Dynatronics Annual Report 2013

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FY2013 Annual Report · Dynatronics

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2013annual report

Letter to Shareholders — 3

Poised to Make a Major Impact in the Market — 7

Board of Directors and Management Team — 8

Management’s Discussion and Analysis — 9

Report of Independent Registered Public Accounting Firms — 18

Financial Statements — 20

Notes to Financial Statements — 25

Corporate Information — 36

The SolarisPlus devices were

introduced in August 2012,

and quickly became our

top–selling product line.

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2013letter to shareholders

Years of increased R&D expenditures and

practitioners with a variety of choices.

strategic planning culminated in fiscal year

Along with the four devices that comprise

2013 with the introduction of a record number

the Dynatron SolarisPlus family of products,

of innovative devices. We expect that these

we introduced the new Tri–Wave Light Probe

new investments will increase market interest

and the Tri–Wave Light Pad. These devices

in our product lines. While Dynatronics has

include three wavelengths of light to deliver

long been an innovation leader in our market,

powerful phototherapy. The new probe and

we have never introduced a greater number

pad function as accessory devices to the

of new devices during any other 12–month

Dynatron SolarisPlus product family.

period in our history. Even better, the

An additional accessory introduced as part

innovation did not stop in fiscal year 2013.

of the SolarisPlus family is a transport cart on

Early in 2013, we introduced the

which the SolarisPlus unit can be positioned

Dynatron Solaris®Plus family of products,

for easy movement around practitioners’

updating and

improving our premier

Solaris brand family

of products. The

SolarisPlus family of

products includes

four therapy devices

capable of delivering

...we have never introduced a
greater number of new devices
during any other 12-month
period in our history.

clinics. This attractive

cart not only improves

the aesthetic appeal

of the SolarisPlus

family of products, but

is highly functional,

providing three large

drawers for storage and

varying combinations of electrotherapy,

a low center of gravity to eliminate tipping.

ultrasound therapy and phototherapy all at

The introduction of the Dynatron

the same time, if desired. The top–of–the–line

SolarisPlus products helped us reverse a 5

Dynatron SolarisPlus 709 is capable of

percent decline in therapy device sales to

delivering seven different forms of electro-

produce a 6 percent sales improvement in

therapy through five patient therapy channels,

fiscal year 2013 compared to fiscal year 2012.

three frequencies of ultrasound therapy and

In addition to the Dynatron SolarisPlus

multiple variations of phototherapy. The

family of products, we brought new therapy

other three SolarisPlus devices, which offer

tables to the market in the second quarter

fewer therapy channels or exclude ultrasound

of fiscal year 2013. The Ultra 2 and Ultra

therapy, are variations on these combinations.

3 are premium hi–lo segmented therapy

The entire product line provides

tables. As indicated by their names, the

Ultra 2 is a two–section table and the

new probe will provide practitioners with a

products increased this fiscal year over last

Ultra 3 is a three–section table. Both are

tool that delivers thermal therapy and/or elec-

year. The loss of sales has been exclusively

heavy–duty, 550–pound capacity tables with

trotherapy in a single device. A year ago we

limited to decreased sales of distributed

unique operator conveniences. Interest in

introduced our first version of this probe as

products produced by other manufacturers.

these new therapy tables was slow at first,

an accessory to our Quad 7 thermal therapy

Our strategy of expanding our sales force

but sales are now gaining momentum.

device. The original Thermostim achieved

by attracting new distributors and sales

Besides the SolarisPlus devices, the

heating and cooling of the probe face using

persons with our innovative, new, proprietary

Tri–Wave Light Probe and Pad, and the Ultra

heated or cooled water circulated from the

manufactured products will, we believe, also

therapy tables, we also introduced a new line of

Quad 7 device. The Dynatron Thermostim

lead to an increase of sales of the products

combination therapy devices branded the “25

Probe is a new, advanced–technology probe

we distribute for other manufacturers.

Series.” The 25 Series is intended to replace

that achieves thermal therapy capabilities

We continue to explore options for

our aging 50 Series line of products. The 25

by use of a thermoelectric chip, instead of

expanding relationships with national accounts

Series products are similar to the SolarisPlus

circulating water, eliminating the need for the

and group purchasing organizations, and to

product family, except that they offer only

awkward hoses used on the predicate device.

pursue international sales opportunities. For

electrotherapy and ultrasound therapy, and

The new Thermostim Probe, scheduled

the first time in our history, we have significant

do not include phototherapy, a transport

for release before the end of calendar year

interest in our new products from Asian

cart or the ability to add future modalities.

2013, is a plug–and–play accessory to the

and European distributors. While cultivating

We expect the 25 Series products

Dynatron SolarisPlus family of products.

national accounts and international sales is a

will open new doors of distribution for us.

This exciting technology will further enhance

more prolonged process, we remain engaged

Throughout our history we have subscribed

the innovative SolarisPlus brand. We also

to bring those opportunities to fruition.

to a sales philosophy of protected territories

expect the introduction of the Thermostim

In December 2012, we implemented

for our proprietary devices. While this has

Probe to significantly boost revenue through

a one–for–five reverse split of our common

attracted the best sales persons and the best

sales of the probe itself, as well as increased

stock. We are pleased that our overall

dealers, it has also precluded our pursuit

sales of the SolarisPlus products.

of a significant part of our key market.

We believe the introduction of a record

With the advent of the 25 Series, we will,

number of products this last year and in the

market capitalization has actually improved

since the implementation of that reverse

stock split. In fact, on August 6, 2013 the

for the first time in our history, offer proprietary

new fiscal year, together with the anticipated

stock price closed at $5.57 per share.

combination therapy devices to all qualified

introduction of the Thermostim Probe and

We are confident that as we begin to

distributors. We will continue to protect certain

the new strategy for expanding distribution of

implement the new sales strategy, backed

distributors and sales

persons by restricting

the offer and sale of the

Dynatron SolarisPlus

products and associated

accessories to be sold

only by these exclusive

distributors and repre-

sentatives, or under their

direction, within limited

geographical territories.

[we]... improved operating
performance compared
to fiscal year 2012,
reducing pre-tax losses
31% from $190,241 last
year to $131,125 this year.

products, positions us well

for a new growth phase.

by our new proprietary products, we will

see sustained growth in the sales both of

That strategy is timely:

Dynatronics–manufactured products as well as

For the first time since we

distributed products. Adding these improved

began to offer commercialized

sales and the resulting gross profits to our

products, we reported net

losses for two consecutive

years. In fiscal year 2012,

we reported a net loss of

$23,535. In fiscal year

2013, we reported a net

more austere platform of reduced expense

and overhead should position us to return

to profitability in the coming fiscal year.

At the same time, we will make available the

loss of $44,371. Despite the slightly larger net

25 Series of combination therapy products

loss for fiscal year 2013, we actually improved

generally to qualified sales persons, dealers

operating performance compared to fiscal

and distributors without geographic limitations.

year 2012, reducing pre–tax losses 31% from

Kelvyn H. Cullimore, Jr.

Chairman, President and CEO

We anticipate that this will broaden our stable

$190,241 last year to $131,125 this year.

of capable sales persons, many of whom may

That improvement was achieved by cutting

also be attracted to sell other Dynatronics

expenses by just over $900,000 from fiscal

products, including the Dynatron SolarisPlus

year 2012 to fiscal year 2013. Those expense

products, by working with the appointed sales

reductions were offset by a 6.7 percent drop

representative or dealer in their territories.

in sales, resulting in a loss of approximately

In the coming months we will introduce

$850,000 in gross profit margin year over year.

one of the most innovative and exciting new

While we are concerned about these

products we have engineered in years. It is

declines in sales, we are encouraged by the

called the Dynatron ThermostimTM Probe. This

fact that sales of our proprietary manufactured

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Introduction of the ThermoStim

Probe, promises to be one of the

most significant contributions

to the Physical Therapy

market in the last decade.

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poised to make a major impact on the market in

2014

Poised to make a major impact on the market in 2014, a quick review of Dynatronics’

history reveals that two things have significantly moved the sales and profitability

needle in the past—extending distribution and leveraging new technology.

1996—ACquisition of superior ortHopediC supplies, inC.

The acquisition of Superior Orthopedic Supplies expanded Dynatronics’ manufactured

product offerings by over 200 products, including hot/cold packs, supports, pillows, and

therapy tables. Sales for fiscal year 1996 jumped 50%, following this major acquisition.

2004—introduCtion of solAris series

Dynatronics once again raised the bar for technological innovation with the introduction

of the Solaris Series of electrotherapy devices. After one year on the market, no other

company had yet offered the unique combination of 7 electrotherapy modalities,

3-frequency ultrasound capabilities, and the option of adding light therapy. Leveraging

this new technology, company profits jumped from $24,799 to $883,300.

2008—deAler ACquisitions

The acquisition of 6 key dealers expanded Dynatronics’ influence and direct sales access nationwide.

With improved sales margins, increased number of sales reps, and solid presence in 29 states

across the nation, Dynatronics sales nearly doubled from $17.8 million to $32.6 million.

