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 December 31, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------
(Address of principal executive offices)
(801) 568-7000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes __ No X
The number of shares outstanding of the issuer's common stock, no par value, as
of February 6, 2007 is 8,888,007.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
DYNATRONICS CORPORATION
FORM 10-QSB
DECEMBER 31, 2006
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Balance Sheets
December 31, 2006 (unaudited) and June 30, 2006 (audited).....................1
Unaudited Statements of Operations
Three and Six Months Ended December 31, 2006 and 2005.........................2
Unaudited Statements of Cash Flows
Six Months Ended December 31, 2006 and 2005...................................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. Unregistered Sales of Equity Securities and Use of Proceeds.........15
Item 6. Exhibits............................................................16
DYNATRONICS CORPORATION
Balance Sheets
December 31, June 30,
2006 2006
Assets (Unaudited) (Audited)
------------- -------------
Current assets:
Cash $ 490,090 423,184
Trade accounts receivable, less allowance
for doubtful accounts of $271,029 at
December 31, 2006 and $244,238 at
June 30, 2006 2,825,493 3,022,991
Other receivables 346,824 216,847
Inventories, net 4,597,319 4,982,990
Prepaid expenses 608,612 505,786
Prepaid income taxes 207,214 65,869
Deferred tax asset - current 387,830 387,830
-------------- -------------
Total current assets 9,463,382 9,605,497
Property and equipment, net 3,553,827 3,671,216
Goodwill, net of accumulated amortization
of $649,792 at December 31, 2006 and
at June 30, 2006 789,422 789,422
Other assets 407,444 457,520
-------------- -------------
$ 14,214,075 14,523,655
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 238,418 254,518
Line of credit 1,043,053 577,232
Accounts payable 344,921 593,016
Accrued expenses 480,279 536,131
Accrued payroll and benefit expenses 205,171 254,453
-------------- -------------
Total current liabilities 2,311,842 2,215,350
Long-term debt, excluding current installments 1,911,185 2,023,410
Deferred compensation 404,360 388,250
Deferred tax liability - noncurrent 225,603 225,603
-------------- -------------
Total liabilities 4,852,990 4,852,613
-------------- -------------
Commitments
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 8,893,678
shares at December 31, 2006 and
9,034,566 shares at June 30, 2006 2,651,140 2,746,503
Deferred stock compensation - (4,000)
Retained earnings 6,709,945 6,928,539
-------------- -------------
Total stockholders' equity 9,361,085 9,671,042
-------------- -------------
$ 14,214,075 14,523,655
============== =============
See accompanying notes to condensed financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2006 2005 2006 2005
-------------- --------------- -------------- ---------------
Net sales $ 4,428,182 $ 5,230,833 $ 8,567,239 $ 9,589,261
Cost of sales 2,796,992 3,172,671 5,443,892 5,942,515
-------------- --------------- -------------- ---------------
Gross profit 1,631,190 2,058,162 3,123,347 3,646,746
Selling, general, and administrative expenses 1,308,868 1,328,353 2,570,013 2,571,478
Research and development expenses 346,671 432,361 824,755 845,965
-------------- --------------- -------------- ---------------
Operating income (loss) (24,349) 297,448 (271,421) 229,303
-------------- --------------- -------------- ---------------
Other income (expense):
Interest income 4,662 2,409 11,344 5,200
Interest expense (53,260) (39,880) (100,769) (70,069)
Other income, net 2,075 562 5,407 59,811
-------------- --------------- -------------- ---------------
Net other income (expense) (46,523) (36,909) (84,018) (5,058)
-------------- --------------- -------------- ---------------
Income (loss) before income taxes (70,872) 260,539 (355,439) 224,245
Income tax expense (benefit) (27,286) 100,306 (136,845) 86,333
-------------- --------------- -------------- ---------------
Net income (loss) $ (43,586) $ 160,233 $ (218,594) $ 137,912
============== =============== ============== ===============
Basic and diluted net income (loss)
per common share $ (0.00) $ 0.02 $ (0.02) $ 0.02
============== =============== ============== ===============
Weighted average basic and diluted common
shares outstanding (note 2)
Basic 8,949,804 9,020,394 8,963,274 9,019,082
Diluted 8,949,804 9,161,516 8,963,274 9,184,666
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2006 2005
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (218,594) $ 137,912
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization of
property and equipment 176,480 169,109
Other amortization 3,662 3,662
