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| DYNT > SEC Filings for DYNT > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
Overview
Our principal business is the distribution, marketing and sale of physical medicine and aesthetic products, many of which we design and manufacture. We offer a broad line of medical equipment including therapy devices, medical supplies and soft goods, treatment tables and rehabilitation equipment. Our line of aesthetic products includes aesthetic massage and microdermabrasion devices, as well as skin care products. Our products are sold to and used primarily by physical therapists, chiropractors, sports medicine practitioners, podiatrists, plastic surgeons, dermatologists and aestheticians. We have a fiscal year ending June 30. For example, reference to fiscal year 2012 refers to the year ending June 30, 2012.
Recent Developments
In March 2012, we introduced the new Dynatron Quad7 therapy device to the market. The innovative Quad7 utilizes thermoelectric technology and is designed to deliver thermal (hot or cold) and compression therapy through a variety of wraps and innovative ThermoStim Probes. In addition, the ThermoStim Probes are capable of delivering a combination thermal therapy and electrotherapy treatment concurrently. The Quad7 has the flexibility to offer seven different treatments dramatically expanding both the variety and location of conditions that can be treated. The Dynatron Quad7 employs state-of-the-art technology providing precise temperature control while moving beyond the current standard by eliminating the need for ice in providing thermal therapy. The thermal therapy in our Quad7 device is achieved via a thermoelectric computer chip.
Results of Operations
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended March 31, 2012, should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report, and our Annual Report on Form 10-K for the year ended June 30, 2011, which includes audited financial statements for the year then ended. Results of operations for the three and nine months ended March 31, 2012 are not necessarily indicative of the results that will be achieved for the full fiscal year ending June 30, 2012.
Net sales decreased approximately 8.7% to $7,653,586 for the quarter ended March
31, 2012, compared to $8,383,842 for the quarter ended March 31, 2011. The
$730,256 decrease in sales is primarily attributable to the following factors:
1) the apparent insolvency and interruption of purchases by a large, independent
distributor that historically purchased between $150,000 to $250,000 per
quarter; 2) lower sales of capital equipment, likely due, in part, to the
anticipation of new product introductions in May 2012; and 3) renewed softness
of the U.S. economy which reported general weakness in this quarter for durable,
manufactured goods. The Company expects several new products introduced this
fiscal year will help to boost sales going forward. Net sales for the nine
months ended March 31, 2012, decreased 2.4% to $23,925,818, compared to
$24,502,477 for the same period in 2011. It should be noted that most of the
decrease in sales for the nine month period occurred in the quarter ended March
31. Prior to that time, as previously reported in our Quarterly Report on Form
10-Q for the quarter ended December 31, 2011, sales were trending slightly
upward. We expect that sales of the new products to be introduced during the
fourth fiscal quarter of 2012 and the first fiscal quarter of 2013 will increase
net sales in those periods.
Gross Profit
Gross profit decreased 11.8% to $2,844,957, or 37.2% of net sales, for the quarter ended March 31, 2012, compared to $3,224,392, or 38.5% of net sales, for the quarter ended March 31, 2011. Gross profit was $9,060,013, or 37.9% of net sales, for the nine months ended March 31, 2012, compared to $9,345,666, or 38.1% of net sales, for the nine months ended March 31, 2011. The decrease in gross profit during the current quarter and nine-month period reflects the decrease in total sales discussed above and, in particular, lower sales of capital equipment which carry higher margins compared to medical supplies and treatment tables. Looking ahead, we expect to generate improved sales of higher margin capital equipment as our new products are introduced to the market.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased $27,814 to $2,667,867, or 34.9% of net sales, for the quarter ended March 31, 2012, from $2,640,053, or 31.5% of net sales, for the quarter ended March 31, 2011. SG&A expenses increased $274,286, to $8,049,134, or 33.6% of net sales, for the nine months ended March 31, 2012, from $7,774,848, or 31.7% of net sales, for the nine months ended March 31, 2011. The increase in SG&A expenses for the first nine months of fiscal year 2012 reflects higher sales expenses associated with the development of the Group Purchasing Organization ("GPO") business, together with improvements made to the Company's information systems and e-commerce website, and higher personnel costs. The following factors impacted SG&A expenses for the nine months ended March 31, 2012, as compared to the same period in 2011:
· $122,937 of higher selling expenses;
· $145,156 of higher production labor, license fees and depreciation expenses;
· $6,193 of higher general expenses including higher regulatory and compliance costs
The Company has identified over $800,000 of annual cost reductions which we plan
to implement immediately to 1) reduce labor costs through a reduction in force;
2) reduce overhead costs; and 3) improve operating efficiencies. We anticipate
to begin to see benefits from these cost reductions in future periods beginning
in the quarter ending June 30, 2012.