2014—tHermostim probe

Introduction of the ThermoStim Probe, promises to be one of the most significant contributions to

the Physical Therapy market in the last decade. No other device on the market can supply a variety

of Stim outputs combined with both heat (112°) and cold (35°) options in one device. Designed as an

optional accessory to the SolarisPlus Series, this revolutionary tool facilitates the delivery of three

different therapies in one treatment, significantly reducing the time typically required to administer

separate treatments. By leveraging proprietary technology, the new ThermoStim Probe will be the

catalyst to boost sales and attract new distributors, beginning midway through fiscal year 2014.

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boArd of direCtors

Pictured above, in order from left to right

Kelvyn H. Cullimore, Jr.

Chairman, President and CEO

Larry K. Beardall

Executive Vice President of Sales and Marketing

Joseph H. Barton

Director

Howard L. Edwards

Director

R. Scott Ward, Ph.D.

Director

mAnAgement teAm

Kelvyn H. Cullimore, Jr.

Chairman, President and CEO

Larry K. Beardall

Executive Vice President of Sales and Marketing

Terry M. Atkinson, CPA

Chief Financial Officer

Robert J. (Bob) Cardon

Vice President of Administration, Secretary/Treasurer

Douglas G. Sampson

Vice President of Production and R&D

Bryan D. Alsop

Vice President of Information Technology

discussion & analysis

MGMT

The following discussion should be read in conjunction with our consolidated financial statements and

notes to those consolidated financial 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 differ materially from our expectations.

overview—Our principal business is the distribution and marketing of physical medicine

products and aesthetic products, many of which we design and manufacture. We offer a broad

line of medical equipment including therapy devices, medical supplies and soft goods, treatment

tables and rehabilitation equipment. Our line of aesthetic 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 fiscal

year ends on June 30. Reference to fiscal year 2013 refers to the year ended June 30, 2013.

results of operAtions

20% of the reduced sales are due to a single

Fiscal Year 2013 Compared to Fiscal Year 2012

manufacturer that changed their distribution

paradigm negatively impacting our sales

net sAles—Net sales in fiscal year

of their products. The continued general

2013 were $29,538,275 compared to

economic weakness in our primary markets

$31,664,181 in fiscal year 2012. The

combined with uncertainties over anticipation

$2,125,906 decrease is characterized by

of negative market impacts related to

sales reductions evenly split between supplies

provisions of the Affordable Care Act also

and capital equipment distributed for other

contributed to lower sales, particularly of

manufacturers. Consolidated sales of

capital equipment. The reductions in sales of

proprietary manufactured products actually

distributed medical supplies during the year

increased over the prior year with more

include the impact of a single large customer

significant gains in sales of the new Dynatron

that discontinued operations in early 2012.

Solaris Plus family of products offsetting

Sales of proprietary manufactured

lower sales of other proprietary manufactured

physical medicine products represented

products. The decline in sales of products

approximately 46% and 42% of total physical

distributed for other manufacturers is

medicine product sales in fiscal years 2013

attributable to several factors. Approximately

and 2012, respectively. Distribution of

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products manufactured by other suppliers

products increases in conjunction with the

2012. R&D expenses are expected to increase

above, we have taken steps to reduce expenses

accounted for the balance of our physical

introduction of our new ThermoStim Probe in

slightly in fiscal year 2014, as a result of the

at an annualized amount of approximately

medicine product sales in those years.

the quarter ending December 31, 2013, sales

introduction of the new ThermoStim Probe.

$500,000 during fiscal year 2014.

Sales of manufactured aesthetic products

growth will resume and, as a result, gross profit

However, those increases will mostly be incurred

in fiscal years 2013 and 2012, represented

will improve. In addition, as healthcare reform

in the first two quarters of the next fiscal

inCome tAx benefit—Income tax benefit

approximately 78% and 73% of total

progresses, we expect uncertainty in our market

year. R&D costs are expensed as incurred.

was $86,754 in fiscal year 2013, compared

aesthetic product sales, respectively, with

to diminish, confidence to increase and demand

to $166,706 in fiscal year 2012. Due to tax

distributed products making up the balance.

for our products to begin to strengthen.

interest expense—Interest expense

benefits associated with R&D tax credits

The majority of our sales revenues come

decreased by $1,294, to $260,699 in fiscal

and other credits, the effective income tax

from the sale of physical medicine products,

selling, generAl And AdministrAtive

year 2013 compared to $261,993 in fiscal year

benefit rate in fiscal year 2013 was 66.2%

both manufactured and distributed. In

expenses—Selling, General and Administra-

2012 due to lower balances on our long-term

compared to an effective tax benefit rate

fiscal years 2013 and 2012, sales of physical

tive, or SG&A expenses were $9,860,964,

debt compared to fiscal year 2012. During

of 87.6% in 2012. The difference in the

medicine products accounted for 91%

or 33.4% of net sales, in fiscal year 2013,

fiscal 2013, we paid off the first mortgage

effective tax rates is attributable to lower

of total sales in both years. Chargeable

compared to $10,506,460, or 33.2% of net

on our Cottonwood Heights facility.

R&D tax credits in fiscal year 2013, as well as

repairs, billable freight revenue, aesthetic

sales, in fiscal year 2012. The $645,496

certain permanent book to tax differences.

product sales and other miscellaneous

decrease in SG&A expenses in fiscal year 2013

loss before inCome tAx benefit—

revenue accounted for approximately

as compared to 2012 is a result of the following:

Pre-tax loss in fiscal year 2013 was $131,125,

net loss—Net loss was $44,371 ($.02

9% of total revenues in both years.

compared to $190,241 in fiscal year 2012, an

per share) in fiscal year 2013, compared to

During the fiscal year ended June 30,

$396,178 of lower selling expenses due

improvement of 31%. The decrease in pre-tax

$23,535 ($.01 per share) in fiscal year 2012.

2013, we introduced more new proprietary

primarily to lower sales commissions;

loss for 2013 resulted from lower selling,

As reported in the section above entitled Loss

manufactured products than at any other time

$154,872 of lower labor and overhead costs;

labor, and R&D expenses. More specifically,

Before Income Tax Benefit, operating losses

in our history. However, the full impact of

$94,446 of lower general expenses primarily

an $856,631 reduction in gross margin was

were reduced by nearly one third in fiscal year

these new products will not likely be seen until

related to a reduction in professional fees.

offset by reducing SG&A and R&D expenses by

2013 compared to fiscal year 2012. Therefore,

the next fiscal year. They do provide a strong

foundation for a strategy

to reverse the trend of

declining sales experienced

this past fiscal year.

...management identified
over $500,000 of new
annual cost reductions...

During the first

quarter of fiscal year 2014,

management identified over

$500,000 of new annual

cost reductions which are

$935,015 for the year ended June 30, 2013. It

the reason net loss increased from $23,535

should be noted that during the year we paid

last year to $44,371 this year is due to higher

$81,736 in medical device taxes as required

income tax benefits last year associated with

by the Affordable Care Act. This Medical

higher R&D tax credits compared to this year.

Device Tax is assessed on sales regardless of

We expect improved profitability in fiscal year

profitability. Therefore, despite the fact we

2014 due to the planned introduction of an

gross profit—Gross

being implemented to further

did not generate an operating profit we were

important new product in the quarter ending

profit totaled $11,086,602, or 37.5% of

reduce labor and overhead costs and improve

still required to pay these excise taxes as

December 31, 2013 and with our planned

net sales, in fiscal year 2013, compared to

operating efficiencies in future periods.

noted above which contributed to the losses

expense reductions which are scheduled to

$11,943,233, or 37.7% of net sales, in fiscal

incurred during the fiscal year. As noted

be implemented during the fiscal year 2014.

year 2012. The decrease in gross profit

reseArCH And development—Over the

during the year directly reflects lower sales

last three years, we have undertaken the most

generated during the current fiscal year as

extensive research and development (“R&D”)

liquidity And CApitAl resourCes

reported above. Lower sales and margins

effort in our history. More new products have

We have financed operations through available cash reserves and borrowings under a line of credit with a

of distributed capital equipment and certain

been introduced during this period of time than

bank. Working capital was $3,516,011 as of June 30, 2013, inclusive of the current portion of long-term

medical supplies were partially offset by higher

any period since our formation. These new

obligations and credit facilities, compared to working capital of $3,565,858 as of June 30, 2012. During

sales and margins from the new SolarisPlus

products include the Quad7 thermal therapy

fiscal year 2013, we generated $643,106 in cash from operating activities, used $418,386 to pay down

and Quad7 products. Overall, gross margin

device, the Dynatron SolarisPlus line of four

principal on long-term debt, paid $100,438 for capital expenditures primarily related to improving

as a percent of sales, remained virtually

electrotherapy/ultrasound devices enabled

our e-commerce and IT infrastructure, and paid $99,997 to repurchase and retire common stock.

unchanged. The implementation of the Medical

to power two phototherapy accessories, the

Device Tax on January 1, 2013, as required by

Ultra 2 and Ultra 3 treatment tables, and the

ACCounts reCeivAble—Trade accounts

customers. Accounts receivable are generally

the Affordable Care Act placed a 2.3% tax on

25 Series line of four therapy devices. With

receivable, net of allowance for doubtful

collected within 30 days of the agreed terms.

