 4,644,489
=================== ==================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31, 2004 June 30, 2003
------------------------- ---------------------
Land $ 354,743 $ 354,743
Buildings 2,899,729 2,897,447
Machinery and equipment 1,745,372 1,728,106
Office equipment 654,752 415,349
Vehicles 79,598 65,487
------------------------- ---------------------
5,734,194 5,461,132
Less accumulated depreciation
and amortization (2,495,644) (2,258,579)
------------------------- ---------------------
$ 3,238,551 $ 3,202,553
========================= =====================
NOTE 7. 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 ended 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 March 31, 2004, 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.
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
March 31, 2004 June 30, 2003
-------------------- ------------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization (26,245) (20,752)
-------------------- ------------------
Net carrying amount $ 46,955 52,488
==================== ==================
Amortization expense associated with the license agreement was $1,831 and
$5,493, respectively, for the three and nine months ended for both March 31,
2004 and 2003. 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 8. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates.
Product warranty periods range from ninety days to five years.
A reconciliation of the changes in the warranty liability is as follows:
Three months ended Three months ended
March 31, 2004 March 31, 2003
------------------------- -------------------------
Beginning product warranty reserve balance $ 172,000 $ 148,000
Warranty repairs (38,830) (43,296)
Warranties issued 54,556 59,951
Changes in estimated warranty costs (9,726) (10,655)
------------------------- -------------------------
Ending product warranty liability balance $ 178,000 $ 154,000
========================= =========================
Nine months ended Nine months ended
March 31, 2004 March 31, 2003
------------------------- -------------------------
Beginning product warranty reserve balance $ 160,000 $ 136,000
Warranty repairs (102,249) (136,960)
Warranties issued 161,844 178,620
Changes in estimated warranty costs (41,595) (23,660)
------------------------- -------------------------
Ending product warranty liability balance $ 178,000 $ 154,000
========================= =========================
NOTE 9. COMMON STOCK.
During the nine months ended March 31, 2004 the Company redeemed 77,400 shares
of common stock at a cost of $89,000.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
The Company's fiscal year ends on June 30th. This report covers the third
quarter and nine months ended March 31, 2004, for the Company's fiscal year
ending June 30, 2004.
Net Sales and Net Income
During the quarter ended March 31, 2004, net sales increased 20% to $5,246,044
compared to $4,376,353 during the same quarter of the previous year. Net income
for the quarter ended March 31, 2004, increased to $309,702, compared to $23,253
in the same quarter in 2003. Net sales for the nine months ended March 31, 2004,
were a record $15,562,919 compared to $13,016,705 during the same period of the
previous year. Net income for the nine months ended March 31, 2004, increased
300% to $725,059, compared to $181,025 in the same period in 2003.
Continued strong demand for the Company's new Solaris product line gave a boost
to sales and profits for the quarter and nine months ended March 31, 2004. 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. Hundreds
of independent research studies have proven the efficacy of light therapy in
clinics around the world. 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. In
addition, Solaris was recently featured on television newscasts around the
country. This positive national exposure is helping to introduce large numbers
of people to the benefits of this technology.
Light therapy is enjoying strong interest not only in the rehabilitation market,
but also in the aesthetic market. In January 2004, the Company introduced a new
light therapy device called Synergie LT for the spa and beauty market. The
Company plans to develop and introduce additional light therapy probes this
summer for both the aesthetic as well as the medical rehabilitation market. In
addition, we are exploring new applications for light therapy beyond our current
markets. For example, excellent results are being reported using light therapy
for pain among dental patients. This type of success provides an opportunity to
develop light therapy products specifically for new markets.
Sales of the Company's general line medical supply products remained strong
during the quarter and nine months ended March 31, 2004. Sales of all physical
medicine products represented 87% and 86% of total revenues for the quarters
ended March 31, 2004 and 2003, respectively while sales of aesthetic products
accounted for 8% and 7% of total revenues for the quarters ended March 31, 2004
and 2003, respectively. Chargeable repairs, billable freight revenue and other
miscellaneous revenue accounted for 6% and 7% of total revenues for each of the
quarters ended March 31, 2004 and 2003. The new Solaris Series products
accounted for the majority of the sales increases reported for the first three
quarters of fiscal year 2004.
Gross Profit
During the quarter ended March 31, 2004 total gross profit was $2,139,754 or
40.8% of net sales compared to $1,595,054 or 36.4% of net sales in the quarter
ended March 31, 2003. Gross profit for the nine months ended March 31, 2004 was
$6,151,889 or 39.5% of net sales compared to $4,851,604 or 37.3% of net sales in
the nine months ended March 31, 2003.
