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, 2003.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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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)
The number of shares outstanding of the issuer's common stock, no par value, as
of May 10, 2003 is 8,869,335.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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DYNATRONICS CORPORATION
FORM 10-QSB
MARCH 31, 2003
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Unaudited Balance Sheets
March 31, 2003 and June 30, 2002..............................................1
Unaudited Statements of Income
Three and Nine Months Ended March 31, 2003 and 2002...........................2
Unaudited Statements of Cash Flows
Nine Months Ended March 31, 2003 and 2002.....................................3
Notes to Unaudited Financial Statements.......................................5
Item 2. Management's Discussion and Analysis or Plan of Operation............12
Item 3. Controls and Procedures..............................................20
PART II. OTHER INFORMATION
Item 5. Other Information...................................................20
Item 6. Exhibits and Report on Form 8-K.....................................20
DYNATRONICS CORPORATION
Balance Sheets
(Unaudited)
March 31, June 30,
Assets 2003 2002
---------------- ----------------
Current assets:
Cash $ 427,934 396,803
Trade accounts receivable, less allowance for doubtful
accounts of $187,156 March 31, 2003 and $165,763 at
June 30, 2002 3,102,706 3,156,436
Other receivables 14,450 58,202
Inventories 4,244,445 3,836,751
Prepaid expenses 516,291 359,000
Prepaid income taxes 104 -
Deferred tax asset-current 276,905 276,905
---------------- ----------------
Total current assets 8,582,731 8,084,097
Property and equipment, net 3,250,750 3,345,059
Goodwill, net of accumulated amortization of $649,752 at
March 31, 2003 and at June 30, 2002 789,422 789,422
Other assets 300,484 289,624
---------------- ----------------
$ 12,923,387 12,508,202
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 191,721 225,604
Line of credit 1,411,176 1,435,689
Accounts payable 570,980 318,904
Accrued expenses 496,528 380,424
Accrued payroll and benefit expenses 280,254 208,504
Income tax payable - 30,804
---------------- ----------------
Total current liabilities 2,950,659 2,599,929
Long-term debt, excluding current installments 1,816,171 1,950,309
Deferred compensation 299,797 282,229
Deferred tax liability - noncurrent 99,160 99,160
---------------- ----------------
Total liabilities 5,165,787 4,931,627
---------------- ----------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 8,869,335 shares at March 31, 2003 and 8,928,774
shares at June 30, 2002 2,478,981 2,638,677
Treasury stock at cost, zero common shares at March 31, 2003
and 59,439 at June 30, 2002 - (159,696)
Retained earnings 5,278,619 5,097,594
---------------- ----------------
Total stockholders' equity 7,757,600 7,576,575
---------------- ----------------
$ 12,923,387 12,508,202
================ ================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Statements Of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
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Net sales $ 4,163,291 4,159,244 12,404,150 12,282,961
Cost of sales 2,568,237 2,539,529 7,552,546 7,335,329
-----------------------------------------------------------------------------
Gross profit 1,595,054 1,619,715 4,851,604 4,947,632
Selling, general, and administrative expenses 1,245,921 1,250,614 3,707,654 3,869,262
Research and development expenses 271,344 171,891 725,426 497,981
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Operating income 77,789 197,210 418,524 580,389
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Other income (expense):
Interest income 973 800 1,839 3,696
Interest expense (41,921) (66,492) (131,591) (221,750)
Other income, net 795 1,241 5,404 5,738
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Total other income (expense) (40,153) (64,451) (124,348) (212,316)
-----------------------------------------------------------------------------
Income before income taxes 37,636 132,759 294,176 368,073
Income tax expense 14,383 49,837 113,151 141,787
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Net income $ 23,253 82,922 181,025 226,286
=============================================================================
Basic and diluted net income
per common share $ 0.00 0.01 0.02 0.03
-----------------------------------------------------------------------------
Weighted average basic and diluted
common shares outstanding (note 2)
Basic 8,869,335 8,865,835 8,869,335 8,850,350
Diluted 8,869,335 8,898,061 8,869,335 8,902,927
See accompanying notes to financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
2003 2002
------------------ -----------------
Cash flows from operating activities:
Net income $ 181,025 226,286
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 262,811 243,613
Other amortization 5,493 70,905
Provision for doubtful accounts 54,000 36,000
Provision for inventory obsolescence 180,000 153,000
Provision for warranty reserve 154,960 184,600
Provision for deferred compensation 17,568 16,227
Change in operating assets and liabilities:
Receivables 43,482 (372,779)
Inventories (587,694) 251,784
Prepaid expenses and other assets (173,644) (130,121)
Prepaid income tax - 9,450
Accounts payable and accrued expenses 284,970 9,012
Income taxes payable (30,804) 36,237
------------------ -----------------
Net cash provided by operating activities 392,167 734,214
------------------ -----------------
Capital expenditures (168,502) (117,515)
------------------ -----------------
------------------ -----------------
Cash flows from financing activities:
Principal payments on long-term debt (168,021) (164,885)
Net change in line of credit (24,513) (419,353)
Proceeds from sale of common stock - 28,765
------------------ -----------------
Net cash used in financing activities (192,534) (555,473)
------------------ -----------------
Net increase decrease in cash 31,131 61,226
Cash at beginning of period 396,803 258,884
------------------ -----------------
Cash at end of period $ 427,934 320,110
================== =================
3
DYNATRONICS CORPORATION
Statements of Cash Flows (Continued)
(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid for interest $ 139,381 227,276
Cash paid for income taxes
144,059 96,100
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in exchange for cashless exercise of options
using mature stock
$ - 39,600
See accompanying notes to financial statements.