sales of proprietary manufactured products

the completion of development of the Quad7,

accounts, decreased $420,374, or 11.5%, to

and products imported by us for distribution

Ultra tables and SolarisPlus product line, we

$3,246,712 as of June 30, 2013, compared

inventories—Inventories, net of reserves,

in the United States. This tax had the effect

were able to reduce research and development

to $3,667,086 as of June 30, 2012. Trade

increased $308,956, or 5.1%, to $6,407,553

of lowering gross profits during the year as it

(“R&D”) expense during the early part of

accounts receivable represent amounts

as of June 30, 2013, compared to $6,098,597

effectively increased the cost of goods sold

fiscal year 2013 to more normal levels. R&D

due from our dealer network as well as

as of June 30, 2012. During fiscal year

on all items taxed. During the fiscal year

expenses for 2013 were $1,120,887 compared

from medical practitioners and clinics. We

2013, we increased our inventory of parts

we paid $81,736 in medical device taxes.

to $1,410,406 in 2012. R&D expense decreased

believe that our estimate of the allowance for

in conjunction with the introduction of the

Management believes that as market

as a percentage of net sales in fiscal year 2013

doubtful accounts is adequate based on our

Dynatron SolarisPlus product line, Ultra

demand for our proprietary manufactured

to 3.8% from 4.5% of net sales in fiscal year

historical knowledge and relationship with our

Tables product line and the 25 Series product

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line. In addition, inventory levels fluctuate

3.5%. The line of credit is collateralized by

inventory reserves—The nature of our

customer, and collection of any resulting

based on the timing of large inventory

accounts receivable and inventories. Borrowing

business requires that we maintain sufficient

receivable is reasonably assured. Amounts

purchases from overseas suppliers.

limitations are based on approximately 45%

inventory on hand at all times to meet the

billed for shipping and handling of products

of eligible inventory and up to 80% of eligible

requirements of our customers. We record

are recorded as sales revenue. Costs

ACCounts pAyAble—Accounts payable

accounts receivable, up to a maximum credit

finished goods inventory at the lower of standard

for shipping and handling of products to

increased $338,693, or 14.0%, to $2,751,894

facility of $7,000,000. Interest payments

cost, which approximates actual cost (first-in,

customers are recorded as cost of sales.

as of June 30, 2013, from $2,413,201 as of

on the line are due monthly. As of June 30,

first-out) or market. Raw materials are recorded

June 30, 2012. The increase in accounts

2013, the borrowing base was approximately

at the lower of cost (first-in, first-out) or market.

AllowAnCe for doubtful ACCounts—

payable is a result of increased inventories,

$4,821,000, resulting in approximately

Inventory valuation reserves are maintained

We must make estimates of the collect-

the timing of our weekly payments to suppliers

$1,325,000 available on the line. The line of

for the estimated impairment of the inventory.

ability of accounts receivable. In doing

and the timing of purchases of product

credit is renewable on December 15, 2013 and

Impairment may be a result of slow-moving

so, we analyze historical bad debt trends,

components. Accounts payable are generally

includes covenants requiring us to maintain

or excess inventory, product obsolescence

customer credit worthiness, current economic

not aged beyond the terms of our suppliers.

certain financial ratios. As of June 30, 2013,

or changes in the valuation of the inventory.

trends and changes in customer payment

We take advantage of available early payment

we were in compliance with the loan covenants

In determining the adequacy of reserves, we

patterns when evaluating the adequacy of

discounts when offered by our vendors.

or had received waivers of compliance. If the

analyze the following, among other things:

the allowance for doubtful accounts. Our

line of credit is not extended, we will need to

accounts receivable balance was $3,246,712

CAsH And CAsH equivAlents—Our cash

find additional sources of financing. Failure

Current inventory quantities on hand;

and $3,667,086, net of allowance for doubtful

position as of June 30, 2013 was $302,050,

to obtain additional financing would have

Product acceptance in the marketplace;

accounts of $247,708 and $201,349, as of

compared to cash of $278,263 as of June

a material adverse effect on our business

30, 2012. We expect that cash flows from

operations. All borrowings under the line of

operating activities, together with amounts

credit are presented as current liabilities in the

Customer demand;

Historical sales;

Forecast sales;

June 30, 2013 and 2012, respectively.

deferred inCome tAx Assets—In

available through an existing line-of-credit

accompanying consolidated balance sheet.

Product obsolescence;

assessing the deferred income tax assets,

facility, will be sufficient to cover operating

The current ratio remained constant

Technological innovations; and

management considers whether it is more

needs in the ordinary course of business for

at 1.5 to 1 as of June 30, 2013 and June

Character of the inventory as a distributed

likely than not that some portion or all of the

the next twelve months. If we experience an

30, 2012. Current assets represented

item, finished manufactured item or

deferred income tax assets will not be realized.

adverse operating environment, including a

72% of total assets as of June 30, 2013

raw material.

The ultimate realization of deferred income tax

further worsening of the general economy in the

compared to 70% as of June 30, 2012.

assets is dependent upon the generation of

United States, or unusual capital expenditure

Any modifications to estimates of

future taxable income during the years in which

requirements, additional financing may be

debt—Long-term debt (excluding current

inventory valuation reserves are reflected in

those temporary differences become deductible.

required. However, no assurance can be given

installments) totaled $1,561,776 as of

cost of goods sold within the statements of

Management considers the scheduled reversal

that additional financing, if required, would be

June 30, 2013, compared to $1,916,315

operations during the period in which such

of deferred income tax liabilities, projected

available on terms favorable to us, or at all.

as of June 30, 2012. Long-term debt is

modifications are determined necessary

future taxable income, and tax planning

comprised primarily of the mortgage loans

by management. As of June 30, 2013 and

strategies in making this assessment. Based

line of Credit—During fiscal year 2013,

on our office and manufacturing facilities in

2012, our inventory valuation reserve balance,

upon the level of historical taxable income

the outstanding balance on our line of credit

Utah and Tennessee. The principal balance

which established a new cost basis, was

and projections for future taxable income over

remained steady with a balance outstanding

on the mortgage loans is approximately

$327,519 and $292,999, respectively, and

the periods which the deferred income tax

of $3,496,390 as of June 30, 2013, compared

$1,762,255 with monthly principal and interest

our inventory balance was $6,407,553 and

assets are deductible, management believes

to $3,497,597 as of June 30, 2012. Interest

payments of $30,263. For a more complete

$6,098,597, net of reserves, respectively.

it is more likely than not that we will realize

on the line of credit is based on the 90-day

explanation of the long-term debt, see Note

the benefits of these deductible differences.

LIBOR rate (0.27% as of June 30, 2013) plus

7 to the consolidated financial statements.

revenue reCognition— Our sales

We have available at June 30, 2013 and

CritiCAl ACCounting poliCies

force and distributors sell our products to

2012 federal and state net operating loss

end users, including physical therapists,

(“NOL”) carry forwards of $499,614 and

professional trainers, athletic trainers,

$558,062, respectively. The federal NOLs

Management’s discussion and analysis of financial condition and results of operations is based

chiropractors, medical doctors and

will expire in 2028. The state NOLs will

upon our consolidated financial statements, which have been prepared in accordance with U.S.

aestheticians. Sales revenues are recorded

expire depending upon the various rules in

generally accepted accounting principles. The preparation of these financial statements requires

when products are shipped FOB shipping

the states in which we operate. Our federal

estimates and judgments that affect the reported amounts of our assets, liabilities, net sales

point under an agreement with a customer,

and state income tax returns for June 30,

and expenses. Management bases estimates on historical experience and other assumptions it

risk of loss and title have passed to the

2010, 2011, and 2012 are open tax years.

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.

We believe that the following critical accounting policies involve a high degree of judgment and

business plAn And outlooK

complexity. See Note 1 to our consolidated financial statements for fiscal year 2013, for a complete

During the past three years, we have focused much of our resources and energy on developing new

discussion of our significant accounting policies. The following summary sets forth information regarding

and innovative products. The scope of that R&D effort has been more significant than at any time

significant estimates and judgments used in the preparation of our consolidated financial statements.

in our history. As a result, we have introduced several important new products over the past year.

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In June 2013, we began shipping our new

part of the SolarisPlus product line, we also

version of the catalog that is incorporated into

many of the large GPO accounts. As a result,

Dynatron® 25 Series electrotherapy/ultrasound

introduced a new display cart specifically

our e-commerce website. The new catalog has

we have turned our attention more toward

line of combination therapy devices. This

designed for these units. The SolarisPlus

been praised for its clarity and ease of use.

accessible national and regional accounts where

new line consists of four separate devices:

line is expected to quickly become popular

Over the past few years, consolidations in

we can more easily prove our value proposition.

the Dynatron 925, Dynatron 825, Dynatron

for its power and versatility. The new units

our market have changed the landscape of our

While we have not abandoned efforts to secure

625 and Dynatron 525. These four units

are capable of simultaneously powering five

industry’s distribution channels. At the present

GPO and large national account business, we

provide seven different types of electrotherapy

electrotherapy channels, ultrasound therapy,

time, we believe that there remain only two

have become more strategic in our approach to

treatments and three frequencies of ultrasound,

a phototherapy probe and phototherapy pad.

companies with a national direct sales force

such business. Last year we were successful

including our proprietary three-frequency

No other device on the market offers such

selling proprietary and distributed products:

in qualifying to be an approved vendor to the

ultrasound transducers. They are capable of

powerful simultaneous combination therapies.