Provision for doubtful accounts 24,000 24,000
Provision for inventory obsolescence 96,000 126,000
Provision for warranty reserve 134,557 129,843
Provision for deferred compensation 16,110 13,866
Compensation expense on stock and options 4,367 -
Change in operating assets and
liabilities:
Receivables 43,521 (442,846)
Inventories 289,671 (175,066)
Prepaid expenses and other assets (56,412) (222,348)
Accounts payable and accrued expenses (487,786) (320,788)
Prepaid income tax (141,345) 21,701
Income tax payable - 16,632
------------- -------------
Net cash used in operating
activities (115,769) (518,323)
------------- -------------
Cash flows from investing activities:
Capital expenditures (59,091) (62,362)
Proceeds from sale of assets - 1,500
------------- -------------
Net cash used in investing
activities (59,091) (60,862)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,530,000
Principal payments on long-term debt (128,325) (684,581)
Net change in line of credit 465,821 6,051
Proceeds from issuance of common stock 23,297 8,095
Redemption of common stock (119,027) -
------------- -------------
Net cash provided by financing
activities 241,766 859,565
------------- -------------
Net change in cash 66,906 280,380
Cash at beginning of period 423,184 472,899
------------- -------------
Cash at end of period $ 490,090 $ 753,279
============= =============
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 99,785 $ 70,896
Cash paid for income taxes $ 4,500 $ 48,000
See accompanying notes to condensed financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 1. PRESENTATION
The balance sheet as of December 31, 2006 and statements of operations and cash
flows for the three and six months ended December 31, 2006 and 2005 were
prepared by Dynatronics Corporation without audit pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, all necessary adjustments, which
consist only of normal recurring adjustments, to the financial statements have
been made to present fairly the financial position and results of operations and
cash flows. The results of operations for the respective periods presented are
not necessarily indicative of the results for the respective complete years. The
Company has previously filed with the SEC an annual report on Form 10-KSB which
included audited financial statements for the two years ended June 30, 2006 and
2005. It is suggested that the financial statements contained in this filing be
read in conjunction with the statements and notes thereto contained in the
Company's 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents. The computation of diluted earnings per share does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per common share is the amount of
net income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each common stock equivalent
outstanding during the period, unless inclusion of common stock equivalents
would have an anti-dilutive effect.
In calculating net income (loss) per common share, the net income (loss) was the
same for both the basic and diluted calculation for the three and six months
ended December 31, 2006 and 2005. A reconciliation between the basic and diluted
weighted-average number of common shares for the three and six months ended
December 31, 2006 and 2005 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ---------- ------------ ------------
Basic weighted average
number of common shares
outstanding during the
period 8,949,804 9,020,394 8,963,274 9,019,082
Weighted average number
of dilutive common stock
options outstanding
during the period - 141,122 - 165,584
----------- ---------- ------------ ------------
Diluted weighted average
number of common and
common equivalent shares
outstanding during the
period 8,949,804 9,161,516 8,963,274 9,184,666
=========== ========== ============ ============
4
Outstanding options not included in the computation of diluted net income (loss)
per share for the three month periods ended December 31, 2006 and 2005 total
819,838 and 823,016 and for the six month periods ended December 31, 2006 and
2005 total 813,442 and 798,032 respectively, because to do so would have been
anti-dilutive.
NOTE 3. EMPLOYEE STOCK COMPENSATION
Effective July 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements using a fair value method of accounting. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans.
Using the modified prospective method, compensation cost recognized in the three
and six months ended December 31, 2006, includes amounts of compensation cost of
all stock based payments that vested during the period (based on grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
previously presented in the proforma footnote disclosures). In accordance with
the modified prospective method, results for prior periods have not been
restated.
