Dynatronics Corporation 2012 Annual Report
Letter to Shareholders
Marketing Section
Management’s Discussion and Analysis
Report of Independent Registered Public Accounting Firm
Financial Statements
Notes to Financial Statements
Corporate Information
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Letter To Shareholders
For the past two years we have been engaged in the most intensive
research and development projects in the history of the company.
Investing in research and development has been a key to our success
over the years. It has earned Dynatronics a reputation for being
innovative, creative and progressive in the design and development of
new products for the markets we serve. Th is level of innovation has
been critical in maintaining a competitive edge.
In addition to the SolarisPlus, we have introduced the Quad7 thermal
therapy device. Th is exciting new product provides multiple
combinations of thermal and compression therapy and introduces
hand-held thermal probes capable of coupling with the SolarisPlus
devices to deliver thermal therapy and electrotherapy in combination
– another groundbreaking product and design only available from
Dynatronics.
However, engaging in intensive research and development comes at a
cost. For the last two fi scal years we have averaged approximately
$1,400,000 in annual research and development costs. Th is compares
to approximately $1,085,000 average for the three prior fi scal years –
an increase of approximately 30 percent. Th is added investment has
diminished profi ts by over $300,000 for each of fi scal years 2012 and
2011. Although the investment reduced profi tability for the last two
years, it has placed us in a position to introduce more new products in
fi scal year 2013 than in any other year in our history.
In fact, we anticipate introducing a dozen new products during fi scal
year 2013. Th ese new products will eff ectively renovate and update our
core product line and introduce new technologies in combinations
never before seen in our marketplace. In August 2012, we introduced
the new SolarisPlus line of combination devices. Th is is our proprietary,
top-of-the-line family of therapy devices. It includes seven wave forms
of electrotherapy, three frequencies of ultrasound therapy, three
wavelengths of light therapy in a probe or pad confi guration at powers
signifi cantly higher than predecessor products, plus the ability to do
combination treatments of electrotherapy and ultrasound or
electrotherapy and thermal therapy. No devices on the market are as
powerful or capable of so many diverse functions. What’s more, all
modalities can run simultaneously. Th at level of power and versatility is
unequalled in our competitors’ units.
Other new products are contemplated for introduction in the latter half
of fi scal year 2013. We expect that these will further establish
Dynatronics as a leader in the design and development of inventive new
products. We believe that the addition of these products will drive sales
in the coming years and prove the investment in research and
development of the last two years to have been very worthwhile, despite
the impact on profi tability.
Fiscal year 2012 was only the fourth year that we have not shown a
profi t since we began commercializing products in 1987. Although our
net loss was only $23,535, it was nevertheless a loss. Th e investment in
research and development was only part of the reason for the net loss for
the fi scal year. Diminished sales also contributed. Th rough December
2011, sales were running slightly ahead of the prior fi scal year. However,
from January through June 2012, the trend reversed and sales were
down approximately 10 percent over the prior year.
Th ere are many reasons for the drop in sales. We had one large customer
that became insolvent and closed its doors. We also had a product line
similar to the Quad7 product we previously distributed that was no
longer available to us. In fact, it was the loss of that line that motivated
the development and introduction of our Quad7 product. Th ere has
also been a perceptible fatigue in our market caused by ongoing
economic strain. Th e impending eff ects of health care reform have
caused many to proceed with caution. Normal cycles for replacing
capital equipment have been lengthened as practitioners have made do
with existing devices and equipment. Th e opening of new clinics and
expansion of existing clinics has slowed to a proverbial crawl. All of
these factors have combined to produce an adverse impact on our sales
and profi tability.
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Our response to these conditions has been two-pronged. Th e fi rst
prong has been to reduce expenses. Following an unexpectedly large
loss in the quarter ended March 31, 2012, we took steps to reduce
expenses, including staffi ng and R&D costs. Th e result is that we have
cut expenses by over $750,000 annually. Th is reduction in expenses
off sets the loss of margin associated with lower sales.
Th e second prong of our response has been to stimulate sales through
the introduction of new products. Th e best way to encourage purchase
of new products is to off er innovative and unique products that exceed
practitioners’ expectations. We believe SolarisPlus, Quad7 and the
other new products scheduled for introduction in this next year will do
just that. Th e introduction of these new products is also timely as it
places us in an excellent position to take advantage of recovering
economic markets and any increased demand that may be associated
with healthcare reform.
Th e continuing impact of the Aff ordable Care Act looms large for
small companies like Dynatronics. While there is a possibility of
increased demand resulting from the addition of millions of patients to
the rolls of the insured, such potential is blunted by the reality of the
medical device tax imposed on manufacturers such as Dynatronics to
help pay for adding those insured. We estimate that had the device tax
been eff ective this last year we would have been required to pay
approximately $400,000 in excise taxes despite reporting a net loss. An
excise tax is based on sales, not profi tability. Th e medical device tax is
scheduled to become eff ective in January 2013. We plan to raise prices
to cover this added fi nancial burden, but there is no guarantee we will
be able to cover the entire tax, as there is little tolerance for price
increases in the market. As a board member of the Medical Device
Manufacturers Association, I have been actively lobbying Congress for
the repeal of this onerous tax. I am pleased that a bill introduced by
our own Senator from Utah, Orrin Hatch, proposes a repeal of this
tax. Th e repeal has already been passed in the House of
Representatives. Th e November elections will have a signifi cant
bearing on whether Senator Hatch will be successful in pushing the
repeal through the Senate.
With the challenges to profi tability of the past year, we have been
notifi ed by NASDAQ that our failure to maintain the $1 minimum bid
price on our stock must be cured by November 5, 2012 or our stock will
be de-listed. It is the stated intent of the board of directors that
appropriate steps be taken to maintain the visibility of our common
stock on NASDAQ with the goal of preserving shareholder liquidity and
confi dence. Th e specifi cs of that plan will be disclosed in our proxy
statement fi led in connection with our upcoming annual meeting of
shareholders.
Th ese are challenging economic times. It has required constant
restructuring and re-evaluation of strategies to be responsive to the
challenges. Our eff orts to grow through securing contracts with group
purchasing organizations have not been eff ective. Despite off ering
proposals confi rmed by the GPOs as being competitive, most have
chosen to award sole source contracts to a competitor. Th ere seems to be
little motivation to engage a new supplier. While these results are
discouraging, we are not prepared to surrender the eff ort. We will
continue to vie for portions of that business we believe are accessible.
In the meantime we are positioning ourselves as the vendor of choice for
the private practice segment of the market. We continue to recruit new
sales persons and dealers to broaden our reach. We will introduce a new,
comprehensive 2013-14 catalog that will off er products from other
manufacturers not off ered in the past. As one of only two companies in
our market with a direct sales force coast to coast, we fi ll an important
niche that is enhanced by the fact we are a manufacturer of many of the
products we sell. Being a manufacturer not only allows us to be more
price competitive than those that are just distributors, but also permits us
to control the innovative nature and quality of the products. No other
company in our industry has the breadth of manufacturing that we off er,
married with a signifi cant national sales force. Th ese are the elements
that should help keep us competitive in the face of economic challenge
and government regulation.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Th e following discussion should be read in conjunction with our consolidated
fi nancial statements and notes to those consolidated fi nancial statements,
included elsewhere in this Annual Report on Form 10-K. In addition to
historical information, this discussion contains forward-looking statements that
involve risks, uncertainties and assumptions that could cause actual results to
diff er materially from our expectations.