Dynatronics and Patterson Medical. All other

federal government, including the Veterans

delivering between three and five separate

In the quarter ended December 31, 2013,

distribution in our market is directed through

Administration hospitals and medical facilities

treatments simultaneously, depending on

we anticipate introducing the ThermoStim

catalog companies with a limited direct sales

associated with military installations. These

the model. The ability to provide multiple

probe - one of the most innovative and

force, or through independent local dealers that

types of contracts are strategically more

treatments simultaneously is expected to be

revolutionary products in our history. The

have limited geographical reach. In the past

accessible for us than GPO business.

very helpful in busy clinics and training rooms,

ThermoStim probe will offer the ability to do

year, we have reinforced our direct sales team

Economic pressures from the recent

or for patients needing treatment of multiple

thermal therapy (hot and cold) and/or elec-

that includes over 50 direct sales employees

recession in the United States have affected

areas of the body. This new product line was

trotherapy in a targeted, attended treatment.

and independent sales representatives. In

available credit that would facilitate large capital

specially designed to be sold through our

The hand held probe is an accessory to the

addition to these direct sales representatives,

purchases, and have also reduced demand for

expanding channel of general line distributors.

Dynatron SolarisPlus family of products. Unlike

we continue to enjoy a strong relationship with

discretionary services such as those provided

In December 2012, we introduced a new

its predecessor, also called the ThermoStim

scores of independent dealers. We believe we

by the purchasers of our aesthetic products.

line of motorized treatment tables. The Ultra 2

probe, this new probe does not require a water

have the best trained and most knowledgeable

As a result, we reduced our expenses in the

and Ultra 3 are the first two of possibly several

source to heat and cool the surface of the

sales force in the industry. We are actively

Synergie department. We believe that our

other future treatment tables manufactured

treatment face. Instead, a thermoelectric chip

seeking to expand our market penetration

aesthetic devices remain the best value on

for us by Enraf-Nonius, a well-established

powers the thermal therapy controlled by the

through increased distribution. To accomplish

the market and we are seeking innovative

manufacturer of physical therapy products in

Dynatron SolarisPlus console. This innovative

this, we have, for the first time in our history,

ways to market these products, including

Europe. These tables offer features popular

probe is expected to generate significant

made available to all distributors and qualified

strategic partnerships, both domestic and

to the practitioner such as full-length foot

demand not only for the probe, but also for the

sales persons, a family of proprietary

international, to help enhance sales momentum.

bars that elevate and lower the table height

new SolarisPlus units which serve as the control

combination therapy devices, the Dynatron 25

We have long believed that international

together with a unique wheel raising system

console for the probe. It will be the catalyst

Series. The availability of these products is

markets present an untapped potential for

that lifts the table allowing an easy change

to boost sales and attract new distributors

attracting new distributors and sales persons.

growth and expansion. Adding new distributors

between mobility and stability. Enraf tables

beginning midway through fiscal year 2014.

are known for their high quality standards and

With most of the planned new products

are competitively priced for the US market.

now released, R&D costs cycled back to a lower

In August 2012, we introduced to the

level more in line with historical amounts during

market our new Dynatron SolarisPlus line of

fiscal year 2013. Those R&D costs are expected

electrotherapy/ultrasound/ phototherapy units.

to rise again during the first part of fiscal year

This new product line consists of four new

2014 as the new ThermoStim Probe is finalized.

units: the Dynatron SolarisPlus 709, 708, 706,

Management is confident the investments

In addition, where

these sales persons

have had limited or

no access to premier

lines like the Dynatron

SolarisPlus products,

they will now be able to

access these products

We are actively seeking
to expand our market
penetration through
increased distribution.

in several countries will be

the key to this expansion

effort. We remain

committed to finding the

most effective ways to

expand our markets inter-

nationally. Over the coming

year, our efforts will be

and 705. These attractive new units provide

made in R&D will yield long-term benefits and

in certain geographical areas through the

focused on partnering with key manufacturers

our most advanced technology in combination

are important to assuring that we maintain

authorized sales representative or dealer

and distributors interested in our product line

therapy devices by adding phototherapy

our reputation in the industry for being an

who has the rights to the products in those

or technology. Our Utah facility, where all elec-

capabilities to enhanced electrotherapy

innovator and leader in product development.

territories. Making these products more widely

trotherapy, ultrasound, traction, phototherapy

and ultrasound combination devices. The

In April 2013, we began shipping the newly

available will increase our ability to expand

and Synergie products are manufactured, is

Dynatron SolarisPlus line of products features

updated version of our product catalog to

distribution of not only our own proprietary

certified to ISO 13485:2003, an internationally

a Tri-Wave phototherapy probe and a Tri-Wave

customers. This new catalog not only includes

products, but also those we distribute on

recognized standard of excellence in medical

phototherapy pad. Tri-Wave phototherapy

our new proprietary products previously

behalf of other manufacturers. This strategic

device manufacturing. This designation is an

features infrared, red and blue wavelength

discussed, but also expands our offering of

expansion of distribution will begin to hit

important requirement in obtaining the CE

light. The new Dynatron Solaris Tri-Wave

non-proprietary products by hundreds of

stride as the new ThermoStim product is

Mark certification, which allows us to market

phototherapy pad is capable of treating large

items in order to better service the broader

released in the second fiscal quarter of 2014.

our products in the European Union and in

areas of the body via unattended infrared,

needs of our customers. It also provides an

Pursuit of national accounts, including

other international locations. The introduction

red and blue wavelength phototherapy. The

excellent new sales tool for all of our sales

Group Purchasing Organizations (GPO)

of several important new products has

Tri-Wave phototherapy probe allows the

representatives in the field and the foundation

continues to be a strategic endeavor. However,

generated new interest on the part of some

practitioner to treat specific, targeted areas

for expanding our e-commerce platform. The

securing such accounts has proven to be elusive

foreign distributors in Asia, Europe and South

of the body in an attended treatment. As

new catalog includes an online electronic

as entrenched suppliers seem to dominate

America. As we secure CE Mark Certification

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for our products we will be better able to explore

Seeking to improve distribution of

the interest of these distributors. Refining our

our products through recruitment of

sHAreHolders

business model for supporting sales representa-

additional qualified sales representa-

As of September 18, 2013, the approximate number of shareholders of record was

tives and distributors will also be a focal point

tives and dealers attracted by the many

393. This number does not include beneficial owners of shares held in “nominee”

of operations.

We will continue

to evaluate the

most efficient

ways to maintain

our satellite

sales offices

Refining our business model
for supporting sales
representatives and distributors will
also be a focal point of operations.

new products

being offered

and expanding

the availability

of proprietary

combination

or “street” name. Including such beneficial owners, we estimate that the total

number of beneficial owners of our common stock is approximately 2,200.

dividends

We have never paid cash dividends on our common stock. Our anticipated

therapy devices.

capital requirements are such that we intend to follow a policy of retaining

and warehouses. The ongoing refinement

Increasing market share with our new

earnings in order to finance the development of the business.

of this model is expected to yield further

2013-14 product catalog featuring

efficiencies that will better achieve sales goals

a broader product offering.

while, at the same time, reduce expenses.

Continue to seek ways of increasing

nAsdAq

Our efforts to prudently reduce costs in

business with GPOs, as well as through

Minimum Bid Requirement

the face of some economic uncertainty have

GSA contracts with the U.S. Government

made us a leaner operation. During fiscal year

and to national and regional accounts.

On January 8, 2013, we announced that we had received notification from NASDAQ that we

2013 we implemented almost $1,000,000

Improving operational efficiencies by scaling

had regained compliance with the $1.00 minimum bid requirement for continued listing

in expense reductions. So far in fiscal

costs to be reflective of current levels of

on that exchange as a result of a 1 for 5 reverse split of our common stock effected on

2014 we have identified another $500,000

sales. Strengthening pricing management

December 19, 2012. All common share and per share information in the accompanying

annually in cost savings that have been or

and procurement methodologies.

condensed consolidated financial statements and notes thereto have been adjusted to

will be implemented to reduce expenses. We

Minimizing expense associated in the

reflect retrospective application of the reverse stock split, except for par value per share and

will continue to be vigilant in maintaining

Synergie department until demand

the number of authorized shares, which were not affected by the reverse stock split.

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appropriate overhead costs and operating costs

for capital equipment re-emerges,

while still providing support for anticipated

and, in the meantime, seeking

increases in sales from our new products.

additional independent distributors

Based on our defined strategic

and strategic partnerships.

initiatives, we are focusing our

resources in the following areas:

Focusing international sales efforts

on identifying key distributors

and strategic partners who could

Increasing market share of manufactured

represent the Company’s product line,

capital products by promoting sales

particularly in Europe and China.

of our new state-of-the-art Dynatron

Exploring strategic business alliances

SolarisPlus and 25 Series products.

that will leverage and complement

Introducing additional new products such as

our competitive strengths, increase

the ThermoStim Probe to better capitalize

market reach and supplement

on opportunities in our core markets.

capital resources.

mArKet informAtion

As of September 18, 2013, we had approximately 2,518,904 shares of common stock issued and

outstanding. Our common stock is included on the NASDAQ Capital Market (symbol: DYNT). The

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. All common stock share and per share information

in the tables below have been adjusted to reflect retrospective application of the reverse stock split.

