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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2009.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________.
Commission file number 0-12697
DYNATRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, Utah 84121-6618
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 568-7000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act. Yes No X
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer ___ Smaller reporting company X
(Do not check if a smaller reporting company)
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 aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of September 23, 2009 was approximately
$11.2 million, based on the average bid and asked price on that date.
As of September 23, 2009, there were approximately 13.7 million shares of the
registrant's common stock outstanding.
Documents Incorporated by Reference
The issuer hereby incorporates information required by Part III (Items 10, 11,
12, 13, and 14) of this report by reference to the registrant's definitive proxy
statement for the fiscal year ended June 30, 2009 to be filed pursuant to
Regulation 14A and provided to shareholders subsequent to the filing of this
report.
Transitional Small Business Disclosure Format (Check one): Yes No X
2
TABLE OF CONTENTS
PART I
Item 1. Business........................................................1
Item 2. Properties.....................................................10
Item 3. Legal Proceedings..............................................10
Item 4. Submission of Matters to a Vote of Security Holders............10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..............10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................12
Item 8. Financial Statements and Supplementary Data....................21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................22
Item 9A(T) Controls and Procedures........................................22
Item 9B. Other Information..............................................22
PART III
Item 10. Directors, Executive Officers, and Corporate Governance........23
Item 11. Executive Compensation.........................................23
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.....................23
Item 13. Certain Relationships and Related Transactions, and
Director Independence..........................................23
Item 14. Principal Accountants' Fees and Services.......................23
PART IV
Item 15. Exhibits.......................................................23
Signatures ...............................................................25
Certifications .............................................................26
PART I
Unless the context otherwise requires, all references in this report to
"registrant," "we," "us," "our," "Dynatronics" or the "Company" refer to
Dynatronics Corporation, a Utah corporation and its wholly-owned subsidiary.
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking information.
Forward-looking information includes statements relating to future actions,
prospective products, future performance or results of current or anticipated
products, sales and marketing efforts, costs and expenses, interest rates,
outcome of contingencies, financial condition, results of operations, liquidity,
business strategies, cost savings, objectives of management and other matters.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking information in order to encourage companies to provide
prospective information about themselves without fear of litigation, so long as
that information is identified as forward-looking and is accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the information.
Forward-looking information may be included in this Annual Report on Form 10-K
or may be incorporated by reference from other documents filed by us with the
Securities and Exchange Commission. You can find many of these statements by
looking for words including, for example, "believes," "expects," "anticipates,"
"estimates" or similar expressions in this Annual Report on Form 10-K or in
documents incorporated by reference in this Annual Report on Form 10-K. Except
as otherwise required by applicable law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information or future events.
We have based the forward-looking statements relating to our operations
on management's current expectations, estimates and projections about us and the
industry in which we operate. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that we cannot
predict. In particular, we have based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
our actual results may differ materially from those contemplated by these
forward-looking statements. Any differences could result from a variety of
factors, including, but not limited to the following:
o strategies, outlook and growth prospects;
o future plans and potential for future growth;
o liquidity, capital resources and capital expenditures;
o growth in demand for our products;
o economic outlook and industry trends;
o developments of our markets;
o the impact of regulatory initiatives;
o new state or federal legislation; and
o the strength of our competitors
Our Company
Dynatronics is a Utah corporation formed on April 29, 1983. Our
principal business is the design, manufacture, marketing and distribution of
physical medicine products and aesthetic products. We operate on a fiscal year
basis, ending June 30. For example, reference to fiscal year 2009 refers to the
fiscal year ended June 30, 2009. All references to financial statements in this
report refer to the consolidated financial statements of Dynatronics Corporation
and subsidiary.
1
Developments in Fiscal Year 2009
In September 2008, we introduced a new 2009-2010 product catalog. With
thousands of new products included in the catalog, we have seen a significant
boost in medical supply sales that we attribute to the catalog. The acquisition
of six of our top distributors last year has allowed us to greatly expand our
product offering. The new catalog contains over 400 pages of products - more
than double our previous catalog.
In June 2009, we introduced the new V-Force vibration therapy device to
the market. This new unit employs powerful, whole-body vibration technology,
which provides neuromuscular training to increase strength, improve balance and
enhance flexibility. Whole-body vibration therapy has been the subject of
extensive research for many years with numerous clinical studies demonstrating
its effectiveness in the areas of balance/fall prevention, circulation, knee
rehabilitation, low back pain, range of motion and many other neuromuscular
conditions.
We expanded our direct sales team to 50 sales representatives from 36
sales representatives in fiscal year 2008. Our expanded sales force now includes
27 direct sales employees and 23 independent sales representatives. The recent
consolidation occurring within our market presents a unique opportunity for us
to grow market share in future periods by recruiting experienced and successful
sales representatives and dealers. We are focusing specific efforts on
recruiting additional independent distributors and seasoned direct sales
representatives in geographical areas where distribution has been lost or
diminished due to the recent consolidation in our industry.
Description of Products
We manufacture and distribute a broad line of medical equipment
including therapy devices, medical supplies and soft goods, treatment tables and
rehabilitation equipment. In addition, we manufacture and distribute a line of
aesthetic equipment including aesthetic massage and microdermabrasion devices,
as well as skin care products. Our products are used primarily by physical
therapists, chiropractors, sports medicine practitioners, podiatrists, plastic
surgeons, dermatologists, aestheticians and other aesthetic services providers.
Physical Medicine Products
Electrotherapy The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over four decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies to produce patient comfort and successful treatment of
pain and related physical ailments. Medium frequency alternating currents, which
we use primarily in our electrotherapy devices, are believed to be the most
effective and comfortable for patients. Electrotherapy can be effective in
treating chronic intractable pain and/or acute post-traumatic pain, increasing
local blood circulation, relaxation of muscle spasms, prevention or retardation
of disuse atrophy, and muscle re-education.
Therapeutic Ultrasound Ultrasound therapy provides therapeutic deep
heat to soft tissue through the introduction of sound waves into the body. It is
one of the most common modalities used in physical therapy for treating pain,
muscle spasms and joint contractures.
We market a broad line of devices that include electrotherapy,
ultrasound or a combination of both of these modalities in a single device. The
Dynatron 125 ultrasound and the Dynatron 525 electrotherapy devices target the
low-priced segment of the market. The "50 Series Plus" products offer
combinations of electrotherapy and ultrasound modalities at a reasonable cost to
the practitioner. The Dynatron Solaris(TM) products provide our most advanced
technology in combination therapy devices by adding infrared light therapy
capabilities to enhanced electrotherapy and ultrasound combination devices. See
"Schedule of Therapy Products" on page 6. We intend to continue development of
our electrotherapy and ultrasound technology and remain a leader in the design,
manufacture and sale of therapy devices.
Infrared Light Therapy Our five Dynatron Solaris units, the Dynatron
702, and the Dynatron X3 and DX2 devices, all feature infrared light therapy
technology. These units are capable of powering various cluster probes at
different wavelengths for treating a variety of medical conditions including
pain and stiffness associated with arthritis, as well as muscle and joint pain.
In fiscal year 2006, we introduced the Dynatron Xp light pad for treating larger
areas of the body via unattended infrared light therapy. This light pad can be
powered by several of our devices including the Dynatron 702, Dynatron X3, and
Dynatron DX2. The benefits of light therapy have been documented by numerous
research studies published over the past four decades.
2
Oscillation Therapy Soft tissue oscillation therapy has been used for
the treatment of pain in Europe for over 15 years, yet it is relatively new to
the United States market. The Dynatron X5 Oscillation Therapy device creates an
electrostatic field within the patient, resulting in a highly effective
treatment for reducing minor muscle aches and pains.
Iontophoresis Iontophoresis uses electrical current to transdermally
deliver drugs such as lidocaine for localized treatment of inflammation without
the use of needles. In fiscal year 2006, we developed a proprietary
iontophoresis device - the Dynatron iBox - which is capable of delivering two
treatments simultaneously. At the same time we began distribution of a line of
proprietary iontophoresis electrodes under the brand name of Dynatron Ion
electrodes. These electrodes replace the line of electrodes we previously
distributed for other manufacturers.
Vibration Therapy We introduced our V-Force vibration therapy device in
June 2009. Originally developed for the Russian space program to compensate for
bone and muscle loss resulting from extended periods in space, whole-body
vibration therapy provides neuromuscular training to increase strength, improve
balance and enhance flexibility. A number of clinical studies have demonstrated
its effectiveness in the areas of balance/fall prevention, circulation
improvement, knee rehabilitation, low back pain relief, range of motion
expansion and many other neuromuscular conditions.
The following chart lists the therapy device products that we
manufacture and distribute.
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
Product Name Description
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Dynatron(R) 125 Ultrasound
Dynatron(R) 525 Electrotherapy
Dynatron(R) 150 Plus** Ultrasound
Dynatron(R) 550 Plus** Multi-modality Electrotherapy
Dynatron(R) 650 Plus** Multi-modality Electrotherapy
Dynatron(R) 850 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) 950 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) STS Electrotherapy for Chronic Pain
Dynatron(R) STS Rx Electrotherapy for Chronic Pain
Dynatron(R) STSi Multi-modality Electrotherapy for Chronic
Pain
Dynatron Solaris(R) 701 Ultrasound with Infrared Light Therapy
Dynatron(R) 702 Infrared Light Therapy
Dynatron Solaris(R) 705 Electrotherapy with Infrared Light Therapy
Dynatron Solaris(R) 706 Electrotherapy with Infrared Light Therapy
Dynatron Solaris(R) 708 Combination Electrotherapy/Ultrasound with
Infrared Light Therapy
Dynatron Solaris(R) 709 Combination Electrotherapy/Ultrasound with
Infrared Light Therapy
Dynatron Solaris(R) 880 Accessory Infrared Light Probe
Dynatron Solaris(R) 890 Accessory Infrared Laser Light Probe
Dynatron(R) X3 Infrared Light Therapy
DX2 and DynaPro Spinal
Health System Combination Traction with Infrared Light
Therapy
Dynatron(R) X5 Turbo Oscillation Therapy
Dynatron(R) iBox Iontophoresis
Dynatron(R) TX900 Traction Therapy
V-Force Vibration Therapy
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Dynatron(R) and Dynatron Solaris(R) are registered trademarks owned by
Dynatronics
** "50 Series Plus" Product Line
Medical Supplies and Soft Goods We currently manufacture or have
manufactured for us over 700 medical supply and soft good products including hot
packs, cold packs, exercise balls, therapy wraps, wrist splints, ankle weights,
lumbar supports, cervical collars, slings, cervical pillows, back cushions,
weight racks, and parallel bars. We also distribute products such as hot and
cold therapy products, exercise balls, lotions and gels, paper products,
athletic tape, canes and crutches, reflex hammers, stethoscopes, splints,
elastic wraps, exercise weights, Thera-Band(R) (a registered mark of Hygenic
Corp.) tubing, walkers, treadmills, stair climbers, heating units for hot packs,
whirlpools, gloves, electrodes, and Transcutaneous Electrical Nerve Stimulation
or "TENS" devices.
3
As a result of our acquisition of six independent distributors in June
and July 2007, we significantly expanded the number of products we now
distribute to include additional exercise equipment, massage therapy products,
chiropractic tables, hand therapy products, Pilates and yoga equipment,
nutritional supplements, emergency care products and portable electrotherapy
products. A new, 400-page full-line catalog was introduced to the market in
September 2008, containing over 12,000 rehabilitation products. This new catalog
is a major step in presenting our new image to the market following the
assimilation of these dealers. It represents a more consolidated approach to
selling both our high-quality manufactured products, and hundreds of lines of
distributed products we now represent.
We market our products through direct sales representatives,
independent dealers and the new product catalog. We are also continually seeking
to update our line of manufactured and distributed medical supplies and soft
goods.
Treatment Tables and Rehabilitation Equipment We manufacture and
distribute motorized and manually operated physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products.