4
DYNATRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 2003 and June 30, 2002 and for the
three and nine months ended March 31, 2003 and 2002 were prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. Certain amounts in
the prior period have been reclassified to conform with current period
presentation. 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, 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, 2003 and 2002 is summarized as follows:
5
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
Basic weighted average number of common
shares outstanding during the period 8,869,335 8,865,835 8,869,335 8,850,350
Weighted average number of dilutive common
stock options outstanding during the period - 32,226 - 52,577
--------------- --------------- -------------- ---------------
Diluted weighted average number of common
and common equivalent shares outstanding
during the period 8,869,335 8,898,061 8,869,335 8,902,927
=============== =============== ============== ===============
Outstanding options not included in the computation of diluted net income per
share for the three month periods ended March 31, 2003 and 2002 total 1,016,627
and 504,238 and for the nine month periods ended March 31, 2003 and 2002 total
1,016,627 and 211,471 respectively, because to do so would have been
anti-dilutive.
NOTE 3. COMPREHENSIVE INCOME
For the periods ended March 31, 2003 and 2002, comprehensive income was equal to
the net income as presented in the accompanying statements of income.
NOTE 4. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2003 2002
------------------------ --------------------
Raw Material $ 2,454,959 2,555,535
Finished Goods 2,234,662 1,546,908
Inventory Reserve (445,176) (265,692)
-------------------- --------------------
$ 4,244,445 3,836,751
==================== ====================
7
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31, 2003 June 30, 2002
------------------------- ----------------------
Land $ 354,743 354,743
Buildings 2,897,223 2,871,286
Machinery and equipment 1,680,743 1,603,963
Office equipment 414,571 352,502
Vehicles 65,487 61,771
--------------------- ----------------------
5,412,767 5,244,265
Less accumulated depreciation
and amortization 2,162,017 1,899,206
--------------------- ----------------------
$ 3,250,750 3,345,059
===================== ======================
NOTE 6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB), issued Statement
of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of
the pooling-of-interest method of accounting and requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and is applicable to all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies that intangible
assets acquired in a purchase method business combination must meet certain
criteria to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite lives no longer be amortized effective July 1, 2002; rather, these
assets must be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite 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 the Impairment or Disposal of
Long-Lived Assets.
Beginning July 1, 2002, the Company adopted the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation, the
Company performed an assessment of whether there is an indication that goodwill
is impaired as of the date of adoption. The Company has determined that it has
one reporting unit. The Company determined its fair value using an independent
appraisal firm and compared it to its book value. 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. However, the publicly traded value, one of
the indicators of the fair value of the Company, has decreased since July 1,
2002. If the publicly traded value of the Company does not increase prior to the
Company's annual assessment date in the fourth quarter, impairment may be
7
indicated. If upon the Company's annual assessment of the fair value of
goodwill, an impairment is indicated, the Company will be required to perform
the second step of the impairment test. In the second step, the Company must
compare the implied fair value of goodwill with the carrying amount of the
Company's goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the Company to all of the assets (recognized and
unrecognized) and liabilities of the Company in a manner similar to a purchase
price allocation in accordance with SFAS No. 141. The residual fair value after
this allocation is the implied fair value of the goodwill.