Fiscal Year Ended June 30,

2013

2012

1st Quarter (July-September)

2nd Quarter (October-December)

3rd Quarter (January-March)

4th Quarter (April-June)

High

Low

3.25

2.35

4.24

2.00

3.95

2.30

2.86

2.45

High

Low

8.85

4.00

4.15

3.11

4.65

3.33

4.00

2.36

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independent registered public accounting firm

REPORT

to tHe boArd of direCtors And stoCKHolders,

We have audited the accompanying consolidated balance

sheet of Dynatronics Corporation and subsidiary (collectively,

the Company) as of June 30, 2013, and the related

We have audited the consolidated balance sheet of

Dynatronics Corporation and subsidiary (collectively, the

Company) as of June 30, 2012, and the related consolidated

consolidated statements of operations, stockholders’ equity, and cash flows for the year then

statements of operations, stockholders’ equity, and cash flows for the year then ended.

ended. These financial statements are the responsibility of the Company’s management. Our

These financial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these financial statements based on our audits.

responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company

Accounting Oversight Board (United States). Those standards require that we plan and

perform the audit 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 its 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 also includes examining,

reporting. Accordingly, we express no such opinion. An audit includes examining, on a

on a test basis, evidence supporting the amounts and disclosures in the financial

test basis, evidence supporting the amounts and disclosures in the financial statements.

statements. An audit also includes assessing the accounting principles used and significant

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.

presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material

In our opinion, the financial statements referred to above present fairly, in all

respects, the financial position of Dynatronics Corporation and subsidiary as of June

material respects, the financial position of Dynatronics Corporation and subsidiary as

30, 2013, and the results of its operations and its cash flows for the year then ended in

of June 30, 2012, and the results of their operations and their cash flows for the year

conformity with accounting principles generally accepted in the United States of America.

then ended in conformity with U.S. generally accepted accounting principles.

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Salt Lake City, Utah

September 30, 2013

Salt Lake City, Utah

September 28, 2012

dynAtroniCs CorporAtion ConsolidAted bAlAnCe sHeets

dynAtroniCs CorporAtion ConsolidAted stAtements of operAtions

June 30, 2013 and 2012

Years ended June 30, 2013 and 2012

Assets

Current assets:

Net sales

Cost of sales

2013

2012

2013

2012

$ 29,538,275

31,664,181

18,451,673

19,720,948

Cash and cash equivalents

302,050

278,263

Trade accounts receivable, less allowance for doubtful accounts of

Gross profit

11,086,602

11,943,233

$247,708 as of June 30, 2013 and $201,349 as of June 30, 2012

3,246,712

3,667,086

Other receivables

Inventories, net

Prepaid expenses and other assets

Prepaid income taxes

Current portion of deferred income tax asset

27,197

11,718

6,407,553

6,098,597

506,836

—

389,101

226,596

3,550

368,348

Total current assets

10,879,449

10,654,158

Selling, general, and administrative expenses

Research and development expenses

9,860,964

10,506,460

1,120,887

1,410,406

Operating income

104,751

26,367

Property and equipment, net

Intangible asset, net

Other assets

Deferred income tax assets, net of current portion

3,324,947

3,677,898

Other Income (expense):

280,078

422,672

197,441

324,715

482,719

131,440

Interest income

Interest expense

Other income, net

681

16,183

(260,699)

(261,993)

24,142

29,202

Total assets

$ 15,104,587

15,270,930

Total other income (expense)

(235,876)

(216,608)

Liabilities and Stockholders’ Equity

Current liabilities:

Current portion of long-term debt

322,573

395,055

Line of credit

Warranty reserve

Accounts payable

Accrued expenses

Accrued payroll and benefits expenses

Income tax payable

3,496,390

3,497,597

178,148

181,000

2,751,894

2,413,201

347,221

216,266

21,369

386,229

215,218

—

Loss before income tax benefit

(131,125)

(190,241)

Income tax benefit

86,754

166,706

Net loss

Basic and diluted net loss per common share

(44,371)

(23,535)

(0.02)

(0.01)

Total current liabilities

7,333,861

7,088,300

Weighted-average basic and diluted common shares outstanding:

2,526,533

2,562,203

Long-term debt, net of current portion

1,561,776

1,916,315

Total liabilities

8,895,637

9,004,615

Commitments and contingencies

Stockholders’ equity:

Common stock, no par value: Authorized 50,000,000

shares; issued 2,518,904 shares as of June 30, 2013

and 2,537,730 shares as of June 30, 2012

7,078,941

7,091,935

Accumulated deficit

(869,991)

(825,620)

Total stockholders’ equity

6,208,950

6,266,315

Total liabilities and stockholders’ equity

$ 15,104,587

15,270,930

See accompanying notes to consolidated financial statements.

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dynAtroniCs CorporAtion ConsolidAted stAtements of stoCKHolders' equity

dynAtroniCs CorporAtion ConsolidAted stAtements of CAsH flows

Years ended June 30, 2013 and 2012

Number of

shares*

Common

Accumulated

Stockholders’

Total

stock

Deficit

Equity

Cash flows from operating activities:

2013

2012

Net loss

(44,371)

(23,535)

Balances at July 1, 2011

2,612,078

7,417,244

(802,085)

6,615,159

Adjustments to reconcile net loss to net cash

Repurchase of common stock

(79,857)

(401,408)

Stock based compensation

5,509

76,099

—

(401,408)

76,099

provided by operating activities:

Depreciation & amortization of property & equipment

Amortization of intangible and other assets

Gain on sale of assets

Stock-based compensation expense

435,366

118,335

(2,993)

86,639

404,374

44,637

—

76,099

Net loss

—

(23,535)

Change in deferred income tax assets

(86,754)

(166,706)

Balances at June 30, 2012

2,537,730

7,091,935

(825,620)

6,266,315

Provision for inventory obsolescence

Provision for doubtful accounts receivable

Repurchase of common stock

(32,786)

(99,997)

Stock-based compensation

13,689

86,639

—

(99,997)

86,639

Issuance of common

stock upon exercise of

employee stock options

208

364

—

364

Change in operating assets and liabilities:

Receivables

Inventories

Prepaid expenses and other assets

Prepaid income taxes

Accounts payable and accrued expenses

180,000

206,460

224,895

(515,416)

(281,855)

23,615

299,185

108,000

120,000

(100,512)

(570,782)

(148,607)

27,771

265,073

Net cash provided by operating activities

643,106

35,812

Shares issued due to

stock split rounding

Net loss

—

Proceeds from sale of property and equipment

345

—

Cash flows from investing activities:

Purchase of property and equipment

(100,438)

(328,707)

(44,371)

Net cash used in investing activities

(100,093)

(328,707)

Balances at June 30, 2013

2,518,904

7,078,941

(869,991)

6,208,950

Cash flows from financing activities:

*Reflects adjusted shares due to 1:5 reverse stock split effective December 19, 2012

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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

—

45,341

(418,386)

(371,339)

(1,207)

364

913,660

—

Purchase and retirement of common stock

(99,997)

(401,408)

Net cash provided by (used in) financing activities

(519,226)

186,254

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of the year

23,787

278,263

(106,641)

384,904

Cash and cash equivalents at end of the year

302,050

278,263

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosures of non-cash investing and financing activities:

Long-term debt incurred for purchase of property and equipment

259,794

—

263,491

2,100

44,334

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See accompanying notes to consolidated financial statements.

consolidated financial statements

NOTES

(1) bAsis of presentAtion And summAry of signifiCAnt ACCounting poliCies

(A) desCription of business—

(d) inventories—Finished goods

Dynatronics Corporation (the Company), a

inventories are stated at the lower of

Utah corporation, distributes and markets

standard cost (first-in, first-out method),

a broad line of medical and aesthetic

which approximates actual cost, or market.

products, many of which are designed and

Raw materials are stated at the lower of

manufactured by the Company. Among

cost (first in, first out method) or market.

the products offered by the Company are

The Company periodically reviews the

therapeutic, diagnostic, and rehabilitation

value of items in inventory and provides

equipment, medical supplies and soft goods,

write-downs or write-offs of inventory

treatment tables and aesthetic medical

based on its assessment of slow moving

devices to an expanding market of physical

or obsolete inventory. Write-downs and

therapists, podiatrists, orthopedists,

write-offs are charged against the reserve.

chiropractors, plastic surgeons, dermatolo-

gists, and other medical professionals.