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Overview
Our principal business is the manufacture, distribution and marketing
of physical medicine products and aesthetic products, many of which we
design and manufacture. We off er 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. Our fi scal year ends on June 30. Reference to fi scal year 2012
refers to the year ended June 30, 2012.
Results of Operations
Fiscal Year 2012 Compared to Fiscal Year 2011
Net Sales
Net sales in fi scal year 2012 were $31,664,181 compared to $32,692,859 in
fi scal year 2011. Th e $1,028,678 decrease in sales is primarily attributable
to the following factors: 1) the apparent insolvency of and interruption of
purchases by a large, independent distributor that historically purchased
between $150,000 to $250,000 per quarter from the Company; and 2)
lower sales of capital equipment likely due to continuing weakness of the
U.S. economy leading to a postponement of purchases of durable medical
equipment. We also believe the uncertainty surrounding healthcare
reform in the United States has had the eff ect of limiting expansion and
improvements in our market sector. We expect the introduction of our
new SolarisPlus products and Quad 7 devices to stimulate sales in fi scal
year 2013.
Sales of manufactured physical medicine products represented approximately
42% and 43% of total physical medicine product sales in fi scal years 2012
and 2011, respectively. Distribution of products manufactured by other
suppliers accounted for the balance of our physical medicine product
sales in those years. Sales of manufactured aesthetic products in fi scal
years 2012 and 2011, represented approximately 73% and 77% of total
aesthetic product sales, respectively, with distributed products making up
the balance.
Th e majority of our sales revenues come from the sale of physical medicine
products, both manufactured and distributed. In fi scal years 2012 and
2011, sales of physical medicine products accounted for 91% and 92%
of total sales, respectively. Chargeable repairs, billable freight revenue,
aesthetic product sales and other miscellaneous revenue accounted for
approximately 9% and 8% of total revenues in 2012 and 2011.
Gross Profi t
Gross profi t totaled $11,943,233, or 37.7% of net sales, in fi scal year 2012,
compared to $12,484,824, or 38.2% of net sales, in fi scal year 2011. Th e
decrease in gross profi t in absolute dollars and as a percentage of net sales
during the year mostly refl ects the decrease in total sales attributed to the
factors discussed above. Th e most signifi cant reduction in sales was our
higher margin capital equipment which had the eff ect of lowering the gross
margin percentage as lower margin supplies and distributed items became
a larger percentage of overall sales in fi scal year 2012. Looking ahead, we
expect to generate improved sales of higher margin capital equipment with
the introduction of our new SolarisPlus products (released in August 2012)
and the Quad 7. In addition, as the eff ects of healthcare reform become
clearer following the presidential and general elections in the United States
in November 2012, we expect confi dence to increase and demand for our
products to begin to strengthen.
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Selling, General and Administrative Expenses
Interest Expense
SG&A expenses were $10,506,460, or 33.2% of net sales, in fi scal year
2012, compared to $10,431,463, or 31.9% of net sales, in fi scal year 2011.
Th e $74,997 increase in SG&A expenses in fi scal year 2012 as compared to
2011 is a result of the following:
• $24,231 of higher selling expenses;
• $31,735 of higher production labor and depreciation expenses;
• $19,031 of higher general expenses including higher regulatory
compliance costs and legal fees
During the fourth quarter of fi scal year 2012 and the fi rst quarter of fi scal
year 2013, the Company identifi ed over $750,000 of annual cost reductions
which are being implemented to 1) reduce labor costs through a reduction
in force; 2) reduce overhead costs; and 3) improve operating effi ciencies.
Research and Development
Over the last two years, we have undertaken the most extensive research
and development eff orts in our history. More new products will be
introduced in fi scal 2013 than any year since the Company began. As
a result, research and development (“R&D”) expense increased 2%, or
$26,694, to $1,410,406 in fi scal year 2012, from $1,383,712 in 2011.
R&D expense increased as a percentage of net sales in fi scal year 2012
to 4.5% from 4.2% of net sales in fi scal year 2011. In March 2012, we
introduced the Dynatron Quad7, the fi rst of several new planned product
introductions. Th e Company has been heavily involved with developing
fi ve new SolarisPlus units, four of which were introduced to the market in
August 2012. Th ese development eff orts are directly responsible for the
signifi cant R&D expenses for the past two years. By contrast, the average
annual R&D expenditures in the three years ended June 30, 2010 were
$1,087,671. R&D expenses are expected to normalize closer to historic
levels in fi scal year 2013, as a result of the completion of development of
the new SolarisPlus products. R&D costs are expensed as incurred.
Interest expense decreased by $32,411, to $261,993 in fi scal year 2012
compared to $294,404 in fi scal year 2011 due to lower negotiated borrowing
rates on our bank line of credit compared to fi scal year 2011, and the fi rst
mortgage on our Salt Lake City facility entering the fi nal two years of its
term.
Income/Loss Before Income Tax Provision
Pre-tax loss in fi scal year 2012 was $190,241, compared to pre-tax income
of $418,864 in fi scal year 2011. Th e reduction in income before income
tax provision for 2012 resulted from lower sales and gross profi ts generated
during the year as explained above, along with higher selling, labor,
depreciation and R&D expenses. Th e reduction of gross margin accounted
for $542,000 of the $609,000 diff erence in pre-tax results, or about 90%.
Th e balance of the diff erence is accounted for by higher SG&A expenses as
well as higher R&D expenses. Th e increase in selling expense was associated
with our pursuit of GPO and national account business, while increased
depreciation expense was related to increased investments in information
systems. We off set some of these higher expenses with lower interest expense
for the year ended June 30, 2012. As noted above, steps have been taken
to reduce expenses at an annualized amount of approximately $750,000,
the eff ect of which only began to be realized in the last two months of the
fi scal year.
Income Tax Provision/Benefi t
Income tax benefi t was $166,706 in fi scal year 2012, compared to income
tax provision of $147,976 in fi scal year 2011. Due to tax benefi ts associated
with R&D tax credits and other credits, the income tax benefi t reduced the
pre-tax loss in fi scal year 2012 by 87.6% compared to an eff ective tax rate
of 35.3% in 2011. Th e diff erence in the eff ective tax rates is attributable
to higher R&D tax credits in fi scal year 2012, as well as certain permanent
book to tax diff erences.
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Net Income/Loss
Inventories
Net loss was $23,535 ($.00 per share) in fi scal year 2012, compared to net
income of $270,888 ($.02 per share) in fi scal year 2011. Th e reduction in
net income in 2012 was caused primarily by decreased sales and margins
generated during the year compared to fi scal year 2011. However, the net
loss was mitigated by the recognition of signifi cant tax benefi ts associated
with R&D tax credit as explained above. We expect that R&D expense will
decrease in fi scal year 2013 as a result of the completion of development
of the new SolarisPlus products in August 2012. We expect improved
profi tability in fi scal year 2013, due to a reduction in R&D expense and
with other reductions implemented or anticipated to be made as well as
sales of new products that we recently introduced.
Liquidity and Capital Resources
We have fi nanced operations through available cash reserves and borrowings
under a line of credit with a bank. Working capital was $3,565,858 as of
June 30, 2012, inclusive of the current portion of long-term obligations
and credit facilities, compared to working capital of $4,552,731 as of June
30, 2011. During fi scal year 2012, we generated $35,812 in cash from
operating activities, used $401,408 to repurchase and retire common stock,
paid $328,707 for capital expenditures primarily related to improving our
e-commerce and IT infrastructure, and paid $371,339 in principal on long-
term debt. In addition, we purchased $450,782 of inventory primarily for
the introduction of the new Dynatron Quad7 product. During fi scal year
2012, the outstanding balance on our line of credit increased by $913,660.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
decreased $5,042, or 0.1%, to $3,667,086 as of June 30, 2012, compared
to $3,672,128 as of June 30, 2011. 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.