Goodwill. The cost of acquired companies in excess of the fair value of the net
assets and purchased intangible assets at acquisition date is recorded as
goodwill. As of June 30, 2002, 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 was amortized over a period of 15 and 30 years, respectively, on a
straight-line basis. The following table sets forth reported net income and
basic and diluted net income per share, as adjusted, to exclude amortization of
goodwill which would not have been recorded under SFAS No. 142:
Three months ended Nine months ended
March 31, 2002 March 31, 2002
--------------------------- -------------------------
Net income, as reported $ 82,922 226,286
Amortization expense of goodwill, net of tax 14,255 42,764
--------------------------- -------------------------
Net income, as adjusted $ 97,177 269,050
Basic net income per share, as reported $ 0.01 0.03
Diluted net income per share, as reported 0.01 0.03
Amortization expense of goodwill basic and diluted shares - -
Basic net income per share, as adjusted 0.01 0.03
Diluted net income per share, as adjusted 0.01 0.03
Year ended June 30,
2002 2001
----------------------------- ----------------------------
Net income, as reported $ 316,101 334,179
Amortization expense of goodwill, net of tax 57,018 57,018
----------------------------- ----------------------------
Net income, as adjusted $ 373,119 391,197
Basic net income per share, as reported $ 0.04 0.04
Diluted net income per share, as reported 0.04 0.04
Amortization expense of goodwill per basic
and diluted share 0.01 0.01
Basic net income per share, as adjusted 0.04 0.04
Diluted net income per share, as adjusted 0.04 0.04
8
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, 2003 June 30, 2002
--------------------------- ---------------------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 18,921 13,427
--------------------------- ---------------------------
Net carrying amount $ 54,319 59,813
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,
2003 and 2002. Estimated amortization expense for the existing license agreement
is expected to be $7,324 for each of the fiscal years ending June 30, 2003
through June 30, 2010.
NOTE 7. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, for the quarter ended March 31, 2003. The
Company accrues the estimated costs to be incurred in connection with the
Company's product warranty programs as products are sold based on historical
warranty rates. A reconciliation of the changes in the warranty liability is as
follows:
Three months ended Three months ended
March 31, 2003 March 31, 2002
------------------------- --------------------------
Beginning product warranty reserve balance $ 148,000 124,000
Warranty repairs (43,296) (64,771)
Warranties issued 59,951 57,190
Changes in estimated warranty costs (10,655) 13,581
------------------------- --------------------------
Ending product warranty reserve balance $ 154,000 130,000
========================= ==========================
Nine months ended Nine months ended
March 31, 2003 March 31, 2002
------------------------- --------------------------
Beginning product warranty reserve balance $ 136,000 112,000
Warranty repairs (136,960) (166,600)
Warranties issued 178,620 168,891
Changes in estimated warranty costs (23,660) 15,709
------------------------- --------------------------
Ending product warranty reserve balance $ 154,000 130,000
========================= ==========================
9
NOTE 8. COMMON STOCK.
During the nine months ended March 31, 2003 the Company canceled 59,439 shares
of treasury stock.
NOTE 9. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure". SFAS 123 encourages entities to adopt a fair-value-based method
of accounting for stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"). The Company has elected to apply the provisions of APB
25. Accordingly, no compensation expense has been recognized for the stock
option plan. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's results of operations would have
been reduced to the pro forma amounts indicated below:
Three months ended Three months ended
March 31, 2003 March 31, 2002
---------------------------- ----------------------------
Net income as reported $ 23,253 82,922
Less: pro forma adjustment for stock-based
compensation, net of income tax (8,622) (9,679)
---------------------------- ----------------------------
Pro forma net income $ 14,631 73,243
============================ ============================
Basic net income per share:
As reported - 0.01
Effect of pro forma adjustment - -
Pro forma - 0.01
Diluted net income per share:
As reported - 0.01
Effect of pro forma adjustment - -
Pro forma - 0.01
10
Nine months ended Nine months ended
March 31, 2003 March 31, 2002
---------------------------- ----------------------------
Net income as reported $ 181,025 226,286
Less: pro forma adjustment for stock-based
compensation, net of income tax (27,931) (57,618)
---------------------------- ----------------------------
Pro forma net income $ 153,094 168,668
============================ ============================