(e) trAde ACCounts reCeivAble—Trade

accounts receivable are recorded at the

(b) prinCiples of ConsolidAtion—

invoiced amount and do not bear interest,

The consolidated financial statements

although a finance charge may be applied

include the accounts and operations of

to such receivables that are past due. The

Dynatronics Corporation and its wholly

allowance for doubtful accounts is the

owned subsidiary, Dynatronics Distribution

Company’s best estimate of the amount of

Company, LLC. All significant intercompany

probable credit losses in the Company’s

account balances and transactions have

existing accounts receivable. The Company

been eliminated in consolidation.

determines the allowance based on a

combination of statistical analysis, historical

collections, customers’ current credit

include all highly liquid investments with

worthiness, the age of the receivable balance

maturities of three months or less at the

both individually and in the aggregate and

date of purchase. Also included within cash

general economic conditions that may affect

equivalents are deposits in-transit from

the customer’s ability to pay. All account

banks for payments related to third-party

balances are reviewed on an individual basis.

credit card and debit card transactions.

Account balances are charged off against

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the allowance when the potential for

and handling of products to customers

recovery is considered remote. Recoveries

are recorded as cost of sales.

2013

2012

of receivables previously charged off are

Basic weighted-average number of common shares outstanding during the year

2,526,533

2,562,203

recognized when payment is received.

(J) reseArCH And development

Weighted-average number of dilutive common stock

Costs—Direct research and development

options outstanding during the year

—

(f) property And equipment—

costs are expensed as incurred.

Property and equipment are stated at

Diluted weighted-average number of common and common

cost less accumulated depreciation.

(K) produCt wArrAnty Costs—Costs

equivalent shares outstanding during the year

2,526,533

2,562,203

Depreciation is computed using the

estimated to be incurred in connection with

straight line method over the estimated

the Company’s product warranty programs

useful lives of the assets. The building

are charged to expense as products are

and its component parts are being

sold based on historical warranty rates.

Outstanding options not included in the

The Company evaluates the need for a valuation

depreciated over their estimated useful

computation of diluted net loss per common

allowance on deferred taxes on a quarterly and annual

lives that range from 5 to 31.5 years.

(l) net inCome (loss) per Common

share totaled 161,454 as of June 30, 2013.

basis. This evaluation considers the level of historical

Estimated lives for all other depreciable

sHAre—Net income (loss) per common

These common stock equivalents were

taxable income and projections for future taxable

assets range from 3 to 7 years.

share is computed based on the weighted-

not included in the computation because

income over the periods which the deferred income

average number of common shares

to do so would have been antidilutive.

tax assets are deductible. If management determines

assets, such as property and equipment, are

dilutive common stock equivalents

(m) inCome tAxes—The Company

will not realize the benefits of these deductible

(g) long-lived Assets—Long–lived

outstanding and, when appropriate,

that it is more likely than not that the Company

reviewed for impairment whenever events

outstanding during the year. Stock options

recognizes an asset or liability for the deferred

differences, a valuation allowance is recorded.

or changes in circumstances indicate that

are considered to be common stock

income tax consequences of all temporary

the carrying amount of an asset may not be

equivalents. The computation of diluted net

differences between the tax bases of assets

(n) stoCK-bAsed CompensAtion—The

recoverable. Recoverability of assets to be

income (loss) per common share does not

and liabilities and their reported amounts in

Company accounts for stock-based compensation

held and used is measured by a comparison

assume exercise or conversion of securities

the consolidated financial statements that will

in accordance with FASB ASC 718, Stock

of the carrying amount of an asset to

that would have an anti-dilutive effect.

result in taxable or deductible amounts in future

Compensation. Stock-based compensation cost is

estimated undiscounted future cash flows

Basic net income (loss) per common

years when the reported amounts of the assets

measured at the grant date based on the fair value

expected to be generated by the asset. If

share is the amount of net income

and liabilities are recovered or settled. Accruals

of the award and is recognized as expense over

the carrying amount of an asset exceeds its

(loss) for the year available to each

for uncertain tax positions are provided for in

the applicable vesting period of the stock award

estimated future cash flows, an impairment

weighted-average share of common stock

accordance with the requirements of Financial

(generally five years) using the straight-line method.

charge is recognized for the difference

outstanding during the year. Diluted net

Accounting Standards Board (FASB) Accounting

between the carrying amount of the asset

income (loss) per common share is the

Standards Codification (ASC) 740-10, Income

(o) ConCentrAtion of risK—In the normal

and the fair value of the asset. Assets to be

amount of net income (loss) for the year

Taxes. Under ASC 740-10, the Company may

course of business, the Company provides unsecured

disposed of are separately presented in the

available to each weighted-average share

recognize the tax benefits from an uncertain

credit to its customers. Most of the Company’s

balance sheet and reported at the lower of

of common stock outstanding during the

tax position only if it is more likely than not

customers are involved in the medical industry. The

the carrying amount or fair value less costs

year and to each common stock equivalent

that the tax position will be sustained on

Company performs ongoing credit evaluations of its

to sell, and are no longer depreciated.

outstanding during the year, unless

examination by the taxing authorities, based

customers and maintains allowances for probable

inclusion of common stock equivalents

on the technical merits of the position. The tax

losses which, when realized, have been within the

(H) intAngible Assets—Costs

would have an anti-dilutive effect.

benefits recognized in the financial statements

range of management’s expectations. The Company

associated with the acquisition of trademarks,

On December 19, 2012, the Company

from such a position are measured based

maintains its cash in bank deposit accounts which

trade names, license rights and non-compete

completed a 1-for-5 reverse split of its

on the largest benefit that has a greater than

at times may exceed federally insured limits. The

agreements are capitalized and amortized

common stock. All common stock share

50% likelihood of being realized upon ultimate

Company believes it is not exposed to any significant

using the straight-line method over periods

and per share information in the

settlement. ASC 740-10 also provides guidance

credit risks with respect to cash or cash equivalents.

ranging from 3 months to 15 years.

accompanying consolidated financial

on derecognition of income tax assets and

As of June 30, 2013, the Company has

statements and notes thereto have

liabilities, classification of current and deferred

approximately $52,000 in cash and cash equivalents

(i) revenue reCognition—The

been adjusted to reflect retrospective

income tax assets and liabilities, accounting

in excess of the Federal Deposit Insurance

Company recognizes revenue when

application of the reverse stock split,

for interest and penalties associated with

Corporation (FDIC) limits. The Company has not

products are shipped FOB shipping

except for par value per share and the

tax positions, and income tax disclosures.

experienced any losses in such accounts.

point under an agreement with a

number of authorized shares, which were

Judgment is required in assessing the future

customer, risk of loss and title have

not affected by the reverse stock split.

tax consequences of events that have been

(p) operAting segments—The Company

passed to the customer, and collection

The reconciliation between the

recognized in the financial statements or tax

operates in one line of business: the development,

of any resulting receivable is reasonably

basic and diluted weighted-average

returns. Variations in the actual outcome of

marketing, and distribution of a broad line of

assured. Amounts billed for shipping

number of common shares for the

these future tax consequences could materially

medical products for the physical therapy and

and handling of products are recorded

years ended June 30, 2013 and

impact the Company’s financial position,

aesthetics markets. As such, the Company has

as sales revenue. Costs for shipping

2012 is summarized as follows:

results of operations and cash flows.

only one reportable operating segment.

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The Company groups its sales into

and the disclosure of contingent assets and

physical medicine products and aesthetic

liabilities in accordance with US Generally

(4) intAngible Assets

products. Physical medicine products

Accepted Accounting Principles (US GAAP).

made up 91% of net sales for both the years

Significant items subject to such estimates and

Identifiable intangibles assets and their useful lives consist of the following as of June 30:

ended June 30, 2013 and 2012. Aesthetics

assumptions include the carrying amount of

products made up 1% of net sales for both

property and equipment; valuation allowances

the years ended June 30, 2013 and 2012.

for receivables, income taxes, and inventories;

Chargeable repairs, billable freight and

accrued product warranty costs; and estimated

other miscellaneous revenues account for

recoverability of intangible assets. Actual

the remaining 8% of net sales for both the

results could differ from those estimates.

years ended June 30, 2013 and 2012.

Trade name – 15 years

Domain name – 15 years

Non-compete covenant – 4 years

Customer relationships – 7 years

(r) Advertising Costs—Advertising

Trademark licensing agreement – 20 years

(q) use of estimAtes—Management of

costs are expensed as incurred. Advertising

the Company has made a number of estimates

expense for the years ended June 30,

and assumptions relating to the reporting of

2013 and 2012 was approximately

assets, liabilities, revenues and expenses,

$127,400 and $87,400, respectively.

Backlog of orders – 3 months

Customer database – 7 years

License agreement – 10 years

Total identifiable intangibles

Less accumulated amortization

2013

2012

339,400

5,400

149,400

120,000

45,000

2,700

38,100

73,240

339,400

5,400

149,400

120,000

45,000

2,700

38,100

73,240

773,240

(493,162)

(448,525)

(2) inventories

Inventories consist of the following as of June 30:

Net carrying amount

280,078

324,715

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Raw materials

Finished goods

Inventory reserve

2013

2012

Amortization expense associated

identifiable intangibles is expected to be

with the intangible assets was $44,637

as follows: 2014, $44,637; 2015, $30,680;

2,732,363

2,401,676

for both fiscal years 2013 and 2012.

