Dynatronics
Annual Report 2014

Plain-text annual report

2014 ANNUAL REPORT A Letter to ShareholdersB Letter to ShareholdersLeveraging Technology Letter to Shareholders Global Expansion Exclusive Contract Training Tables: We Do It All Board of Directors and Management Management’s Discussion and Analysis Report of Independent Registered Public Accounting Firm Financial Statements Notes to Financial Statements Corporate Information 2 3 6 7 8 10 11 19 20 25 35 LEVERAGING TECHNOLOGY Expansion of the Solaris Plus line of products continues to flourish. Building on the excitement triggered by the introduction of the one-of-a-kind ThermoStim probe, Dynatronics will be introducing two new devices to the Solaris Plus line in fiscal year 2015, one of which will provide therapy solutions never before available while at the same time, expanding potential sales into a wider spectrum of practitioners. Innovation has always been the hallmark of Dynatronics’ success and the innovative Solaris Plus line has proven to be no exception. Solaris Plus continues to build a solid, dependable foundation for increasing profits. After two years on the market, there is still no other device capable of providing seven waveforms of electrotherapy, TriWave Light therapy, Dynatronics exclusive three-frequency ultrasound and IFC Target features plus the power of ThermoStim. 2 Letter to ShareholdersFor the third consecutive year we are reporting an operating loss. While the economic conditions improved somewhat in the last year, the impacts of the Affordable Care Act (ACA) have only intensified. We reported an operating loss of $397,000. Notably, $160,000 (40 percent of the total loss) was attributable to the recently imposed Medical Device Tax (MDT). Implemented in January 2013, the MDT imposes a 2.3 percent excise tax on approximately 33 percent of our sales. An excise tax is a tax on sales usually reserved for such consumables as tires or cigarettes. However, the ACA has used this unusual type of tax, instead of an income tax, as one of over 40 new taxes assessed to help pay for healthcare reform. As a result, we are paying $160,000 in tax despite falling short of profitability this fiscal year. A repeal of this egregious tax has been passed by the House of Representatives at least twice, but the United States Senate failed to act on those bills. However, the United States Senate, in an amendment to its proposed budget for fiscal year 2015, voted 79 to 20 in favor of repealing the MDT. Congressmen and senators have realized the folly of this tax. While it impacts all medical device companies, it is particularly harmful to small companies. I serve on the board of the Medical Device Manufacturers Association (MDMA). Repealing this tax is the top priority of MDMA for this next fiscal year. Failure to do so will cost jobs, stifle innovation and discourage investment in new medical technology. While the MDT accounted for approximately 40 percent of our reported operating losses this year, the other 60 percent came from operations. Starting in January 2012 when the ACA began to be implemented, we have seen a steady softening of sales. ACA could be dismissed as a convenient scapegoat, but our intelligence indicates that our competitors are also experiencing weaker sales performance. The ACA has created significant uncertainty about how health care will be delivered in the future. It has also put pressure on reimbursement. Add to these factors a slowly recovering economy and health insurance plans that are relying more and more on high deductible features, and it provides a plausible explanation for a sustained softening of demand that cannot be explained any other way. For the first 18 months of this period of softer sales, we experienced declines only in the lower-margin supplies and soft goods. Capital equipment sales maintained levels Letter to Shareholders 3 2014 LETTER TO SHARE HOLDERSequivalent to or better than the prior periods. This may purchasing organizations (GPOs) in the United States. This have been attributable to the fact we introduced many new contract has the potential to ultimately deliver several million products during that time, thus stimulating sales of capital dollars in new sales. It will take time to ramp up the contract, equipment. During that period, sales were down by an average but it presents a significant opportunity to increase sales, of approximately seven percent, comparing one month to the representing our first real success in the GPO market since we same month the prior year. began efforts to pursue such business six years ago. In fiscal year 2014, we experienced less demand for capital International sales also represent a significant opportunity. equipment – both manufactured and distributed. This was not We have identified new distributors in Asia, South America and totally unexpected. Uncertainty often results in scaling back Central America that should generate several million dollars in of capital expenditures, including the replacement of capital new sales in fiscal year 2015. equipment and the opening of new clinics. Both of these are Finally, we recognize that the market we have serviced typically significant sources of capital equipment