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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, 2008.
[ ] 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
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(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number, Including Area Code)
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 May 12, 2008 is approximately 13.7 million.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
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i
DYNATRONICS CORPORATION
FORM 10-QSB
MARCH 31, 2008
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................1
Condensed Consolidated Balance Sheets
March 31, 2008 and June 30, 2007 ...........................................1
Condensed Consolidated Statements of Operations
Three and Nine Months Ended March 31, 2008 and 2007.........................2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2008 and 2007...................................3
Notes to Condensed Consolidated Financial Statements........................4
Item 2. Management's Discussion and Analysis or Plan of Operation...........9
Item 3. Controls and Procedures............................................18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......18
Item 6. Exhibits..........................................................19
ii
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets March 31, 2008 June 30, 2007
-------------- --------------
Current assets:
Cash $ 212,670 1,301,105
Trade accounts receivable, less
allowance for doubtful accounts
of $181,990 at March 31, 2008
and $330,857 at June 30, 2007 5,513,805 3,757,484
Other receivables 65,427 282,741
Inventories, net 6,952,979 5,313,984
Prepaid expenses 899,787 507,755
Prepaid income taxes 106,412 92,702
Deferred tax asset - current 408,429 396,156
-------------- ------------
Total current assets 14,159,509 11,651,927
Property and equipment, net 3,617,687 3,453,495
Goodwill, net 6,623,596 2,758,572
Intangible asset, net 653,509 356,792
Deferred tax asset - noncurrent 495,058 -
Other assets 354,154 346,830
-------------- ------------
$ 25,903,513 18,567,616
============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term
debt $ 318,632 271,979
Line of credit 5,704,823 250,000
Warranty reserve 208,000 208,000
Accounts payable 2,380,281 1,241,030
Accrued expenses 395,275 287,773
Accrued payroll and benefit expenses 422,796 276,754
Acquisition cash obligations - 1,000,000
-------------- ------------
Total current liabilities 9,429,807 3,535,536
Long-term debt, excluding current
installments 3,110,160 3,251,631
Deferred compensation 444,635 420,470
Deferred tax liability - noncurrent - 289,335
-------------- ------------
Total liabilities 12,984,602 7,496,972
-------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value.
Authorized 50,000,000 shares;
issued 13,540,736 shares at
March 31, 2008 and 10,308,522
shares at June 30, 2007 7,755,184 4,227,147
Retained earnings 5,163,727 6,843,497
-------------- ------------
Total stockholders' equity 12,918,911 11,070,644
-------------- ------------
$ 25,903,513 18,567,616
============== ============
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2008 2007 2008 2007
------------ ----------- ------------ ------------
Net sales $ 7,781,871 $ 4,330,440 $ 24,534,934 $ 12,897,679
Cost of sales 4,946,912 2,719,548 15,428,447 8,163,440
------------ ----------- ------------ ------------
Gross profit 2,834,959 1,610,892 9,106,487 4,734,239
Selling, general,
and
administrative
expenses 3,325,765 1,368,680 10,240,809 3,938,693
Research and
development
expenses 368,994 328,980 1,070,993 1,153,736
------------ ----------- ------------ ------------
Operating
income (loss) (859,800) (86,768) (2,205,315) (358,190)
------------ ----------- ------------ ------------
Other income
(expense):
Interest income 3,823 7,381 9,210 18,726
Interest expense (165,613) (54,870) (463,216) (155,640)
Other income, net 2,033 1,919 8,865 7,326
------------ ----------- ------------ ------------
Net other
income
(expense) (159,757) (45,570) (445,141) (129,588)
------------ ----------- ------------ ------------
Income (loss)
before income
taxes (1,019,557) (132,338) (2,650,456) (487,778)
Income tax expense
(benefit) (390,782) (50,949) (970,686) (187,794)
------------ ----------- ------------ ------------
Net income
(loss) $ (628,775) $ (81,389) $ (1,679,770) $ (299,984)
============ =========== ============ ============
Basic and diluted
net income
(loss) per
common share $ (0.05) $ (0.01) $ (0.12) $ (0.03)
============ =========== ============ ============
Weighted average
basic and
diluted common
shares
outstanding
(note 2)
Basic 13,579,328 8,881,534 13,616,237 8,936,425
Diluted 13,579,328 8,881,534 13,616,237 8,936,425
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
2008 2007
------------ ------------
Cash flows from operating activities:
Net loss $ (1,679,770) (299,984)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization
of property and equipment 276,844 266,108
Amortization of intangible assets 69,683 5,493
Stock based compensation expense 292,365 6,374
Provision for doubtful accounts 190,000 24,000
Provision for inventory obsolescence 126,000 126,000
Provision for deferred income taxes (971,854) -
Provision for warranty reserve 209,137 198,792
Provision for deferred compensation 24,165 24,165
Change in operating assets and liabilities:
Receivables (360,468) (109,726)
Inventories (572,356) (154,519)
Prepaid expenses and other assets (394,574) 144,232
Accounts payable and accrued expenses (313,142) (651,136)
Prepaid income taxes (13,710) (196,402)
------------ ------------
Net cash used in operating activities (3,117,680) (616,603)
------------ ------------
Cash flows from investing activities:
Capital expenditures (238,138) (68,009)
Business acquisitions (1,839,794) -
------------ ------------
Net cash used in investing activities (2,077,932) (68,009)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (184,952) (193,281)
Net change in line of credit 4,454,823 1,090,786
Proceeds from issuance of common stock 49,225 23,664