The following table summarizes the effect during the three and six months ended
December 31, 2006 of adopting SFAS No. 123(R) as of July 1, 2006:
Three Months Six Months
December 31, 2006 December 31, 2006
------------------- ------------------
Selling, general, and administrative
expenses $ 274 367
------------------- ------------------
Total stock option compensation
expense recognized 274 367
Related deferred income tax expense - -
------------------- ------------------
Increase in net loss 274 367
$
=================== ==================
Impact on basic and diluted net income
(loss) per common share $ - -
=================== ==================
Prior to July 1, 2006, as permitted under SFAS No. 123, the Company accounted
for its stock option plans following the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no stock based
compensation had been reflected in net income (loss) for stock options granted
to directors, officers and employees of the Company as all options granted had
an exercise price equal to the market value of the underlying common stock on
the date of grant and the related number of shares granted was fixed at that
time. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's results of operations would have
been reduced to the pro forma amounts indicated below for the periods ended
December 31, 2005:
Three months ended Six months ended
December 31, 2005 December 31, 2005
-------------------- ------------------
Net income (loss) as reported $ 160,233 137,912
Less: pro forma adjustment
for stock based compensation,
net of income tax (277,912) (451,474)
-------------------- ------------------
Pro forma net income (loss) $ (117,679) (313,562)
==================== ==================
Basic and diluted net income
(loss) per share:
As reported $ 0.02 0.02
Effect of pro forma adjustment (0.03) (0.05)
-------------------- ------------------
Pro forma (0.01) (0.03)
==================== ==================
5
The per share weighted-average fair value of stock options granted for the three
months ended December 31, 2006 and 2005 was $0.86 and $1.45 per share,
respectively, and for the six months ended December 31, 2006 and 2005 was $0.78
and $1.59 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
December 31, 2006 December 31, 2005
--------------------- ------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.50% 4.37%
Expected volatility 55% 87%
Vesting period 4 - 5 years 0 - 5 years
Expected life 7 years 7 & 10 years
Six months ended Six months ended
December 31, 2006 December 31, 2005
--------------------- ------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 4.50 - 5.03% 4.14 - 4.37%
Expected volatility 55 - 58% 87 - 88%
Vesting period 4 - 5 years 0 - 5 years
Expected life 7 years 7 & 10 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended December 31, 2006 and 2005, comprehensive income was equal
to the net income as presented in the accompanying condensed statements of
income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31, 2006 June 30, 2006
----------------- ----------------
Raw material $ 2,866,078 3,034,919
Finished goods 2,185,712 2,331,563
Inventory reserve (454,471) (383,492)
----------------- -----------------
$ 4,597,319 4,982,990
================= =================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, 2006 June 30, 2006
----------------- ----------------
Land $ 354,744 354,743
Buildings 3,603,380 3,590,088
Machinery and equipment 1,517,336 1,481,796
Office equipment 1,069,922 1,059,664
Vehicles 94,290 94,290
----------------- -----------------
6,639,672 6,580,581
Less accumulated depreciation
and amortization 3,085,845 2,909,365
----------------- -----------------
$ 3,553,827 3,671,216
================= =================
6
NOTE 7. PRODUCT WARRANTY RESERVE
The Company accrues the estimated costs to be incurred in connection with its
product warranty programs as products are sold based on historical warranty
rates. The product warranty reserve is included in accrued expenses at December
31, 2006 and 2005. A reconciliation of the changes in the warranty liability is
as follows:
Three months ended Three months ended
December 31, 2006 December 31, 2005
------------------ ------------------
Beginning product warranty reserve
balance $ 208,000 208,000
Warranty repairs (64,424) (70,391)
Warranties issued 63,560 37,255
Changes in estimated warranty costs 864 33,136
----------------- -----------------
Ending product warranty liability
balance $ 208,000 208,000
================= =================
Six months ended Six months ended
December 31, 2006 December 31, 2005
----------------- -----------------
Beginning product warranty reserve
balance $ 208,000 208,000
Warranty repairs (134,557) (129,843)
Warranties issued 122,971 68,296
Changes in estimated warranty costs 11,586 61,547
----------------- -----------------
Ending product warranty liability
balance $ 208,000 208,000
================= =================
NOTE 8. COMMON STOCK.
The Company received proceeds of $1,697 during the six months ended December 31,
2006 for 1,664 shares of common stock that were issued upon the exercise of
options by employees and $21,600 for 20,000 shares of common stock that were
issued upon the exercise of options by non-employees. The Company received
proceeds of $8,095 during the six months ended December 31, 2005 for 6,886
shares of common stock that were issued upon the exercise of options by
employees.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB ratified Emerging Issues Task Force Issue, or EITF, No.
06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation). EITF No. 06-3 requires that, for interim and annual reporting
periods beginning after December 15, 2006, we disclose our policy related to the
presentation of sales taxes and similar assessments related to our revenue
transactions. Early adoption is permitted. Dynatronics Corporation presents
revenue net of sales taxes and any similar assessments. EITF No. 06-3 had no
effect on our financial position and results of operations.