2016, $30,680; 2017, $30,680; 2018,

4,002,709

3,989,920

(327,519)

(292,999)

Estimated amortization expense for the

$26,430 and thereafter $116,970.

6,407,553

6,098,597

(5) wArrAnty reserve

A reconciliation of the change in the warranty reserve consists of the following for the fiscal

years ended June 30:

(3) property And equipment

2013

2012

Property and equipment consist of the following as of June 30:

Beginning warranty reserve balance

181,000

185,245

Land

Buildings

Machinery and equipment

Office equipment

Computer equipment

Vehicles

Less accumulated depreciation

2013

2012

354,743

3,746,472

3,745,404

1,550,633

1,521,896

263,861

1,963,414

1,905,332

266,946

289,678

8,146,069

8,080,914

(4,821,122)

(4,403,016)

Warranty repairs

Warranties issued

Changes in estimated warranty costs

(160,267)

(124,844)

127,863

29,552

127,059

(6,460)

Ending warranty reserve

178,148

181,000

(6) line of Credit

The Company has a revolving line-of-credit

balance was approximately $3,496,000 and

facility with a commercial bank in the amount of

$3,498,000, respectively. Available borrowings

Depreciation expense for the years ended June 30, 2013 and 2012 was $435,366 and

$404,374, respectively.

45% of eligible inventory and up to 80% of eligible

of credit is collateralized by inventory and

accounts receivable resulting in a borrowing

accounts receivable and bears interest at a rate

limit of $4,821,000 as of June 30, 2013. As

based on the lender’s 90-day LIBOR rate plus

of June 30, 2013 and 2012, the outstanding

3%. The interest rate was 3.8% and 3.5% as of

3,324,947

3,677,898

$7,000,000. Borrowing limitations are based on

as of June 30, 2013 were $1,325,000. The line

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June 30, 2013 and 2012, respectively. The line

accompanying consolidated balance sheets.

of credit is renewable on December 15, 2013. If

Accrued interest is payable monthly.

(8) leAses

the line of credit is not extended, the Company

The Company’s revolving line of credit

will need to find additional sources of financing.

agreement includes covenants requiring

The Company leases vehicles under

respectively. Future minimum lease payments

Failure to obtain additional financing would have

the Company to maintain certain financial

noncancelable operating lease agreements.

required under noncancelable operating leases

a material adverse effect on the Company’s

ratios. As of June 30, 2013, the Company

Lease expense for the years ended June 30,

that have initial or remaining lease terms in

operations. All borrowings under the line of

was in compliance with the loan covenants

2013 and 2012, was $15,076 and $7,812,

excess of one year as of 2013 are as follows:

credit are presented as current liabilities in the

or had received waivers of compliance.

2014

2015

2016

(7) long term debt

Future minimum lease payments

$16,106

$7,403

Long term debt consists of the following as of June 30:

2013

2012

storage space and office equipment under

Future minimum rental payments required under

agreements which run one year or more in duration.

operating leases that have a duration of one

The Company rents office, warehouse and

and 2012 was $191,659 and $231,142, respectively.

6.44% promissory note secured by trust deed on real property,

953,929

1,048,496

The rent expense for the years ended June 30, 2013

year or more as of June 30, 2013 are as follows:

maturing January 2021, payable in monthly installments of $13,278

5.649% promissory note secured by building, maturing

808,326

961,196

2014

2015

2016

2017

December 2017, payable in monthly installments of $16,985

Promissory note secured by a vehicle, payable in monthly

43,449

—

Future minimum rental payments

$138,164

$89,664

$79,689

$49,764

installments of $639 through February 2019

8.49% promissory note secured by equipment, payable in

35,332

56,515

monthly installments of $2,097 through December 2014

During fiscal year 2013, the office and

have been conducted on an arms-length

14.305% promissory note secured by equipment, payable

23,965

46,781

warehouse spaces in Detroit, Michigan;

basis and the terms are similar to those that

in monthly installments of $2,338 through May 2014

Pleasanton, California; and Hopkins, Minnesota

would be available to other third parties. In

5.887% promissory note secured by a vehicle, payable in

15,970

19,284

were leased on an annual/monthly basis from

December, 2012, the Company moved its

monthly installments of $390 through March 2017

employees/stockholders; or entities controlled

Pleasanton operation to a new, larger location

5.75% promissory note secured by a vehicle, payable in

1,695

6,661

by stockholders, who were previously principals

in Livermore, California and entered into a lease

monthly installments of $435 through October 2013

of the dealers acquired in June and July, 2007.

agreement with an unaffiliated third party. The

13.001% promissory note secured by equipment, payable

1,683

2,263

The leases are related-party transactions

expense associated with these related-party

in monthly installments of $70 through October 2015

6.21% promissory note secured by a trust deed on real property,

maturing November 2013, payable in monthly installments of $7,240

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

10.15% promissory note secured by a vehicle, payable in

monthly installments of $448 through December 2012

—

108,243

37,859

21,460

2,612

with three employee/stockholders, however,

transactions totaled $93,300 and $156,000

management believes the lease agreements

for the years ended June 30, 2013 and 2012.

(9) inCome tAxes

Income tax provision (provision) for the years ended June 30 consists of:

Total long-term debt

Less current installments

1,884,349

2,311,370

2013:

(322,573)

(395,055)

U.S. federal

State and local

Long-term debt, net of current installments

1,561,776

1,916,315

The aggregate maturities of long term debt for each of the years subsequent to 2013

are as follows:

2014

2015

2016

2017

2018

thereafter

2012:

U.S. federal

State and local

Long Term Debt

$322,573

$303,196

$308,491

$326,194

$240,387

$383,508

Current

Deferred

Total

—

83,198

3,556

83,198

3,556

86,754

159,921

6,785

159,921

6,785

166,706

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The actual income tax benefit (provision)

federal corporate income tax rate of 34%

differs from the “expected” tax benefit

to income (loss) before income taxes for

(10) mAJor Customers And sAles by geogrApHiC loCAtion

(provision) computed by applying the U.S.

the years ended June 30, as follows:

2013

2012

and 2012, sales to any single customer

or 2.2% of net sales, for the fiscal

During the fiscal years ended June 30, 2013

outside North America totaled $647,047,

Expected tax benefit (provision)

44,583

State taxes, net of federal tax benefit

R&D tax credit

Incentive stock options

Other, net

2,359

55,000

(10,213)

(4,975)

64,682

4,478

75,000

(14,246)

36,792

did not exceed 10% of total net sales.

year ended June 30, 2013 compared

The Company exports products

to $896,887, or 2.8% of net sales, for

to approximately 30 countries. Sales

the fiscal year ended June 30, 2012.

(11) Common stoCK And Common stoCK equivAlents

86,754

166,706

On July 15, 2003, the board of directors

incentive plan for the benefit of employees.

Deferred income tax assets and liabilities related to the tax effects

of temporary differences are as follow as of June 30:

(board) approved an open-market share

Incentive and nonqualified stock options,

repurchase program for up to $500,000

restricted common stock, stock appreciation

of the Company’s common stock. On

rights, and other share-based awards may

November 27, 2007, the board approved an

be granted under the plan. Awards granted

additional $250,000 for the open-market

under the plan may be performance-based.

2013

2012

share repurchase program after the original

Effective November 27, 2007, the plan was

Net deferred income tax asset – current:

Inventory capitalization for income tax purposes

72,058

Inventory reserve

Warranty reserve

Accrued product liability

Allowance for doubtful accounts

127,732

69,477

23,228

96,606

75,127

114,270

70,590

29,835

78,526

$500,000 was used. In February 2011, the

amended, as approved by the shareholders,

board approved an additional $1,000,000

to increase the number of shares available

for repurchases under the program. During

by 1,000,000 shares. As of June 30, 2013,

fiscal year 2010, the board authorized the

109,187 shares of common stock were

repurchase of up to $100,000 of stock

authorized and reserved for issuance, but

annually for three years from each of two

were not granted under the terms of the

former distributors that were acquired by the

2005 equity incentive plan as amended.

Company in 2007. During the year ended June

The Company granted options to acquire

Total net deferred income tax asset – current

389,101

368,348

30, 2013, the Company acquired and retired

common stock under its 2005 equity incentive

Net deferred income tax asset (liabilities) – non-current:

Property and equipment, principally due

32,786 shares of common stock for $99,997.

plan during fiscal years 2013 and 2012. The

During the year ended June 30, 2012, the

options are granted at not less than 100% of

Company acquired and retired 79,857

the market price of the stock at the date of

shares of common stock for $401,408.

grant. Option terms are determined by the

to differences in depreciation

(262,726)

(268,839)

During the years ended June 30, 2013

board, and exercise dates may range from 6

Research and development credit carryover

Other intangibles

Operating loss carry forwards

383,226

(109,231)

186,172

328,927

(126,640)

197,992

and 2012, the Company granted 13,689

months to 10 years from the date of grant.

and 5,509 shares, respectively, of restricted

The fair value of each option grant

common stock to directors and officers in

was estimated on the date of grant using

connection with compensation arrangements.

the Black Scholes option pricing model

Total net deferred income tax asset (liabilities) – non-current

197,441

131,440

The Company maintains a 2005 equity

with the following assumptions:

In assessing the realizability of deferred

income over the periods which the deferred income

income tax assets, management considers

tax assets are deductible, management believes it

Expected dividend yield

whether it is more likely than not that some

is more likely than not that the Company will realize

Expected stock price volatility

portion or all of the deferred income tax assets

the benefits of these temporary differences.

will not be realized. The ultimate realization of

The Company has available at June 30,

Risk-free interest rate

Expected life of options

deferred income tax assets is dependent upon

2013 and 2012 federal and state net operating

2013

2012

69%

1.74%

10 years

69%

2.09%

10 years

the generation of future taxable income during

loss (“NOL”) carry forwards of $499,614 and

The weighted average fair value of options granted during fiscal

the years in which those temporary differences

$558,062, respectively. The federal NOLs

years 2013 and 2012 was $2.03 and $3.10, respectively.