Redemption of common stock (211,919) (192,444)
------------ ------------
Net cash provided by financing
activities 4,107,177 728,725
------------ ------------
Net change in cash (1,088,435) 44,113
Cash at beginning of period 1,301,105 423,184
------------ ------------
Cash at end of period $ 212,670 467,297
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 438,872 152,215
Cash paid for income taxes 8,700 8,608
Supplemental disclosure of non-cash investing
and financing activities:
Stock based compensation - see note 3
for details
Business acquisition disclosure - see note
9 for details
Capital expenditures financed by long
term debt 90,134 -
Acquisition cash obligation financed by
line of credit 1,000,000 -
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of March 31, 2008 and condensed
consolidated statements of operations and cash flows for the three and nine
months ended March 31, 2008 and 2007 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, 2007 and 2006. 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
form 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 nine months
ended March 31, 2008 and 2007. A reconciliation between the basic and diluted
weighted-average number of common shares for the three and nine months ended
March 31, 2008 and 2007 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2008 2007 2008 2007
------------ ----------- ------------ -------------
Basic weighted average
number of common shares
outstanding during the
period 13,579,328 8,881,534 13,616,237 8,936,425
Weighted average
number of dilutive
common stock options
outstanding during the
period -0- -0- -0- -0-
------------ ----------- ------------ ------------
Diluted weighted
average number of
common and common
equivalent shares
outstanding during the
period 13,579,328 8,881,534 13,616,237 8,936,425
============ =========== ============ ============
4
Outstanding options not included in the computation of diluted net loss per
share for the three month periods ended March 31, 2008 and 2007 total 1,323,464
and 830,757 and for the nine month periods ended March 31, 2008 and 2007 total
730,646 shares and 810,193 respectively, because to do so would have been
anti-dilutive.
NOTE 3. STOCK BASED COMPENSATION
Stock-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized over the employee requisite service period. The
Company recognized $18,390 and $2,374 in stock-based compensation during the
three months ended March 31, 2008 and 2007, respectively, and recognized
$292,365 and $6,374 in stock-based compensation during the nine months ended
March 31, 2008 and 2007, respectively, as selling, general, and administrative
expenses in the condensed consolidated statements of operations.
On July 1, 2007, the Company granted 220,000 shares of common stock to employees
with an estimated value of $1.08 per share. This stock had a ninety day vesting
period. On July 1, 2007, the Company also granted 80,000 shares of common stock
with an estimated value of $1.08 per share, which vested over a four-year period
in annual installments of 20,000 shares per year. The Company recognized $11,250
and $272,700 in stock-based compensation during the three and nine month periods
ended March 31, 2008, respectively, from these shares. As of March 31, 2008,
$52,650 in unrecognized stock-based compensation from the unvested shares is
expected to be recognized over the remainder of the four-year period.
NOTE 4. COMPREHENSIVE INCOME
For the periods ended March 31, 2008 and 2007, comprehensive income was equal to
the net income as presented in the accompanying condensed consolidated
statements of operations.
NOTE 5. INVENTORIES
Inventories consisted of the following:
March 31, 2008 June 30, 2007
-------------- --------------
Raw material $ 3,278,192 2,961,653
Finished goods 4,060,410 2,646,141
Inventory reserve
(385,623) (293,810)
-------------- --------------
$ 6,952,979 5,313,984
============== ==============
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31, 2008 June 30, 2007
-------------- --------------
Land $ 354,743 354,743
Buildings 3,682,504 3,603,380
Machinery and equipment 1,656,230 1,521,601
Office equipment 1,281,926 1,147,667
Vehicles 188,148 95,124
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7,163,551 6,722,515
Less accumulated depreciation
and amortization 3,545,864 3,269,020
-------------- --------------
$ 3,617,687 3,453,495
============== ==============
5
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. A reconciliation of the changes in the warranty liability is as follows:
Three months Three months
ended ended
March 31, 2008 March 31, 2007
-------------- ---------------
Beginning product warranty reserve balance $ 208,000 208,000
Warranty repairs (81,962) (64,235)
Warranties issued 117,848 62,157
Changes in estimated warranty costs (35,886) 2,078
-------------- --------------
Ending product warranty liability balance $ 208,000 208,000
============== ==============
Nine months Nine months
ended ended
March 31, 2008 March 31, 2007
-------------- ---------------
Beginning product warranty reserve balance $ 208,000 208,000
Warranty repairs (209,137) (198,792)
Warranties issued 371,556 185,128
Changes in estimated warranty costs (162,419) 13,664
-------------- --------------
Ending product warranty liability balance $ 208,000 208,000
============== ==============
NOTE 8. COMMON STOCK.
The Company received proceeds of $49,225 during the nine months ended March 31,
2008 for 47,499 shares of common stock that were issued upon the exercise of
options for services.
NOTE 9. ACQUISITION AND NON-CASH DISCLOSURE
On July 2, 2007, the Company completed the acquisition of a 100% interest in
five of its key independent distributors, Responsive Providers, Inc. of Houston,
Texas, Therapy and Health Care Products, Inc. of Youngstown, Ohio, Cyman
Therapy, Inc. of Detroit, Michigan, Al Rice and Associates, Inc. of
Jeffersonville, Indiana and Theratech Inc. of Minneapolis, Minnesota. The total
consideration paid for the five separately-negotiated acquisitions was
approximately $5.6 million comprised of approximately $2.3 million in cash and
3,061,591 shares of common stock.