Inventories, net of reserves, increased $450,782, or 8.0%, to $6,098,597
as of June 30, 2012, compared to $5,647,815 as of June 30, 2011. Th e
amount of inventory we carry fl uctuates each period based on the timing
of large inventory purchases from overseas suppliers. Inventory levels
increased in fi scal year 2012 in conjunction with the introduction of the
Dynatron Quad7 unit.
Accounts Payable
Accounts payable increased $286,038, to $2,413,201 as of June 30, 2012,
from $2,127,163 as of June 30, 2011. Th e 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 off ered by our vendors.
Cash and Cash Equivalents
Our cash position as of June 30, 2012 was $278,263, compared to cash of
$384,904 as of June 30, 2011. We expect that cash fl ows from operating
activities, together with amounts available through an existing line-of-credit
facility, will be suffi cient 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
fi nancing may be required. However, no assurance can be given that
additional fi nancing, if required, would be available on terms favorable to
us, or at all.
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Line of Credit
Critical Accounting Policies
During fi scal year 2012, the outstanding balance on our line of credit
increased by $913,660, leaving a balance outstanding of $3,497,597 as of
June 30, 2012, compared to $2,583,937 as of June 30, 2011. Th e increase
in the line of credit was primarily the result of $401,408 used to repurchase
and retire common stock, $328,707 for capital expenditures primarily
related to improving our e-commerce and IT infrastructure and $371,339
in principal payments on long-term debt. We also purchased an additional
$450,782 of inventory primarily related to the introduction of the new
Dynatron Quad7 product.
Management’s discussion and analysis of fi nancial condition and results
of operations is based upon our consolidated fi nancial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. Th e preparation of these fi nancial statements requires estimates
and judgments that aff ect 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 diff er
from these estimates under diff erent assumptions or conditions.
Interest on the line of credit is based on the 90-day LIBOR rate (0.46%
as of June 30, 2012) plus 3%. Th e line of credit is collateralized by
accounts receivable and inventories. Borrowing limitations are based on
approximately 45% of eligible inventory and up to 80% of eligible accounts
receivable, up to a maximum credit facility of $7,000,000. Interest
payments on the line are due monthly. As of June 30, 2012, the borrowing
base was approximately $5,115,000, resulting in approximately $1,617,000
available on the line. Th e line of credit is renewable on December 15, 2012
and includes covenants requiring us to maintain certain fi nancial ratios. As
of June 30, 2012, we were in compliance with the loan covenants.
Th e current ratio was 1.5 to 1 as of June 30, 2012 compared to 1.8 to 1
as of June 30, 2011. Current assets represented 70% of total assets as of
June 30, 2012 and June 30, 2011. Th e lower current ratio refl ects the use
of short term borrowings to fi nance stock repurchases, capital equipment
investments and repayment of long-term debt.
Debt
Long-term debt (excluding current installments) totaled $1,916,315 as
of June 30, 2012, compared to $2,238,417 as of June 30, 2011. Long-
term debt is comprised primarily of the mortgage loans on our offi ce and
manufacturing facilities in Utah and Tennessee. Th e principal balance on
the mortgage loans is approximately $2,118,000 with monthly principal
and interest payments of $37,503. For a more complete explanation of the
long-term debt, see Note 7 to the fi nancial statements.
We believe that the following critical accounting policies involve a high
degree of judgment and complexity. See Note 1 to our consolidated
fi nancial statements for fi scal year 2012, for a complete discussion of
our signifi cant accounting policies. Th e following summary sets forth
information regarding signifi cant estimates and judgments used in the
preparation of our consolidated fi nancial statements.
Inventory Reserves
Th e nature of our business requires that we maintain suffi cient inventory
on hand at all times to meet the requirements of our customers. We record
fi nished goods inventory at the lower of standard cost, which approximates
actual costs (fi rst-in, fi rst-out) or market. Raw materials are recorded at the
lower of cost (fi rst-in, fi rst-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:
• Current inventory quantities on hand;
• Product acceptance in the marketplace;
• Customer demand;
• Historical sales;
• Forecast sales;
• Product obsolescence;
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• Technological innovations; and
Deferred Income Tax Assets
• Character of the inventory as a distributed item, fi nished manufactured
item or raw material.
Any modifi cations to estimates of inventory valuation reserves are refl ected
in cost of goods sold within the statements of operations during the period
in which such modifi cations are determined necessary by management. As
of June 30, 2012 and 2011, our inventory valuation reserve balance, which
established a new cost basis, was $292,999 and $337,748, respectively, and
our inventory balance was $6,098,597 and $5,647,815, net of reserves,
respectively.
Revenue Recognition
Our sales force and distributors sell our products to end users, including
physical therapists, professional trainers, athletic trainers, chiropractors,
medical doctors and aestheticians. 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 $3,667,086 and $3,672,128, net of
allowance for doubtful accounts of $201,349 and $293,436, as of June 30,
2012 and 2011, respectively.
In August 2012 and August 2011, our management performed an analysis
of the deferred income tax assets and their recoverability. Based on several
factors, including our strong earnings history of pre-tax profi t averaging
over $500,000 per year in 18 of the last 22 fi scal years and the fact that
the principal causes of the loss in fi scal 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.
Business Plan and Outlook
During the past two years, we have focused much of our resources and
energy on developing new and innovative products. Th e scope of that
R&D eff ort has been more signifi cant than at any time in our history. As a
result, more new products will be introduced during fi scal year 2013 than
we have introduced in any other year.
In March 2012, we introduced the new Dynatron Quad7 therapy device
to the market. Th e innovative Quad7 utilizes thermoelectric technology
to deliver thermal therapy (either cold or hot therapy) combined with
compression treatments through a variety of wraps and innovative
Th ermoStim Probes. Th e Th ermoStim Probes are unique in their design
as they allow for delivery of electrotherapy treatments concurrent with
thermal therapy. Th e Quad7 has the fl exibility to off er seven diff erent
treatments including intermittent compression, cold with compression,
heat with compression, cold with stim, heat with stim, cold therapy alone,
and heat therapy alone. Th is capability dramatically expands both the
variety and location of conditions that can be treated. Th e Quad7 employs
state-of-the-art technology providing precise temperature control moving
beyond the current technology by eliminating the need for ice. Th ermal
therapy in our Quad7 is achieved by using a thermoelectric computer chip
technology.
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In August 2012, we introduced to the market our new Dynatron SolarisPlus
line of electrotherapy/ultrasound/ light therapy units. Th is new product
line consists of four new units: the Dynatron SolarisPlus 709, 708, 706,
and 705. Th ese attractive new units provide our most advanced technology
in combination therapy devices by adding tri-wave light therapy capabilities
to enhanced electrotherapy and ultrasound combination devices. Tri-wave
light therapy features infrared, red and blue wavelength light. Th e new
Dynatron Solaris light pad is capable of treating large areas of the body via
unattended infrared, red and blue wavelength light therapy. As part of the
SolarisPlus product line introduction, we also introduced a new display
cart specifi cally designed for these units. Th is new cart is expected to begin
shipping in October 2012. Th e SolarisPlus line is expected to quickly
become popular for its power and versatility. Th e new units are capable of
simultaneously powering fi ve electrotherapy channels, ultrasound therapy,
a light probe and light pad.