On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB No. 109, was issued. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. Accordingly, the Company will implement
the revised standard in the first quarter of fiscal year 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
157 defines fair value, establishes a framework for measuring fair value, and
expands disclosure requirements regarding fair value measurement. Where
applicable, this statement simplifies and codifies fair value related guidance
previously issued within United States of America generally accepted accounting
principles. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently reviewing SFAS 157 and has not yet determined
the impact that the adoption of SFAS 157 will have on its results of operations
or financial condition.
7
During the quarter ended September 29, 2006, the Securities and Exchange
Commission released Staff Accounting Bulletin 108, Considering the Effects of
Prior Year Misstatements in Current Year Financial Statements ("SAB 108"), which
provides guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 calls for the quantification of errors using both a balance sheet and
income statement approach based on the effects of such errors on each of the
company's financial statements and the related financial statement disclosures.
SAB 108 is effective for financial statements issued for the fiscal year ending
after November 15, 2006. Adoption of SAB 108 will not have a significant impact
on our results of operations or financial condition.
On December 21, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position (FSP) Emerging Issues Task Force ("EITF") 00-19-2,
"Accounting for Registration Payment Arrangements," which requires an issuer to
account for a contingent obligation to transfer consideration under a
registration payment arrangement in accordance with FASB Statement No. 5,
Accounting for Contingencies and FASB Interpretation 14, Reasonable Estimation
of the Amount of Loss. Registration payment arrangements are frequently entered
into in connection with issuance of unregistered financial instruments, such as
equity shares or warrants. A registration payment arrangement contingently
obligates the issuer to make future payments or otherwise transfer consideration
to another party if the issuer fails to file a registration statement with the
SEC for the resale of specified financial instruments or fails to have the
registration statement declared effective within a specific period. The FSP
requires issuers to make certain disclosures for each registration payment
arrangement or group of similar arrangements. The FSP is effective immediately
for registration payment arrangements and financial instruments entered into or
modified after the FSP's issuance date. For previously issued registration
payment arrangements and financial instruments subject to those arrangements,
the FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2006. We do not expect the adoption of this FSP to have a
significant impact on our financial condition or results of operations
8
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 second
quarter ended December 31, 2006, for the Company's fiscal year ending June 30,
2007.
Net Sales
During the quarter ended December 31, 2006, the Company generated sales of
$4,428,182, compared to $5,230,833 in the quarter ended December 31, 2005. For
the six months ended December 31, 2006, the Company generated sales of
$8,567,239, compared to $9,589,261 in the prior year period. Lower sales of the
Company's therapy and aesthetic equipment were partially offset by sales of the
new DX2 decompression/light therapy units. The introduction of the Dynatron XP
light pad in last year's second quarter ending December 31, 2005, resulted in an
increase in sales and gross margins in that period. In addition, there appears
to be a general softening in demand for capital equipment and supplies broadly
reported by our dealer network which contributed to decreased sales compared to
last year. We believe this softening is partly attributable to the impact of
anticipated reductions in reimbursements by Medicare that were recently
postponed as well as increased competition.
Gross Profit
During the quarter ended December 31, 2006, total gross profit was $1,631,190,
or 36.8% of net sales, compared to $2,058,162, or 39.3% of net sales, in the
quarter ended December 31, 2005. For the six months ended December 31, 2006,
total gross profit was $3,123,347, or 36.5% of net sales, compared to
$3,646,746, or 38.0% of net sales, in the prior year period. The single biggest
factor accounting for the diminished gross margin was the introduction of the XP
light pads last year which represented an additional $205,000 in gross margin in
the comparative quarter last year. This factor alone accounted for approximately
one-half of the diminished gross margins. The decrease in gross profit was also
affected by reduced sales of above-average margin therapy devices as well as
reduced sales of the company's Synergie products. Lower than expected gross
margins on the new X3 and DX2 products also contributed to overall lower gross
margin percentages.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
December 31, 2006 were $1,308,868, or 29.6% of net sales, compared to
$1,328,353, or 25.4% of net sales in the prior year period. SG&A expenses for
the six months ended December 31, 2006 were $2,570,013, or 30.0% of net sales,
compared to $2,571,478, or 26.8% of net sales in the prior year period. Overall
SG&A expenses for the quarter and six months ended December 31, 2006 were within
2% of prior year's amounts. Increased health insurance premiums in the quarter
and six month periods ended December 31, 2006 compared to the prior year
periods, were offset by lower selling expenses related to our aesthetic
products.