The acquisition value of the five dealers acquired was accounted for using the
purchase method of accounting. Accordingly, the purchase price was assigned to
the assets acquired and the liabilities assumed based on fair values at the
purchase date. The following table reflects the unaudited estimated fair values
of the assets acquired and the liabilities assumed as of the acquisition date:
6
Cash $ 651,828
Trade accounts receivable 1,160,976
Inventories 1,192,639
Prepaid expenses 4,782
Property and equipment 112,764
Cash surrender value of life insurance 207,563
Intangible assets - weighted average 9 years 366,400
Goodwill 3,512,779
--------------
Total assets acquired 7,209,731
Accounts payable and accrued expenses (1,496,800)
--------------
Net assets acquired 5,712,931
==============
The acquisition resulted in a $175,188 deferred income tax liability and a
corresponding increase to goodwill of $175,188.
Unaudited pro forma results of operations for the three and nine months ended
March 31, 2008 and 2007, as though the five dealers had been acquired as of
July 1, 2006, are as follows:
Three months Three months
ended ended
March 31, 2008 March 31, 2007
-------------- ---------------
Net sales $ 7,781,871 6,542,337
Net loss (628,775) (46,906)
Basic and diluted net loss per common share (.05) (.00)
Nine months Nine months
ended ended
March 31, 2008 March 31, 2007
-------------- ---------------
Net sales $ 24,534,934 19,472,975
Net loss (1,679,770) (196,534)
Basic and diluted net loss per common share (.12) (.02)
NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. The cost of the 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 March 31, 2008 the Company had net goodwill of $6,646,481
arising from various acquisitions. Goodwill is subject to annual specified
impairment tests or more frequently if events or changes in circumstances
indicate that goodwill might be impaired. There were no goodwill impairment
losses recorded during the three and nine month periods ended March 31, 2008.
Identifiable Intangibles. Identifiable intangibles assets consists of the
following:
As of As of
March 31, 2008 June 30, 2007
-------------- --------------
Trade name - 15 years $ 339,400 118,000
Domain name - 15 years 5,400 1,200
Non-compete covenant - 4 years 149,400 114,000
Customer relationships - 7-15 years 120,000 89,000
Trademark licensing agreement - 20 years 45,000 -0-
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 8,700
License agreement - 10 years 73,240 73,240
-------------- --------------
Total identifiable intangibles 773,240 406,840
Accumulated amortization 119,731 50,048
-------------- --------------
Net carrying amount $ 653,509 356,792
============== ==============
7
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted the
revised standard during the quarter ended September 30, 2007. The adoption of
this standard had no material impact on the Company's financial statements.
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 for financial assets and November 15,
2008 for non-financial assets, 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.
In December 2007, the FASB Statement 141R, "Business Combinations" ("SFAS 141R")
was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest of the acquired company at
fair value. SFAS 141R also requires transactions costs related to the business
combination to be expensed as incurred. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The effective date for the Company will be January 1, 2009. We have
not yet determined the impact of SFAS 141R related to future acquisitions, if
any, on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51," which
establishes accounting and reporting standards to improve the relevance,
comparability, and transparency of financial information in its consolidated
financial statements. This is accomplished by requiring all entities, except
not-for-profit organizations, that prepare consolidated financial statements to
(a) clearly identify, label, and present ownership interests in subsidiaries
held by parties other than the parent in the consolidated statement of financial
position within equity, but separate from the parent's equity, (b) clearly
identify and present both the parent's and the non-controlling's interest
attributable consolidated net income on the face of the consolidated statement
of income, (c) consistently account for changes in parent's ownership interest
while the parent retains it controlling financial interest in subsidiary and for
all transactions that are economically similar to be accounted for similarly,
(d) measure of any gain, loss or retained non-controlling equity at fair value
after a subsidiary is deconsolidated, and (e) provide sufficient disclosures
that clearly identify and distinguish between the interests of the parent and
the interests of the non-controlling owners. This Statement also clarifies that
a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for fiscal years, and interim
periods on or after December 15, 2008. The management of the Company does not
expect the adoption of this pronouncement to have a material impact on its
financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards." EITF06-11 requires companies to recognize the income tax benefit
realized from dividends or dividend equivalents that are charged to retained
earnings and paid to employees for non-vested equity-classified employee
share-based payment awards as an increase to additional paid-in capital. EITF
06-11 is effective for fiscal years beginning after September 15, 2007. The
Company does not expect EITF 06-11 will have a material impact on its financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,
("SFAS No. 161"), which requires companies to provide additional disclosures
about its objectives and strategies for using derivative instruments, how the
derivative instruments and related hedged items are accounted for under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities , and related
interpretations, and how the derivative instruments and related hedged items
affect the Company's financial statements. SFAS No. 161 also requires companies
to disclose information about credit risk-related contingent features in their
hedged positions. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. Although the Company will continue to
evaluate the application of SFAS No. 161, management does not currently believe
adoption will have a material impact on the Company's financial condition or
operating results.
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 in Part I, Item 1 of this report on Form
10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the three and
nine months ended March 31, 2008, for the Company's fiscal year ending June 30,
2008.