Th e commitment to innovation of high-quality products has been a
hallmark of Dynatronics and will continue to be part of our future strategic
objectives. Th is emphasis on R&D contributed in large part to the lower
profi tability we experienced over the past two years. R&D costs for us have
been cyclical in nature. Th e higher costs in fi scal year 2012 refl ect the fact
that we have been in a more intense part of the development cycle. With
the new products introduced to the market in August 2012, we expect
that R&D costs will cycle back to a lower level more in line with historical
amounts. However, we have several additional products that are targeted
for introduction in the coming fi scal year that will build on the technology
developed over the past two years. Management is confi dent the higher
costs associated with the more intense part of the development cycle in
the short term will yield long-term benefi ts and are important to assuring
that we maintain our reputation in the industry for being an innovator and
leader in product development.
In calendar 2011, we announced the signing of contracts with four
Group Purchasing Organizations (GPOs): Premier, Inc., Amerinet, Inc.,
FirstChoice Cooperative and Champs Group Purchasing. Th ese GPOs
represent tens of thousands of clinics and hospitals around the nation.
With the broader off ering of products now available through our catalog
and e-commerce website, we are better able to compete for this high
volume business. Over the past two years, we have also been successful in
becoming a preferred vendor to many national and regional accounts.
Th e contracts with the GPOs represent a license to solicit business directly
from the members of the respective GPOs. Th e GPOs do not order any
product directly. Th ey serve the function of negotiating favorable pricing
terms on behalf of their members. We believe it will require years of eff ort
to develop relationships with the individual GPO and national account
clinics and hospitals and convert this business to our brand. Th is has been
manifest by the lack of signifi cant progress under the limited contracts with
Premier and Amerinet and the decision by other GPO’s like MedAssets
and Novation to not put Dynatronics on contract. While we will continue
to seek eff ective ways of accessing business with GPO members outside
of a GPO contract, the pattern of the GPO’s has not been conducive to
putting new vendors, like Dynatronics, on contract. Th erefore, while we
will continue to petition for fairer treatment by the GPO’s we also realize
that the resources that may be required to secure contracts with the GPO’s
could be more productively deployed in other ways to improve sales of our
products. While we are not abandoning the GPO eff ort, we recognize that
the GPO bar is set very high and we would be better served initiating other
strategies to increase sales.
In late 2012 or early 2013 we plan to introduce a new, updated version of
our product catalog. Th is new catalog will expand our product off ering
in order to better service the broader needs of our customers. It will also
provide an excellent new sales tool for all of our sales representatives in
the fi eld as well as provide a foundation for expanding our e-commerce
platform.
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Over the past few years, consolidations in our market have changed the
landscape of our industry’s distribution channels. At the present time,
we believe that there remain only two companies with a national direct
sales force selling proprietary and distributed products: Dynatronics and
Patterson Medical. All other distribution in our market is directed through
catalog companies with no direct sales force, or through independent
local dealers that have limited geographical reach. In the past year, we
have reinforced our direct sales team to include 53 direct sales employees
and independent sales representatives. In addition to these direct sales
representatives, we continue to enjoy a strong relationship with scores
of independent dealers. We believe we have the best trained and most
knowledgeable sales force in the industry. Th e changes taking place within
our market provide a unique opportunity for us to grow market share in
the coming years through recruitment of high-quality sales representatives
and dealers.
To further our eff orts to recruit high-quality direct sales representatives and
dealers, we intend to continue to improve effi ciencies of our operations and
the sales support for the industry. Chief among the steps we are taking to
make these improvements was the introduction of our fi rst true e-commerce
solution on July 6, 2010 and the enhancements to that portal in the two years
since its introduction. With the availability of this e-commerce solution,
customers are able to more easily place orders and obtain information
about their accounts. Sales representatives are increasing their eff ectiveness
with the abundance of information available to them electronically through
our e-quote system, which is a companion to the e-commerce solution
introduced. Not only is our e-commerce solution easy and effi cient to
use, it should also facilitate reducing transactional costs thus enabling us to
accommodate higher sales without signifi cantly increasing overhead.
Th e passage in 2010 of the Patient Protection and Aff ordable Care Act and
with the Health Care and Educational Reconciliation Act will aff ect our
future operations. Th e addition of millions to the rolls of the insured is
expected to increase demand for services. Th at increased demand could
lead to increased sales of our products. Th e magnitude of those increases
is diffi cult to assess at this time. A negative impact of this legislation
as enacted is its imposition of an excise tax on all manufacturers and
importers of medical devices. An excise tax is assessed against sales, not
profi ts. Th erefore, even in a year when we may have no profi ts, we will
still owe the excise tax to the federal government. Barring a change in
the statute, we estimate that this tax would be approximately $300,000 to
$400,000 annually based on current sales levels. Because of the phase-in of
various provisions in the legislation, the impact of the 2012 elections, and
possible legislative actions, we cannot predict what the full eff ects of this
legislation on our business and industry will be. Th e fi rst impact is expected
in the early part of calendar year 2013. In addition, rule-making under
the law is not yet complete which could mean a temporary postponement
in implementing the tax. In the meantime, we are taking full advantage
of every opportunity presented by this legislation to increase sales and
to off set any negative eff ects that may accompany those opportunities.
Should the tax become eff ective January 1, 2013 as anticipated, we will
likely be compelled to raise prices as a refl ection of that new tax.
Economic pressures from the recent recession in the United States have
aff ected available credit that would facilitate large capital purchases, and
have also reduced demand for discretionary services such as those provided
by the purchasers of our aesthetic products. As a result, we reduced our
expenses in the Synergie department. We believe that our aesthetic devices
remain the best value on the market and we are seeking innovative ways to
market these products, including strategic partnerships, both domestic and
international, to help enhance sales momentum.
15
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 eff ort. We remain committed
to fi nding the most eff ective ways to expand our markets internationally.
Over the coming year, our eff orts will be focused on partnering with key
manufacturers and distributors interested in our product line or technology.
Our Utah facility, where all electrotherapy, ultrasound, traction, light therapy
and Synergie products are manufactured, is certifi ed to ISO 13485:2003,
an internationally recognized standard of excellence in medical device
manufacturing. Th is designation is an important requirement in obtaining
the CE Mark certifi cation, which allows us to market our products in the
European Union and in other international locations.
Refi ning our business model for supporting sales representatives and
distributors also will be a focal point of operations. We will continue to
evaluate the most effi cient ways to maintain our satellite sales offi ces and
warehouses. Th e ongoing refi nement of this model is expected to yield
further effi ciencies that will better achieve sales goals while, at the same
time, reduce expenses.
Our eff orts to prudently reduce costs in the face of some economic
uncertainty have made us a leaner operation. During calendar 2012, we
identifi ed a number of cost saving measures totaling more than $750,000
annually that have been or will be implemented to reduce expenses. We
will continue to be vigilant in maintaining appropriate overhead costs and
operating costs while still providing support for anticipated increases in
sales from our new products.
Based on our defi ned strategic initiatives, we are focusing our resources in
the following areas:
• Increasing market share of manufactured capital products by promoting
sales of our new state-of-the-art Dynatron Quad7 and Dynatron
SolarisPlus products introduced in calendar 2012.
• Introducing additional new products to better capitalize on opportunities
in our core market including the market for the Quad 7 technology.
Th e introduction of additional new products in the coming year is
made possible by the technology platform built over the past two years
of intense R&D eff ort. Th erefore, the new products can be introduced
with minimal additional R&D expenditures.