Aesthetic Products
We manufacture and market a line of aesthetic products under the brand
name of Synergie(TM). The new Synergie Elite Aesthetic Massage System (AMS)
introduced in April 2008 applies therapeutic vacuum massage to skin and
subcutaneous tissues to achieve a temporary reduction in the appearance of
cellulite as well as reducing the circumferential body measurements of the
treated areas.
The results of a Dynatronics-sponsored research study available at our
offices show that 91% of Synergie participants experienced a reduction in the
appearance of cellulite. In addition, participants on average reported a
cumulative reduction of six-inches in girth around the hips, thighs, and waist.
We also manufacture and market the Synergie Elite microdermabrasion
device (MDA) as a companion to the AMS device. The MDA device gently exfoliates
the upper layers of skin, exposing softer, smoother skin. In conjunction with
the microdermabrasion devices, we offer a unique line of skin care products
under the trademark Calisse(TM) which is designed to enhance the effects of the
MDA treatments.
As part of the aesthetics line of products, we market the Synergie
Elite LT device which provides light therapy for aesthetic applications. Light
therapy is popular in spas and health clubs for improving skin tone and
appearance. Combining elements of the AMS vacuum massage techniques with
microdermabrasion and Synergie Elite LT for light therapy has provided
aestheticians with the ability to provide an enhanced "ultimate facial"
available only with the use of Synergie devices.
Allocation of Sales Among Key Products
No product accounted for more than 10% of total revenues during the
fiscal years ended June 30, 2009 and 2008.
Patents and Trademarks
Patents We hold a United States patent on the multi-frequency
ultrasound technology that will remain in effect until June 2013, and a United
States patent on the microdermabrasion device that will remain in effect until
February 2020. In addition, we hold a United States patent on the STS technology
for treating chronic pain that will remain in effect until July 17, 2021 and a
United States patent on the combination of our aesthetic massage and
microdermabrasion technologies that will remain in effect until February 28,
2020. We also hold two design patents on the microdermabrasion device that will
remain in effect until November 2015. We hold a patent on our light therapy
technology that will remain in effect until August 2025. Three additional patent
applications pertaining to our infrared light therapy technology and combination
traction/light therapy technology have been filed with the United States Patent
and Trademark Office and are currently pending. We also own the exclusive,
worldwide rights (under a license agreement) to patent protection on the STS
technology for the treatment of chronic pain.
Trademarks. We have developed and we use registered trademarks in our
business, particularly relating to our corporate and product names. The
trademark "Dynatron" has been registered with the United States Patent and
Trademark Office. In addition, United States trademark registrations have been
obtained for the trademarks: "Synergie," "Synergie Peel," "Sympathetic Therapy,"
and "Dynatron Solaris," and trademark registrations have been obtained for
various other product trademarks. Company materials are also protected under
copyright laws, both in the United States and internationally.
4
Federal registration of a trademark enables the registered owner of the
mark to bar the unauthorized use of the registered mark in connection with a
similar product in the same channels of trade by any third-party anywhere in the
United States, regardless of whether the registered owner has ever used the
trademark in the area where the unauthorized use occurs. We have filed
applications and own trademark registrations, and we intend to register
additional trademarks in countries where our products are or may be sold in the
future. Protection of registered trademarks in some jurisdictions may not be as
extensive as the protection in the United States.
We also claim ownership and protection of certain product names,
unregistered trademarks, and service marks under common law. Common law
trademark rights do not provide the same level of protection that is afforded by
the registration of a trademark. In addition, common law trademark rights are
limited to the geographic area in which the trademark is actually used. We
believe these trademarks, whether registered or claimed under common law,
constitute valuable assets, adding to recognition of Dynatronics and the
effective marketing of Dynatronics products. Trademark registration once
obtained is essentially perpetual, subject to the payment of a renewal fee. We
therefore believe that these proprietary rights have been and will continue to
be important in enabling us to compete.
Trade Secrets. We own certain intellectual property, including trade
secrets that we seek to protect, in part, through confidentiality agreements
with employees and other parties, although some employees who are involved in
research and development activities have not entered into these agreements. Even
where these agreements exist, there can be no assurance that these agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or independently
developed by competitors. Our proprietary product formulations are generally
considered trade secrets, but are not otherwise protected under intellectual
property laws.
We intend to protect our legal rights concerning intellectual property
by all appropriate legal action. Consequently, we may become involved from time
to time in litigation to determine the enforceability, scope, and validity of
any of the foregoing proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical personnel.
Warranty Service
We provide a warranty on all products we manufacture for time periods
ranging in length from 90 days to five years from the date of sale. We service
warranty claims on these products out of our Salt Lake City, Utah and
Chattanooga, Tennessee facilities according to the service required. Our
warranty policies are comparable to warranties generally available in the
industry. Warranty claims as a percentage of gross sales were not material in
fiscal years 2009 and 2008.
Products we distribute carry warranties provided by the manufacturers
of those products. We do not generally supplement these warranties or provide
warranty services for distributed products. We also sell accessory items for our
manufactured products that are supplied by other manufacturers. These accessory
products carry warranties from their original manufacturers without supplement
from us.
Customers and Markets
We sell our products primarily to licensed practitioners such as
physical therapists, chiropractors, podiatrists, sports medicine specialists,
medical doctors, hospitals and clinics, plastic surgeons, dermatologists and
aestheticians. As a result of the acquisition of six dealers and the appointment
or hiring of other sales representatives, we now have 50 direct sales
representatives selling our products in 34 states. We also make use of a network
of over 150 independent dealers throughout the United States and
internationally. These dealers purchase and take title to the products, which
they then sell to licensed practitioners.
We have entered into direct sales relationships with a few national and
regional chains of physical therapy clinics and hospitals. We sell our products
directly to these clinics and hospitals pursuant to preferred pricing
arrangements. We also have preferred pricing arrangements with key dealers who
commit to purchase certain volumes and varieties of products. No single dealer
or national account or group of related accounts was responsible for 10% or more
of total sales in fiscal years 2009 and 2008.
5
We export products to approximately 30 different countries. Sales
outside North America totaled approximately $765,000, or 2.4% of net sales in
fiscal year 2009 compared to $772,500, or 2.4% of net sales in fiscal year 2008.
We are working to establish effective distribution for its products in
international markets. Our Salt Lake City facility is certified to the ISO 13485
quality standard for medical device manufacturing. Many of our therapy devices
carry the CE Mark, a designation required for marketing products in the European
community that signifies the device or product was manufactured pursuant to a
certified quality system. We have no foreign manufacturing operations. However,
we purchase certain products and components from foreign manufacturers.
Competition
We believe our key products are distinguished competitively by our use
of the latest technology. Many of our products are protected by patents. We
believe that the integration of advanced technology in the design of each
product has distinguished Dynatronics branded products in a very competitive
market. We were the first company to integrate infrared light therapy as part of
a combination therapy device. By manufacturing many of the medical supplies,
soft goods and tables that we sell, we can focus on quality manufacturing at
competitive prices. We believe these factors give us an edge over many
competitors who are solely distributors of competing products. Furthermore, the
acquisition of six key distributors in June and July 2007 and the addition of
direct sales representatives over the course of fiscal year 2009 have provided
us with expanded direct distribution of products into 34 states. This vertical
integration allows us to exercise better control over the sale and distribution
of our products as well as products distributed by competitors, including
Mettler, MedX, and DJO and many manufacturers of treatment tables, medical
supplies and soft goods.
Information necessary to determine or reasonably estimate our market
share or that of any competitor in any of these markets is not readily
available.
Electrotherapy/Ultrasound
We compete in the clinical market for electrotherapy and ultrasound
devices with both domestic and foreign companies. Approximately one dozen
companies produce electrotherapy and/or ultrasound devices. Some of these
competitors are larger and better established, and have greater resources than
us. Other than Dynatronics, few companies, domestic or foreign, provide
multiple-modality devices, which is one important distinction between us and our
competition. Furthermore, we believe no competitor offers three frequencies on
multiple-sized soundheads for which we hold a patent. We believe that our
primary domestic competitors in the sale of electrotherapy and ultrasound
products include DJO (Chattanooga Group division), Naimco (Rich-Mar division),
and Mettler Electronics.
Light Therapy
Competitors that manufacture and market light therapy devices include
DJO, Rich-Mar, Erchonia, Anodyne and MedX. These and other competitors offer
light therapy units that are not as powerful as our units. We are aware of only
two competitors, DJO and Rich-Mar, who offer a combination light therapy device
that includes electrotherapy and ultrasound capabilities.
Vibration Therapy
The primary competitors that manufacture and market vibration therapy
devices include PowerPlate and Wave Manufacturing. These competitors offer units
that are more expensive than our unit. In addition, we offer a better warranty
and we believe that we provide better training and customer service than these
competitors.
Medical Supplies and Soft Goods
We compete against various manufacturers and distributors of medical
supplies and soft goods, some of which are larger, more established and have
greater resources than us. Excellent customer service along with providing value
to customers is of key importance for us to remain competitive in this market.
While there are many specialized manufacturers in this area such as DJO and
Fabrication Enterprises, most of our competitors are primarily distributors such
as North Coast Medical, Sammons Preston (a division of Patterson Medical), and
Meyer Distributing. We enjoy cost advantages on the products we manufacture and
distribute directly to end users compared to companies that only distribute
similar products.
Iontophoresis
Our competitors in the iontophoresis market include DJO (EMPI and Iomed
divisions) and Naimco. We believe that DJO enjoys the largest market share of
the iontophoresis market. We also believe that our strong distribution network
is important to our continued ability to compete in this increasingly
competitive market. In addition, our products target a lower selling price than
the products of DJO. Our Dynatron iBox iontophoresis device is helping expand
our presence in this market.
6
Treatment Tables
Our primary competition in the treatment table market is from domestic
manufacturers including Hill Laboratories Company, Hausmann Industries, Sammons
Preston, Bailey Manufacturing, Tri-W-G, DJO (Chattanooga Division), Armedica,
and Clinton Industries. We believe we compete based on our industry experience
and product quality. In addition, certain components of the treatment tables are
manufactured overseas, which we believe allows for pricing advantages over
competitors.
Aesthetic Products
Our two primary competitors in the therapeutic massage industry are LPG
Systems, and Silhouette Tone. Other competitors include Cynosure, Inc., Diamond
Systems, Palomar Medical, Eleme Medical, Syneron, and Durmafirm. The Synergie
Elite AMS device utilizes proprietary technology that has been proven effective
in a research study and in ten years of use by doctors and spas. In addition, we
provide a comprehensive training and certification program for aestheticians and
medical practitioners. Our aesthetic massage equipment is priced lower than
competitors' units, providing a significant advantage in the marketplace. We are
striving to develop a network of domestic and international distributors and
national accounts, which is expected to provide another competitive advantage in
the marketplace for these products.
There are a number of competitors in the microdermabrasion market
including Mega Peel, Diamond Peel, DermaGenesis, DermaMed, E-Med, Integremed,
Medical Alliance, Palomar, Slimtone USA and Soundskin Corp. The Synergie MDA
device incorporates a patented anti-clogging design for the crystals, which sets
it apart from competitors' units. In addition, the system has an innovative
disposable system for the abrasive material, which prevents unwanted contact
with the spent crystals following treatment. Powered by the Synergie Elite AMS
device, the Synergie Elite MDA is one of the most powerful and easy to control
units on the market.
Competitors in the light therapy segment of the aesthetic market
include Revitalite, Silhouette Tone, Photo Actif, and DermaPulse. We believe the
Synergie Elite LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.
Manufacturing and Quality Assurance
We manufacture therapy devices, soft goods and other medical products
at our facilities in Salt Lake City, Utah and Chattanooga, Tennessee. We
purchase some components for our manufactured products from third-party
suppliers. All parts and components purchased from these suppliers meet
specifications we have established. Trained staff performs all sub-assembly,
final assembly and quality assurance procedures. Every effort is made to design
Dynatronics products to incorporate component parts and raw materials that are
readily available from suppliers.