Net Sales
During the quarter ended March 31, 2008, the Company's sales increased 79.7% to
$7,781,871, compared to $4,330,440 in the quarter ended March 31, 2007. For the
nine months ended March 31, 2008, the Company's sales increased 90.2% to
$24,534,934, compared to $12,897,679 in the nine month period ended March 31,
2007. The increase in sales is the result of the addition of revenues from the
Company's acquisition of six of its distributors of physical medicine products
completed on June 30, 2007 and July 2, 2007. On June 30, 2007, we acquired our
largest independent distributor, Rajala Therapy Sales Associates of Pleasanton,
California. On July 2, 2007, Dynatronics acquired five additional independent
distributors: Responsive Providers, Inc. of Houston, Texas; Therapy and Health
Care Products, Inc. of Girard, Ohio; Cyman Therapy, Inc. of Detroit, Michigan;
Al Rice and Associates, Inc. of Jeffersonville, Indiana; and Theratech, Inc. of
Minneapolis, Minnesota. The vertical integration of these distributors is a key
strategic step toward strengthening our distribution channels. We believe that
these acquisitions, as they are fully assimilated into our business operations,
will provide Dynatronics with more effective direct distribution of our products
and result in better margins on each product sold at the retail level compared
to the wholesale level. Subsequent to these acquisitions, we added twelve new
direct sales persons in other territories including Southern California,
Louisiana, Kansas, Oklahoma, and Missouri, expanding our direct sales force to
40 sales representatives covering 30 states.
The acquired distributors sell products from many manufacturers, including
Dynatronics. As a result of the transactions described above, the mix between
Company's sales of manufactured and distributed products during the quarter
covered by this report shifted toward distributed products with 42% of sales
attributed to sales of distributed products and the remaining 58% being
manufactured products. By comparison, during the same period in fiscal year
2007, the mix between manufactured and distributed products was 71% and 29%,
respectively. We anticipate the mix between manufactured and distributed
products in future periods will be similar to the mix experienced during the
first three quarters of fiscal year 2008.
Gross Profit
During the quarter ended March 31, 2008, gross profit increased 76% to
$2,834,959, or 36.4% of net sales, compared to $1,610,892, or 37.2% of net
sales, in the quarter ended March 31, 2007. For the nine months ended March 31,
2008, gross profit increased 92.4% to $9,106,487, or 37.1% of net sales,
compared to $4,734,239, or 36.7% of net sales, in the nine months ended March
31, 2007. The increase in gross profit in the three and nine month periods was
primarily a result of the sales added by the recent acquisitions. For the
quarter ended March 31, 2008, gross profit as a percent of sales decreased 0.8
percentage point to 36.4% due to a shift in product mix toward sales of medical
supplies and distributed items which generate lower margins as a percent of
sales compared to the Company's manufactured medical devices and products.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 2008 increased $1,957,085 to $3,325,765, or 42.7% of net sales,
compared to $1,368,680, or 31.6% of net sales in the prior year period. SG&A
expenses for the nine months ended March 31, 2008 increased $6,302,116to
$10,240,809, or 41.7% of net sales, compared to $3,938,693, or 30.5% of net
sales in the prior year period. Substantially all of the increase in SG&A
expenses for the nine months ended March 31, 2008 is related to the recent
acquisitions and includes the following:
o $3,315,500 in higher selling expenses primarily related to the new
direct sales force
o $1,878,400 in higher labor and operating costs to support the
higher sales volume
o $1,360,700 in higher general and administrative expenses
associated with the acquired companies
9
With the assimilation of the six acquisitions substantially completed, during
the quarter ended March 31, 2008, management implemented measures designed to
reduce annual operating expenses by an estimated $1.9 million. These cost
savings are expected to be achieved by a reduction of approximately 20 percent
of the Company's workforce and the elimination of duplicative overhead expense.
In addition, we consolidated operations from eight distribution points to three.
Many of these reductions had been contemplated as part of the planning for the
acquisition and assimilation of the distributors in 2007. We believe these
reductions in expenses will not negatively impact the Company's sales or
operations. The implementation of the cost reductions caused us to incur
severance costs of approximately $102,000 that were expensed in the quarter
ended March 31, 2008; we expect to see the benefit of those reductions in our
operating results commencing in the fourth quarter 2008.
Research and Development
Research and Development ("R&D") expense during the quarter ended March 31, 2008
increased to $368,994, compared to $328,980 in the prior year period. The
increase in the current quarter is attributable to the final stages of
completing the new Synergie Elite line of products. R&D expense during the nine
months ended March 31, 2008 decreased to $1,070,993 compared to $1,153,736 in
the prior year period. R&D expense represented approximately 4.7% and 7.6% of
the net sales of the Company in the quarters ended March 31, 2008 and 2007,
respectively. R&D expenditures as a percentage of sales were lower due to the
additional sales during the quarter and nine month periods ended March 31, 2008
due to the acquisitions, compared to the prior year periods which predated the
acquisitions. R&D costs are expensed as incurred. Dynatronics intends to
continue its commitment to developing innovative products for the physical
medicine market in fiscal year 2008 and beyond in order to position the Company
for growth.
Pre-tax Loss
Pre-tax loss for the quarter ended March 31, 2008 was $1,019,557 compared to a
pre-tax loss of $132,338 in the quarter ended March 31, 2007. Pre-tax loss for
the nine months ended March 31, 2008 was $2,650,456 compared to a pre-tax loss
of $487,778 in the similar period ended March 31, 2007. Included in the pre-tax
loss in the quarter ended March 31, 2008 was approximately $100,000 of severance
costs related to the reduction in force completed during the quarter, as well as
approximately $450,000 in costs management believes have been eliminated through
the cost cutting measures implemented at the end of the quarter.
Income Tax Benefit
Income tax benefit for the quarter ended March 31, 2008 was $390,782 compared to
income tax benefit of $50,949 in the quarter ended March 31, 2007. Income tax
benefit for the nine months ended March 31, 2008 was $970,686 compared to income
tax benefit of $187,794 in the nine months ended March 31, 2007. The effective
tax rate for the quarter ended March 31, 2008 was 38.3% compared to 38.5% for
the prior year period. The effective tax rate for the nine months ended March
31, 2008 was 36.6% compared to 38.5% for the prior year period. The lower tax
rate for this quarter and nine month period ended March 31, 2008 reflects the
assumption of certain anticipated tax benefits that will be earned during the
year.