• Continue to seek ways of petitioning for more business with GPO’s,
but redirect focus to more viable and immediate opportunities in the
private practice market including customers that may be members of
GPO’s, but not required to purchase under a GPO contract. Increased
focus will be given to developing business with large chains of clinics,
including national and regional accounts.
• Introducing a new 2013-14 product catalog featuring a broader product
off ering.
• Using our e-commerce solution in order to facilitate business
opportunities and reduce transactional costs.
• Reinforcing distribution through a strategy of recruiting direct sales
representatives and working closely with the most successful distributors
of capital equipment.
• Improving operational effi ciencies by reducing costs to be more
refl ective of current levels of sales. Strengthening pricing management
and procurement methodologies.
• Minimizing expense associated in the Synergie department until
demand for capital equipment re-emerges, and, in the meantime,
seeking additional independent distributors and strategic partnerships.
• Focusing international sales eff orts on identifying key distributors and
strategic partners who could represent the Company’s product line,
particularly in Europe.
• Improving effi ciencies as a distributor of other manufacturers’ products
and considering ways to enhance our role as a distributor and not just a
manufacturer.
• Exploring strategic business alliances that will leverage and complement
our competitive strengths, increase market reach and supplement capital
resources.
16
NASDAQ Minimum Bid Requirement
Shareholders
As of September 22, 2012, the approximate number of stockholders of
record was 430. Th is number does not include benefi cial owners of shares
held in “nominee” or “street” name. Including such benefi cial owners, we
estimate that the total number of benefi cial owners of our common stock
is approximately 2,600.
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 fi nance the development of the business.
On May 9, 2012, we received a defi ciency 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 defi ciency notice, our common stock is subject to potential
delisting because, for a period of 180 consecutive days, the bid price of the
common stock closed below the minimum $1.00 per share requirement for
continued inclusion. NASDAQ allows six months to comply with the rule
and an additional six months if certain criteria are met. Th e deadline for
our compliance with the rule is November 5, 2012. 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 notifi cation that we have achieved compliance with the rule.
If compliance is not achieved, we may seek shareholder approval for
a reverse stock split in order to cure the NASDAQ listing defi ciency.
Alternatively, the Company’s stock may be delisted and begin trading on
the OTC bulletin board or OTC Markets where there is no minimum bid
requirement. Th ere can be no assurance that a market will develop for the
Company’s stock under any of these alternatives.
Market Information
As of September 22, 2012, we had approximately 12,688,650 shares of
common stock issued and outstanding. Our common stock is included
on the NASDAQ Capital Market (symbol: DYNT). Th e following table
shows the range of high and low sale prices for our common stock as quoted
on the NASDAQ system for the quarterly periods indicated:
1st Quarter (July-September)
2nd Quarter (October-December)
3rd Quarter (January-March)
4th Quarter (April-June)
Fiscal Year Ended June 30,
2012
2011
High
Low
High
Low
$1.77
$.83
$.93
$.80
$.80
$.62
$.67
$.47
$.75
$.72
$1.18
$2.14
$0.62
$0.60
$0.62
$1.12
17
Dynatronics Corporation
Consolidated Balance Sheets - June 30, 2012 and 2011
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowance for doubtful accounts of $201,349 as of
June 30, 2012 and $293,436 as of June 30, 2011
Other receivables
Inventories, net
Prepaid expenses and other
Prepaid income taxes
Current portion of deferred income tax assets
Total current assets
Property and equipment, net
Intangible assets, net
Other assets
Deferred income tax assets, net of current portion
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt
Line of credit
Warranty reserve
Accounts payable
Accrued expenses
Accrued payroll and benefi ts expense
Total current liabilities
Long-term debt, net of current portion
Deferred income tax liabilities, net of current portion
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock, no par value: Authorized 50,000,000 shares; issued
12,688,650 shares as of June 30, 2012 and 13,060,392 shares as of
June 30, 2011
Accumulated defi cit
Total stockholders' equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated fi nancial statements.
2012
2011
$
278,263
384,904
3,667,086
11,718
6,098,597
226,596
3,550
368,348
3,672,128
14,164
5,647,815
266,439
28,754
418,607
10,654,158
10,432,811
3,677,898
324,715
482,719
131,440
3,722,749
369,352
294,269
-
$ 15,270,930
14,819,181
$
395,055
3,497,597
181,000
2,413,201
386,229
215,218
368,135
2,583,937
185,245
2,127,163
379,336
236,264
7,088,300
5,880,080
1,916,315
-
2,238,417
85,525
9,004,615
8,204,022
7,091,935
7,417,244
(825,620)
(802,085)
6,266,315
6,615,159
$ 15,270,930
14,819,181
19
Dynatronics Corporation
Consolidated Statements of Operations - Years Ended June 30, 2012 and 2011
Net sales
Cost of sales
Gross profi t
Selling, general, and administrative expenses
Research and development expenses
Operating income
Other income (expense):
Interest income
Interest expense
Other income, net
Total other income (expense)
2012
2011
$ 31,664,181
19,720,948
11,943,233
32,692,859
20,208,035
12,484,824
10,506,460
1,410,406
10,431,463
1,383,712
26,367
669,649
16,183
(261,993)
29,202
16,395
(294,404)
27,224
(216,608)
(250,785)
Income (loss) before income tax benefi t (provision)
(190,241)
418,864
Income tax benefi t (provision)
Net income (loss)
166,706
(147,976)
$
(23,535)
270,888
Basic and diluted net income (loss) per common share
$
(0.00)
0.02
Weighted-average basic and diluted common shares outstanding:
Basic
Diluted
12,811,017
12,811,017
13,332,583
13,367,049
20
See accompanying notes to consolidated fi nancial statements.
Dynatronics Corporation
Consolidated Statements of Stockholders’ Equity - Years Ended June 30, 2012 and 2011
Balances as of July 1, 2010
13,591,152
$
7,872,250
(1,072,973)
6,799,277
Number of shares
Common stock
Accumulated defi cit
Total stockholders’
equity
Issuance of common stock upon exer-
cise of employee stock options
4,884
7,949
Repurchase of common stock
(543,240)
(519,053)
Stock-based compensation
Net income
7,596
-
56,098
-
-
-
-
270,888
Balances as of June 30, 2011
13,060,392
$
7,417,244
(802,085)
Repurchase of common stock
(399,287)
(401,408)
Stock-based compensation
Net loss
27,545
-
76,099
-
Balances as of June 30, 2012
12,688,650
$
7,091,935
-
-
(23,535)
.
(825,620)
7,949
(519,053)
56,098
270,888
6,615,159
(401,408)
76,099
(23,535)
6,266,315
See accompanying notes to consolidated fi nancial statements.
21
Dynatronics Corporation
Consolidated Statements of Cash Flows - Years Ended June 30, 2012 and 2011
Cash fl ows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment
Amortization of intangible assets
Gain on disposal of assets
Stock-based compensation expense
Change in deferred income tax assets
Provision for doubtful accounts receivable
Provision for inventory obsolescence
Change in operating assets and liabilities:
Receivables
Inventories
Prepaid expenses and other assets
Prepaid income taxes
Accounts payable and accrued expenses
2012
2011
$
(23,535)
270,888
404,374
44,637
-
76,099
(166,706)
108,000
120,000
(100,512)
(570,782)
(148,607)
27,771
265,073
370,726
83,206
(703)
56,098
209,325
108,000
90,000
11,878
28,985
16,659
(84,690)
447,997
Net cash provided by operating activities
35,812
1,608,369
Cash fl ows from investing activities:
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash fl ows from fi nancing activities:
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Net change in line of credit
Proceeds from issuance of common stock
Purchase and retirement of common stock
Net cash provided by (used in) fi nancing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the year
(328,707)
-
(534,001)
2,500
(328,707)
(531,501)
45,341
(371,339)
913,660
-
(401,408)
-
(380,061)
(184,555)
7,949
(519,053)
186,254
(1,075,720)
(106,641)
1,148
384,904
383,756
Cash and cash equivalents at end of the year
$
278,263
384,904
Supplemental disclosure of cash fl ow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash investing and fi nancing activities:
Long-term debt incurred for purchase of property and equipment
See accompanying notes to consolidated fi nancial statements.