sales. The for the past 30 years is a mature market, in which many end of fiscal year 2014 concluded a 30-month period where products are somewhat commoditized. We have avoided the sales were generally down seven percent period over period. commoditized segment of the business, choosing instead to That is the bad news. Those are the reasons for our less- focus on the higher-margin capital equipment. Nevertheless, than-satisfactory performance in this and the two previous in recognition of the maturity of our market, we have embarked fiscal years. But there is good news to report. on a search to find ways to improve shareholder value by We have worked to offset fewer sales by making reductions exploring opportunities for growth – not only in our market, but in expenses. In fiscal year 2013, we reduced expenses by in adjacent markets as well. We filed a registration statement $800,000. In fiscal year 2014, we reduced expenses by an on Form S-3 with the Securities and Exchange Commission in additional $600,000. Comparing expenses for the fourth August as a placeholder for raising capital, should we find the quarter of fiscal year 2014 to the same period in fiscal year right opportunity. We will not raise added capital without the 2012, we show an annualized expense reduction rate of $1.5 filing of additional disclosure documentation, but we wanted to million, exclusive of the MDT. In other words, we have been explain why we filed that form and what our intent is. reducing expenses in our battle to overcome the onslaught The 30-month period ending in June 2014 has been of weak sales demand created by the ACA. Of course, we perhaps the most difficult period of the last 30 years. recognize that expense reduction is not the ultimate answer Battling sales that are being weakened by general market to these challenges, but it does demonstrate our efforts to conditions has been frustrating, especially when the MDT is appropriately react to the current market conditions. added as an insult to the injury that has been the ACA. We are While capital equipment sales were down in fiscal year nevertheless optimistic about the future. We have reduced 2014, the introduction of the ThermoStim Probe (TSP) helped expenses and are a leaner operation as a result. New product bolster sagging sales. Over the last seven months of the fiscal introductions are helping boost sales. The market seems to year, we averaged sales of about 40 units per month. More be showing signs of rebounding based on trends from the end importantly, since the TSP is an accessory of the Solaris Plus of the fourth quarter of 2014 to the first quarter of 2015. The family of products, 80 percent of TSP sales included the sale new Amerinet contract will help increase sales for the next of a Solaris Plus device. Sales of the TSP continue to be strong. three years. International sales increases are more imminent The 30-month trend of declining sales seems to have than at any other period in our history. Add to these operating reversed. In the month of June 2014, we saw a significant factors the fact we are seeking ways to enhance operations increase of sales, and that trend has continued through the through expansion in this or strategic markets, and there is first quarter of fiscal 2015. During the last 30 months we saw realistic cause for optimism. an occasional month where sales were higher than the same We are committed to improving our performance. We period the prior year, but this trend since June is the first appreciate your patience and support as we work to return sustained increase in sales we have seen in 30 months. That the company to profitability and enhance shareholder value. may be an indication that practitioners are starting to adjust to the new ACA and that demand may be on the rebound. We believe pent-up demand will manifest in the coming year. We recognize the number one priority is to not only stop the 30-month trend of declining sales, but to return to sales growth. To that end, we announced in June that we were awarded a sole KELVYN H. CuLLImORE, JR. source contract with Amerinet: one of the five largest group Chairman, President and CEO 4 Letter to Shareholders Letter to Shareholders 5 GLOBAL EXPANSION Dynatronics is increasing its international footprint with expansion into a number of countries including China, Singapore, Thailand, Malaysia, and Mexico. As we near the completion of all required approvals for our new specialty products, Australia, New Zealand, and countries in the European Union will soon provide opportunities to further expand international sales. The International Division has been reorganized and expanded under the direction of Kelvyn H. Cullimore, Sr. whose years of international experience are helping to provide a clear path for global expansion. Dynatronics’ increased focus in the international arena is comprised of more than just making investments outside the United States, it includes the concept of maintaining profitable, long-term business relationships with our worldwide neighbors. 