Research and development ("R&D") expenses increased $22,654 to $361,912, or 4.7% of sales, in the quarter ended March 31, 2012, compared to $339,258, or 4.0% of sales in the quarter ended March 31, 2011. R&D expenses increased $85,547 to $1,131,120 for the nine months ended March 31, 2012, from $1,045,573 for the nine months ended March 31, 2011. In March 2012, we introduced the Dynatron Quad7, the first of several new product introductions anticipated to be made in fiscal year 2012. We are completing the development of additional new products that are expected to be introduced during the next six months. These development efforts are directly responsible for the significant R&D expenses we are incurring. We anticipate that R&D expenses will return to more historical levels starting in the fourth fiscal quarter ending June 30. We believe that developing new products is a key element in our growth strategy. R&D costs are expensed as incurred.
Income (Loss) Before Income Tax Provision
Pre-tax loss for the quarter ended March 31, 2012, totaled $245,440 compared to pre-tax income of $194,837 for the quarter ended March 31, 2011. Pre-tax loss for the nine months ended March 31, 2012, totaled $279,190 compared to pre-tax income of $337,615 for the nine months ended March 31, 2011. The reduction in income before income tax provision for the current quarter and nine-month period resulted from lower sales and gross profits generated during the quarter, along with higher selling, labor, depreciation and R&D expenses. Lower sales and gross profits resulted from a large, independent distributor that ceased purchasing our products due to its apparent insolvency, together with lower capital equipment sales in anticipation of our new product introductions, and the general weakness in the U.S. economy. The increase in sales expense was associated with our pursuit of GPO and national account business, while increased depreciation expense was related to increased investments in information systems. We reported lower interest expense for the quarter and nine months ended March 31, 2012.
Income Tax Provision (Benefit)
Income tax benefit was $(127,877) for the quarter ended March 31, 2012, compared to income tax provision of $77,577 for the quarter ended March 31, 2011. Income tax benefit was $(139,701) for the nine months ended March 31, 2012, compared to an income tax provision of $135,503 for the nine months ended March 31, 2011. The effective tax rate for the third quarter of fiscal year 2012 was 52.1% compared to 39.8% for the same period in fiscal year 2011. The effective tax rate for the nine months ended March 31, 2012, was 50.0% compared to 40.1% for the prior year period. The difference in the effective tax rates is attributable to higher R&D tax credits in fiscal year 2012 as well as certain permanent book to tax differences.
Net Income (Loss)
Net loss was $(117,563) or $(.01) per share for the quarter ended March 31, 2012, compared to net income of $117,260 or $.01 per share for the quarter ended March 31, 2011. Net loss totaled $(139,489), or $(.01) per share, for the nine months ended March 31, 2012, compared to net income of $202,112, or $.02 per share, for the nine months ended March 31, 2011. The decrease in earnings per share for the quarter and nine months ended March 31, 2012 compared to the prior year periods reflects the cumulative effect of the various components discussed above.
Liquidity and Capital Resources
We have financed operations through available cash reserves and borrowings under a line of credit with a bank. Working capital was $3,667,064 as of March 31, 2012, inclusive of the current portion of long-term obligations and credit facilities, compared to working capital of $4,552,731 as of June 30, 2011. In connection with our ongoing stock buyback program, during the quarter ended September 30, 2011, we used cash of approximately $301,000 to repurchase approximately 268,000 shares of our common stock in the open market. No shares were repurchased during the quarters ended December 31, 2011 or March 31, 2012. In addition, capital expenditures required for tooling related to new products as well as investments in information systems infrastructure including the ongoing improvement to our electronic sales systems contributed to lower working capital by increasing long-term assets using short-term borrowings.