The development and manufacture of many of our products is subject to
rigorous and extensive regulation by the United States Food and Drug
Administration, or FDA, and other regulatory agencies and authorities in the
United States and abroad. In compliance with the FDA's Good Manufacturing
Practices, or GMP, we have developed a comprehensive program for processing
customer feedback and analyzing product performance trends. By ensuring prompt
processing of timely information, we are better able to respond to customer
needs and insure proper operation of the products.
In 1994, we established the Quality First Program, a concept for total
quality management designed to involve each employee in the quality assurance
process. Under this program, employees are not only expected to inspect for
quality, but they are empowered to stop any process and make any changes
necessary to insure that quality is not compromised. An incentive program is
established to insure the continual flow of ideas and to reward those who show
extraordinary commitment to the Quality First concept. Quality First has not
only become our company motto, but it is the standard by which all decisions are
made. We believe the Quality First Program reinforces employee pride, increases
customer satisfaction, and improves overall operations.
Our Salt Lake facility is certified to ISO 13485 standards for medical
products. ISO 13485 is an internationally recognized standard for quality
systems and manufacturing processes adopted by over 90 countries. In addition,
we have qualified for the CE Mark Certification on our electrotherapy,
ultrasound and light therapy products. With the CE Mark Certification, we are
qualified to market these products throughout the European Union and in other
countries where CE Mark Certification and ISO 13485 certification are
recognized.
7
Research and Development
Total research and development, or R&D, expenses in fiscal year 2009
decreased $361,405 to $993,338 from $1,354,743 in fiscal year 2008. R&D expenses
represented approximately 3.1% and 4.2% of our net sales in fiscal years 2009
and 2008, respectively. The decrease in R&D expenditures as a percentage of net
sales in fiscal year 2009 is due to the cost cutting measures performed by the
company. We also reduced our R&D spending in fiscal year 2009 due to reduced
cash flows. We generally dedicate significant resources to R&D each year in
order to develop new products for the physical medicine and aesthetic markets
and to sustain engineering efforts of existing products.
Regulatory Matters
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by numerous
national and local governmental agencies in the United States and other
countries. In the United States, the FDA regulates our products pursuant to the
Medical Device Amendment of the Food, Drug, and Cosmetic Act, or FDC Act and
regulations promulgated thereunder. Advertising and other forms of promotion and
methods of marketing of the products are subject to regulation by the Federal
Trade Commission, or FTC, under the Federal Trade Commission Act, or FTC.
As a device manufacturer, we are required to register with the FDA and
once registered we are subject to inspection for compliance with the FDA's
Quality Systems regulations. These regulations require us to manufacture our
products and maintain our documents in a prescribed manner with respect to
manufacturing, testing, and control activities. Further, we are required to
comply with various FDA requirements for reporting. The FDC Act and medical
device reporting regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been caused or contributed to by the
use of our products, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to occur. The FDA
also prohibits an approved device from being marketed for unapproved uses. All
of our therapeutic and aesthetic treatment devices as currently designed are
cleared for marketing under section 510(k) of the Medical Device Amendment to
the FDC Act or are considered 510(k) exempt. If a device is subject to section
510(k), the FDA must receive premarket notification from the manufacturer of its
intent to market the device. The FDA must find that the device is substantially
equivalent to a legally marketed predicate device before the agency will clear
the new device for marketing. We intend to continuously improve our products
after they have been introduced to the market. Certain modifications to the
Company's marketed devices may require a premarket notification and clearance
under section 510(k) before the changed device may be marketed, if the change or
modification could significantly affect safety or effectiveness. As appropriate,
we may therefore submit future 510(k) notifications, Pre-Market Approval (PMA)
or PMA supplement applications to the FDA. No assurance can be given that
clearance or approval of such new applications will be granted by the FDA on a
timely basis, or at all. Furthermore, we may be required to submit extensive
preclinical and clinical data depending on the nature of the product changes.
All of the Company's devices, unless specifically exempted by regulation, are
subject to the FDC Act's general controls, which include, among other things,
registration and listing, adherence to the Quality System Regulation
requirements for manufacturing, Medical Device Reporting and the potential for
voluntary and mandatory recalls described above.
The FDA is currently evaluating the classification of iontophoresis
products. Since the passage of the Medical Device Amendment in 1975, these
products have been listed as Class III products. However, the FDA has never
called for a PMA for these products. Instead, it has allowed iontophoresis
products to proceed to market as though they were Class II. Recently, FDA has
indicated they intend to make a final decision regarding calling for a PMA for
iontophoresis products or reclassifying them to Class II. We submitted to FDA
the required information to allow continued marketing of our proprietary
iontophoresis products until the final FDA decision is made. In our submission
we urged that the products be reclassified to Class II. If the FDA does not
change the classification of iontophoresis products and requires a PMA, we will
be required to provide a PMA or, in the alternative, cease distributing our
proprietary line and distribute competitor products that comply with the FDA
requirements.
During fiscal year 2003, Congress enacted the Medical Device User Fee
and Modernization Act (MDUFMA). Among other things, this act imposes for the
first time a user fee on medical device manufacturers. Under the provisions of
MDUFMA, manufacturers seeking clearance to market a new device must pay a fee to
the FDA in order to have their applications reviewed. We submit new products for
clearance primarily under section 510(k) of the Medical Device Amendment of the
FDC Act.
8
Failure to comply with applicable FDA regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines, and criminal prosecutions. Any such action by the FDA
could materially adversely affect our ability to successfully market our
products. Our Salt Lake City facility is inspected periodically by the FDA for
compliance with the FDA's GMP and other requirements, including appropriate
reporting regulations and various requirements for labeling and promotion. The
FDA Quality Systems Regulations are now based in large part on the ISO 13485
Quality Standard. The GMP regulation requires, among other things, that (i) the
manufacturing process be regulated and controlled by the use of written
procedures, and (ii) the ability to produce devices that meet the manufacturer's
specifications be validated by extensive and detailed testing of every aspect of
the process.
Advertising of our products is subject to regulation by the FTC under
the FTC Act. Section 5 of the FTC Act prohibits unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce. Section 12
of the FTC Act provides that the dissemination or the causing to be disseminated
of any false advertisement pertaining to, among other things, drugs, cosmetics,
devices or foods, is an unfair or deceptive act or practice. Pursuant to this
FTC requirement, we are required to have adequate substantiation for all
advertising claims made about its products. The type of substantiation required
depends upon the product claims made.
If the FTC has reason to believe the law is being violated (e.g., the
manufacturer or distributor does not possess adequate substantiation for product
claims), it can initiate an enforcement action. The FTC has a variety of
processes and remedies available to it for enforcement, both administratively
and judicially, including compulsory process authority, cease and desist orders,
and injunctions. FTC enforcement could result in orders requiring, among other
things, limits on advertising, consumer redress, divestiture of assets,
rescission of contracts, and such other relief as may be deemed necessary.
Violation of such orders could result in substantial financial or other
penalties. Any such action by the FTC could materially adversely affect the
Company's ability to successfully market its products.
From time to time, legislation is introduced in the Congress of the
United States or in state legislatures that could significantly change the
statutory provisions governing the approval, manufacturing, and marketing of
medical devices and products like those we manufacture. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted, or FDA
regulations, guidance, or interpretations will be changed, and what the impact
of such changes, if any, may be on the Company's business and the results of its
operations. We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
domestically or internationally, would have on our business in the future. They
could include, however, requirements for the reformulation of certain products
to meet new standards, the recall or discontinuance of certain products,
additional record keeping, expanded documentation of the properties of certain
products, expanded or different labeling, and additional scientific
substantiation. Any or all such requirements could have a material adverse
effect on our business, results of operations or financial condition.
We believe all of our present products are in compliance in all
material respects with all applicable performance standards as well as GMP,
record keeping and reporting requirements in the production and distribution of
the products.
Environment
Environmental regulations and the cost of compliance with them are not
material to our business. Dynatronics does not discharge into the environment
any pollutants that are regulated by a governmental agency with the exception of
the requirement to provide proper filtering of discharges into the air from the
painting processes at our Tennessee location.
Seasonality
We believe that the effect of seasonality on the results of our
operations is not material.
Backlog
The Company had a backlog of orders of approximately $500,000 at June
30, 2009 compared to approximately $567,000 at June 30, 2008.
9
Employees
On June 30, 2009, we had a total of 148 full-time employees and 5
part-time employees, compared to 165 full-time employees and 18 part-time
employees on June 30, 2008.
Item 2. Properties
Our corporate headquarters and principal executive offices are located
at 7030 Park Centre Drive, Salt Lake City, Utah. The headquarters consist of a
single facility housing administrative offices and manufacturing space totaling
approximately 36,000 square feet. We own the land and building, subject to
mortgages requiring a monthly payment of approximately $19,000. The mortgages
mature in 2013 and 2017. We also own a 53,200 sq. ft. manufacturing facility in
Ooltewah, Tennessee (near Chattanooga), and accompanying undeveloped acreage for
future expansion subject to a mortgage requiring monthly payments of
approximately $13,000 and maturing in 2021. In addition, we rent office and
warehouse space in Pleasanton, California; Houston, Texas; Detroit, Michigan;
Minneapolis, Minnesota; and Girard, Ohio.
We believe the facilities described above are adequate and able to
accommodate our presently expected growth and operating needs. As our business
continues to grow, additional facilities or the expansion of existing facilities
may be required.
We own equipment used in the manufacture and assembly of our products.
The nature of this equipment is not specialized and replacements may be readily
obtained from any of a number of suppliers. In addition, we own computer
equipment and engineering and design equipment used in research and development
programs.
Item 3. Legal Proceedings
There are no pending legal proceedings of a material nature to which we
are a party or of which any of our property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report. Our annual meeting of shareholders will be held in
November 2009 in Salt Lake City, Utah.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information
As of September 23, 2009, we had approximately 13.7 million shares of
common stock issued and outstanding. Our common stock is listed on the Nasdaq
Capital Market (symbol: DYNT). The following table shows the range of high and
low sale prices for the common stock as quoted on the NASDAQ system for the
quarterly periods indicated.
Fiscal Year Ended June 30,
2009 2008
---- ----
High Low High Low
1st Quarter (July-September) $1.03 $0.17 $2.00 $0.95
2nd Quarter (October-December) $0.64 $0.26 $1.55 $1.01
3rd Quarter (January-March) $0.48 $0.20 $1.20 $0.97
4th Quarter (April-June) $0.75 $0.27 $1.07 $0.60
10
Shareholders
As of September 23, 2009, the approximate number of shareholders of
record was 439. This number does not include beneficial owners of shares held in
"nominee" or "street" name. Including beneficial owners, we estimate that the
total number of shareholders exceeds 2,000.
Dividends
We have never paid cash dividends on our common stock. Our anticipated
capital requirements are such that we intend to follow a policy of retaining
earnings in order to finance the development of the business.
NASDAQ Deficiency Notice
On June 25, 2008, we received a deficiency letter from the NASDAQ Stock
Market, indicating that we had failed to comply with the minimum bid requirement
for continued inclusion under Marketplace Rule 4310(c)(4). Under the deficiency
notice, our common stock is subject to potential delisting because, for a period
of 30 consecutive business days, the bid price of the common stock has closed
below the minimum $1.00 per share requirement for continued inclusion. The
deadline for compliance with the rule was subsequently extended by Nasdaq to
October 9, 2009. If prior to that date the bid price of our common stock closes
at $1.00 per share or more for a minimum of 10 consecutive business days, Nasdaq
staff may provide written notification that we have achieved compliance with the
rule.