Net Loss
Net loss for the quarter ended March 31, 2008 was $628,775 ($.05 per share),
compared to net loss of $81,389 ($.01 per share) in the quarter ended March 31,
2007. Net loss for the nine months ended March 31, 2008 was $1,679,770 ($.12 per
share), compared to a net loss of $299,984 ($.03 per share) in the nine months
ended March 31, 2007.
Recent Developments
On April 17, 2008, Dynatronics announced the introduction of the DynaPro Spinal
Health System, a non-surgical treatment for back and neck pain. This innovative
system combines the benefits of decompression and light therapy with
core-stabilization exercises and nutrition, together forming a very effective
tool for reducing pain.
Another new product introduced on April 17, 2008 was the new Dynatron X5 "Turbo"
soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times more
powerful than the original X5 device and is a highly effective treatment for
acute as well as chronic pain.
10
In April 2008, we began shipments of the new "Synergie Elite" line of aesthetic
treatment devices. This new line is comprised of cellulite treatment devices,
microdermabrasion units and bio-stimulation light therapy equipment. These new
products represent the first time in 10 years the Synergie line of products have
been updated. Initial response to the new Synergie Elite equipment at trade
shows has been promising. The new updated design and additional features make
the Synergie Elite products not only visually attractive, but functionally
enhanced positioning us to better compete in the aesthetic markets.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through available cash reserves and
borrowings under its line of credit. The Company had working capital of
$4,729,702 at March 31, 2008, inclusive of the current portion of long-term
obligations and credit facilities, compared to working capital of $8,116,391 at
June 30, 2007. The $3.4 million decrease in working capital over the nine month
period is a direct result of a $5,455,000 increase in the line of credit that
was required in part to finance a $3,400,000 increase in accounts receivable and
inventory and to finance a portion of the $3.3 million in cash expended in the
acquisitions in June and July 2007. The remaining reduction in working capital
is accounted for by increased accounts payable and lower cash balances.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$1,756,321 to $5,513,805 at March 31, 2008, compared to $3,757,484 at June 30,
2007. The majority of this increase in trade accounts receivable was a result of
increased sales associated with the recent acquisitions. During the first eight
months following the acquisitions, new billing paradigms were implemented to
accommodate large orders from certain retail customers. These billing paradigms
allowed extended terms for payment until complete orders had been delivered.
These extended terms significantly delayed collection on some orders that had
components delivered over a three to four month period of time. We are modifying
these arrangements to require that all products subject to special term orders
will be delivered within a specific 30 day period or the customer will be
required to pay monthly for product shipped. As these accounts are collected and
the new policy implemented, we expect accounts receivable to decrease in coming
quarters.
Trade accounts receivable represent amounts due from the Company's dealer
network, from medical practitioners and clinics. We estimate that the allowance
for doubtful accounts is adequate based on our historical knowledge and
relationship with these customers. Except for those special accounts described
above, accounts receivable are generally due within 30 days of the agreed terms.
However, as a result of the recent acquisitions, the character of the accounts
receivable and collection patterns have changed and will be carefully monitored
over the coming year to ensure the allowance estimates are adequate. Allowances
for the retail accounts assumed in the acquisitions are currently calculated
based on the historical experience of the acquired companies.
Inventories
Inventories, net of reserves, at March 31, 2008 increased $1,638,995 to
$6,952,979 compared to $5,313,984 at June 30, 2007. This increase is primarily a
result of the inventories acquired in connection with the acquisitions.
Inventories are expected to reduce modestly now that we have consolidated eight
distribution points to three central distribution facilities.
Goodwill
Goodwill at March 31, 2008 increased to $6,623,596, compared to $2,758,572 at
June 30, 2007. This increase in goodwill is attributable to the acquisitions
completed on July 2, 2007.
In compliance with Statement of Financial Accounting Standard ("SFAS") No. 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, 2007, management believes the fair value of the Company exceeded
the book value of the Company. Therefore, there was no indication of impairment
at June 30, 2007. Management is primarily responsible for the SFAS No. 142
valuation determination and performed the annual impairment assessment during
the Company's fourth quarter.
11
Accounts Payable
Accounts payable increased $1,139,251 to $2,380,281 at March 31, 2008, compared
to $1,241,030 at June 30, 2007, primarily as a result of the recent acquisitions
and the increased level of sales associated with those acquisitions. Accounts
payable are generally within term with the exception of disputed or inadequately
documented payables that are associated with the transition and assimilation of
the acquired dealers. We attempt to take advantage of available early payment
discounts when offered.
Accrued Expenses and Acquisition Cash Obligation
Accrued expenses increased $107,502 to $395,275 at March 31, 2008, compared to
$287,773 at June 30, 2007, primarily as a result of increased sales at the
retail level which generate higher sales tax liabilities in the 30 states where
we now sell on a direct basis.
Acquisition cash obligations decreased to $0 at March 31, 2008, compared to
$1,000,000 at June 30, 2007. This obligation at June 30 reflected the cash
amount that was placed into escrow in conjunction with the acquisition made on
June 30, 2007, which was paid subsequently.
Accrued Payroll and Benefit Expenses
Accrued payroll and benefit expenses increased $146,042 to $422,796 at March 31,
2008, compared to $276,754 at June 30, 2007. The increase in accrued payroll and
benefit expenses is related to timing differences as well as increased number of
employees resulting in higher accrued payroll at March 31, 2008 compared to June
30, 2007.