6 Letter to ShareholdersEXCLuSIVE CONTRACT After several years of pursuing a contract with one of the large to secure significant discounts. Being awarded an exclusive GPOs (Group Purchasing Organizations), we are pleased to contract with a GPO means that its members now have the have been awarded an exclusive sole-source contract for reha- ability to purchase all of their equipment and supplies at bilitation equipment and supplies with Amerinet, a GPO that very competitive prices from Dynatronics. This purchasing represents over 65,000 member facilities. advantage not only works for the GPO members, but works Group Purchasing Organizations were created to help to the advantage of Dynatronics as well, creating higher sales hospitals and other providers pool their purchasing power over the course of the three-year contract. 7 Letter to Shareholders 8 Letter to Shareholders WE DO IT ALL Professional teams, high schools, colleges, and universities nationwide are reaching out to Dynatronics to design, customize, and build well-branded training rooms. Dynatronics is not only bringing state-of-the-art functionality to their facilities, but adding the wow factor that often makes the difference when recruiting the most talented athletes in the game. Dynatronics furnishes these athletic facilities with individual taping stations and cabinets in beautiful, durable hardwoods with custom wood-carved details. Team logos are color-screened or debossed into the Naugahyde®. In addition, these teams benefit from all the advantages of buying direct from the manufacturer, not only for their customized training tables and furniture, but for all of the advanced therapy equipment and supplies needed to completely outfit the facility. Training Rooms: We Do It All 9 BOARD Of DIRECTORS Kelvyn H. Cullimore, Jr. Chairman, President and CEO Larry K. Beardall Executive Vice President of Sales and Marketing Joseph H. Barton (deceased 11/07/14) Director Howard L. Edwards Director R. Scott Ward, Ph.D. Director mANAGEmENT TEAm Pictured below, in order from left to right 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 10 Board of Directors and Management The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in our Annual Report on Form 10-K filed with the Securities and Exchange Commision on OVERVIEW forward-looking statements that involve to those differences include, but are risks, uncertainties and assumptions information, this discussion contains differ materially from our expectations. Factors that could cause or contribute that could cause actual results to Sept. 29, 2014. In addition to historical section of the Annual Report entitled “Item 1A. Risk Factors.” not limited to, those identified below and those discussed in the We offer a broad line of medical equipment including therapy marketing of physical medicine products and aesthetic products. Our principal business is the manufacturing, distribution and MANAGE MENT DISCUSSION AND ANALYSIS practitioners, podiatrists, plastic surgeons, dermatologists, to $29,538,275 in fiscal year 2013. In fiscal year 2013, primarily by physical therapists, chiropractors, sports medicine year ends on June 30. Reference to fiscal year 2014 refers to the includes aesthetic massage and microdermabrasion devices, as aestheticians and other aesthetic services providers. Our fiscal devices, medical supplies and soft goods, treatment tables Net sales in fiscal year 2014 were $27,444,223, compared and rehabilitation equipment. Our line of aesthetic equipment well as skin care products. Our products are sold to and used Fiscal Year 2014 Compared year ended June 30, 2014. RESuLTS Of OPERATIONS to Fiscal Year 2013 Net Sales we introduced the new SolarisPlus product line which significantly increased sales during that period. In fiscal year 2014, increased sales of our top-selling SolarisPlus therapy Management’s Discussion and Analysis of Financial Condition 11 devices and new ThermoStim probe were offset by lower sales distributed. In fiscal years 2014 and 2013, sales of physical of certain medical products and supplies, including other medicine products accounted for 91% of total sales in both manufactured modalities, metal treatment tables, exercise years. Chargeable repairs, billable freight revenue, aesthetic products, nutritional supplements and taping products. product sales and other miscellaneous revenue accounted for Market conditions continued to deteriorate during the year approximately 9% of total revenues in both years. due to the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Gross Profit Act, each enacted in March 2010 (the “Health Care Reform Gross profit totaled $10,020,372, or 36.5% of net sales, in Law”). The Health Care Reform Law has had the effect of fiscal year 2014, compared to $11,086,602, or 37.5% of net creating significant uncertainty relative to delivery of care sales, in fiscal year 2013. Lower sales revenue generated and reimbursement. There has been a marked decline in the during the year was the primary factor in the reduction in opening of new clinics and expansion of existing clinics in our gross profit compared to the prior year period. In addition, marketplace which typically are a significant source of demand a reduction in revenue from the phasing out of our Stream for our products – particularly the higher margin capital software service contributed to the lower gross profit and