22
$
263,491
2,100
298,941
12,100
44,334
-
Dynatronics Corporation
Notes to Consolidated Financial Statements - June 30, 2012 and 2011
(1) Basis of Presentation and Summary of Signifi cant Accounting
Policies
(a) Description of Business
Dynatronics Corporation (the Company), a Utah corporation, distributes and markets
a broad line of medical and aesthetic products, many of which are designed and
manufactured by the Company. Among the products off ered by the Company are
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.
the customer’s ability to pay. All account balances are reviewed on an individual basis.
Account balances are charged off against the allowance when the potential for recovery
is considered remote. Recoveries of receivables previously charged off are recognized
when payment is received.
(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 the assets. Th e 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.
(b) Principles of Consolidation
Th e consolidated fi nancial statements include the accounts and operations of
Dynatronics Corporation and its wholly owned subsidiary, Dynatronics Distribution
Company, LLC. All signifi cant intercompany account balances and transactions have
been eliminated in consolidation.
(c) 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 (fi rst-in, fi rst-out
method), which approximates actual cost, or market. Raw materials are stated at the
lower of cost (fi rst in, fi rst out method) or market.
(e) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest,
although a fi nance charge may be applied to such receivables that are past the due date.
Th e allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. Th e Company
determines the allowance based on a combination of statistical analysis, historical
collections, customers’ current credit worthiness, the age of the receivable balance both
individually and in the aggregate and general economic conditions that may aff ect
(g) Long-Lived Assets
Long–lived assets, such as property and equipment, 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 fl ows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash fl ows, an impairment charge is recognized for the
diff erence between the carrying amount of the asset and 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.
(h) Intangible Assets
Costs 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.
(i) Revenue Recognition
Th e 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.
(j) Research and Development Costs
Direct research and development costs are expensed as incurred.
23
in accordance with the requirements of Financial Accounting Standards Board (FASB)
Accounting Standards Codifi cation (ASC) 740-10, Income Taxes. Under ASC 740-
10, the Company may recognize the tax benefi ts 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. Th e tax benefi ts
recognized in the fi nancial statements from such a position are measured based on the
largest benefi t that has a greater than 50% likelihood of being realized upon ultimate
settlement. ASC 740-10 also provides guidance on derecognition of income tax assets
and liabilities, classifi cation 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 fi nancial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact the Company’s
fi nancial position, results of operations and cash fl ows.
(n) Stock-Based Compensation
Th e Company accounts for stock-based compensation in accordance with FASB ASC
718, Stock Compensation. 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 fi ve years) using the straight-line method.
(o) Concentration of Risk
In the normal course of business, the Company provides unsecured credit to its
customers. Most of the Company’s customers are involved in the medical industry.
Th e Company performs ongoing credit evaluations of its customers and maintains
allowances for probable losses which, when realized, have been within the range of
management’s expectations. Th e Company maintains its cash in bank deposit accounts
which at times may exceed federally insured limits. Th e Company has not experienced
any losses in such accounts. Th e Company believes it is not exposed to any signifi cant
credit risks with respect to cash or cash equivalents.
(k) Product Warranty Costs
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.
(l) Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the weighted-average
number of common shares outstanding and, when appropriate, dilutive common stock
equivalents outstanding during the year. Stock options are considered to be common
stock equivalents. Th e computation of diluted net income (loss) per common share
does not assume exercise or conversion of securities that would have an anti-dilutive
eff ect.
Basic net income (loss) per common share is the amount of net income (loss) for the
year available to each weighted-average share of common stock outstanding during the
year. Diluted net income (loss) per common share is the amount of net income (loss)
for the year available to each weighted-average share of common stock outstanding
during the year and to each common stock equivalent outstanding during the year,
unless inclusion of common stock equivalents would have an anti-dilutive eff ect.
Th e reconciliation between the basic and diluted weighted-average number of common
shares for the years ended June 30, 2012 and 2011 is summarized as follows:
Basic weighted-average number of common shares
outstanding during the year
Weighted-average number of dilutive common stock
options outstanding during the year
Diluted weighted-average number of common and
common equivalent shares outstanding during the year
2012
2011
12,811,017
13,332,583
-
34,466
12,811,017
13,367,049
Outstanding options not included in the computation of diluted net loss per common
share totaled 865,463 as of June 30, 2012. Th ese common stock equivalents were not
included in the computation because to do so would have been antidilutive.
(m) Income Taxes
Th e Company recognizes an asset or liability for the deferred income tax consequences
of all temporary diff erences between the tax bases of assets and liabilities and their
reported amounts in the consolidated fi nancial 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
24
(p) Operating Segments
Th e 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.
Th e Company groups its sales into physical medicine products and aesthetic products.
Physical medicine products made up 91% and 92% of net sales for the years ended
June 30, 2012 and 2011, respectively. Aesthetics products made up 1% of net sales for
both the years ended June 30, 2012 and 2011. Chargeable repairs, billable freight and
other miscellaneous revenues account for the remaining 8% and 7% of net sales for the
years ended June 30, 2012 and 2011, respectively.
(q) 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 in accordance with US Generally Accepted
Accounting Principles (US GAAP). Signifi cant 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
costs; and estimated recoverability of intangible assets. Actual results could diff er from
those estimates.
(r) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended June
30, 2012 and 2011 was approximately $87,400 and $115,300, respectively.
(2) Inventories
Inventories consist of the following as of June 30:
Raw materials
Finished goods
Inventory reserve
2012
$
2,401,676
3,989,920
(292,999)
$
6,098,597
2011
2,329,536
3,656,027
(337,748)
5,647,815
(3) Property and Equipment
Property and equipment consist of the following as of June 30:
Land
Buildings
Machinery and equipment
Offi ce equipment
Offi ce equipment
Vehicles
Less accumulated depreciation and
amortization
2012
2011
$
354,743
3,745,404
1,521,896
263,861
354,743
3,726,224
1,530,389
260,626
1,905,332
1,732,700
289,678
247,369
8,080,914
7,852,051
(4,403,016)
(4,129,302)
$
3,677,898
3,722,749
(4) Intangible Assets
Identifi able intangible assets and their useful lives consist of the following as of June 30:
Trade name – 15 years
Domain name – 15 years
Non-compete covenant – 4 years
Customer relationships – 7 years
Trademark licensing agreement – 20 years
Backlog of orders – 3 months
Customer database – 7 years
License agreement – 10 years
Total identifi able intangibles
Less accumulated amortization
Net carrying amount
2012
2011
$
339,400
5,400
149,400
120,000
45,000
2,700
38,100
73,240
773,240
(448,525)
$
324,715
339,400
5,400
149,400
120,000
45,000
2,700
38,100
73,240
773,240
(403,888)
369,352
Amortization expense associated with the intangible assets was $44,637 and $83,206
for fi scal years 2012 and 2011, respectively. Estimated amortization expense for the
identifi able intangibles is expected to be as follows: 2013, $44,637; 2014, $44,637;
2015, $30,680; 2016, $30,680; 2017, $30,680 and thereafter $143,400.