Cash
The Company's cash position decreased to $212,670, compared to $1,301,105 at
June 30, 2007, as a result of payments related to the acquisitions made on June
30, 2007 and July 2, 2007. The Company had deposited the financing proceeds in
anticipation of the acquisitions, which temporarily increased cash balances at
June 30, 2007. The Company believes that improved cash flow from operations
through improving management of accounts receivable, maintaining current
inventory levels and the recently implemented reductions in expenses will
further minimize operating losses and expedite a return to profitability. This
improved cash flow combined with balances under available lines of credit is
expected to be sufficient to cover 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
In March 2008, the Company temporarily increased its revolving line of credit
with a commercial bank from $6,500,000 to $8,000,000. At March 31, 2008, the
Company owed $5,704,823 compared to $250,000 at June 30, 2007. The increase in
the line of credit was the result of the following factors:
o The Company used approximately $3.3 million under the line of
credit to finance the acquisitions after June 30, 2007.
o Receivables and inventory increased $3,400,000, while payables
increased approximately $1,139,000. This imbalance of slower
collections while maintaining payables more current required
additional financing demands on the line of credit.
o Operating losses and capital expenditures, mostly associated with
the acquisitions, required additional financing provided by the
line of credit.
Interest on the line of credit is based on the bank's prime rate plus 1%, which
at March 31, 2008, equaled 6.25%. The line of credit is collateralized by
accounts receivable and inventories of the Company. Borrowing limitations are
based on approximately 45% of eligible inventory and up to 80% of eligible
accounts receivable. Interest payments on the line are due monthly. The line of
credit is renewable biennially on December 15th and includes covenants requiring
the Company to maintain certain financial ratios. As of March 31, 2008, the
Company was in compliance with all loan covenants or had received waivers of any
noncompliance.
The current ratio was 1.5 to 1 at March 31, 2008 compared to 3.3 to 1 at June
30, 2007. Current assets represented 55% of total assets at March 31, 2008,
compared to 63% at June 30, 2007.
12
Debt
Long-term debt excluding current installments totaled $3,110,160 at March 31,
2008, compared to $3,251,631 at June 30, 2007. In June 2007, we obtained $1.5
million of long-term mortgage financing used to finance our acquisitions in June
and July 2007. The funding of this loan temporarily increased our cash balances
at the end of June 2007. 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 $3.4 million with
monthly principal and interest payments of $40,707.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
The Company's business operations are not materially affected by seasonality
factors.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
an understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed where such policies
affect our reported and expected financial results. 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 reported 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. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, and revenue recognition. 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 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.
o Character of the inventory whether it is a distributed item,
finished manufactured item or raw material.
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,
2008 and June 30, 2007, our inventory valuation reserve balance, which
established a new cost basis, was $385,623 and $293,810, respectively, and our
inventory balance was $6,952,979 and $5,313,984 net of reserves, respectively.
Revenue Recognition
The majority of our product sales for the fiscal year ended June 30, 2007, were
to customers who are independent distributors. Beginning in the fiscal first
quarter ended September 30, 2007, a significant portion of our sales were
generated through our new direct sales force. Our sales force and distributors
sell our products to end users, including physical therapists, professional
trainers, athletic trainers, chiropractors, medical doctors and aestheticians.
With the acquisition of key distributors, we effectively reduced our dependence
13
on sales by independent distributors. Sales revenues are recorded when products
are shipped FOB shipping point under an agreement with a customer, risk of loss
and title have passed to the customer, and collection of any resulting
receivable is reasonably assured. Amounts billed for shipping and handling of
products are recorded as sales revenue. Costs for shipping and handling of
products to customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze 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 $5,513,805 and $3,757,484, net of allowance for doubtful accounts of
$181,990 and $330,857, at March 31, 2008 and June 30, 2007, respectively. The
expansion of our customer base associated with more direct sales will spread bad
debt risk over a broader base of customers and reduce the concentration of large
dealer balances. At the same time, the management of more customer accounts
presents a higher risk. These risks will be evaluated over the coming year to
determine if current estimate policies are still applicable. In the meantime,
allowance for doubtful accounts associated with these acquired customers is
being based on the historical experience of the dealers acquired.
Business Plan and Outlook
During fiscal year 2008, we will continue to implement a four-fold strategy to
improve overall operations. This strategy focuses on (1) strengthening in-house
distribution channels; (2) developing new, state-of-the-art products for future
growth; (3) refining operations associated with the acquired companies and
reducing overhead costs; and (4) enhancing product profit margins through
improved manufacturing processes. Our goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth.
Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. In order to compete more favorably and
effectively, we moved aggressively to strengthen our channels of distribution by
acquiring key distributors. We identified six key distributors with operations
in 20 states. On June 30, 2007, we acquired our largest independent distributor
headquartered in California. On July 2, 2007, we acquired five additional key
independent distributors headquartered in Texas, Ohio, Michigan, Indiana and
Minnesota. We also began hiring direct sales representatives in key locations
around the country resulting in direct sales representatives now in 30 states.
The creation of a direct distribution channel through these key acquisitions and
hiring direct sales representatives provides Dynatronics with expanded ability
to sell at the retail level, which we believe will improve gross profit margins
and enhance the Company's control over the distribution process. We expect these
changes will open new opportunities for improving future sales as we continue to
pursue our strategy of strengthening our distribution channels through
consideration of additional acquisitions, the expansion of our direct sales
force, and maximizing our relationships with strong independent dealers.