equipment products. The uncertainty surrounding the Health gross margin percentage generated in the reporting periods. Care Reform Law has not only led to customers focusing more Sales of Stream services were approximately $7,765 in 2014, on controlling operating costs by reducing expenditures, but compared to $108,100 in 2013. Those sales were 100% has also caused a reluctance to invest in new equipment and gross profit as they carried no associated cost of sale. Loss of clinic upgrades. In addition to the impacts of the Health Care approximately $100,000 in gross profit from the termination Reform Law, we continue to see slower economic recovery in of the Stream program accounted for one third of the drop some parts of the country as well as a temporary decrease in in gross profit percentage. The balance was attributable to demand due to severe weather events during this past winter. product mix favoring lower margin supply products and slightly With a currently shrinking market, it is necessary to increased cost of sales for manufactured capital products. implement strategies to increase market share. To accomplish that, management has undertaken efforts to (i) expand our Selling, General and Administrative Expenses distribution channels by adding several new dealers and sales Selling, general and administrative, or SG&A expenses representatives, and (ii) stimulate sales of the new Dynatron were $9,213,433, or 33.6% of net sales, in fiscal year 2014, ThermoStim Probe and other new products. We may also compared to $9,860,964, or 33.4% of net sales, in fiscal year consider the acquisition of other businesses and technology. 2013. The $647,531 decrease in SG&A expenses in fiscal year The new ThermoStim probe delivers thermal (hot and cold) 2014 as compared to 2013 is a result of the following: therapy and/or electrotherapy in a targeted, attended treatment. Because the probe is operated from the control • $281,331 of lower selling expenses due primarily to lower console of the SolarisPlus units, we are seeing demand for sales commissions; SolarisPlus units rise commensurate with the demand for the • $226,860 of lower labor and overhead costs; ThermoStim probe. • $139,340 of lower general expenses primarily related Management believes that as healthcare reform to a reduction in regulatory compliance costs and progresses, uncertainty in our market will diminish, and professional fees and lower bad debt expense. demand for our products will begin to strengthen. Sales of proprietary manufactured physical medicine The reduction in expenses was related to the declining products represented approximately 47% and 46% of total sales. However, the reduction in expense was insufficient to fully physical medicine product sales in fiscal years 2014 and offset the $1,067,000 decrease in gross profit during the period. 2013, respectively. Distribution of products manufactured by other suppliers accounted for the balance of our physical Research and Development medicine product sales in those years. Sales of manufactured Research and development, or R&D expenses for 2014 were aesthetic products in fiscal years 2014 and 2013, represented $992,729 compared to $1,120,887 in 2013, a drop of $128,158. approximately 86% and 78% of total aesthetic product sales, With the completion of the development work associated with respectively, with distributed products making up the balance. the new ThermoStim probe, R&D expense in the latter half of The majority of our sales revenues come from the sale 2014 decreased. Over the past two years, we have introduced of physical medicine products, both manufactured and more new products than any previous two-year period in our 12 Management’s Discussion and Analysis of Financial Condition history. The new product introductions include the SolarisPlus The difference in the effective tax benefit rates is attributable line of electrotherapy/ultrasound/ phototherapy units, the to lower R&D tax credits in fiscal year 2014, a true up of R&D Ultra 2 and Ultra 3 motorized treatment tables, the 25 Series tax credits in 2013, as well as certain permanent book to tax line of electrotherapy and ultrasound products, as well as the differences. It should be noted that the sale of the building Dynatron ThermoStim Probe. We believe that developing new referenced above will result in a profit that consumes all tax products is a key element in our strategy and critical to moving attributes available to us at the end of fiscal year 2015. purchasing momentum in a positive direction. R&D costs are expensed as incurred and are expected to remain at current Net Loss levels in the coming year as we have concluded a major R&D Net loss was $271,142 ($.11 per share) in fiscal year 2014, investment cycle incurred over the past three years. R&D compared to $44,371 ($.02 per share) in fiscal year 2013. As expense decreased as a percentage of net sales in fiscal year reported above, lower sales and gross profits were the primary 2014 to 3.6% from 3.8% of net sales in fiscal year 2013. reason for the increase in net loss for the reporting periods. Interest Expense These increases were partially offset by lower SG&A, R&D and interest expenses for fiscal year 2014. The