We are using our best efforts to regain compliance with the minimum bid
price rule. However, there can be no assurance that compliance will be achieved
given recent historical performance of the common stock and the overall current
condition of financial and stock markets in the United States. If compliance is
not achieved and our stock is delisted, we expect that the common stock will
begin trading on the OTC bulletin board where there is no minimum bid
requirement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information related to our equity
compensation plans as of June 30, 2009:
Number of Number of securities
securities to be remaining available
issued upon for future issuance
exercise of Weighted-average under equity
outstanding exercise price compensation plans
options, of outstanding (excluding
warrants and options, warrants securities reflected
rights and rights in column (a))
Plan Category (a) (b) (c)
----------------------------------- ------------------- ------------------ ----------------------
Equity compensation plans
approved by security holders 960,104 $1.39 1,012,828
Equity compensation plans not
approved by security holders 20,000 $4.00 -0-
------------------- ----------------------
Total 980,104 1,012,828
=================== ======================
Description of Compensation Plans Not Approved by Security Holders
On August 16, 2000, the Company granted 80,000 options to the licensor
of certain technology under a license agreement. At June 30, 2009, 20,000 of
these options remained outstanding. However, these remaining options expired by
their terms on September 1, 2009.
11
Recent Sales of Unregistered Securities
We did not sell any securities without registration under the
Securities Act of 1933 during the period covered by this report.
Purchases of Equity Securities
On September 3, 2003, our board of directors adopted and announced a
stock repurchase program for the expenditure of up to $500,000 to purchase our
common stock on the open market pursuant to regulatory restrictions governing
such repurchases. In December 2008, the board authorized an additional $250,000
for repurchases under the program. During fiscal year 2008, we purchased 258,569
shares for $280,440 under the program. In fiscal year 2009, we purchased 13,600
shares for $10,138 before discontinuing the program in order to reallocate cash
resources. We made no purchases of equity securities under the repurchase
program during the last quarter of fiscal year 2009.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our principal business is the design, manufacture, marketing,
distribution and sales of physical medicine products and aesthetic products. We
manufacture and distribute a broad line of medical equipment including therapy
devices, medical supplies and soft goods, treatment tables and rehabilitation
equipment. Our line of aesthetic equipment 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, aestheticians and
other aesthetic services providers. We operate on a fiscal year ending June 30.
For example, reference to fiscal year 2009 refers to the year ended June 30,
2009.
Recent Developments
In fiscal year 2009, we introduced a new 2009-2010 product catalog to
our customers. With thousands of new products added to the new catalog as a
result of our acquisition of distributors in 2007, we have experienced a
significant increase in medical supply sales which we attribute to the catalog.
The acquisition of six of our top distributors allowed us to greatly expand our
product offering. The new catalog contains over 400 pages of products - more
than double our previous catalog offerings.
We introduced the new V-Force vibration therapy device to the market in
the fourth fiscal quarter of fiscal year 2009. This new unit employs powerful,
whole-body vibration technology, which provides neuromuscular training to
increase strength, improve balance and enhance flexibility. Whole-body vibration
therapy has been the subject of extensive research for many years with numerous
clinical studies demonstrating its effectiveness in the areas of balance/fall
prevention, circulation, knee rehabilitation, low back pain, range of motion and
a host of other neuromuscular conditions.
We also expanded our direct sales team from 36 sales representatives in
fiscal year 2008 to 50 sales representatives by September 2009. Our expanded
sales force now consists of 27 direct sales employees and 23 independent sales
representatives, helping extend our reach and grow market share. We expect to
continue to recruit experienced sales representatives and dealers as our
industry experiences an ongoing period of consolidation. In addition, we intend
to recruit additional independent distributors and seasoned direct sales
representatives in geographical areas where distribution has been lost or
diminished due to the consolidation activities in our industry.
During fiscal year 2009, we undertook an aggressive internal campaign
to improve operating efficiencies. With the help of Vici Capital Partners, we
identified a number of opportunities to improve cash flows and operational
efficiencies, as well as to strengthen margins and reduce manufacturing and
other costs. These changes were specifically targeted at lowering transaction
costs, obtaining better pricing and terms from vendors and service providers,
streamlining customer service and production processes, and improving our sales
support functions. Implementation of all ideas generated through this campaign
is projected to yield net economic benefits of approximately $2,000,000 annually
by the end of fiscal year 2010.
12
How We Assess the Performance of Our Business
We consider a variety of performance and financial measures in
assessing the performance of our business. The key measures for determining how
our business is performing are net sales, gross profit margin and selling,
general and administrative expense.
Net Sales
Net sales constitute gross sales net of any returns and sales
discounts.
Gross Profit
Gross profit is equal to our net sales minus our cost of goods sold.
Gross margin measures gross profit as a percentage of our net sales. Cost of
goods sold for manufactured products includes direct material and labor costs as
well as allocated indirect costs of labor and overhead. Cost of goods sold for
distributed products includes the direct cost of purchased products,
distribution center costs, and all freight costs incurred. The components of our
cost of goods sold may not be comparable to those of other manufacturers or
distributors of similar products within our industry.
Our cost of goods sold is substantially higher in higher volume
quarters because cost of goods sold generally increases as net sales increase.
Changes in the mix of our products, such as changes in the proportion of
manufactured products, may also impact our overall cost of goods sold. We review
our inventory levels on an ongoing basis in order to identify slow-moving
products in inventory. We may offer incentives or mark-downs on these products.
The timing and level of markdowns are not seasonal in nature but are driven by
customer acceptance and sales. If we misjudge the market for our products, we
may be faced with excess inventories for some products and be required to mark
down those products in order to sell them, however, historically markdowns have
not been a material factor in our business.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration,
share-based compensation and occupancy costs. These expenses do not generally
vary proportionally with net sales. As a result, selling, general and
administrative expense as a percentage of net sales is usually higher in lower
volume quarters and lower in higher volume quarters.
Share-based compensation expense related to stock options was $30,524
and $14,292 for fiscal years 2009 and 2008, respectively. We granted options to
purchase an aggregate of shares 79,455 and 648,370 shares of common stock in
fiscal years 2009 and 2008, respectively. These and any future stock option
grants will increase our share-based compensation expense in fiscal year 2010
and in future fiscal years compared to fiscal year 2009. See "Critical
Accounting Policies".
Results of Operations
Fiscal Year 2009 Compared to Fiscal Year 2008
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
Net Sales
Net sales decreased less than 1%, or $185,616 to $32,406,892 in fiscal
year 2009, from $32,592,507 in fiscal year 2008. Sales were essentially even in
fiscal year 2009 when compared with the prior year, notwithstanding significant
turmoil in the credit and financial markets and the general economic environment
in the United States. Sales of medical supplies and soft goods increased as a
percentage of overall sales to 55.8% in fiscal year 2009, from 51.3% of sales in
2008. We believe that the introduction of our new product catalog in the first
quarter of fiscal year 2009 contributed to the increase in medical supply sales.
The new product catalog contains over 400 pages of products and is twice the
size of our previous catalog. Sales of capital equipment for both rehabilitation
and aesthetics markets experienced a reduction in fiscal year 2009 compared to
fiscal year 2008. This decrease was due primarily to the general downturn in the
economy. The decrease in capital equipment sales was mostly offset by higher
sales of catalog products, medical supplies and treatment tables in fiscal year
2009.
13
Sales of manufactured physical medicine products represented
approximately 44% and 49% of our physical medicine product sales in fiscal years
2009 and 2008, respectively. Distribution of products manufactured by other
suppliers accounted for the balance of our physical medicine product sales in
those years. This is a significant change from the product mix prior to the
acquisitions in 2007. For example, in fiscal year 2007, sales of manufactured
physical medicine products represented approximately 76% of all of our physical
medicine product sales. The introduction of our new product catalog produced
increased demand for medical supplies, soft goods and distributed products in
fiscal year 2009, promoting this shift in product mix toward sales of the
distributed products.
Sales of manufactured aesthetic products in fiscal years 2009 and 2008
represented approximately 83% and 87% of our aesthetic product sales,
respectively, with distributed products making up the balance.
The majority of our sales revenues come from the sales of physical
medicine products, both manufactured and distributed. In fiscal year 2009, sales
of physical medicine products accounted for 91% of total sales, up from 89% in
fiscal year 2008. Chargeable repairs, billable freight revenue and other
miscellaneous revenue accounted for approximately 7% of total revenues in 2009
and 2008.
Gross Profit
Gross profit increased approximately $268,500 to $12,410,455, or 38.3%
of net sales in fiscal year 2009, from $12,141,937 or 37.3% of net sales in
fiscal year 2008. The 100 basis points increase in gross margin as a percentage
of sales in fiscal year 2009 over the prior year is attributable primarily to
price increases implemented during the second fiscal quarter ended December 31,
2008. In addition, we implemented a number of refinements to our business
operations in fiscal year 2009 which lowered our costs through better pricing
and terms obtained from vendors. These refinements contributed to the
improvement in gross profit in fiscal year 2009. Gross margin in fiscal year
2008 was adversely affected by the sale of inventory of manufactured products in
inventory of the acquired dealers at the time of the acquisitions. These
products had been purchased from us and as a result of our acquisitions of the
dealers, we acquired products with a cost basis at the higher acquired dealer
cost. This had the effect of increasing our cost of goods sold for those
products by approximately $400,000 in fiscal year 2008 when compared to the
margin for those products had we been able to sell them at our stated cost basis
instead of the acquired cost basis.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased
$2,763,478, or 20.5%, to $10,709,712, or 33.0% of net sales in fiscal year 2009,
from $13,473,190, or 41.3% of net sales in fiscal year 2008. The decrease in
SG&A expenses in fiscal year 2009 is primarily the result of our internal
aggressive cost reduction campaign to improve efficiencies. We targeted lowering
transaction costs, obtaining better pricing and terms from service providers,
streamlining customer service and production processes, and improving our sales
support functions. The impact of these changes on SG&A expenses for the year
ended June 30, 2009 included:
o $495,000 in lower selling expenses
o $1,474,000 in lower labor and operating costs
o $794,000 in lower general and administrative expenses
Approximately $472,000, or 17.1%, of the reduction in labor and
operating costs in fiscal year 2009 resulted from the recording of a reversal of
an accrued liability resulting from the cancellation of retirement benefits
previously provided by contract to two executive officers, Kelvyn Cullimore, Jr.
and Larry Beardall. The benefits were cancelled when the employment agreements
in which they were granted were terminated in March 2009. Both executives
subsequently entered into new agreements with the Company in June 2009. The new
agreements do not include retirement benefits such as those that had been a part
of the terminated agreements.
Research and Development
Research and Development ("R&D") expense decreased $361,405, or 26.7%,
to $993,338 in fiscal year 2009, from $1,354,743 in 2008. R&D expense also
decreased as a percentage of net sales in fiscal year 2009, to 3.1% from 4.2% of
net sales in fiscal year 2008. R&D costs are expensed as incurred. During fiscal
2009, we introduced the V-Force vibration therapy device and began an important
redesign of our main line of therapy products which is scheduled for completion
next summer. We expect to continue our commitment to developing innovative
products for the physical medicine market in fiscal year 2010 and in future
periods in order to position us for growth. We anticipate that R&D expense as a
percentage of net sales and in absolute terms will increase in 2010 to levels
similar to fiscal year 2008.
14
Pre-tax Income (Loss)
Pre-tax income improved significantly in fiscal year 2009, to $185,260
compared to a pre-tax loss of $9,915,555 in fiscal year 2008. The improvement in
pre-tax income for fiscal year 2009 was a result in part of the reduction in
SG&A expenses of approximately $2,764,000. A significant portion, approximately
66.9%, of the net loss in fiscal year 2008 was due to $6,636,466 of goodwill
impairment. Higher gross profit, lower R&D expenses, and the elimination of
acquisition-related expenses of approximately $2,000,000 also contributed to the
improved operating results in fiscal year 2009. Additionally, expenses related
to increases in the allowance for doubtful accounts receivable and the reserve
for obsolete inventory decreased $648,000 in fiscal year 2009 as compared to
2008.
Income Tax Expense (Benefit)
Income tax expense was $81,936 in fiscal year 2009, compared to income
tax benefit of $1,471,784 in fiscal year 2008. The effective tax rate for fiscal
year 2009 was 44.2% compared to 14.8% in 2008. The lower tax accrual rate in
2008 is a result of the non-deductibility of a significant portion of the
write-off of goodwill and certain other items.