In the fiscal year ended June 30, 2007, Dynatronics introduced many new products
including the following:
o Dynatron X3 - A powerful light therapy device capable of powering
a light probe and two light pads simultaneously was introduced in
August 2006.
o Dynatron DX2 - Dynatronics' first proprietary traction device that
offers not only decompression therapy, but also light therapy was
introduced in December 2006.
o Dynatron T4 Table - This motorized treatment table was introduced
in March 2007 and is designed to be used in decompression and
traction therapy.
o Dynatron T3 Table - This motorized treatment table was introduced
in July 2007 and was an enhancement of the company's popular HLT3
treatment table.
o Dynatron X5 - A unique modality providing Oscillation Therapy for
the reduction of pain using electrostatic fields that combine
concepts from electrotherapy and therapeutic massage was
introduced in June 2007.
Fiscal 2007 was an important year for introduction of new devices and
technology. Significant investments were made in research and development to
bring these products to market. That commitment to bringing new products to
market has continued in the current fiscal year. Though our investment in
research and development has not been as intense during the current fiscal year,
the new product introductions have not diminished thus supporting our objective
of bringing new, state of the art products to market to enhance growth.
In April 2008, Dynatronics introduced the DynaPro Spinal Health System, a
non-surgical treatment for back and neck pain. This innovative system combines
the benefits of decompression and light therapy with core-stabilization
exercises and nutrition forming a very effective tool for reducing pain.
14
Decompression therapy has been shown effective in relieving pain associated with
a host of back problems including herniated discs, degenerative disc disease,
sciatica and pinched nerves. In addition to offering the most comprehensive
approach to the effective treatment of many of the most common causes of back
and neck pain, the DynaPro Spinal Health System features the company's Dynatron
DX2, T4 treatment table and other packaged accessories incorporating a
state-of-the-art marketing and patient-awareness program to help practitioners
promote this proven, non-surgical pain relief treatment.
Another new product introduced in April 2008 is the new Dynatron X5 "Turbo"
soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times more
powerful than the original X5 device and is a highly effective treatment for
various orthopedic and sports injuries, and is gaining popularity in sports
medicine.
Also introduced in April 2008 is the new "Synergie Elite" product line. The new
"Synergie Elite" line of aesthetic treatment devices is comprised of cellulite
treatment devices, microdermabrasion units and bio-stimulation light therapy
equipment. These new products represent the first major redesign of the Synergie
AMS cellulite reduction device and MDA microdermabrasion device since their
introduction almost a decade ago. Initial response to the new Synergie Elite
equipment at trade shows has been promising. The new updated design and
additional features make the Synergie Elite products not only visually
attractive, but functionally enhanced positioning us to better compete in the
aesthetic markets. By including proven treatment procedures that have made
Synergie aesthetic devices the most effective with the new design this line
continues to be the best value on the market. In addition, we plan to develop
and introduce additional products for the aesthetic market. Strategic
partnerships, both domestic and international, are currently under consideration
that would help maintain the sales momentum that is being initiated by the
introduction of this revised product line.
With all these products being introduced in April 2008, we expect to receive
revenue from sales of the new products during the fiscal fourth quarter ending
June 30, 2008.
Since the acquisitions were completed in July 2007, Dynatronics has consolidated
operations from eight distribution points to three facilities: our existing
facilities in Tennessee and Utah as well as a new facility established in
California that was formerly associated with Rajala Therapy Sales Associates,
one of the acquired companies. The ability to timely service west coast
customers was deemed a critical point of service and warranted the continuance
of the Rajala operations. We believe that other areas of the country can be
adequately served from these three warehouse operations.
With the assimilation of the six acquisitions now substantially completed,
management has taken measures designed to reduce expenses by an estimated $1.9
million annually. These cost savings are expected to be achieved primarily by a
reduction of approximately 20 percent of the Company's workforce and the
elimination of duplicative overhead expense. Many of these reductions had been
contemplated as part of the successful assimilation of the acquired
distributors; however, implementation of the planned reductions took longer to
realize than expected. The implementation of these cost reductions and further
refinements that should be achieved over the coming months are expected to
contribute significantly to our profitability objectives in the coming quarters.
In addition to reducing operating costs through better assimilation of the
acquired dealers, sales strategies are being implemented to capitalize on our
new direct sales force. While we continue to look for opportunities to add to
our direct sales force, we also are working with strong, independent dealers who
are well established in their territories. The combination of strong dealers and
a direct sales force will allow us to continue to expand our sales network. In
support of that effort, we plan to introduce the most comprehensive product
catalog in the Company's history in September 2008. We expect that the expanded
catalog and new sales initiatives will provide additional impetus to sales. In
addition, we are currently negotiating strategic partnerships that we expect
will give us greater access to segments of the market not previously pursued by
Dynatronics.
We have long believed that international sales present an untapped potential for
growth and expansion, particularly given the current exchange rates which favor
foreign currencies over the dollar. Adding new distributors in several countries
will be the key to this expansion effort. Our past efforts to improve
international marketing have yielded only marginal improvements. We remain
committed, however, to finding the most cost effective ways to expand our
markets internationally. Our Salt Lake City facilities, where all
electrotherapy, ultrasound, traction, STS devices, light therapy and Synergie
products are manufactured, are 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.