25
(5) Warranty Reserve
A reconciliation of the change in the warranty reserve consists of the following for the
fi scal years ended June 30:
2012
2011
Beginning warranty reserve balance
$
185,245
Warranty repairs
Warranties issued
Changes in estimated warranty costs
(124,844)
127,059
(6,460)
Ending product warranty reserve
$
181,000
186,022
(135,542)
149,362
(14,597)
185,245
(6) Line of Credit
Th e Company has a revolving line-of-credit facility with a commercial bank in the
amount of $7,000,000. Borrowing limitations are based on 45% of eligible inventory
and up to 80% of eligible accounts receivable resulting in a borrowing limit of
$5,115,000 as of June 30, 2012. As of June 30, 2012 and 2011, the outstanding
balance was approximately $3,498,000 and $2,584,000, respectively. Available
borrowings as of June 30, 2012 were $1,617,000. Th e line of credit is collateralized by
inventory and accounts receivable and bears interest at a rate based on the lender’s 90-
day LIBOR rate plus 3%. Th e interest rate was 3.5% and 3.2% as of June 30, 2012 and
2011, respectively. Th is line is subject to biennial renewal and matures on December
15, 2012. Accrued interest is payable monthly.
Th e Company’s revolving line of credit agreement includes covenants requiring the
Company to maintain certain fi nancial ratios. As of June 30, 2012, management
believes the Company was in compliance with its loan covenants.
(7) Long Term Debt
Long term debt consists of the following as of June 30:
6.44% promissory note secured by trust deed on real
property, maturing January 2021, payable in monthly
installments of $13,278
2012
2011
$
1,048,496
1,137,179
5.649% promissory note secured by building, maturing
December 2017, payable in monthly installments of $16,985
961,196
1,105,292
6.21% promissory note secured by a trust deed on real
property, maturing November 2013, payable in monthly
installments of $7,240
8.49% promissory note secured by equipment, payable in
monthly installments of $2,097 through December 2014
14.305% promissory note secured by equipment, payable in
monthly installments of $2,338 through May 2014
4.75% promissory note secured by a vehicle, payable in
monthly installments of $721 through May 2017
5.531% promissory note secured by a vehicle, payable in
monthly installments of $482 through August 2016
5.887% promissory note secured by a vehicle, payable in
monthly installments of $390 through March 2017
5.75% promissory note secured by a vehicle, payable in
monthly installments of $435 through October 2013
10.15% promissory note secured by a vehicle, payable in
monthly installments of $448 through December 2012
13.001% promissory note secured by equipment, payable in
monthly installments of $70 through October 2015
7.95% promissory note secured by a vehicle, payable in
monthly installments of $724 through July 2013
16.35% promissory note secured by equipment, payable in
monthly installments of $409 through October 2011
9.69% promissory note secured by equipment, payable in
monthly installments of $318 through October 2011
108,243
183,687
56,515
75,980
46,781
66,572
37,859
21,460
19,284
6,661
2,612
2,263
-
-
-
-
-
-
11,351
7,456
-
16,627
1,580
828
Total long-term debt
Less current portion
2,311,370
2,606,552
(395,055)
(368,135)
Long-term debt, net of current portion
$
1,916,315
2,238,417
Th e aggregate maturities of long term debt for each of the years subsequent to 2012
are as follows: 2013, $395,055; 2014, $355,217; 2015, $308,500; 2016, $314,467;
2017, $327,162 and thereafter $610,969.
26
(8) Leases
Th e Company leases vehicles under noncancelable operating lease agreements. Lease
expense for the years ended June 30, 2012 and 2011, was $7,812 and $15,898,
respectively. Future minimum lease payments required under noncancelable operating
leases that have initial or remaining lease terms in excess of one year as of 2012 are as
follows: 2013, $6,507.
Expected tax benefi t (provision)
State taxes, net of federal tax benefi t
R&D tax credit
Other, net
2012
2011
64,682
4,478
75,000
22,546
(142,414)
(12,650)
-
7,088
166,706
(147,976)
$
$
Deferred income tax assets and liabilities related to the tax eff ects of temporary
diff erences are as follow as of June 30:
Net deferred income tax assets – current:
Inventory capitalization for income tax purposes
$
Inventory reserve
Warranty reserve
Accrued product liability
Allowance for doubtful accounts
Total deferred income tax asset - current
Net deferred income tax assets (liabilities) – non-
current:
Property and equipment, principally due to
diff erences in depreciation
Research and development credit carryover
Other intangibles
Operating loss carry forwards
2012
2011
75,127
114,270
70,590
29,835
78,526
368,348
73,812
131,721
72,245
26,389
114,440
418,607
(268,839)
328,927
(126,640)
197,992
(266,858)
212,161
(144,047)
113,219
Total deferred income tax assets (liabilities) –
non-current
$
131,440
(85,525)
Th e Company rents offi ce, warehouse and storage space and offi ce equipment under
agreements which run one year or more in duration. Th e rent expense for the years
ended June 30, 2012 and 2011 was $231,142 and $285,347, respectively. Future
minimum rental payments required under operating leases that have a duration of one
year or more as of June 30, 2012 are as follows: 2013, $109,775; 2014, $56,400; 2015,
$39,775 and 2016, $29,925.
During fi scal year 2011, the offi ce and warehouse spaces in Girard, Ohio; Detroit,
Michigan; Pleasanton, California; and Hopkins, Minnesota were leased on an annual/
monthly basis from employees/stockholders; or entities controlled by stockholders,
who were previously principals of the dealers acquired in June and July, 2007. Th e leases
are related-party transactions with four employee/stockholders, however, management
believes the lease agreements have been conducted on an arms-length basis and the
terms are similar to those that would be available to other third parties. Eff ective July 1,
2011, the offi ce in Girard, Ohio was moved to Boardman, Ohio and is leased through
from a third party.
(9) Income Taxes
Income tax benefi t (provision) for the years ended June 30 consists of:
2012:
U.S. federal
State and local
2011:
U.S. federal
State and local
Current
Deferred
Total
-
-
-
159,921
6,785
166,706
159,921
6,785
166,706
61,449
(100)
61,349
(209,689)
(148,240)
364
264
(209,325)
(147,976)
$
$
$
$
Th e actual income tax benefi t (provision) diff ers from the “expected” tax benefi t
(provision) computed by applying the U.S. federal corporate income tax rate of 34% to
income (loss) before income taxes for the years ended June 30, are as follows:
27
In assessing the realizability of deferred income 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. Th e ultimate realization of deferred income tax assets
is dependent upon the generation of future taxable income during the years in which
those temporary diff erences 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 benefi ts of these deductible diff erences.
(10) Major Customers and Sales by Geographic Location
During the fi scal years ended June 30, 2012 and 2011, sales to any single customer did
not exceed 10% of total net sales.
Th e Company exports products to approximately 30 countries. Sales outside North
America totaled $896,887, or 2.8% of net sales, for the fi scal year ended June 30, 2012
compared to $678,576, or 2.1% of net sales, for the fi scal year ended June 30, 2011.
(11) Common Stock and Common Stock Equivalents
On July 15, 2003, the board of directors (board) 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 used. In February 2011, the
board approved an additional $1,000,000 for repurchases under the program. During
fi scal year 2010, the board authorized the repurchase of up to $100,000 of stock
annually for three years from each of two former distributors that were acquired by
the Company in 2007. During the year ended June 30, 2012, the Company acquired
and retired 399,287 shares of common stock for $401,408. During the year ended
June 30, 2011, the Company acquired and retired 543,240 shares of common stock
for $519,053.