Basic net income per share:
As reported 0.02 0.03
Effect of pro forma adjustment - (0.01)
Pro forma 0.02 0.02
Diluted net income per share:
As reported 0.02 0.03
Effect of pro forma adjustment - (0.01)
Pro forma 0.02 0.02
The per share weighted-average fair value of stock options granted for the three
months ended March 31, 2003 and 2002 was $.52 and $.83 per share, and for the
nine months ended March 31, 2003 and 2002 was $.56 and $.89 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, 2003 March 31, 2002
---------------------- ------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.46 - 3.66% 4.34 - 5.14%
Expected volatility 89-90% 94 - 95%
Expected life 5 & 7 years 5 & 7 years
Nine months ended Nine months ended
March 31, 2003 March 31, 2002
----------------------- ------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.46 - 4.42% 4.34 - 5.14%
Expected volatility 89-90% 90 - 95%
Expected life 5 & 7 years 5 & 7 years
11
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
Over the past two years, our national economy has faced difficult times. The
rate of economic growth in the United States has slowed dramatically, and in
many sectors, even declined. In assessing the situation, we realized that we
could either continue with the status quo, or we could make a bold move to grow
the Company. We decided on the latter. Our major focus this fiscal year centers
around an aggressive research and development (R&D) campaign to develop several
new products including powered therapy tables, a low-power laser, an infrared
light therapy device, the STSi combination device, proprietary iontophoresis
products, proprietary cold pack products and most importantly a redesign of our
primary line of electrotherapy and ultrasound therapy devices.
The powered therapy tables were introduced in the first quarter of the current
fiscal year. The STSi device was introduced in November 2002. This device
combines our innovative STS chronic pain technology with our well-established
interferential acute pain modality in order to target a much broader segment of
the pain market. In late June 2003, we plan to introduce "Solaris", our new line
of advanced technology electrotherapy/ultrasound products including an available
infrared light therapy probe. The Solaris Series of products will also be
capable of powering a low power laser probe that is scheduled for submission to
the FDA prior to the end of June 2003. Low power lasers have been used in
medical applications for decades throughout Europe and Asia. Only recently has
the FDA allowed low-power lasers to be marketed in the United States. By adding
laser technology and light therapy to our five new Solaris Series products, we
expect the Solaris line to quickly gain acceptance and popularity in the
physical medicine market and increase our share of sales in that market.
During the quarter ended March 31, 2003, net sales were $4,163,291, compared to
$4,159,244 during the same quarter of the previous year. During the nine months
ended March 31, 2003, net sales were $12,404,150, 1% higher than the $12,282,961
in net sales generated during the nine months ended March 31, 2002.
During the quarter ended March 31, 2003 total gross profit was $1,595,054 or
38.3% of net sales compared to $1,619,715 or 38.9% of net sales in the quarter
ended March 31, 2002. Gross profit for the nine months ended March 31, 2003 was
$4,851,604 or 39.1% of net sales compared to $4,947,632 or 40.3% of net sales in
the quarter ended March 31, 2002. The decrease in gross margin as a percent of
net sales in the quarter and nine-month periods reflects lower sales of high
margin aesthetic products and increased sales of treatment tables, exercise
products and supplies that carry lower margins. The introduction of new products
is expected to push margins higher in the near future.
Selling, general and administrative (SG&A) expenses for the quarter ended March
31, 2003, were $1,245,921 or 29.9% of net sales compared to $1,250,614 or 30.1%
of net sales in the quarter ended March 31, 2002. SG&A expenses for the nine
months ended March 31, 2003 decreased to $3,707,654 or 29.9% of net sales
compared to $3,869,262 or 31.5% of net sales for the nine months ended March 31,
2002. The decreases in SG&A expenses reflect our efforts since January 2002 to
12
reduce operating expenses through our `Back to Basics' program. Through this
program, we have realized reductions in overhead and labor expenses as well as
certain selling expenses. Also, the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which was required as of July 1, 2002, reduced the expense associated with the
amortization of goodwill and intangible assets for the three and nine-months
ended March 31, 2003, to $1,831 and $5,493 respectively compared to $23,635 and
$70,905, for the same periods in 2002. This resulted in savings of $21,804 and
$65,412 for the current reporting periods in 2003. For a more complete
discussion of the effects of Standard No. 142, including the potential future
impact of goodwill impairment assessments, please refer to Note 6 in the
accompanying financial statements.