Research and Development
R&D expenses during the quarter ended December 31, 2006 decreased to $346,671,
compared to $432,361 in the prior year period. R&D expenses represented
approximately 7.8% and 8.3% of the net sales of the Company in the quarters
ended December 31, 2006 and 2005, respectively. For the six months ended
December 31, 2006, R&D expenses decreased to $824,755, compared to $845,965 in
the prior year period. R&D costs are expensed as incurred. The emphasis to
develop the new X-Series products resulted in higher R&D expenses over the past
several quarters. With that development effort now completed, R&D expenses for
the second quarter decreased to levels experienced in prior years. Nevertheless,
the Company remains committed to a strong R&D program in order to develop
state-of-the-art products for future growth.
Other income
The Company recorded a $57,000 gain from the sale of an investment last year
during the quarter ended September 30, 2005.
9
Pre-tax Profit/ Loss
Pre-tax loss for the quarter ended December 31, 2006 was $70,872 compared to a
pre-tax profit of $260,539 in the quarter ended December 31, 2005. Pre-tax loss
for the six months ended December 31, 2006 was $355,439 compared to a pre-tax
profit of $224,245 in the prior year period. As described above, lower sales and
margins generated during the current periods resulted in the pre-tax loss in the
quarter and six months ended December 31, 2006 compared to the prior year
periods.
Income Tax Benefit/Expense
Income tax benefit for the quarter ended December 31, 2006 was $27,286 compared
to income tax expense of $100,306 in the quarter ended December 31, 2005. For
the six months ended December 31, 2006, income tax benefit equaled $136,845
compared to income tax expense of $86,333 in the prior year period. The
effective tax rate for all periods reported was 38.5%.
Net Income/Loss
Net loss for the quarter ended December 31, 2006 was $43,586 ($.00 per share),
compared to net income of $160,233 ($.02 per share) in the quarter ended
December 31, 2005. Net loss for the six months ended December 31, 2006 was
$218,594 ($.02 per share), compared to net income of $137,912 ($.02 per share)
in the similar period of the prior year. These decreases in 2006 are the result
of lower sales and margins compared to the prior year periods.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its line of credit, and from cash provided by operations. The
Company had working capital of $7,151,540 at December 31, 2006, inclusive of the
current portion of long-term obligations and credit facilities, as compared to
working capital of $7,390,147 at June 30, 2006. The Company believes that it has
sufficient liquidity and working capital to meet its operational requirements.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, decreased
$197,498 to $2,825,493 at December 31, 2006 compared to $3,022,991 at June 30,
2006. The Company's trade accounts receivable fluctuate each quarter based on
the level of sales generated during the reporting period, and the timing of
payments received from its dealers, medical practitioners and clinics who are
its primary customers. We estimate that the allowance for doubtful accounts is
adequate based on our historical knowledge and relationships with these
customers. Accounts receivable are generally collected within 30 days of the
agreed terms.
Inventories
Inventories, net of reserves, at December 31, 2006 decreased $385,671 to
$4,597,319 compared to $4,982,990 at June 30, 2006. Inventory levels fluctuate
based on the timing of the receipt of imported goods from overseas suppliers. In
addition, the decrease reflects the normalization of inventory levels following
the introduction of our two new X-series products in the quarter ended September
30, 2006.
Prepaid Expenses
Prepaid expenses increased $102,826 to $608,612 at December 31, 2006 compared to
$505,786 at June 30, 2006, due primarily to increases in advances made to
suppliers for various component parts.
Goodwill
Goodwill at December 31, 2006 and June 30, 2006 was $789,422. Beginning July 1,
2002, the Company adopted the provisions of SFAS No. 142 Goodwill and other
Intangible Assets. In compliance with SFAS 142, management utilized standard
principles of financial analysis and valuation, including transaction value,
market value and income value methods, to arrive at a reasonable estimate of the
fair value of the Company in comparison to its book value. The Company has
determined it has one reporting unit. As of July 1, 2002 and June 30, 2006, the
fair value of the Company exceeded the book value of the Company. Therefore,
there was no indication of impairment upon adoption of SFAS No. 142 or at June
30, 2006. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter of fiscal 2006.