During the years ended June 30, 2012 and 2011, the Company granted 27,545 and
7,596 shares, respectively, of restricted common stock to directors and offi cers in
connection with compensation arrangements.
Th e Company maintains a 2005 equity incentive plan for the benefi t of employees.
Incentive and nonqualifi ed 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. Eff ective November 27, 2007, the plan was
amended, as approved by the stockholders, to increase the number of shares available
by 1,000,000 shares. As of June 30, 2012, 500,869 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.
28
Th e Company granted options to acquire common stock under its 2005 equity
incentive plan during fi scal years 2012 and 2011. Th e 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, and exercise dates may range from 6 months to 10 years from
the date of grant.
Th e fair value of each option grant was estimated on the date of grant using the Black
Scholes option pricing model with the following assumptions:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
2012
0%
69%
2.09%
10 years
2011
0%
60-64%
2.5 - 3.43%
10 years
Th e weighted average fair value of options granted during fi scal years 2012 and 2011
was $.62 and $.53, respectively.
Th e following table summarizes the Company’s stock option activity during the fi scal
years 2012 and 2011:
2012
2011
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
Number of
shares
Weighted
average
exercise
price
Number of
shares
Options outstanding at
beginning of the year
933,462
$
1.33
4.84 years 932,805
$
Options granted
Options exercised
Options canceled or
expired
52,277
-
(120,276)
.82
-
1.31
66,248
(4,884)
(60,707)
Options outstanding at
end of the year
Options exercisable at
end of the year
Range of exercise prices
at end of the year
865,463
1.30
4.12 years 933,462
561,664
1.55
534,412
$ 0.35 - 1.89
$
0.35 - 1.99
1.35
.74
1.63
1.10
1.33
1.64
In June 2011, the FASB issued authoritative guidance on the presentation of
comprehensive income. Th is guidance specifi es that an entity has the option to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along with
total net income, each component of other comprehensive income along with a total
for other comprehensive income, and a total amount for comprehensive income. Th is
guidance does not change the items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassifi ed to net
income. It also does not change the presentation of related tax eff ects, before related
tax eff ects, or the portrayal or calculation of earnings per share. Th is guidance is to be
applied retrospectively and is eff ective for fi scal years, and interim periods within those
years, eff ective for Dynatronics July 1, 2012. Th e adoption of this guidance will not
have a material eff ect on our consolidated fi nancial statements as it amended only the
presentation of comprehensive income. Comprehensive income (loss) was equal to the
net income (loss) as presented in the consolidated fi nancial statements for the fi scal
years ended June 30, 2012 and 2011.
Th e Company recognized $76,099 and $56,098 in stock-based compensation for the
years ended June 30, 2012 and 2011, respectively, which is included in selling, general,
and administrative expenses in the consolidated statements of operations. Th e stock-
based compensation includes amounts for both restricted stock and stock options
under ASC 718.
As of June 30, 2012 there was $503,528 of unrecognized stock-based compensation
cost that is expected to be expensed over periods of four to 10 years.
No options were exercised during the fi scal year 2012, and the aggregate intrinsic value
on the date of exercise of options exercised during fi scal year 2011 was $1,552. Th e
aggregate intrinsic value of the outstanding options as of June 30, 2012 and 2011 was
$1,281 and $206,721, respectively.
(12) Employee Benefi t Plan
Th e Company has a deferred savings plan which qualifi es under Internal Revenue
Code Section 401(k). Th e plan covers all employees of the Company who have at
least six months of service and who are age 20 or older. For fi scal years 2012 and
2011, the Company made matching contributions of 25% of the fi rst $2,000 of each
employee’s contribution. Th e Company’s contributions to the plan for 2012 and 2011
were $37,745 and $38,728, respectively. Company matching contributions for future
years are at the discretion of the board of directors.
(13) Subsequent Events
In accordance with ASC 855-10, management determined that through the date of this
report, there are no material subsequent events to report.
(14) Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance related to testing goodwill for impairment. Th is guidance
provides that entities may fi rst assess qualitative factors to determine whether it
is necessary to perform the two-step goodwill impairment test. If the qualitative
assessment results in a more than 50% likely result that the fair value of a reporting
unit is less than the carrying amount, then the entity must continue to apply the two-
step impairment test. If the entity concludes the fair value exceeds the carrying amount,
then neither of the two steps in the goodwill impairment test is required. Th is guidance
is eff ective for annual and interim goodwill impairment tests performed for fi scal years
beginning after December 15, 2011 with early adoption permitted. Th e adoption of
this pronouncement had no signifi cant eff ect on the Company’s fi nancial statements.
29
Corporate Information
Availability of Form 10-K
Dynatronics Corporation fi les an annual report on Form 10-K each year with
the Securities and Exchange Commission. A copy of the Form 10-K for the
fi scal year ended June 30, 2012, may be obtained at no charge by sending
a written request to: Mr. Bob Cardon, Vice President of Administration,
Dynatronics Corporation, 7030 Park Centre Drive, Cottonwood Heights,
Utah 84121.
Annual Meeting
Th e company’s annual shareholders meeting will be Monday, December 17, 2012
at 3:00 p.m. MST (or at such other time as is properly noticed) at Dynatronics’
corporate headquarters, 7030 Park Centre Drive, Cottonwood Heights, Utah
84121.
General Information
Dynatronics Corporation, a Utah corporation organized on April 29, 1983,
manufactures, markets and distributes a broad line of therapeutic, diagnostic
and rehabilitation equipment, medical supplies and soft goods, treatment
tables, and aesthetic massage and microdermabrasion devices to an expanding
market of physical therapists, sports medicine practitioners and athletic trainers,
chiropractors, podiatrists, orthopedists, plastic surgeons, dermatologists,
aestheticians and other medical professionals.
Offi cers and Directors
Kelvyn H. Cullimore Jr.
Chairman of the Board, President, and CEO
Larry K. Beardall
Executive Vice President of Sales and Marketing and Director
Terry M. Atkinson, CPA
Chief Financial Offi cer
Robert J. (Bob) Cardon
Vice President of Administration, Secretary and Treasurer
Douglas G. Sampson
Vice President of Production and R&D
Bryan D. Alsop
Vice President of Information Technology
Howard L. Edwards
Director
Retired Corporate Secretary, ARCO Company
Val J. Christensen
Director
Former President, Energy Solutions Inc.
Joseph H. Barton
Director
Retired Sr. Vice President, GranCare Inc.
Accountants, Legal Counsel and Transfer Agent
Independent Registered Public Accounting Firm
Tanner LLC
Salt Lake City, Utah
Corporate Legal Counsel
Durham Jones & Pinegar
Salt Lake City, Utah
Intellectual Property Legal Counsel
Kirton & McConkie
Salt Lake City, Utah
Transfer Agent
Interwest Transfer Company
P.O. Box 17136
Salt Lake City, Utah 84117
Dynatronics Corporation Headquarters
7030 Park Centre Drive
Cottonwood Heights, Utah 84121
1.800.874.6251
http://www.dynatronics.com
30
Th is annual report contains forward-looking statements related to anticipated
fi nancial performance, product development and similar matters. Securities laws
provide a safe harbor for such statements. Th e company notes that risks inherent
in its business and a variety of factors could cause or contribute to a diff erence
between actual results and anticipated results.
Dynatronics Corporation Headquarters
7030 Park Centre Dr., Cottonwood Heights, Utah 84121
1.800.874.6251 - www.dynatronics.com