Interest Expense, Net
Interest expense, net decreased by $67,300 to $553,173 in fiscal year
2009 due to decreased borrowings and lower carrying balances on our bank line of
credit.
Net Income (Loss)
Net income increased to $103,324 ($.01 per share) in fiscal year 2009,
compared to a net loss of $8,443,771 ($.62 per share) in fiscal year 2008. Major
factors contributing to the improvement in fiscal year 2009 were the reduction
in SG&A expenses of approximately $2,764,000, higher gross profit generated for
the year, lower R&D expenses and the elimination of $6,636,466 of goodwill
impairment incurred in fiscal year 2008.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased as a percentage of net
sales to 1.12% in fiscal year 2009 from 1.15% in fiscal year 2008, or $11,378.
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 $4,217,187 as
of June 30, 2009, inclusive of the current portion of long-term obligations and
credit facilities, compared to working capital of $4,320,883 as of June 30,
2008.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
decreased $411,508, or 7.9% to $4,739,727 as of June 30, 2009, compared to
$5,151,235 as of June 30, 2008. Trade accounts receivable represent amounts due
from our dealer network as well as from medical practitioners and clinics. 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.
As a result of increased distribution activity following the
acquisitions completed in fiscal year 2008, the character of the accounts
receivable and collection patterns have changed from prior years. We will
continue to carefully monitor our collection practices to ensure the allowance
estimates are adequate. Allowances for the retail accounts assumed in the
acquisitions include consideration of the historical experience of the acquired
companies.
15
Inventories
Inventories, net of reserves, decreased $83,817 or 1.3%, to $6,199,251
as of June 30, 2009, compared to $6,283,068 as of June 30, 2008. As expected,
inventories began to reduce following consolidation of eight distribution points
to three central distribution facilities since the completion of the
acquisitions in 2007. In addition, the amount of inventory we carry fluctuates
each period based on the timing of large inventory purchases from overseas
suppliers.
Accounts Payable
Accounts payable increased $371,681 or 26.1% to $1,795,520 as of June
30, 2009, from $1,423,839 as of June 30, 2008. 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 take advantage of available early payment
discounts when offered by our vendors.
Accrued Expenses
Accrued expenses decreased $53,818 or 10.8%, to $446,327 as of June 30,
2009, compared to $500,145 as of June 30, 2008. Accrued expenses consist of
accrued real property taxes and personal property taxes, sales taxes liability,
accrued royalties, commissions, professional fees, directors fees, product
liability deductions, interest expense and miscellaneous other expenses.
Accrued Payroll and Benefit Expenses
Accrued payroll and benefit expenses increased $14,705 or 3.6%, to
$426,623 as of June 30, 2009, compared to $411,918 as of June 30, 2008. The
increase in accrued payroll and benefit expenses is related to the number of
days within a pay period that require accrual as of the end of our fiscal year.
Cash and Cash Equivalents
Our cash position as of June 30, 2008 was $141,714, a decrease of 50.9%
or $146,767 from cash of $288,481 as of June 30, 2008. We believe that improved
cash flows from operating activities will be generated through higher sales,
improved management of accounts receivable, reduction of current inventory
levels and reduction of operating expenses. 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 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. However, no assurance can be given that additional
financing, if required, would be available on terms favorable to the Company, or
at all.
Line of Credit
During fiscal year 2009, we paid down the outstanding balance on our
line of credit with a bank by $1,215,669, leaving a remaining balance
outstanding of $4,602,651 as of June 30, 2009, compared to $5,818,320 as of June
30, 2008. The decrease in the line of credit was primarily the result of
improved collections of accounts receivable, an increase in accounts payable,
profits generated during fiscal year 2009 and cash flows from operating
activities.
Interest on the line of credit is based on the 90-day LIBOR rate (1.1%
as of June 30, 2009) plus 4%, which as of June 30, 2009 equaled 5.1% per annum.
The line of credit is collateralized by accounts receivable and inventories, as
well as a security interest in our headquarters facility in Salt Lake City,
Utah. 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 $8,000,000. Interest payments on the line are due monthly. As of June 30,
2009, the borrowing base was approximately $6,300,000, resulting in
approximately $1,700,000 available on the line. The line of credit is renewable
on October 31, 2009 and includes covenants requiring us to maintain certain
financial ratios. As of June 30, 2009, we were in compliance with these loan
covenants.
The current ratio was 1.5 to 1 as of June 30, 2009 compared to 1.5 to 1
as of June 30, 2008. Current assets represented 70% of total assets as of June
30, 2009 and 2008.
16
Debt
Long-term debt excluding current installments totaled $2,881,659 as of
June 30, 2009, compared to $3,046,000 as of June 30, 2008. 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 $2,970,000 with monthly principal and interest payments of
$32,039. For a more complete explanation of the long-term debt, see Note 6 in
the financial statements.
Inflation and Seasonality
Our revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
Our business operations are not materially affected by seasonality
factors.
Recent Accounting Pronouncements
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS No.
165"). SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No. 165 is
effective for interim or annual periods ending after June 15, 2009. We adopted
SFAS No. 165 in the fourth quarter of fiscal 2009. See note 1(t) to the
consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the
Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. We are currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on our consolidated results of operation, cash flows or
financial condition.
In December 2007, SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, was issued which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as non-controlling interests and will be reported as a
component of equity separate from the parent's equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to the
non-controlling interest will be included in net income and, upon a loss of
control, the interest sold, as well as any interest retained, will be recorded
at fair value, with any gain or loss recognized in net income. SFAS No. 160 is
effective for the Company beginning July 1, 2009 and will apply prospectively,
except for the presentation and disclosure requirements, which will apply
retrospectively. We believe the adoption of SFAS No. 160 will not have a
material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS No. 157"). SFAS No. 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 No. 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. We adopted SFAS No. 157 on July 1,
2008 for our financial assets and liabilities and on July 1, 2009 for
non-financial assets with no material impact on our consolidated financial
statements.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. 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 under different assumptions or conditions.
17
We believe that the following critical accounting policies involve a
higher degree of judgment and complexity. See Note 1 to our consolidated
financial statements for the fiscal year ended June 30, 2009 for a complete
discussion of our significant accounting policies. The following reflect the
significant estimates and judgments used in the preparation of our 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:
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; and
o 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 the cost of goods sold within the statements of operations during
the period in which such modifications are determined necessary by management.
As of June 30, 2009 and 2008, our inventory valuation reserve balance, which
established a new cost basis, was $338,788 and $337,718, respectively, and our
inventory balance was $6,199,251 and $6,283,068, net of reserves, respectively.
Revenue Recognition
Historically, the majority of our product sales were to customers who
were independent distributors. In fiscal year 2008, as a result of acquiring six
of our top distributors, 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 the key distributors, we effectively reduced our dependence 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 collectability 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 $4,739,727 and $5,151,235, net of allowance for doubtful accounts of
$398,610 and $411,057, as of June 30, 2009 and 2008, respectively.
Deferred Income Tax Assets
In August 2009 and August 2008, our management performed an in-depth
analysis of the deferred income tax assets and their recoverability based on the
criteria of SFAS No. 109. Based on several factors, including our strong
earnings history of pre-tax profit averaging over $500,000 per year in 16 of the
last 19 fiscal years and the fact that the principal causes of the loss in
fiscal 2008 (goodwill impairment and expenses resulting from six acquisitions)
are considered to be unusual and are not expected to recur in the near future,
we believe that it is more likely than not that all of the net deferred income
tax assets will be realized.
18
Business Plan and Outlook
During fiscal year 2009, we achieved significant improvement in our
operating results compared to the prior fiscal year. In fiscal year 2010, we
will continue to pursue a focused strategy to improve sales and overall
operations that includes the following elements:
o strengthening distribution channels by adding direct sales
representatives and dealers in key locations
o developing sales with large national accounts and group purchasing
organizations
o refining operations by continuing to reduce overhead costs and
automating processes
o enhancing product profit margins through improved manufacturing
processes and negotiating better pricing of components with
vendors
o developing and introducing new, state-of-the-art products for
future growth
Our goal in implementing this strategy is to improve short-term
profitability without jeopardizing long-term growth.
The landscape of our primary market, the physical medicine marketplace,
continues to change. Past years saw consolidation among manufacturers and
distributors including our own acquisitions completed in fiscal years 2007 and
2008. More recently, two additional significant changes have taken place. DJO
announced the closure of its Chattanooga Group operations and the redistribution
of those manufacturing, R&D and support functions to other DJO facilities, in
and out of the United States. The effect is that the full operations of the
former Chattanooga Group have been reduced to a product brand sold by DJO
through non-proprietary distribution channels. In addition, DJO agreed to sell
the catalog division of its Empi subsidiary to Patterson Medical (Sammons
Preston). This decision essentially eliminates Empi as a significant catalog
competitor and further reduces competition in the market. These consolidations
combined with prior year consolidations and continuing declines in the number of
independent distributors has significantly narrowed distribution channels in our
market. At the present time, there remain only two companies with a direct sales
force selling proprietary and distributed products. Those companies are
Dynatronics and Patterson Medical through its Sammons Preston subsidiary. All
other distributors are catalog companies with no direct sales force, or
manufacturers continuing to rely on a declining network of independent dealers.
In the past year we have reinforced our direct sales team to include 27 direct
sales employees and 23 independent sales representatives. We believe we have the
best trained and most knowledgeable sales force in the industry. The recent
changes within our market provide a unique opportunity for us to grow market
share in the coming years through recruitment of the best sales representatives
and dealers.
The September 2008 introduction of our first consolidated catalog and
pricing schedule provided a powerful sales tool that is helping our sales
efforts with direct sales representatives and independent distributors who use
either a private labeled version or the proprietary version of the catalog. We
are focusing specific efforts on recruiting additional independent distributors
and seasoned direct sales representatives in geographical areas where
distribution has been lost or diminished due to consolidation within our
industry.
With the broad line of products we now offer and a strong sales force
that we expect will only grow stronger in the coming year, we believe that we
are uniquely positioned to develop relationships with Group Purchasing
Organizations (GPO's) and large chains of hospitals and clinics that purchase
only on contract. This is a segment of business which was previously closed to
us because we were not an approved vendor with the various GPO's and national or
regional chains of care facilities. With the broader offering of products now
available through our catalog, we are better able to compete for this high
volume business.
To further our efforts to recruit the best direct sales representatives
and dealers as well as to better appeal to the large GPO's and national
customers, we will continue to improve efficiencies of our operations and the
sales support for the industry. Chief among those changes will be the
introduction of our first true e-commerce solution. This launch is scheduled to
occur in the second quarter of fiscal year 2010. With the introduction of this
e-commerce solution, customers will be able to more easily place orders and
obtain information about their accounts. Sales representatives will be more
effective with an abundance of information available to them electronically. Not
only is our e-commerce solution expected to improve sales, but it will
significantly reduce our transactional costs thus enabling us to accommodate
higher sales without significantly increasing overhead.
19
We will also continue to focus on new product innovation. The
introduction of V-Force in fiscal year 2009 once again testifies of our
commitment to innovation as we are the first to introduce this technology to the
rehabilitation markets we serve. It is expected that V-Force will be an
important contributor to sales and profits in fiscal year 2010. Several new
products are currently under development and are scheduled for introduction in
the summer of 2010. The commitment to innovation of high quality products has
been a hallmark of Dynatronics and will continue to be throughout the coming
year.
In April 2008, we introduced the new Synergie Elite aesthetic product
line, representing the first redesign of our popular aesthetic devices since
their original introduction almost 10 years ago. We believe that this new line
of products remains the best value on the market. While the current economic
conditions have dampened demand for large capital equipment purchases like the
Synergie Elite products, we plan to seek strategic partnerships, both domestic
and international, to help maintain the sales momentum from the introduction of
this revised product line. As the economy begins to improve over the coming
year, we expect to see increased sales of these higher margin products. In the
meantime, expenses related to this division are being kept to a minimum.