As a result of our focus on developing a record number of new products this
fiscal year, research and development expenses during the quarter ended March
31, 2003 increased 58% to $271,344, compared to $171,891 in the quarter ended
March 31, 2002. R&D expenses during the nine months ended March 31, 2003
increased 46% to $725,426 compared to $497,981 for the same period in 2002. Our
increased R&D efforts are allowing us to introduce several new high-tech
products such as the Solaris Series product line featuring low-power laser and
light therapy capability and low-tech products such as powered therapy tables
and proprietary cold packs. R&D expenses are expected to peak in the fourth
quarter of the current fiscal year and then begin to decline each quarter
thereafter.
Pre-tax profit for the quarter ended March 31, 2003 was $37,636 compared to
$132,759 during the same period of the prior year. Pre-tax profit for the nine
months ended March 31, 2003 was $294,176 compared to $368,073 in the same period
in 2002. The large increase in R&D expenses was the primary reason for decreased
profits for the quarter and nine-month periods in 2003.
Income tax expense for the three months ended March 31, 2003 was $14,383
compared to $49,837 in the three months ended March 31, 2002. The effective tax
rate for the quarter ended March 31, 2003 was 38.2% compared to 37.5% in the
quarter ended March 31, 2002. Income tax expense for the nine months ended March
31, 2003 was $113,151 compared to $141,787 in the nine months ended March 31,
2002. The effective tax rate for the nine months ended March 31, 2003 and 2002
was 38.5%.
Net income for the quarter ended March 31, 2003, was $23,253 (approximately $.00
per share), compared to $82,922 (approximately $.01 per share) in the same
quarter in 2002. Net income for the nine months ended March 31, 2003, was
$181,025 (approximately $.02 per share), compared to $226,286 (approximately
$.03 per share) during the nine months ended March 31, 2002. The decline in net
income per share is due primarily to increased R&D expense during the current
period. We expect the heavy R&D expenditures associated with the new product
introductions will fuel increased sales and profits in the coming quarters.
Liquidity and Capital Resources
13
The Company has financed its operations through available borrowings under its
credit line facility and from cash provided by operations. The Company had
working capital of $5,632,072 at March 31, 2003, inclusive of the current
portion of long-term obligations and credit facilities, as compared to working
capital of $5,484,168 at June 30, 2002. The increase in working capital is
primarily attributable to the increased turns on inventories and the continued
profitability from operations.
Management has focused over the past year on the reduction of inventory and
accounts receivable, which have a combined decrease of over $800,000 from March
31, 2002 to March 31, 2003. These improvements, together with other cash flows
generated from operations, helped reduce the outstanding balance on our line of
credit facility from $2.5 million to $1.4 million during the past year. As a
result, interest expense was reduced by approximately $24,500 during the quarter
ended March 31, 2003.
We expect that cash flows from operations, together with amounts available under
an existing bank line of credit will be adequate to meet working capital needs
related to our business and planned capital expenditures for the next 12 months.
The current ratio at March 31, 2003 and June 30, 2002 was 2.9 to 1. Current
assets represent 66% of total assets at March 31, 2003.
Net accounts receivable at March 31, 2003 were $3,102,706 compared to $3,156,436
at June 30, 2002. The days of net sales outstanding in accounts receivable
improved to 67 days at March 31, 2003 compared to 71 days at June 30, 2002.
Accounts receivable are mostly from the dealer network and are generally
considered to be within term.
All accounts payable are within term. We continue to take advantage of available
early payment discounts when offered.
We maintain a revolving line of credit facility with a commercial bank in the
amount of $4,500,000. Borrowing limitations are based on 30% of eligible
inventory and up to 80% of eligible accounts receivable. The outstanding balance
on the line of credit at March 31, 2003 was $1,411,176 compared to $1,435,689 at
June 30, 2002. The line of credit is secured by inventory and accounts
receivable and bears interest at the bank's prime rate, which was 4.25% per
annum at March 31, 2003. This line is subject to annual renewal and matures on
December 1, 2003. Accrued interest is payable monthly.
Inventory levels, net of reserves, totaled $4,244,445 at March 31, 2003,
compared to $3,836,751 at June 30, 2002. The increase in inventory levels is
primarily related to the timing of purchases of overseas manufactured components
as well as a planned build up of 50 Series Plus products to carry through
several months while manufacturing focuses on the new Solaris Series product
line. We expect inventory levels will increase moderately in future quarters as
the new products, including the Solaris product line, are introduced.
Long-term debt excluding current installments totaled $1,816,171 at March 31,
2003, compared to $1,950,309 at June 30, 2002. 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
14
$1.8 million with monthly principal and interest payments of $21,409.
