A Message From CEO Kelvyn Cullimore, Jr.—Fiscal Year 2011
In fiscal year 2011 we extended our string of profitable quarters to 11—one of the longest runs of consecutive profitability in our history. Sales have hovered between $32 and $33 million for three consecutive years while gross margins have remained constant at just over 38 percent. Against a backdrop of general economic malaise, causing many companies to fail, our performance may be viewed by some as acceptable. Rest assured, as management we are not satisfied, but we believe we are laying a foundation for a much better future.
Our commitment to research and development continues to be a priority, but it does not come without a price. During the last fiscal year we initiated one of the most aggressive research and development projects in our history. We believe that project will bring to market a line of new products in late fiscal year 2012 that will rejuvenate our core product line and sustain sales of key manufactured modalities for years to come. As a result, our expenditures for research and development jumped almost $470,000 over last year. This was the single largest reason profitability diminished from fiscal year 2010 to fiscal year 2011.
Pre-tax profit in fiscal year 2010 topped $700,000. Pre-tax profit for the year ended June 30, 2011, reached almost $420,000. But for the higher R&D expenses in fiscal year 2011, net profit would have been $890,000, or a 27 percent increase over the prior year. We see this as an indication that the underlying operating fundamentals of the company remain sound and are improving.
The best news of the year relates to progress made in winning contracts with Group Purchasing Organizations (GPOs) and other national and regional accounts. We have been attempting to break through the GPO barrier for years without success—until this year. GPOs do not purchase product directly. Rather, they represent tens of thousands of clinics and institutions for whom they negotiate purchasing contracts. Many of these institutions have policies that require members to purchase only from vendors who have approved contracts through the GPOs.
There are six major GPOs. Based on our best estimates from available data, we believe total purchases of physical therapy and rehab products by all GPOs exceed $300 million annually. Access to this segment of our market provides important fuel for future growth.
During the year we were awarded a capital equipment contract with Amerinet, Inc., a GPO that represents approximately 50,000 member facilities. We were also awarded a small contract with Premier, Inc. for their colleges and university members as well as their alternate markets. Premier represents over 90,000 member facilities, but our contract allows access to only a fraction of those members. Nevertheless, exposure of our contract to all Premier members has resulted in several smaller GPOs that are Premier members, such as CHAMPS Group Purchasing, seeking to contract directly with us. In addition, we renewed our contract with FirstChoice Cooperative, a Texas GPO that represents over 20,000 members. While we have made progress in this area, we have only scratched the surface. Recently we submitted a bid to the largest GPO, MedAssets, Inc. which will be selecting vendors for its physical therapy and rehabilitation products in approximately December 2011, for a three year contract to begin in March 2012.
In addition to the GPO business, we have been pursuing relationships with national and regional accounts, and have been named a preferred provider for at least a half dozen such accounts in the last year.
These accounts represent fertile fields for us to begin cultivating. While it will take time to achieve a harvest, we are very optimistic about the potential represented by these opportunities, and are working diligently to convert these customers to the Dynatronics brand of products.
Our transformation over the past five years—from being a manufacturer distributing a limited number of other products, to a company with a greatly expanding product offering that now boasts higher sales of distributed items than manufactured items—has opened many of these doors with GPOs and national or regional accounts. Dynatronics remains one of only two companies in our specific market space with a nationwide sales force to service the customers we acquire. To further support that effort, we will be introducing a new catalog with expanded product offerings in fiscal year 2012.
During the past year we introduced a product we called STREAM. It is software as a service. It was designed to help individual practitioners enhance their practices, communicate with their clients and utilize social media to build their practices. Our partner in this venture is Solutionreach, a Utah company that has very successfully provided this same package to the dental market. While STREAM has had a bit of a rocky start, we are refining the model and narrowing our focus to those customers most likely to benefit. As STREAM takes hold, we believe it will provide an unencumbered revenue stream to build our future margins and profits.
We are proud to say that the launch of our e-commerce portal has been a huge success. Over one-third of all orders now are placed through that electronic portal. During the year, we also created our first formal information systems department and appointed Bryan Alsop Vice President of Information Technology. We continue to invest in information systems to make it easier for customers to do business with us and to enhance the capabilities of our sales force and customer service agents.
Our stock price continues to experience fluctuations. With our stock rising to a high of $2.14 in the past year we successfully cured a NASDAQ deficiency regarding a minimum bid price of $1 that could have resulted in de-listing from the exchange. Regrettably, since that time we have seen weakness in our stock that has pushed the price back under $1. Nevertheless, we are confident that the opportunities we are currently developing will result in increased interest in our stock.
General economic conditions and uncertainty related to healthcare reform continue to be a concern. Our strategic planning does not anticipate improving economic conditions. We accept current market conditions as the new norm and believe we must find ways to grow sales and profits in this less-than-fertile economic soil. We believe that with the progress made in obtaining access to GPOs and other national and regional accounts, the new products scheduled for release in the next year, the potential of STREAM and the focus on furthering our business model of transitioning to being an even stronger distributor of quality products, we have never had more potential for growth than we do at the present time.
We appreciate the loyalty and support of our shareholders. We invite you to share in the vision of our future and anticipate the harvest that will come as we patiently cultivate the fields of opportunity before us.
Sincerely,
Kelvyn H. Cullimore, Jr.
Chairman, President and CEO