10
Accounts Payable
Accounts payable decreased by $248,095 to $344,921 at December 31, 2006 compared
to $593,016 at June 30, 2006. All accounts payable are within term. We continue
to take advantage of available early payment discounts when offered.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $49,282 to $205,171 at December
31, 2006 compared to $254,453 at June 30, 2006. The decrease in accrued payroll
& benefit expenses is related to: 1) timing differences resulting in lower
accrued payroll at December 31, 2006 compared to June 30, 2006, and 2) lower
accrued bonuses for employees and officers and corresponding payroll taxes.
Cash
The Company's cash position increased $66,906 to $490,090 at December 31, 2006
compared to $423,184 at June 30, 2006, due to lower inventory and trade accounts
receivable levels during the quarter. The Company believes that its current cash
balances, amounts available under its line of credit and cash provided by
operations will be sufficient to cover its operating needs in the ordinary
course of business for the next twelve months. If we experience an adverse
operating environment or unusual capital expenditure requirements, additional
financing may be required. However, no assurance can be given that additional
financing, if required, would be available on favorable terms.
Line of Credit
The Company maintains a revolving line of credit with a commercial bank up to a
maximum amount of $4,500,000. The outstanding balance on our line of credit
increased $465,821 to $1,043,053 at December 31, 2006 compared to $577,232 at
June 30, 2006. Interest on the line of credit is based on the bank's prime rate,
which at December 31, 2006, was 8.25%. The line of credit is collateralized by
accounts receivable and inventories. Borrowing limitations are based on 30% of
eligible inventory and up to 80% of eligible accounts receivable. The line of
credit is renewable biennially in December of each odd numbered year, and
includes covenants requiring the Company to maintain certain financial ratios.
As of December 31, 2006, the Company was in compliance with all loan covenants.
The current ratio was 4.1 to 1 at December 31, 2006 compared to 4.3 to 1 at June
30, 2006. Current assets represented 67% of total assets at December 31, 2006.
Debt
Long-term debt excluding current installments totaled $1,911,185 at December 31,
2006 compared to $2,023,410 at June 30, 2006. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The current principal balance on the mortgage loans is
approximately $2.1 million, with monthly principal and interest payments of
$29,320.
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market subject to regulatory restrictions
governing such repurchases. During fiscal 2004, the Company purchased $89,000 of
stock. During fiscal 2006, the Company purchased $59,000 of stock. In the two
quarters of fiscal 2007, the Company purchased $119,000 of stock, leaving over
$232,500 of authorized funds for future stock repurchases. The stock repurchase
program is conducted subject to safe harbor regulations under Rule 10b-18 of the
Exchange Act for the repurchase by an issuer of its own shares.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
11
Critical Accounting Policies
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed in this Management's
Discussion and Analysis where such policies affect our reported and expected
financial results. For a detailed discussion of the application of these and
other accounting policies, see Notes to the Audited Financial Statements
contained in the Company's annual report on Form 10-KSB for the year ended June
30, 2006. In all material respects, management believes that the accounting
principles that are utilized conform to accounting principles generally accepted
in the United States of America.
The preparation of this quarterly report requires us to make significant
estimates and judgments that affect the amounts of assets, liabilities, revenues
and expenses reported in our unaudited financial statements. By their nature,
these judgments are subject to an inherent degree of uncertainty. We continually
evaluate these estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability, revenue, and income
taxes. We base our estimates on historical experience and other facts and
circumstances that are believed to be reasonable, and the results form the basis
for making judgments about the carrying value of assets and liabilities. The
actual results may differ from these estimates under different assumptions or
conditions.
Inventory Reserve
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out), or market. Raw materials are recorded at the lower of
cost (first-in, first-out) or market. Inventory valuation reserves are
maintained for the estimated impairment of the inventory. Impairment may be a
result of slow moving or excess inventory, product obsolescence or changes in
the valuation of the inventory. In determining the adequacy of reserves, we
analyze the following, among other things:
o Current inventory quantities on hand.
o Product acceptance in the marketplace.
o Customer demand.
o Historical sales.
o Forecast sales.
o Product obsolescence.
o Technological innovations.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At December 31,
2006 and June 30, 2006, our inventory valuation reserve balance was $454,471 and
$383,492, respectively, and our inventory balance was $4,597,319 and $4,982,990
net of reserves, respectively.