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 (Note 1) included in our Annual Report on Form 10-KSB for the year
ended June 30, 2002. In all material respects, the accounting principles that
are utilized conform to generally accepted accounting principles in the United
States of America.
The preparation of this quarterly report on Form 10-QSB requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are stated at the lower of cost
(first-in, first-out), or market. Inventory valuation reserves are maintained
for the estimated impairment of the inventory. Impairment may be a result of
slow moving or excess inventory, product obsolescence or changes in the
valuation of the inventory. In determining the adequacy of reserves, we analyze
the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
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,
2003 and June 30, 2002, our inventory valuation reserve balance was $445,176 and
$265,692, respectively and our inventory balance was $4,244,445 and $3,836,751
net of reserves, respectively.
15
Revenue Recognition
Our products are sold primarily through a network of independent distributors.
Sales revenues are generally recorded when products are shipped under an
agreement with a distributor or customer, risk of loss and title have passed and
collection of any resulting receivable is reasonably assured. The distributors,
who sell the products to other customers, take title to the products, have no
special rights of return, and assume the risk for credit and obsolescence.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts.
Our accounts receivable balance was $3,102,706 and $3,156,436, net of allowance
for doubtful accounts of $187,156 and $165,763, at March 31, 2003 and June 30,
2002, respectively.
Business Plan
Over the past five years, Dynatronics' annual net sales have grown 60 percent
from $10.2 million in fiscal year 1997 to $16.3 million in fiscal year 2002.
During fiscal year 2003, we are focusing our efforts on fueling and sustaining
future growth through the introduction of several new products for the
rehabilitation markets while, at the same time, strengthening our channels of
distribution and improving operating efficiencies.
To enhance our position in the core physical medicine market, we have introduced
several new products this fiscal year and plan to introduce more new products
before the end of calendar 2003, including a low-power laser accessory to the
Solaris Series devices. In the early 1980's we attempted to gain FDA approval
for a low-power laser device, but were unsuccessful. At that time the laser
device was the only product we offered - a fact reflected in the original name
of the Company, Dynatronics Laser Corporation. When we were unable to obtain
approval for the low-power laser device, we began pursuing the development of
other physical medicine modalities and subsequently changed our name to
Dynatronics Corporation.
A recent change in the regulatory landscape now allows the introduction of
low-power laser devices for the treatment of pain. We plan to first introduce an
infrared light therapy accessory device in conjunction with the new Solaris
Series line of advanced technology electrotherapy/ ultrasound products. This new
product line is expected to quickly become our top selling line. By the end of
June 2003, we expect to have submitted to FDA an application for approval of a
low power laser accessory to the Solaris Series products.
As a result of our concentrated R&D effort, we will incur more research and
development expense in fiscal year 2003 than at any time since the early days of
seeking FDA approval for our first low-power laser product. All of these efforts
are designed to increase market share and improve profitability in the coming
years.
16
As part of this year's R&D campaign, we introduced the Dynatron STSi combination
therapy device in November 2002. This device provides our STS chronic pain
treatment technology together with our interferential therapy for treating
patients with acute pain.
In a research study published in the January, 2002 edition of the American
Journal of Pain Management, test results showed 85% of STS-treated patients
suffering pain associated with peripheral neuropathies realized some reduction
of pain, with 50% of the patients becoming totally pain-free. We believe that
the fact these results were achieved with patients who had suffered on average
for eight years with their chronic pain condition further attests to the
effectiveness of this therapy.
As with many new medical therapies or technologies, insurance reimbursement may
influence the rate of growth of the STS technology. Presently, limited
reimbursement is available for STS treatments or home units. Most are reviewed
on a case-by-case basis. However, as medical practitioners experience positive
outcomes and further research supports the efficacy of this therapy, it is
anticipated that reimbursements will be more broadly established. It will take
time, perhaps years, to obtain broad acceptance and reimbursement for this new
therapy. While the potential for a non-invasive, non-addictive, safe alternative
for the treatment of chronic pain would seem to be vast, the realities of
accessing that market will demand vigilance over the coming years to fully
exploit that potential.