We have long believed that international markets present an untapped
potential for growth and expansion. 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. Over the coming year our efforts will be focused on
partnering with key manufacturers and distributors interested in our product
line or technology. Our Salt Lake City facilities, where all electrotherapy,
ultrasound, traction, 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.
Refining our business model for supporting sales representatives and
distributors also will be a focal point of operations. We will continue to
evaluate the most efficient ways to maintain our satellite sales offices and
warehouses. In addition, more emphasis is being placed on pricing management to
protect margins for both manufactured and distributed products. The ongoing
refinement of this model is expected to yield further efficiencies that will
better achieve sales goals while at the same time reduce expenses. Through our
agreement with Vici Capital Partners over this past year, we have identified
over $2,000,000 of efficiency improvements that either have already been
implemented or that we plan to implement during fiscal year 2010 to drive
greater profitability. This is particularly important given the slow market for
capital products associated with the weak national economy.
While sales in fiscal year 2009 were even with fiscal year 2008, the
trends have favored non-capital equipment and supplies while the demand for
capital equipment has been soft. Yet, the sale of our manufactured capital
equipment remains the largest contributor to margin generation. Therefore, we
have placed renewed emphasis on improving manufacturing operations including
considering more offshore manufacturing of components as well as streamlining
manufacturing operations in Utah and Tennessee. Past experience has shown that
when recessionary pressures start to subside, the pent up demand for capital
equipment will be significant. Expectations of the recessionary grip loosening
during calendar 2010 lead us to a belief that capital equipment sales will start
to rebound toward the end of fiscal year 2010. All our efforts to trim back
during these difficult times should make us a leaner operation when demand ramps
up once again.
Based on our defined strategic initiatives, we are focusing our
resources in the following areas:
o Reinforcing distribution through a strategy of recruiting direct
sales representatives and working closely with the most successful
distributors of capital equipment.
o Improving sales by focusing sales strategies on pursuing business
opportunities with Group Purchasing Organizations and large
national and regional accounts.
o Introducing and refining our first e-commerce solution in order to
facilitate business opportunities and reduce transactional costs.
o Significantly improving operational efficiencies through
implementation of ideas generated by the operational analysis done
with the assistance of Vici Capital. These ideas include lowering
manufacturing and transactional costs, automating processes,
redefining policies and procedures and working to make every
customer a profitable customer.
o Strengthening pricing management and procurement methodologies.
o Minimizing expense associated with the Synergie product line until
the economy improves and demand for capital equipment re-emerges.
In the meantime seek additional independent distributors and
strategic partnerships.
20
o Focusing international sales efforts on identifying key
distributors and strategic partners who could represent the
product line, particularly in Europe.
o Continuing development of new, state-of-the-art products, both
high-tech and commodity, in fiscal year 2010, for both the
rehabilitation and aesthetic markets.
o Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase market
reach and supplement capital resources.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm............. F-1
Consolidated Balance Sheets as of June 30, 2009 and 2008........... F-2
Consolidated Statements of Operations for the years ended
June 30, 2009 and 2008.............................................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2009 and 2008.................................. F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2009 and 2008.............................................. F-5
Notes to Consolidated Financial Statements.......................... F-6
21
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Dynatronics Corporation
We have audited the consolidated balance sheets of Dynatronics Corporation and
subsidiary (collectively, the Company) as of June 30, 2009 and 2008, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of the Company's
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of June 30, 2009 and 2008, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Tanner LC
Salt Lake City, Utah
September 25, 2009
F-1
DYNATRONICS CORPORATION
Consolidated Balance Sheets
As of June 30, 2009 and 2008
Assets 2009 2008
------------ -------------
Current assets:
Cash and cash equivalents $ 141,714 288,481
Trade accounts receivable, less allowance
for doubtful accounts of $398,610 as
of June 30, 2009 and $411,057 as of
June 30, 2008 4,739,727 5,151,235
Other receivables 99,110 63,487
Inventories, net 6,199,251 6,283,068
Prepaid expenses 333,273 619,471
Prepaid income taxes 23,210 98,644
Deferred income tax asset - current 466,783 477,300
------------ -------------
Total current assets 12,003,068 12,981,686
Property and equipment, net 3,349,239 3,527,153
Intangible asset, net 541,870 631,181
Other assets 359,171 359,748
Deferred income tax asset - noncurrent 833,941 928,051
------------ -------------
Total assets $ 17,087,289 18,427,819
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 323,713 297,413
Line of credit 4,602,651 5,818,320
Warranty reserve 191,047 209,168
Accounts payable 1,795,520 1,423,839
Accrued expenses 446,327 500,145
Accrued payroll and benefit expenses 426,623 411,918
----------- -------------
Total current liabilities 7,785,881 8,660,803
Long-term debt, net of current installments 2,881,659 3,046,000
Deferred compensation - 455,377
------------ -------------
Total liabilities 10,667,540 12,162,180
------------ -------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 13,675,387
shares as of June 30, 2009 and
13,670,807 shares as of June 30, 2008 7,916,699 7,865,913
Accumulated deficit (1,496,950) (1,600,274)
------------ -------------
Total stockholders' equity 6,419,749 6,265,639
------------ -------------
Total liabilities and stockholders' equity $ 17,087,289 18,427,819
============ =============
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Consolidated Statements of Operations
For the Years Ended June 30, 2009 and 2008
2009 2008
------------ -------------
Net sales $ 32,406,891 32,592,507
Cost of sales 19,996,436 20,450,570
------------ -------------
Gross profit 12,410,455 12,141,937
Selling, general, and administrative expenses 10,709,712 13,473,190
Research and development expenses 993,338 1,354,743
Goodwill impairment - 6,636,466
------------ -------------
Operating income (loss) 707,405 (9,322,462)
------------ -------------
Other income (expense):
Interest income 7,423 9,610
Interest expense (553,173) (620,473)
Other income, net 23,605 17,770
------------ -------------
Total other income (expense) (522,145) (593,093)
------------ -------------
Income (loss) before income taxes 185,260 (9,915,555)
Income tax (provision) benefit (81,936) 1,471,784
------------ -------------
Net income (loss) $ 103,324 (8,443,771)
============ =============
Basic net income (loss) per common share $ 0.01 (0.62)
Diluted net income (loss) per common share $ 0.01 (0.62)
Weighted-average basic and diluted common
shares outstanding:
Basic 13,665,423 13,609,880
Diluted 13,667,148 13,609,880
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2009 and 2008
Total
Number Common Accumulated stockholders'
Balances as of June 30, 2007 10,308,522 $ 4,227,147 6,843,497 11,070,644
Issuance of common stock upon exercise
of employee stock options 251,499 208,345 - 208,345
Income tax benefit disqualifying disposition
of employee stock options - 4,195 - 4,195
Redemption of common stock (258,569) (280,440) - (280,440)
Common stock issued for compensation 307,764 294,008 - 294,008
Stock option based compensation - 14,292 - 14,292
Issuance of common stock in business
acquisitions 3,061,591 3,398,366 - 3,398,366
Net loss - - (8,443,771) (8,443,771)
------------ ------------- ------------ -------------
Balances as of June 30, 2008 13,670,807 7,865,913 (1,600,274) 6,265,639
Redemption of common stock (13,600) (10,138) - (10,138)
Common stock issued for compensation 18,180 30,400 - 30,400
Stock option based compensation - 30,524 - 30,524
Net income - - 103,324 103,324
------------ ------------- ------------ -------------
Balances as of June 30, 2009 13,675,387 $ 7,916,699 (1,496,950) 6,419,749
============ ============= ============ =============
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2009 and 2008
2009 2008
------------ -------------
Cash flows from operating activities:
Net income (loss) $ 103,324 (8,443,771)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization of
property and equipment 363,627 375,005
Amortization of intangible asset 89,311 92,011
Gain on disposal of assets (2,183) -
Stock-based compensation expense 60,924 308,300
Goodwill impairment - 6,636,466
Deferred income tax asset, net 104,627 (1,473,718)
Provision for doubtful accounts 48,000 480,000
Provision for inventory obsolescence 72,000 288,000
Provision for warranty reserve 241,808 270,124
Provision (gain) for deferred compensation (455,377) 34,907
Change in operating assets and liabilities:
Receivables 327,885 (285,958)
Inventories 85,619 (64,445)
Prepaid expenses and other assets 286,775 (119,852)
Accounts payable and accrued expenses 72,639 (1,235,410)
Prepaid income taxes 97,269 (1,748)
Income tax payable (21,836) -
------------ -------------
Net cash provided by (used in)
operating activities 1,474,412 (3,140,089)
------------ -------------
Cash flows from investing activities:
Capital expenditures (186,130) (335,899)
Business acquisitions - (2,852,664)
Proceeds from sale of assets 2,600 -
------------ -------------
Net cash used in investing activities (183,530) (3,188,563)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 29,472 104,401
Principal payments on long-term debt (241,314) (284,598)
Net change in line of credit (1,215,669) 5,568,320
Proceeds from issuance of common stock - 208,345
Redemption of common stock (10,138) (280,440)
------------ -------------
Net cash provided by (used in)
financing activities (1,437,649) 5,316,028
------------ -------------
Net change in cash and cash equivalents (146,767) (1,012,624)
Cash and cash equivalents at beginning of year 288,481 1,301,105
------------ -------------
Cash and cash equivalents at end of year $ 141,714 288,481
============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 562,457 598,239
Cash paid for income taxes 36,828 16,461
Supplemental disclosure of non-cash investing and
financing activities:
Common stock issued for directors fees 8,000 8,000
Stock-based compensation - see note 1(o)
for details
Business acquisitions disclosure see note 14
for details
See accompanying notes to financial statements.
F-5
DYNATRONICS CORPORATION
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Description of Business
Dynatronics Corporation (the Company), a Utah corporation,
manufactures, markets, distributes and sells a broad line of
therapeutic, diagnostic, and rehabilitation equipment, medical
supplies and soft goods, treatment tables and aesthetic medical
devices to an expanding market of physical therapists,
podiatrists, orthopedists, chiropractors, plastic surgeons,
dermatologists, and other medical professionals.
(b) Principles of Consolidation
The consolidated financial statements include the accounts and
operations of Dynatronics Corporation and its wholly owned
subsidiary, Dynatronics Distribution Company, LLC. All significant
intercompany account balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with
maturities of three months or less at the date of purchase. Also
included within cash equivalents are deposits in-transit from
banks for payments related to third-party credit card and debit
card transactions.
(d) Inventories
Finished goods inventories are stated at the lower of standard
cost, which approximates actual cost (first-in, first-out) or
market. Raw materials are stated at the lower of cost (first-in,
first-out) or market.
(e) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest although a finance charge may be applied to
such receivables that are past the due date. The allowance for
doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts
receivable. The Company determines the allowance based on a
combination of statistical analysis, historical collections,
customers' current creditworthiness, age of the receivable balance
both individually and in the aggregate and general economic
conditions that may affect the customer's ability to pay. All
account balances are reviewed on an individual basis. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. Recoveries of receivables previously charged
off are recognized when payment is received. The Company does not
have any off-balance-sheet credit exposure related to its
customers.
(f) Property and Equipment
Property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of
related assets. The building and its component parts are being
depreciated over their estimated useful lives that range from 5 to
31.5 years. Estimated lives for all other depreciable assets range
from 3 to 7 years.
F-6
(g) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of assets of an acquired business. Goodwill and intangible
assets acquired in business combinations and determined to have an
indefinite useful life are not amortized, but instead tested for
impairment at least annually and whenever circumstances indicate
an impairment may exist per Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangibles.
As of June 30, 2008, the Company performed the initial phase of
its impairment evaluation by comparing the fair market value of
its single reporting entity to its carrying value. The primary
factor in arriving at a fair market value was the market
capitalization of the Company. As the carrying amount exceeded the
fair value, the Company performed the second phase of its
impairment evaluation to calculate impairment and as a result,
recorded a pre-tax goodwill impairment charge of approximately
$6,600,000. As a result of the impairment charge, goodwill has no
net value recorded in the accompanying financial statements.