Revenue Recognition
Our products are sold primarily to customers who are independent distributors
and equipment dealers. These distributors resell the products, typically to end
users, including physical therapists, professional trainers, athletic trainers,
chiropractors, medical doctors and aestheticians. Sales revenues are recorded
when products are shipped FOB shipping point under an agreement with a customer,
risk of loss and title have passed to the customer, and collection of any
resulting receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for shipping and
handling of products to customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $2,825,493 and $3,022,991, net of allowance for doubtful accounts of
$271,029 and $244,238, at December 31, 2006 and June 30, 2006, respectively.
12
Business Plan and Outlook
-------------------------
During fiscal year 2007, management began implementing a four-fold strategy to
improve overall operations. This strategy focused on (1) increasing marketing
efforts through new sales incentive programs; (2) reducing manufacturing and R&D
labor expenses; (3) enhancing product profit margins through improved
manufacturing processes; and (4) continuing development of new, state-of-the-art
products for future growth. Management's goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth.
During fiscal 2007, the Company introduced several new sales incentive programs
for dealers and their salespeople including an incentive cruise for fiscal 2007.
In addition, management identified a number of improvements that can be made to
lower manufacturing costs and plan to implement them to improve profit margins,
not only for the new X-Series products but also for our other therapy equipment.
Labor cost reductions are being achieved through improved production
efficiencies and reductions in R&D labor which had been ramped up the past year
to accelerate development of the X-Series products. Finally, the Company
continues development of new products for both the rehabilitation and aesthetic
markets.
During fiscal 2007, we introduced the Dynatron X3, a powerful light therapy
device capable of powering a light probe and two light pads simultaneously. This
device incorporates touch screen technology for easy interface with the
practitioner. We also introduced the DX2 combination traction and light therapy
device. The DX2 is Dynatronics' first proprietary traction device and
incorporates not only touch screen technology, but other unique and proprietary
technology that will facilitate traction and decompression therapy. We believe
it is the only unit on the market that offers traction and infrared light
therapy from the same device. Market reception of the X3 did not meet
expectations of management partly due to the price point of the unit. Efforts
are being made to reduce costs of this unit to make it more affordable. However,
the DX2 has performed as projected and seems to have been well received as an
innovative device for delivering traction and decompression therapy.
The introductions of the new T3 and T4 treatment tables scheduled for
introduction in the fourth fiscal quarter ending June 30, 2007, will round out
the full traction package concept originally conceived. These tables are
designed with a higher lift capacity and several unique features. The T4 therapy
table is specially designed for performing traction and decompression therapies
with the DX2 unit.
A new therapy product is scheduled for introduction in the summer of 2007. This
new product will not replace any existing products, but serve to broaden the
product line of available therapeutic products.
Over the past two years, international sales have been maintained above the $1
million level, or approximately 5% of net sales. We continue to press forward
seeking additional opportunities for international expansion. The Company's Salt
Lake City operation, where all electrotherapy, ultrasound, STS devices, light
therapy and Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European Union
and other foreign countries. Past efforts to improve international marketing
have yielded only marginal improvements. We remain committed, however, to
finding the most cost effective ways to expand our markets internationally.
During the second half of fiscal 2007, we will be increasing our marketing
efforts to promote our line of aesthetic equipment which includes the Synergie
AMS device for dermal massage, the Synergie MDA device for microdermabrasion,
and the Synergie LT device, an infrared light therapy unit designed specifically
for aesthetic applications. We plan to redesign our Synergie product line to
give it a fresh appearance more functionality. We also plan to develop and
introduce additional products for the aesthetic market. In addition, we are
considering new methods of distribution to boost sales that have lagged due to
reduced dealer interest in aesthetic capital equipment. A new national sales
manager has been hired with experience in setting up dealer and distributor
networks. Also, Kelvyn Cullimore Sr., who managed the Synergie branded products
until departing two years ago on a humanitarian mission to Asia, has returned to
assist in the efforts to manage the department. Under his prior management,
Synergie branded products achieved their highest level of sustained sales.
Dynatronics continues to look for strategic business opportunities that would
enhance shareholder value. Such opportunities could take the form of
acquisitions, exclusive marketing agreements, mergers or asset acquisitions.
Such opportunities are unique and often difficult to structure. Nevertheless,
Dynatronics considers this an important potential avenue for growth.