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become deductible. Management considers

will expire in 2028. The state NOLs will expire

the scheduled reversal of deferred income tax

depending upon the various rules in the

liabilities, projected future taxable income,

states in which the Company operates.

and tax planning strategies in making this

The Company’s federal and state income tax

assessment. Based upon the level of historical

returns for June 30, 2010, 2011, and 2012

taxable income and projections for future taxable

are open tax years.

The following table summarizes the Company’s stock option

activity during the fiscal years 2013 and 2012:

2013

2012

Weighted

average

remaining

Weighted

average

Number

exercise

contractual

Number

exercise

of shares

price

terms

of shares

price

Options outstanding at

beginning of the year

173,089 $

Options granted

Options exercised

Options canceled

1,352

(208)

6.48

2.70

1.75

4.12 yrs

186,692 $

10,455

—

6.63

4.10

—

or expired

(10,365)

5.69

(24,058)

6.56

(14) reCent ACCounting pronounCements

In April 2013, the FASB issued ASU 2013-07,

in net income if the amount being reclassified

Presentation of Financial Statements (Topic

in its entirety to net income. For those items

205) – Liquidation Basis of Accounting. This

not reclassified in its entirety to net income, a

update requires an entity to use the liquidation

cross-reference to other disclosures providing

basis of accounting when liquidation is

information about those amounts. Furthermore,

imminent. Liquidation is considered imminent

information about amounts reclassified out

if the likelihood is remote that the entity will

of accumulated other comprehensive income

return from liquidation and either (a) a plan

must be shown by component. This update is

for liquidation is approved or (b) a plan for

effective prospectively for reporting periods

liquidation is being imposed by other forces.

beginning after December 15, 2012 for public

The update also indicates that asset should

companies. The Company doesn’t expect this

be measured and presented at the expected

update to impact its financials since it does

amount of cash proceeds to be received upon

not have any comprehensive income items.

liquidation. The entity should also present any

However, if any are noted in the future, the

assets not previously recognized but expects

appropriate disclosures will be incorporated.

Options outstanding

to sell in liquidation or use in settling liabilities

In January 2013, the FASB issued ASU

at end of the year

163,868

6.51

3.56 yrs

173,089

6.48

Options exercisable

at end of the year

138,920

7.20

112,333

7.75

Range of exercise prices

at end of the year

1.75 – 8.60

1.75 – 9.45

(i.e. trademarks, etc.). This update is effective

2013-01, Balance Sheet (Topic 210) – Clarifying

for periods beginning after December 15, 2013.

the Scope of Disclosures about Offsetting Assets

The Company doesn’t expect this update to

and Liabilities. The main purpose of this update is

impact its financials since it does not expect

to clarify that the disclosures regarding offsetting

liquidation to be imminent in the near future.

assets and liabilities per ASU 2011-11 apply to

In February 2013, the FASB issued ASU

derivatives including embedded derivatives,

2013-04, Liabilities (Topic 405) – Obligations

repurchase agreements and reverse repurchase

Resulting from Joint and Several Liability

agreements and securities borrowing and lending

Arrangements for Which the Total Amount

transactions that are offset or subject to a master

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The Company recognized $86,639

$450,823 of unrecognized stock-based

of the Obligation is Fixed at the Reporting

netting agreement. Other types of transactions

and $76,099 in stock-based compensation

compensation cost that is expected to be

Date. The update requires a company to

are not impacted. This update is effective for fiscal

for the years ended June 30, 2013 and

expensed over periods of four to nine years.

measure obligations resulting from joint and

years beginning on or after January 1, 2013 and

2012, respectively, which is included

The aggregate intrinsic value on the date

several liability arrangements for which the

for all interim periods within that fiscal year. The

in selling, general, and administrative

of exercise of options exercised during the

total amount of the obligation is fixed at the

Company doesn’t expect this update to impact

expenses in the consolidated statements of

year ended June 30, 2013 was $386. No

reporting date as the sum of the following: 1)

the Company’s financials since it does not have

operations. The stock-based compensation

options were exercised during the fiscal year

The amount the entity agreed to pay on the

instruments noted in the update that are offset.

includes amounts for both restricted stock

2012. The aggregate intrinsic value of the

basis of its arrangement among its co-obligors

In October 2012, the FASB issued ASU

and stock options under ASC 718.

outstanding options as of June 30, 2013 and

and 2) Any additional amount the entity

No 2012-04, Technical Corrections and

As of June 30, 2013, there was

2012 was $734 and $1,281, respectively.

expects to pay on behalf of its co-obligors. This

Improvements. This update makes technical

(12) employee benefit plAn

update is effective retrospectively for fiscal

corrections, clarifications, and limited-scope

years beginning after December 15, 2013

improvements to various topics throughout

for public companies. The Company doesn’t

the Financial Accounting Standards Board

expect this update to impact its financials

Codification. The changes clarify the Codification

The Company has a deferred savings plan which

contributions of 25% of the first $2,000 of

since it does not have any obligations from

or correct unintended application of guidance

qualifies under Internal Revenue Code Section

each employee’s contribution. The Company’s

joint and several liability arrangements.

and are not expected to have a significant

401(k). The plan covers all employees of the

contributions to the plan for 2013 and 2012 were

In February 2013, the FASB issued ASU

impact on current accounting practices. The

Company who have at least six months of service

$35,167 and $37,745, respectively. Company

2013-02, Comprehensive Income (Topic 220)

majority of the amendments in this update

and who are age 20 or older. For fiscal years

matching contributions for future years are

– Reporting of Amounts Reclassified Out of

are effective immediately with a few limited

2013 and 2012, the Company made matching

at the discretion of the board of directors.

Accumulated Other Comprehensive Income. The

scope amendments (mainly related to plan

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(13) subsequent events

main purpose of this update is to improve the

accounting) that will be effective for fiscal years

reporting of reclassifications out of accumulated

beginning after December 15, 2012 for public

other comprehensive income. The update

companies. This guidance had no significant

requires that the effect of significant reclassifi-

impact on the Company’s financials since it was

In accordance with ASC 855-10,

the date of this 10K report, there are no

cations out of accumulated other comprehensive

primarily issued to provide corrections and/

management determined that through

material subsequent events to report.

income be reported on the respective line items

or clarifications of currently issued guidance.

AvAilAbility of form 10-K

Dynatronics Corporation files an annual

report on Form 10-K each year with the

Mr. Bob Cardon, Vice President of Administration

Securities and Exchange Commission. A

Dynatronics Corporation

copy of the Form 10-K for the fiscal year

7030 Park Centre Drive,

ended June 30, 2013, may be obtained at

Cottonwood Heights, Utah 84121

no charge by sending a written request to:

AnnuAl meeting

The company’s annual shareholders

meeting will be Monday, November

7030 Park Centre Drive,

25, 2013, at 3:00 p.m. MST at:

Cottonwood Heights, Utah 84121

Dynatronics’ corporate headquarters:

generAl informAtion

Dynatronics Corporation, a Utah corporation

microdermabrasion devices to an expanding

organized on April 29, 1983, manufactures,

market of physical therapists, sports

markets and distributes a broad line of

medicine practitioners and athletic trainers,

therapeutic, diagnostic and rehabilitation

chiropractors, podiatrists, orthopedists,

equipment, medical supplies and soft goods,

plastic surgeons, dermatologists, aestheticians

treatment tables, and aesthetic massage and

and other medical professionals.

offiCers And direCtors

Kelvyn H. Cullimore, Jr., Chairman of the Board, President and CEO

Larry K. Beardall, Executive Vice President of Sales & Marketing & Director

Terry M. Atkinson, CPA, Chief Financial Officer

Robert J. (Bob) Cardon, Vice President of Administration, Secretary & Treasurer

Douglas Sampson, Vice President of Production and R&D

Bryan D. Alsop, Vice President of Information Technology

Joseph H. Barton, Director, Retired Sr. Vice President, GranCare Inc.

Howard L. Edwards, Director, Retired Corporate Secretary, ARCO Company

R. Scott Ward, PT PhD, Director, Chairman of Department of Physical Therapy, University of Utah

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ACCountAnts, legAl Counsel And trAnsfer Agent

Independent Registered Public Accounting Firm, Larson & Company, 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

Dynatronics Corporation

7030 Park Centre Dr., Cottonwood Heights, Utah 84121

1.800.874.6271 — www.dynatronics.com