The increase in gross margin in both the quarter and nine months ended March 31,
2004 reflects the added sales of the new Solaris products, which carry an
average combined gross margin in excess of 50%, which is more favorable to the
Company. Due to these higher margins, gross margins as a percentage of net sales
for the quarter ended March 31, 2004, increased over four percentage points
compared to the prior year period.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the quarter ended March
31, 2004, were $1,446,932 or 27.6% of net sales compared to $1,245,921 or 28.5%
of net sales in the quarter ended March 31, 2003. SG&A expenses for the nine
months ended March 31, 2004, were $4,147,250 or 26.6% of net sales compared to
$3,707,654 or 28.5% of net sales in the quarter ended March 31, 2003. As a
percentage of total sales, SG&A expense decreased .9% and 1.9%, respectively for
the quarter and nine months ended March 31, 2004. Total SG&A expenses for the
quarter ended March 31, 2004 increased by $201,011 or 16.1%. There were four
material components affecting SG&A expenses during the quarter:
o Approximately $181,000 in increased selling expenses and bonuses
related to the higher sales and profits
o $56,400 in increased health insurance premiums; the costs of health
and dental insurance continue to be one of the fastestgrowing costs
for the Company
o Higher FICA taxes due to the exercise of incentive stock options by
employees; employees exercised options to purchase approximately
159,500 shares of common stock. The subsequent sale of that stock by
employees is treated as compensation and thus subject to FICA taxes.
o Partially offsetting the increased SG&A expenses were lower audit and
legal fees.
Research and Development
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. Research and development expenses
increased 1.7% to $275,910 during the quarter ended March 31, 2004, compared to
$271,344 in the quarter ended March 31, 2003. R&D expenses represented
approximately 5.3% and 6.2% of the revenues of the Company in the 2004 and 2003
periods, respectively. Research and development expenses increased 15.4% to
$837,028 during the nine months ended March 31, 2004, compared to $725,426 in
the similar period ended March 31, 2003. 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 new products for the
future.
Pre-tax profit
Pre-tax profit for the quarter ended March 31, 2004 increased to $380,622
compared to $37,636 during the same period of the prior year. Pre-tax profit for
the nine months ended March 31, 2004 increased to $1,054,433 compared to
$294,176 during the same period of the prior year. Increased sales and gross
margins attributable to the new Solaris line, combined with SG&A and R&D costs
increasing only marginally were the primary reasons for increased profits before
tax for the quarter and nine months ended March 31, 2004.
Income Tax
Income tax expense for the three months ended March 31, 2004 was $70,920
compared to $14,383 in the three months ended March 31, 2003. The effective tax
rates were 18.6% and 38.2% for the quarters ended March 31, 2004 and 2003,
respectively. Income tax expense for the nine months ended March 31, 2004 was
$329,374 compared to $113,151 in the nine months ended March 31, 2003. The
effective tax rates were 31.2% and 38.5% for the nine month periods ended March
31, 2004 and 2003, respectively. During the fiscal 2004 periods, the Company
benefited from a reduction in income taxes of approximately $77,000 related to
the exercise of employee incentive stock options. The gains made by employees
from the exercise and subsequent sale of stock created this tax deduction for
the Company.
Net Income
Net income for the quarter ended March 31, 2004, increased to $309,702
(approximately $.03 per share), compared to $23,253 (approximately $.00 per
share) in the same quarter in 2003. Net income for the nine months ended March
31, 2004, increased 300% to $725,057 (approximately $.08 per share), compared to
$181,025 (approximately $.02 per share) in the same period in 2003. Improved
sales and margin associated with the new Solaris line were the primary
contributors to the increased profitability. Additionally, the containment in
growth of SG&A and R&D expenses together with the reduction in income taxes from
the exercise of employee stock options also contributed to the increases in net
income for the quarter and nine months ended March 31, 2004 over the prior year
periods.
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 $6,191,756 at March 31, 2004, 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.
Accounts Receivable
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 increase in
sales of these products, trade accounts receivable, net of allowance for
doubtful accounts, increased $1,890,760 to $4,173,831 at March 31, 2004 compared
to $2,283,071 at 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
Inventories, net of reserves, increased by $106,202 to $4,750,691 at March 31,
2004, compared to $4,644,489 at June 30, 2003. Management expects that
inventories will fluctuate somewhat over the course of the current fiscal year,
as optimum inventory levels are determined based on ongoing sales demand for
Solaris and other new products.
Prepaid Expenses
Prepaid expenses decreased by $101,861 to $378,836 at March 31, 2004 compared to
$480,697 at June 30, 2003 due to a reduction in advances to suppliers, as well
as lower packaging and freight prepayments.
Goodwill
Goodwill at March 31, 2004 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
Accounts payable increased by $147,160 to $744,271 at March 31, 2004 compared to
$597,111 at June 30, 2003. The fluctuation in accounts payable is a result of
the timing of our weekly payments to suppliers and the timing of purchases for
Solaris components. All accounts payable are within term. We continue to take
advantage of available early payment discounts when offered.
Cash
The Company believes that its current cash balances, amounts available under its
line of credit and cash provided by operations will be sufficient to cover its
operating needs in the ordinary course of business for the next twelve months.
If we experience an adverse operating environment or unusual capital expenditure
requirements, additional financing may be required. However, no assurance can be
given that additional financing, if required, would be available on favorable
terms.