The current ratio was 1.5 to 1 as of March 31, 2012, compared to 1.8 to 1 as of June 30, 2011. Current assets remained consistent at 70% of total assets as of both March 31, 2012 and June 30, 2011.
Cash and Cash Equivalents
Our cash and cash equivalents position as of March 31, 2012, was $218,536, a decrease of 43.2%, from cash and cash equivalents of $384,904 as of June 30, 2011. Our cash position varies from quarter to quarter, but typically stays within a range of $200,000 to $400,000. We expect that cash flows from operating activities, together with amounts available through an existing line-of-credit facility, will be sufficient to cover operating needs in the ordinary course of business for at least the next twelve months. If we experience an adverse operating environment, including a further worsening of the general economy in the United States, or unusual capital expenditure requirements, additional financing may be required. No assurance can be given that additional financing, if required, would be available on terms favorable to us, or at all.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased $94,171, or 2.6%, to $3,766,299 as of March 31, 2012, compared to $3,672,128 as of June 30, 2011. Trade accounts receivable represent amounts due from our customers including medical practitioners, clinics, hospitals, colleges and universities and sports teams as well as dealers and distributors that purchase our products for redistribution. We believe that our estimate of the allowance for doubtful accounts is adequate based on our historical knowledge and relationship with these customers. Accounts receivable are generally collected within 30 days of the agreed terms.
Inventories, net of reserves, increased $469,458, or 8.3%, to $6,117,273 as of March 31, 2012, compared to $5,647,815 as of June 30, 2011. Higher inventory levels as of March 31, 2012 reflect the Company's acquisition of component parts for new products that are being introduced in the next 60-90 days.
Accounts Payable
Accounts payable increased $62,710, or 2.9%, to $2,189,873 as of March 31, 2012, from $2,127,163 as of June 30, 2011. The increase in accounts payable is a result of the timing of our weekly payments to suppliers and the timing of purchases of product components. Accounts payable are generally not aged beyond the terms of our suppliers. We generally take advantage of available early payment discounts when offered by our vendors.
Line of Credit
The outstanding balance on our line of credit increased $1,144,508 to $3,728,445 as of March 31, 2012, compared to $2,583,937 as of June 30, 2011. During the quarter ended September 30, 2011, borrowings of approximately $301,000 were used to repurchase approximately 268,000 shares of the Company's common stock in the open market. No shares were repurchased during the quarters ended December 31, 2011 or March 31, 2012. Increases in inventory balances to accommodate manufacturing of new products, capital expenditures for tooling of new product parts and information systems infrastructure also contributed to increased borrowings. Finally, operating losses were financed through increased borrowings from the line of credit. Interest on the line of credit is based on the 90-day LIBOR rate (0.47% as of March 31, 2012) plus 3%. The line of credit is collateralized by accounts receivable and inventories. Borrowing limitations are based on approximately 45% of eligible inventory and up to 80% of eligible accounts receivable, up to a maximum credit facility of $7,000,000. Interest payments on the line are due monthly. As of March 31, 2012, the borrowing base was approximately $5,190,000, resulting in approximately $1,462,000 of available credit on the line. The line of credit includes covenants requiring us to maintain certain financial ratios. As of March 31, 2012, we were not in compliance with the loan covenants, however, the bank has granted a waiver for the covenants as of March 31, 2012 and for the period then ended. The line of credit expires on December 15, 2012 and therefore the full amount of borrowings under the line of credit is presented as current liabilities in the accompanying condensed consolidated March 31 balance sheet.
We believe that amounts available under the line of credit as well as cash generated from operating activities will continue to be sufficient to meet our operating requirements.