Fiscal year 2008 thus far has been a year of transformation. Dynatronics has
changed its business model from being primarily a manufacturer of products
distributed through a network of independent dealers to a manufacturer and
15
distributor of products through primarily a direct sales force as well as key
independent dealers. This change in our business model comes in response to the
changes occurring in our industry. Consolidation efforts have resulted in a much
more competitive environment. These consolidation efforts are occurring in both
manufacturing and distribution. The consolidation in manufacturing is being led
by DJO, Inc. (formerly Re-able or Encore Medical). Over the past few years DJO,
Inc. has acquired such companies as Chattanooga Group, Saunders, Iomed, Empi,
and Rehabilicare. In addition it has acquired distributors, including
Performance Modalities and Endeavor Medical. The consolidation in distribution
is being led primarily by Patterson Medical. During the same period of time,
Patterson Medical has acquired distributors including Sammons-Preston,
Theraquip, Dale Surgical, W.S. Medical and Goldsmith Medical. These
consolidation efforts have created both challenges and opportunities for
Dynatronics.
In order to strategically protect distribution channels, Dynatronics acquired
the six independent distributors previously discussed. Since that time,
Dynatronics has continued to add direct sales personnel as well as strengthen
relationships with key independent distributors. We believe that through these
direct sales reps and independent distributor relationships, we have the premier
distribution network of seasoned and trained equipment sales personnel in the
industry. The consolidation efforts in manufacturing by DJO and in distribution
by Patterson are having a polarizing effect and compelling independent
distributors and sales reps to choose an affiliation. We believe many of the
best of these have become affiliated with Dynatronics because of our innovative
quality products and proven history of strong customer service and loyalty to
our distribution network. The quality of our products, the breadth of our
product line, and the strength of our distribution channel we believe enable us
to effectively compete in servicing our core market of private clinical
practitioners and professional, collegiate, and other athletic teams.
As a manufacturer of many of the products we sell, we also have the ability to
be competitive in our pricing schemes - particularly when compared to large
consolidated or independent distributors.
Dynatronics' management acknowledges that the transition in our business model
has taken longer than anticipated and the losses incurred have been higher than
expected. Sales during the quarter ended March 31, 2008, did not meet our
expectations. Nevertheless, the strategic decisions to change our business model
were mandated by our desire to be responsive to the consolidations occurring
within our industry. While it has been a more expensive proposition than
originally projected, we believe the worst is behind us. With the reduction in
expenses already implemented, the new products recently introduced, the sales
tools anticipated for introduction in the next two quarters, including the new
catalog, and ongoing efforts to further streamline operations, we believe our
goal of returning to profitability is achievable in the coming quarters.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Reinforcing our position in the physical medicine market by
securing channels of distribution through a strategy of acquiring
dealers, recruiting direct sales representatives and working
closely with the most successful dealers of capital equipment.
o Improving sales by focusing on development of new sales strategies
and promotional programs including the introduction of the most
comprehensive catalog in our history.
o Continuing development of new, state-of-the-art products, both
high tech and commodity, in fiscal year 2008, for both the
rehabilitation and aesthetic markets.
o Further improving efficiencies in conjunction with the
assimilation of the companies acquired.
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 Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths.
o Exploring strategic relationships that would increase market reach
and capital resources.
16
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Part I 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 of
1934, as amended (the "Exchange Act"). These statements refer to our
expectations, hopes, beliefs, anticipations, commitments, intentions and
strategies regarding the future. They may be identified by the use of 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 Assimilating acquired companies in a timely and effective manner
including specific risks of:
o Failure to realize expected economies of scale and
efficiencies of operations
o Inability to achieve sales targets
o Loss of key sales personnel
o Inefficiencies in management of receivables
o Lack of controlling inventories and consolidation of
inventories
o Operational inefficiencies resulting in unmet customer
expectations
o market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, and the Solaris
infrared light therapy products;
o lack of available financing through lines of credit or other
financing sources to fully fund operating losses, expansion in
working capital, and necessary capital expenditures to support the
planned strategic initiatives.
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;
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;
17
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 escalating costs of raw materials, particularly steel and
petroleum based materials; and
o increased competition from a consolidating market that could put
pressure on pricing and margin realization.
As a public company, we are subject to the reporting requirements of the
Exchange Act and the Sarbanes-Oxley Act of 2002. These requirements may place a
strain on our systems and resources. The 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 March 31, 2008 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
Repurchases of Equity Securities. The following table summarizes purchases of
Dynatronics common stock made by the Company during the quarter ended March 31,
2008, under a stock repurchase program approved by the board of directors of the
Company in September 2003.
Small Business Issuer Purchases of Equity Securities*
Total # of Approximate
Shares Purchased Dollar Value of
Total # of as part of Shares that May
Shares Average Price Publicly Announced Yet be Purchased
Period Purchased Paid per Share Plans or Programs Under Plan/Program
--------------------------------------------------------------------------------
1/1/08 to
1/31/08 39,000 $1.04 39,000 $201,756
2/1/08 to
2/29/08 35,014 $1.07 35,014 $164,336
3/1/08 to
3/31/08 18,500 $1.05 18,500 $144,950
----------------
* The Company's repurchase program was announced on September 3, 2003. At
that time, the Company approved repurchases aggregating $500,000. In
November 2007, the Company added an additional $250,000 to the
repurchase plan.
18
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 2006 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive Proxy
Statement on Schedule 14A filed on October 27, 2006)
10.8 Form of Option Agreement for the 2006 Equity Incentive Plan
for incentive stock options (previously filed as Exhibit 10.8
to the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2006)
10.9 Form of Option Agreement for the 2006 Equity Incentive Plan
for non-qualified options (previously filed as Exhibit 10.9 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2006)
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)
19
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 5/13/08 /s/ Kelvyn H. Cullimore, Jr.
-------------------- ----------------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date 5/13/08 /s/ Terry M. Atkinson, CPA
-------------------- ----------------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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