(h) Long-Lived Assets
The Company evaluates its long-lived assets, such as property and
equipment in accordance with SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets. Long-lived assets are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
(i) Intangible Assets
Cost associated with the acquisition of trademarks, trade names,
license rights and non-compete agreements are capitalized and
amortized using the straight-line method over periods ranging from
3 months to 15 years.
(j) Revenue Recognition
The Company recognizes revenue 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.
(k) Research and Development Costs
Direct research and development costs are expensed as incurred.
(l) Product Warranty Reserve
Costs estimated to be incurred in connection with the Company's
product warranty programs are charged to expense as products are
sold based on historical warranty rates.
F-7
(m) Earnings per Common Share
Basic earnings (loss) per common share represents the amount of
earnings (loss) for the period available to each share of common
stock outstanding during the reporting period. Diluted earnings
(loss) per common share is the amount of earnings (loss) for the
period available to each share of common stock outstanding during
the reporting period and to each share that would have been
outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
The reconciliation between the basic and diluted weighted-average
number of common shares for the years ended June 30, 2009 and 2008
is summarized as follows:
2009 2008
----------- -----------
Basic weighted-average number
of common shares outstanding
during the year 13,665,423 13,609,880
Weighted-average number of
dilutive common stock
options outstanding during
the year 1,725 -
----------- -----------
Diluted weighted-average
number of common and common
equivalent shares outstanding
during the year 13,667,148 13,609,880
=========== ===========
Outstanding options not included in the computation of diluted net
income (loss) per share total 1,033,368 and 719,698 as of June 30,
2009 and 2008, respectively, because to do so would have been
antidilutive.
(n) Income Taxes
The Company recognizes an asset or liability for the deferred
income tax consequences of all temporary differences between the
tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements that will result in taxable
or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. Accruals for
uncertain tax positions are provided for in accordance with the
requirements of FIN No. 48, Accounting for Uncertainty in Income
Taxes - An interpretation of SFAS No. 109. Under FIN No. 48, the
Company may recognize the tax benefits from an uncertain tax
position only if it is more-likely-than-not that the tax position
will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. Fin No.
48 also provides guidance on derecognition of income tax assets
and liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures.
Judgment is required in assessing the future tax consequences of
events that have been recognized in the financial statements or
tax returns. Variations in the actual outcome of these future tax
consequences could materially impact the Company's financial
position, results of operations and cash flows.
F-8
(o) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance
with SFAS No. 123(R), Share-Based Payment. Under the fair value
recognition provision of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the applicable vesting
period of the stock award (generally five years) using the
straight-line method.
The Company recognized $60,924 and $312,495 in stock-based
compensation for the years ended June 30, 2009 and 2008,
respectively, as selling, general, and administrative expenses in
the consolidated statements of operations. The stock-based
compensation includes amounts for both restricted stock and stock
options under SFAS No. 123(R).
(p) Concentration of Risk
In the normal course of business, the Company provides unsecured
credit terms to its customers. Most of the Company's customers are
involved in the medical industry. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range
of management's expectations. The Company maintains its cash in
bank deposit accounts which at times may exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any
significant credit risks on cash or cash equivalents.
(q) Operating Segments
The Company operates in one line of business: the development,
marketing, and distribution of a broad line of medical products
for the physical therapy and aesthetics markets. As such, the
Company has only one reportable operating segment as defined by
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
The Company groups its sales into physical medicine products and
aesthetic products. Physical medicine products made up 91% and 89%
of net sales for the years ended June 30, 2009 and 2008,
respectively. Aesthetics products made up 3% and 4% of net sales
for the years ended June 30, 2009 and 2008, respectively.
Chargeable repairs, billable freight and other miscellaneous
revenue account for the remaining 6% and 7% of total revenues for
the years ended June 30, 2009 and 2008, respectively.
(r) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity
with accounting principles generally accepted in the United States
of America. Significant items subject to such estimates and
assumptions include the carrying amount of property and equipment;
valuation allowances for receivables, income taxes, and
inventories; accrued product warranty reserve; and estimated
recoverability of intangible assets. Actual results could differ
from those estimates.
(s) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense
for the years ended June 30, 2009 and 2008 was approximately
$288,100 and $286,700, respectively.
F-9
(t) Subsequent Events
The Company evaluated events occurring between the end of its most
recent fiscal year and September 25, 2009, the date the financials
statements were issued.
(2) Inventories
Inventories consist of the following as of June 30:
2009 2008
------------ -------------
Raw materials $ 2,523,375 2,984,189
Finished goods 4,014,664 3,636,597
Inventory reserve (338,788) (337,718)
------------ -------------
$ 6,199,251 6,283,068
============ =============
(3) Property and Equipment
Property and equipment consist of the following as of June 30:
2009 2008
------------ -------------
Land $ 354,743 354,743
Buildings 3,691,364 3,682,504
Machinery and equipment 1,731,556 1,661,962
Office equipment 1,327,379 1,283,821
Vehicles 247,892 188,148
------------ -------------
7,352,934 7,171,178
Less accumulated depreciation
and amortization 4,003,695 3,644,025
------------ -------------
$ 3,349,239 3,527,153
============ =============
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve consists
of the following for the fiscal year ended as of June 30:
2009 2008
------------ -------------
Beginning product warranty
reserve balance $ 209,168 208,000
Warranty repairs (241,808) (280,746)
Warranties issued 251,028 232,077
Changes in estimated warranty costs (27,341) 49,837
------------ -------------
Ending product warranty
reserve balance $ 191,047 209,168
============ =============
(5) Line of Credit
The Company has a revolving line of credit facility with a commercial
bank in the amount of $8,000,000. Borrowing limitations are based on 45%
of eligible inventory and up to 80% of eligible accounts receivable. As
of June 30, 2009 and 2008, the outstanding balance was approximately
$4,600,000 and $5,800,000, respectively. The line of credit is
collateralized by inventory and accounts receivable and bears interest at
a rate based on the bank's prime rate. The interest rate was 5.1% and 6%
as of June 30, 2009 and 2008, respectively. This line is subject to
annual renewal and matures on October 31, 2009. Accrued interest is
payable monthly.
F-10
The Company's revolving line of credit agreement includes covenants
requiring the Company to maintain certain financial ratios. As of June
30, 2009, the Company was in compliance with its loan covenants.
(6) Long-Term Debt
Long-term debt consists of the following as of June 30:
2009 2008
------------ -------------
9.11% promissory note secured by
building, maturing December 2017,
payable in monthly installments
beginning at $11,388 $ 1,353,048 1,453,372
6.44% promissory note secured by
trust deed on real property,
maturing January 2021, payable
in monthly installments of $13,278 1,298,338 1,371,479
6.21% promissory note secured by a
trust deed on real property,
maturing November 2013, payable in
decreasing installments currently
at $7,373 321,257 383,911
12.17% promissory note secured by
fixed assets, payable in monthly
installments of $2,338 through
May 2014 98,633 79,692
5% promissory note unsecured,
payable in monthly installments of
$3,660 through February 2011 73,802 -
7.95% promissory note secured by
fixed assets, payable in monthly
installments of $724 through July
2013 29,472 -
10.64% promissory note secured by
fixed assets, payable in monthly
installments of $448 through December
2012 15,793 -
16.35% promissory note secured by
fixed assets, payable in monthly
installments of $409 through
October 2011 9,458 12,534
9.69% promissory note secured by
fixed assets, payable in monthly
installments of $318 through
October 2011 5,571 -
5.84% promissory note secured by a
trust deed on real property, payable
in monthly installments of $8,669
through November 2008 - 42,425
------------ -------------
Total long-term debt 3,205,372 3,343,413
Less current installments 323,713 297,413
------------ -------------
Long-term debt, net of current
installments $ 2,881,659 3,046,000
============ =============
The aggregate maturities of long-term debt for each of the years
subsequent to 2009 are as follows: 2010, $323,713; 2011, $346,672; 2012,
$331,882; 2013, $353,056; 2014, $311,582 and thereafter $1,538,467.
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Lease expense for the years ended June 30, 2009 and 2008, was
$22,970 and $30,489, respectively. Future minimum rental payments
required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year as of 2009 are as follows:
2010, $135,906; 2011, $15,231; 2012, $7,809 and 2013, $6,507.
F-11
The Company rents office, warehouse, storage space and office equipment
under agreements which run one year or less in duration. The rent expense
for the years ended June 30, 2009 and 2008 was $263,917 and $259,816,
respectively.
The office and warehouse spaces in Girard, Ohio; Detroit, Michigan;
Pleasanton, California; and Hopkins, Minnesota are leased on an annual
basis from employees/shareholders; or entities controlled by
shareholders, who were previously principals of the dealers acquired in
June and July, 2007. The leases are related-party transactions with four
employee/shareholders, however the lease agreements have been conducted
on an arms-length basis and the terms are equal to or more favorable than
would be available to other third parties.
(8) Goodwill and Other Intangible Assets
Goodwill. The purchase price of acquired companies in excess of the fair
value of the net assets (including intangibles) at the acquisition date
is recorded as goodwill.
As described in note 1(g), the Company determined that 100 percent of its
goodwill should be impaired during the period ended June 30, 2008.
Identifiable Intangibles. Identifiable intangibles assets and their
useful lives consist of the following as of June 30:
2009 2008
------------ -------------
Trade name - 15 years $ 339,400 339,400
Domain name - 15 years 5,400 5,400
Non-compete covenant - 4 years 149,400 149,400
Customer relationships - 7 years 120,000 120,000
Trademark licensing agreement - 20 years 45,000 45,000
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 38,100
License agreement - 10 years 73,240 73,240
------------ -------------
Total identifiable intangibles 773,240 773,240
Less accumulated amortization 231,370 142,059
------------ -------------
Net carrying amount $ 541,870 631,181
============ =============
F-12
Amortization expense associated with the license agreement was $89,311
and $92,011 for 2009 and 2008, respectively. Estimated amortization
expense for the identifiable intangibles is expected to be as follows:
2010, $89,311; 2011, $83,207; 2012, $44,637; 2013, $44,637; 2014,
$44,637 and thereafter $235,440.
(9) Income Taxes
Income tax provision (benefit) for the years ended June 30 consists of:
Current Deferred Total
------------- -------------- ---------------
2009:
U.S. federal $ (33,167) 89,508 56,341
State and local 10,476 15,119 25,595
------------- -------------- ---------------
$ (22,691) 104,627 81,936
============= ============== ===============
2008:
U.S. federal $ (9,082) (1,201,989) (1,211,071)
State and local 11,016 (271,729) (260,713)
------------- -------------- ---------------
$ 1,934 (1,473,718) (1,471,784)
============= ============== ===============
Actual income tax provision (benefit) differs from the "expected" tax
provision (benefit) computed by applying the U.S. federal corporate
income tax rate of 34% to income before income taxes, as follows:
2009 2008
------------ -------------
Expected tax provision (benefit) $ 62,988 (3,371,289)
State taxes, net of federal tax benefit 17,427 (172,071)
Officers' life insurance 34,678 (3,916)
Non-deductible portion of goodwill impairment - 2,035,542
Other, net (33,157) 39,950
------------ -------------
$ 81,936 (1,471,784)
============ =============
Deferred income tax assets and liabilities related to the tax effects of
temporary differences are as follow as of June 30:
2009 2008
------------ -------------
Net deferred tax asset - current:
Inventory capitalization for income
tax purposes $ 84,117 84,285
Inventory reserve 132,127 139,820
Warranty reserve 74,508 81,576
Accrued product liability 20,572 11,307
Allowance for doubtful accounts 155,459 160,312
------------ -------------
Total deferred tax asset - current $ 466,783 477,300
============ =============
Net deferred tax asset (liability) -
non-current:
Deferred compensation $ - 177,597
Property and equipment, principally due to
differences in depreciation (222,550) (246,853)
Research and development credit carryover 89,538 120,269
Other intangibles (207,998) (239,972)
Other 64,499 292
Operating loss carry forwards 1,110,452 1,116,718
------------ -------------
Total deferred tax asset (liability) -
non-current $ 833,941 928,051
============ =============
F-13
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred income tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred income tax
assets are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences.