R&D efforts have not been limited to high tech products alone. In the prior
quarter, Dynatronics introduced new, more price competitive powered therapy
tables. Demand for these tables quickly outstripped supply and by January 2003,
these tables were on backorder. Increased manufacturing efforts have now
eliminated that backlog and are now keeping up with demand. In addition,
Dynatronics will introduce a new line of proprietary cold packs before the end
of fiscal year 2003. These new cold packs will be higher quality than the packs
previously purchased from another vendor and will carry better gross margins.
Going forward, we will continue to strengthen our manufacturing capabilities
with the goal of improving margins and competitive pricing capability. To that
end, some products previously contracted to other manufacturers are being
converted to in-house manufacturing. Other products are being contracted for
overseas manufacturing or moved to more competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. In March 2001, our Salt Lake operation, where all
electrotherapy, ultrasound, STS devices and Synergie products are manufactured,
was designated an ISO 9001 certified facility. That certification was renewed in
July 2002. With this designation, we can market products manufactured in this
facility in any country that recognizes the CE Mark. We are now working to
establish effective distribution of these products in the European Community.
We continue efforts to promote our line of aesthetic products. Controlling and
expanding the channels of distribution for these products is expected to
ultimately increase sales of these high margin products and allow us to more
fully access the potential of the aesthetics products market. We perceive this
market to be both lucrative and expanding, particularly as aging baby boomers
continue to look for ways to retain a youthful appearance. Despite the expansion
17
of the beauty and spa market, this is a segment of our business that seems to be
more directly impacted by general economic slow down as spa and beauty services
are the purchased with discretionary dollars not as readily available in slower
economic times.
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 Reinforce 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 six
months.
o Continue implementation of our Back to Basics program, which
evaluates ways to improve margins and competitive pricing through
strategic manufacturing processes and alliances as well as
controlling expenses.
o Maximize sales of the Dynatron STS technology in the face of
limited reimbursement and better educate the medical and insurance
communities on the efficacy of STS treatments.
o Improve sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Expand distribution of both rehabilitation and aesthetic products
internationally.
o Apply e-commerce solutions to improving overall performance.
Cautionary Statement Concerning Forward-Looking Statements
The statements contained in this report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis or Plan
of Operation regarding product development, clinical results, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in our Annual Report on Form 10-KSB under the headings
"Description of Business" and "Risk Factors." The fact that some of the risk
18
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, laser and light therapy products;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense
of expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The potential continued spread of the SARS outbreak which may
affect overseas sales as well as overseas manufacturing;
o Continued terrorist attacks on U.S. interests and businesses; and
19
o The ability to obtain required financing to meet changes or other
risks described above.
Item 3. Controls and Procedures.
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and principal accounting officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 5. Other Information.
Nasdaq Listing Maintenance Requirements. On July 29, 2002, we received notice
from The Nasdaq Stock Market that for 30 trading days the price of our common
stock had closed below the minimum $1.00 per share bid price required for
continued listing on the Nasdaq SmallCap Market by Marketplace Rule 4450(a)(5).
Under Marketplace Rule 4450(c)(2), we will be provided approximately five
quarters, or until October 27, 2003, to regain compliance with the $1.00 minimum
bid price requirement. We can regain compliance with the minimum bid price
requirement if, at any time before October 27, 2003, the bid price of our common
stock closes at $1.00 per share or more for a minimum of 10 consecutive trading
days. Should we fail to regain compliance, Nasdaq stated that it would provide
us with written notification that our common stock will be delisted from the
Nasdaq SmallCap Stock Market. Removal of our common stock from listing on the
Nasdaq Stock Market would likely have an adverse impact on the trading price and
liquidity of our common stock.
Retirement of Joseph H. Barton. Effective May 9, 2003, Joseph H. Barton, a
director and member of the Company's audit and compensation committees,
announced his retirement and resignation from the Board of Directors. Under the
Bylaws of the Company, the Board of Directors has the power to appoint a
replacement to serve the remainder of Mr. Barton's term, which would ordinarily
continue until the annual meeting of shareholders, scheduled to be held in
November 2003. As of the date of this report the Board had not taken any action
to replace Mr. Barton.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
--------
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K. None.
-------------------
20
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 5/14/03 /s/ Kelvyn H. Cullimore, Jr.
---------------------- -----------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
Date 5/14/03 /s/ Terry M. Atkinson
---------------------- -----------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
21
CERTIFICATIONS
I, Kelvyn H. Cullimore, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dynatronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
22
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Kelvyn H. Cullimore, Jr.
--------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
23
I, Terry M. Atkinson certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dynatronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
24
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Terry M. Atkinson
----------------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
25