Line of Credit
The Company maintains a revolving line of credit facility with a commercial bank
in the amount of $4,500,000. The outstanding balance on our line of credit
facility was approximately $1.69 million at March 31, 2004 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 March 31, 2004, 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. At March 31, 2004 maximum borrowing base was calculated to be $4.2
million. The line of credit agreement is renewable annually on December 1st and
includes covenants requiring the Company to maintain certain financial ratios.
As of March 31, 2004, we were in compliance with all loan covenants.
The current ratio at March 31, 2004 was 2.6 to 1 compared to 2.9 to 1 at June
30, 2003. Current assets represent 70% of total assets at March 31, 2004.
Debt
Long-term debt excluding current installments totaled $1,601,109 at March 31,
2004, 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
$1.7 million with monthly principal and interest payments of $21,409.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and 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 accounting principles generally accepted 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.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At March 31,
2004 and June 30, 2003, our inventory valuation reserve balance, which
established a new cost basis, was $497,199 and $289,936, respectively and our
inventory balance was $4,750,691 and $4,644,489 net of reserves, respectively.
Revenue Recognition
Our products are sold primarily to customers who are independent distributors
and equipment dealers. These distributors resell the products, typically to end
users, including physical therapists, professional trainers, athletic trainers,
chiropractors, medical doctors and aestheticians. Sales revenues are recorded
when products are shipped FOB shipping point under an agreement with a customer,
risk of loss and title have passed to the customer, and collection of any
resulting receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for shipping and
handling of products to customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit-worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $4,173,831 and $2,283,071, net of allowance for doubtful accounts of
$220,955 and $145,130, at March 31, 2004 and June 30, 2003, respectively.
Business Plan and Outlook
Over the past six years, annual net sales have grown from $12.6 million in
fiscal year 1998 to a projected $20 million for the year ending June 30, 2004.
During fiscal year 2004, we continue to focus our efforts on fueling and
sustaining future growth through the development of new products for the
rehabilitation and aesthetics markets while, at the same time, strengthening our
channels of distribution and improving operating efficiencies.
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 submitted an
application to FDA for clearance of a low-power laser accessory probe to the
Solaris Series products. Other light probes will be developed for Solaris in the
future as market needs are identified.
The Dynatron Solaris 701 (the "701") device is scheduled to be introduced during
the fourth quarter of 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 over the past several years 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. Additional powered treatment table models are
currently under development.
In April 2004, we introduced our new product catalog featuring over 2,000
products. Over the years, our product catalog has been an important sales tool
for our nationwide network of dealers. It provides important information about
the new Solaris product line as well as many other products that we manufacture
and/or distribute.
Going forward, we will continue 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 sourced 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 continue to work 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. We believe that by combining this feature and the
availability of light therapy products 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.
We continue efforts to promote our line of aesthetic products. In January 2004,
we introduced the Synergie LT device, an infrared light therapy unit designed
specifically for aesthetic applications. Interest in light therapy applications
is growing in the aesthetics market. The introduction of the Synergie LT device
is positioning Dynatronics to compete more fully in the spa and beauty market.
We plan to develop and introduce additional light therapy probes for the
aesthetic market using different wavelengths of light. Recent interest by
medical spas in the use of other physical therapy modalities such as
electrotherapy, ultrasound and light therapy in aesthetic applications has
opened new potential for crossover of physical medicine modalities into the
aesthetics market. This presents a unique opportunity for us to grow sales of
new aesthetic products with little additional R&D effort since the products have
already been developed for the physical medicine markets.
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 by further
promoting and expanding the new line of Solaris products.
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 Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices and versions of our physical therapy modalities into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Applying e-commerce solutions to improving overall performance.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Item 2. Management's Discussion and Analysis, 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:
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;
o The ability to obtain required financing to meet changes or other
risks; and
o Escalating costs of raw materials, particularly steel and petroleum
based materials.
Item 3. Controls and Procedures
Based on their evaluation, as of March 31, 2004, our Chief Executive Officer and
Controller 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 2. Changes in Securities
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. 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. The Company has purchased 77,400 shares
for approximately $89,000, leaving over $400,000 of authorized funds for future
stock repurchases. No shares were repurchased during the quarter ended March 31,
2004. The stock repurchase program is conducted pursuant to safe harbor
regulations under Rule 10b-18 of the Exchange Act for the repurchase by an
issuer of its own shares.
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).
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)
10.5 Amended Loan Agreement with Zions Bank (December 2003)
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.
On February 11, 2004, the Company filed a Current Report on
Form 8-K for the purpose of furnishing a copy of its earnings press
release dated February 11, 2004 for its second fiscal quarter ended
December 31, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 5/17/03 /s/ Kelvyn H. Cullimore, Jr.
---------------------- -------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
and Chief Financial Officer (Duly
Authorized Officer)
Date 5/17/03 /s/ Terry M. Atkinson, CPA
---------------------- -------------------------------------------
Terry M. Atkinson
Controller