(10) Major Customers and Sales by Geographic Location
During the fiscal years ended June 30, 2009 and 2008, sales to any
single customer did not exceed 10% of total net sales.
Approximately 98% of the Company's products were sold in the United
States and Canada, and approximately 2% were sold in foreign countries
for both years ended June 30, 2009 and 2008.
(11) Common Stock and Stock Equivalents
On July 15, 2003, the Company approved an open-market share repurchase
program for up to $500,000 of the Company's common stock. On November 27,
2007, the board approved an additional $250,000 for the open-market share
repurchase program after the original $500,000 was exhausted. During the
year ended June 30, 2009, the Company acquired and retired 13,600 shares
of common stock for $10,138. During the year ended June 30, 2008, the
Company acquired and retired 258,569 shares of common stock for $280,440.
During the years ended June 30, 2009 and 2008, the Company granted 18,180
and 7,476 shares of restricted common stock to directors in connection
with compensation arrangements, respectively.
The Company maintains a 2005 equity incentive plan for the benefit of
employees. Incentive and nonqualified stock options, restricted common
stock, stock appreciation rights, and other share-based awards may be
granted under the plan. Awards granted under the plan may be
performance-based. Effective November 27, 2007, the plan was amended, as
approved by the shareholders, to increase the number of shares available
by 1,000,000 shares. As of June 30, 2009, 1,012,828 shares of common
stock were authorized and reserved for issuance, but were not granted
under the terms of the 2005 equity incentive plan as amended.
The Company granted options to acquire common stock under its 2005 equity
incentive plan for fiscal 2009 and 2008. The options are granted at not
less than 100% of the market price of the stock at the date of grant.
Option terms are determined by the board of directors, and exercise dates
may range from 6 months to 10 years from the date of grant.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
F-14
2009 2008
------------ -------------
Expected dividend yield 0% 0%
Expected stock price volatility 56-60% 55-57%
Risk-free interest rate 2.59 - 4.14% 3.51 - 4.03%
Expected life of options 10 years 10 years
The weighted average fair value of options granted during 2009 and 2008
was $.39 and $.74, respectively.
The following table summarizes the Company's stock option activity during
the years ended June 30, 2009 and 2008:
2009 2008
--------------------------------- ---------------------------------
Weighted
Weighted average Weighted
Number average remaining Number average
of exercise contractual of exercise
shares price term shares price
-------------- -------------- -------------- --------------
Options outstanding at
beginning of year 1,101,603 $ 1.41 5.86 years 1,048,192 $ 1.40
Options granted 79,455 .50 648,370 1.07
Options exercised - -0- (251,499) .83
Options canceled or expired (220,954) 1.16 (343,460) 1.14
-------------- --------------
Options outstanding at end
of year 960,104 1.39 5.14 years 1,101,603 1.41
============== ==============
Options exercisable at end
of year 581,193 1.65 679,523 1.62
============== ==============
Range of exercise prices at
end of year $ 0.35 - 3.00 $ 0.73 - 3.00
On August 16, 2000, the Company issued 80,000 options that were outside
of its stock option plan. As of June 30, 2009 and 2008, there are 20,000
and 40,000 of those options outstanding respectively. The exercise price
of the options ranges from $3.00 to $4.00. The remaining options expire
during fiscal 2010.
The aggregate intrinsic value on the date of exercise of options
exercised during the years ended June 30, 2009 and 2008 was $0 and
$16,757, respectively. The aggregate intrinsic value of the outstanding
options as of June 30, 2009 and 2008 was $6,071 and $0, respectively.
(12) Employee Benefit Plan
The Company has a deferred savings plan which qualifies under Internal
Revenue Code Section 401(k). The plan covers all employees of the Company
who have at least six months of service and who are age 20 or older. For
2009 and 2008, the Company made matching contributions of 25% of the
first $2,000 of each employee's contribution. The Company's contributions
to the plan for 2009 and 2008 were $29,456 and $50,212, respectively.
Company matching contributions for future years are at the discretion of
the board of directors.
F-15
(13) Salary Continuation Agreements
Effective March 5, 2009, Kelvyn H. Cullimore, Jr. and Larry Beardall
(officers of the Company) legally canceled their Company-funded
retirement programs which were funded through life insurance polices
owned by the Company. As a result, $367,917 in cash value from the life
insurance policies was paid to the Company. As a result of these
cancellations, the contractual liability to pay the retirement benefits
was removed, and selling, general and administrative expense during the
fiscal ended June 30, 2009, was reduced by $472,397.
(14) Acquisition and Non-Cash Disclosure
On July 2, 2007, the Company completed the acquisitions of 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 $5,700,000 comprised of
approximately $2,400,000 in cash and 3,061,591 shares of common stock.
On June 30, 2007, the Company completed the acquisition of its largest
independent distributor, Rajala Therapy Sales Associates of Pleasanton,
California (Rajala). The Rajala purchase price was approximately
$2,695,000, paid through $1,000,000 in cash and the issuance of 1,500,000
shares of the Company's common stock.
The acquisitions of these dealers were 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 market values
at the purchase date. The following table reflects the estimated fair
values of the assets acquired and the liabilities assumed as of the
acquisition dates:
July 2, 2007 June 30, 2007
Acquisitions Acquisition
------------ -------------
Cash $ 651,828 67,839
Trade accounts receivable 1,160,976 900,322
Inventories 1,192,639 573,356
Prepaid expenses 4,782 42,629
Property and equipment 112,764 19,766
Intangible assets 366,400 333,600
Cash surrender value of life insurance 207,563 -
Goodwill 3,512,779 1,876,734
------------ -------------
Total assets acquired 7,209,731 3,814,246
Line of credit - (250,000)
Accounts payable and accrued expenses (1,496,800) (869,244)
------------ -------------
Net assets acquired $ 5,712,931 2,695,002
============ =============
F-16
The July 2, 2007, acquisitions resulted in a $175,188 deferred income tax
liability and a corresponding increase to goodwill of $175,188 for the
fiscal year ended June 30, 2008. The June 30, 2007, acquisition resulted
in a $7,757 current income tax benefit and a $100,173 deferred income tax
liability, the net amount of which was recognized as a $92,416 increase
to goodwill in the fiscal year ended June 30, 2007.
Unaudited pro forma results of operations for the year ended June 30,
2008, as though the six dealers had been acquired as of July 1, 2007, are
as follows:
Year Ended
June 30,
2008
-------------
Net sales $ 32,592,507
Net loss (8,443,771)
Basic and diluted net loss per common share (.62)
(15) Recent Accounting Pronouncements
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS No.
165"). SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No.
165 is effective for interim or annual periods ending after June 15,
2009. The Company adopted SFAS No. 165 in the fourth quarter of fiscal
2009. See note 1(t) to the consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful
Life of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible
asset under SFAS Statement No. 142, Goodwill and Other Intangible Assets.
FSP FAS 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives. FSP FAS 142-3 is
effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years.
The Company is currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on its consolidated results of operation, cash flows
or financial condition.
In December 2007, SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements - an amendment of ARB No. 51, was issued which
changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as non-controlling interests and will
be reported as a component of equity separate from the parent's equity,
and purchases or sales of equity interests that do not result in a change
in control will be accounted for as equity transactions. In addition, net
income attributable to the non-controlling interest will be included in
net income and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value, with any gain or loss
recognized in net income. SFAS No. 160 is effective for the Company
beginning July 1, 2009 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply
retrospectively. The Company believes the adoption of SFAS No. 160 will
not have a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
SFAS No. 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 No. 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 adopted SFAS No. 157 on July 1, 2008 for its financial assets and
liabilities and on July 1, 2009 for non-financial assets with no material
impact on its consolidated financial statements.
F-17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A(T). Controls and Procedures
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include without limitation, controls and
procedures designed to ensure that information required to be disclosed in
company reports filed or submitted under the Exchange Act is accumulated and
communicated to management, including our chief executive officer and treasurer,
as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our
chief executive officer and chief financial officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2009. Based on their evaluation, they concluded that
our disclosure controls and procedures were effective.
Management is responsible for establishing and maintaining adequate
internal control over our financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act). Our internal control over financial reporting is
a process designed by, or under the supervision of, our chief executive officer
and chief financial officer and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of our financial reporting and the preparation of our financial statements for
external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with the authorization of our board of directors and
management; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Under the supervision and with the participation of our management,
including our chief executive officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this evaluation under the criteria established in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of June 30, 2009.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management's report in this
annual report.
During the most recently completed fiscal quarter, there has been no
change in our internal control over financial reporting that has materially
affected or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
22
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act.
Item 11. Executive Compensation
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act.
Item 14. Principal Accountants' Fees and Services
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act.
PART IV
Item 15. Exhibits
(a) Exhibits and documents required by Item 601 of Regulation S-B:
1. Financial Statements (included in Part II, Item 8):
Report of Independent Registered Public Accounting Firm.......F-1
Consolidated Balance Sheets as of June 30, 2009 and 2008......F-2
Consolidated Statements of Operations for the years ended
June 30, 2009 and 2008........................................F-3
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 2009 and 2008.............F-4
Consolidated Statements of Cash Flows for
the years ended June 30, 2009 and 2008........................F-5
Notes to Consolidated Financial Statements....................F-6
23
Exhibits:
--------
Reg. S-B
Exhibit No. Description
----------- -----------
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
Securities and Exchange Commission 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)
3.4 Company ByLaws dated May 19, 1983 (previously filed)
4.1 Form of certificate representing Dynatronics Laser
Corporation common shares, no par value. Incorporated by
reference to a Registration Statement on Form S-1 (No.
2-85045) filed with the Securities and Exchange Commission
and effective November 2, 1984.
10.2 Employment contract with Kelvyn H. Cullimore, Jr. (filed as
an Exhibit to a Current Report on Form 8-K on June 16,
2009)
10.2 Employment contract with Larry K. Beardall (filed as an
Exhibit to a Current Report on Form 8-K on June 16, 2009)
10.3 Loan Agreement with Zion Bank (filed as Exhibit to June 30,
2007 Annual Report on Form 10-K)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn
Cullimore, Sr. (previously filed)
10.7 Dynatronics Corporation 2005 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive
Proxy Statement on Schedule 14A filed on October 27, 2005)
10.8 Form of Option Agreement for the 2005 Equity Incentive
Award Plan for incentive stock options (filed as Exhibit to
June 30, 2007 Annual Report on Form 10-K)
10.9 Form of Option Agreement for the 2005 Equity Incentive
Award Plan for non-qualified options (filed as Exhibit to
June 30, 2007 Annual Report on Form 10-K)
23.1 Consent of Tanner LC (filed herewith)
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
accounting officer and principal financial officer (filed
herewith)
32.1 Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. SECTION 1350) (filed herewith)
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNATRONICS CORPORATION
By /s/ Kelvyn H. Cullimore, Jr.
-------------------------------
Kelvyn H. Cullimore, Jr.
Chief Executive Officer and President
Date: September 25, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Kelvyn H. Cullimore, Jr. Chairman, President, CEO September 25, 2009
---------------------------- (Principal Executive Officer)
Kelvyn H. Cullimore, Jr.
/s/ Terry M. Atkinson Chief Financial Officer September 25, 2009
---------------------------- (Principal Accounting Officer
Terry M. Atkinson, CPA and Principal Financial Officer)
/s/ Larry K. Beardall Director, Executive September 25, 2009
---------------------------- Vice President
Larry K. Beardall
/s/ Howard L. Edwards Director September 25, 2009
----------------------------
Howard L. Edwards
/s/ Val J. Christensen Director September 25, 2009
----------------------------
Val J. Christensen
/s/ Joseph H. Barton Director September 25, 2009
----------------------------
Joseph H. Barton
25
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