Debt
Long-term debt, excluding current installments decreased $221,635 to $2,016,782 as of March 31, 2012, compared to $2,238,417 as of June 30, 2011. 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 $2,197,000 with monthly principal and interest payments of $37,503.
Inflation and Seasonality
Our revenues and net income have not been unusually affected by inflation or price increases for raw materials and parts from vendors.
Stock Repurchase Plan
We have a stock repurchase plan that has been ongoing since 2003. Purchases of shares may be made from time-to-time, in the open market, through block trades or otherwise, and are based on market conditions, the level of our cash balances, general business opportunities, and other factors. Our Board of Directors periodically approves the dollar amounts for share repurchases under the plan. As of March 31, 2012, $848,450 remained available under the plan for purchases. There is no expiration date for the plan.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates.
The following critical accounting policies involve a high degree of judgment and complexity and require significant estimates and judgments used in the preparation of our condensed consolidated financial statements.
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:
· Inventory quantities on hand;
· Product acceptance in the marketplace;
· Customer demand;
· Historical sales;
· Forecast sales;
· Product obsolescence;
· Technological innovations; and
· Character of the inventory as a distributed item, finished manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are reflected in cost of goods sold within the statement of operations during the period in which such modifications are determined necessary by management. As of March 31, 2012 and June 30, 2011, our inventory valuation reserve balance, which established a new cost basis, was $311,484 and $337,748, respectively, and our inventory balance was $6,117,273 and $5,647,815, net of reserves, respectively.
Revenue Recognition
Sales revenues are recorded when products are shipped, title has 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 collectability of accounts receivable. 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 $3,766,299 and $3,672,128, net of allowance for doubtful accounts of $370,266 and $293,436, as of March 31, 2012 and June 30, 2011, respectively.
Deferred Income Tax Assets
At each reporting date, our management performs an analysis of the deferred income tax assets and their recoverability. Based on several factors, including our earnings history of pre-tax profit averaging over $500,000 per year in 19 of the last 22 fiscal years, we believe that it is more likely than not that all of the net deferred income tax assets will be realized.
Business Plan and Outlook
In March 2012, we introduced the new Dynatron Quad7 therapy device to the market. The innovative Quad7 utilizes thermoelectric technology to deliver thermal therapy (either cold or hot therapy) combined with compression treatments through a variety of wraps and innovative ThermoStim Probes. In addition, the ThermoStim Probes are designed to allow for delivery of electrotherapy treatments concurrent with thermal therapy. Initial demand for this new product has been encouraging. We expect the sales of the Quad7 to begin to impact revenues during the quarter ending June 30, 2012. The Quad7 has the flexibility to offer seven different treatments, dramatically expanding both the variety and location of conditions that can be treated. The Quad7 employs state-of-the-art technology providing precise temperature control moving beyond the current technology by eliminating the need for ice. Thermal therapy in our Quad7 is achieved instead by using a thermoelectric computer chip.
During fiscal year 2012, we have focused our research and development efforts on new product innovation and enhancing existing product lines. The scope of that R&D effort has been more significant than at any time in our history. More new products are scheduled for introduction during calendar 2012 than we have introduced in any other calendar year. Most of the new products should be released prior to the end of the fourth fiscal quarter ending June 30, 2012. The commitment to innovation of high-quality products has been a hallmark of Dynatronics and will continue throughout the coming year. This renewed emphasis on R&D contributed in large part to the lower profitability we experienced over the past two years. R&D costs for us have been cyclical in nature. The higher costs in fiscal year 2012 reflect the fact that we have been in a more intense part of the development cycle in that period. However, beginning with the quarter ended March 31, 2012, we have started to see those R&D costs begin to abate as we draw closer to the release of new products. Once the new products are fully introduced, we expect that R&D costs will cycle back to a lower level in line with historical amounts. Management is confident the higher costs associated with the more intense part of the development cycle in the short term will yield long-term benefits and are important to assuring that we maintain our reputation in the industry for being an innovator and leader in product development.