13
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Reinforcing our position in the physical medicine market through
an aggressive marketing and advertising plan which includes
several new sales incentive programs.
o Reducing manufacturing labor and certain other expenses through
improved production efficiencies and reducing R&D labor costs
which had been increased over the past year to accelerate the
introduction of the X-Series products.
o Enhancing product profit margins through improved manufacturing
processes, particularly for the recently introduced X-Series
products.
o Continuing development of new, state-of-the-art products, both
high tech and commodity, in fiscal year 2007, for both the
rehabilitation and aesthetic markets.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more products into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Seeking strategic acquisitions to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Part 1 Item 2, Management's Discussion and Analysis or
Plan of Operation, that are not purely historical, are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act.
These statements refer to our expectations, hopes, beliefs, anticipations,
commitments, intentions and strategies regarding the future. They may be
identified by the use of the words or phrases "believes," "expects,"
"anticipates," "should," "plans," "estimates," "intends," and "potential," among
others. Forward-looking statements include, but are not limited to, statements
contained in Management's Discussion and Analysis or Plan of Operation regarding
product development, market acceptance, financial performance, revenue and
expense levels in the future and the sufficiency of its existing assets to fund
future operations and capital spending needs. Actual results could differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements for the reasons detailed in our Annual Report on Form
10-KSB under the headings "Description of Business" and "Risk Factors." The fact
that some of the risk factors may be the same or similar to past reports filed
with the SEC means only that the risks are present in multiple periods. We
believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, and the Solaris
infrared light therapy products;
o failure to timely release new products against market
expectations;
o the ability to hire and retain the services of trained personnel
at cost-effective rates;
o rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o reliance on key management personnel;
o foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o economic and political risks related to expansion into
international markets;
o failure to sustain or manage growth, including the failure to
continue to develop new products or to meet demand for existing
products;
14
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 additional terrorist attacks on U.S. interests and businesses;
o the ability to obtain required financing to meet changes or other
risks; and
o escalating costs of raw materials, particularly steel and
petroleum based materials.
As a public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These
requirements may place a strain on our systems and resources. The Securities
Exchange Act requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal controls over financial
reporting. We are currently reviewing and further documenting our internal
control procedures. However, the guidelines for the evaluation and attestation
of internal control systems for small companies continue to evolve. Therefore,
we can give no assurances that our systems will satisfy the new regulatory
requirements. In addition, in order to maintain and improve the effectiveness of
our disclosure controls and procedures and internal controls over financial
reporting, significant resources and management oversight will be required.
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officers have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There were no changes in our internal control over
financial reporting that occurred during the quarter ended December 31, 2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Small Business Issuer Purchases of Equity Securities*
Approximate
Total # of Shares Dollar Value of
Total # of Purchased as part Shares that May
Shares Average Price of Publicly Announced Yet be Purchased
Period Purchased Paid per Share Plans or Programs Under Plan/Program
--------------------------------------------------------------------------------
10/1/06 to
10/31/06 11,975 $1.31 11,975 $294,897
11/1/06 to
11/30/06 17,964 $1.22 17,964 $272,934
12/1/06 to
12/31/06 35,262 $1.15 35,262 $232,524
15
* The Company's repurchase program was announced on September 3, 2003. At that
time, the Company approved repurchases aggregating $500,000.
Item 6. Exhibits
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser
Corporation. Incorporated by reference to a Registration
Statement on Form S-1 (No. 2-85045) filed with the SEC and
effective November 2, 1984
3.2 Articles of Amendment dated November 21, 1988 (previously
filed)
3.3 Articles of Amendment dated November 18, 1993 (previously
filed)
10.1 Employment contract with Kelvyn H. Cullimore, Jr. (previously
filed)
10.2 Employment contract with Larry K. Beardall (previously filed)
10.3 Loan Agreement with Zions Bank (previously filed)
10.5 Amended Loan Agreement with Zions Bank (previously filed)
10.6 1992 Amended and Restated Stock Option Plan (previously filed)
10.7 Dynatronics Corporation 2005 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive Proxy
Statement on Schedule 14A filed on October 27, 2005)
10.8 Form of Option Agreement for the 2005 Equity Incentive Plan for
incentive stock options (previously filed as Exhibit 10.8 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2006)
10.9 Form of Option Agreement for the 2005 Equity Incentive Plan for
non-qualified options (previously filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2006)
11 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of principal
financial officer (filed herewith)
32 Certifications under Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. SECTION 1350) (filed herewith)
16
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 2/13/07 /s/ Kelvyn H. Cullimore, Jr.
------- ----------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 2/13/07 /s/ Terry M. Atkinson, CPA
------- ----------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial Officer)
17