In calendar 2011, we announced the signing of contracts with four GPOs: Premier, Inc., Amerinet, Inc., FirstChoice Cooperative and Champs Group Purchasing. These GPOs represent tens of thousands of clinics andhospitals around the nation. With the broader offering of products now available through our catalog and e-commerce website, we are better able to compete for this high volume business. Over the past two years, we have also been successful in becoming a preferred vendor to many national and regional accounts. We believe these contract signings represent important milestones toward our goal of expanding our customer base and increasing our market share.
The contracts with the GPOs represent a license to solicit business directly from the members of the respective GPOs. The GPOs do not order any product directly. They serve the function of negotiating favorable pricing terms on behalf of their members. Most GPO members are loyal to the GPOs in which they have membership and will not typically consider vendors that are not on contract.
Our contract with Amerinet, Inc. allows us to sell capital equipment to its 51,000 clinic members. Capital equipment typically includes non-commodity products over $150 in price. While we may solicit supply-type business from Amerinet customers, we are not under contract to do so. Our contract with FirstChoice Cooperative covers all products that we offer to its 20,000 members. Our contract with Premier, Inc. is to provide products to its members in the "colleges and universities and alternate markets" category which is a subset of its total membership. We expect to realize broader benefits under the Premier Inc. agreement as our involvement with this GPO exposes our products to all of its 95,000 "healthcare" category members. We anticipate this exposure will create interest and possibilities for additional business from these healthcare members. Some of Premier, Inc.'s healthcare members, including Champs Group Purchasing, have negotiated contracts with us directly to obtain access to our products. These contracts present us with significant opportunities for increasing sales in markets that have previously been unavailable to us.
While sales to GPO-related accounts have increased by double digits since the contracts became effective in March 2011, management had expected to attain a higher pace after a year of effort. Nevertheless, we remain optimistic regarding the potential of these accounts. We are currently in discussion with two additional GPO's that anticipate issuing new contracts during calendar 2012. We are working with these groups to have the best opportunity possible to obtain contracts with them.
During calendar 2012, we plan to introduce a new, updated version of our product catalog. This new catalog will expand our product offering in order to better service the broader needs of GPO's and national accounts. It will also provide an excellent new sales tool for all of our sales representatives in the field as well as provide a foundation for expanding our e-commerce platform.
In December 2010, we introduced to the physical medicine market a new electronic patient communications platform called Stream. Stream is an automated service that leverages the latest technologies to connect practitioners with their patients via e-mail, text messaging and social networking tools to provide state-of-the-art communications and marketing tools for practitioners. The system reduces patient "no shows," reactivates past patients and generates new patients. In addition, it provides a wide range of analytics and delivers automated appointment reminders - all while improving staff efficiency. The launch of this product has been slower than expected, but the reviews from those who are using the product are mostly very favorable. The continued development of Stream represents an opportunity to significantly improve overall gross margins and profitability for the Company as each sale creates a recurring monthly revenue stream. Our efforts over the next year to work with our partner, Solutionreach (formerly known as Smile Reminder), to refine the presentation and implementation of this very unique and valuable service will be critical to realizing the full potential of this program.
Over the past few years, consolidations in our market have changed the landscape of our industry's distribution channels. At the present time, we believe that there remain only two companies with a national direct sales force selling proprietary and distributed products: Dynatronics and Patterson Medical. All other distribution in our market is directed through catalog companies with no direct sales force, or through independent local dealers that have limited geographical reach. In the past year, we have reinforced our direct sales team to include over 50 direct sales employees and independent sales representatives. In addition to these direct sales representatives, we continue to enjoy a strong relationship with scores of independent dealers. We believe we have the best trained and most knowledgeable sales force in the industry. The changes taking place within our market provide a unique opportunity for us to grow market share in the coming years through recruitment of high-quality sales representatives and dealers.
To further our efforts to recruit high-quality direct sales representatives and dealers as well as to better appeal to the large GPOs and national customers, we intend to continue to improve efficiencies of our operations and the sales support for the industry. Chief among the steps we are taking to make these improvements was the introduction of our first true e-commerce solution on July 6, 2010. With the introduction of this e-commerce solution, customers are able to more easily place orders and obtain information about their accounts. Sales . . .
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