difference in effective Interest expense decreased by $28,834, to $231,865 in fiscal tax benefit rates also affected the increase in net loss for 2014. year 2014 compared to $260,699 in fiscal year 2013 due to lower balances on our long-term debt compared to fiscal year 2013. In August 2014, we sold our Cottonwood Heights facility LIquIDITY AND CAPITAL RESOuRCES housing our principal executive offices and manufacturing We have financed operations through cash from operations, facilities to an investment group and leased the facility back available cash reserves, and borrowings under a line of for a 15-year term. This sale allowed us to use the proceeds credit with a bank. Working capital decreased $197,993 to retire the mortgage loan on the property and to pay down to $3,347,595 as of June 30, 2014, inclusive of the current our line of credit by approximately $2.1 million. As a result of portion of long-term obligations and credit facilities, compared this repayment of debt, our maximum credit facility under the to working capital of $3,545,588 as of June 30, 2013. As of line of credit was changed to $2,500,000 in August 2014. Our June 30, 2014, the Company had approximately $978,800 of outstanding balance under the line as of September 14, 2014 available credit under a credit facility with a commercial bank. was approximately $827,000. The current ratio was 1.48 to 1 as of June 30, 2014 and June 30, 2013. Current assets were 73% of total assets as of June Loss Before Income Tax Benefit 30, 2014 and 72% of total assets as of June 30, 2013. Pre-tax loss in fiscal year 2014 was $397,165, compared to $131,125 in fiscal year 2013. Lower sales and gross margin Cash and Cash Equivalents led to $1,066,230 in lower gross profit in 2014 compared Our cash and cash equivalents position as of June 30, 2014, was to 2013. That lower gross profit was offset by $775,689 in $332,800, compared to cash and cash equivalents of $302,050 lower SG&A and R&D expenses and $24,501 of lower interest as of June 30, 2013. Our cash position varies throughout expense and other income resulting in a $266,040 greater the year, but typically stays within a range of $200,000 to loss before taxes for 2014. Adding the $266,040 to the $350,000. We expect that cash flows from operating activities, $131,125 loss last year results in this year’s pre-tax loss of together with amounts available through an existing line-of- $397,165. We believe the introduction of the new ThermoStim credit facility, will be sufficient to cover operating needs in the probe not only adds a new, highly profitable product to our ordinary course of business for at least the next twelve months. product line to increase sales, but we also expect that it will If we experience an adverse operating environment, or unusual boost demand for SolarisPlus products that are required to capital expenditure requirements, additional financing may be power the ThermoStim probe. required. No assurance can be given that additional financing, if required, would be available on terms favorable to us, or at all. Income Tax Benefit Income tax benefit was $126,023 in fiscal year 2014, compared Accounts Receivable to $86,754 in fiscal year 2013. Due to tax benefits associated Trade accounts receivable, net of allowance for doubtful with a reduction of R&D tax credits and other credits, the accounts, decreased $81,316, or 2.5%, to $3,165,396 as of effective income tax benefit rate in fiscal year 2014 was 31.7% June 30, 2014, compared to $3,246,712 as of June 30, 2013. compared to an effective tax benefit rate of 66.2% in 2013. Trade accounts receivable represent amounts due from our Management’s Discussion and Analysis of Financial Condition 13 customers including medical practitioners, clinics, hospitals, are based on approximately 45% of eligible inventory and colleges and universities and sports teams as well as dealers up to 80% of eligible accounts receivable, up to a maximum and distributors that purchase our products for redistribution. credit facility of $4,500,000. Interest payments on the line We believe that our estimate of the allowance for doubtful are due monthly. As of June 30, 2014, the borrowing base accounts is adequate based on our historical knowledge and was approximately $4,500,000 resulting in approximately relationship with these customers. Accounts receivable are $979,000 of available credit on the line. All borrowings generally collected within 30 days of the agreed terms. under the line of credit are presented as current liabilities in Inventories the accompanying consolidated balance sheet. The line of credit agreement includes covenants requiring Inventories, net of reserves, decreased $249,705, or 3.9%, to us to maintain certain financial ratios. As of June 30, 2014, we $6,157,848 as of June 30, 2014, compared to $6,407,553 as were not in compliance with one of the loan covenants; however, of June 30, 2013. Inventory levels can fluctuate based on the the bank granted a waiver for the period. The line of credit timing of large inventory purchases from overseas suppliers. matures on October 31, 2014. On October 3, 2014, the bank Medical Device Tax informed us that it did not intend to renew the line, but would likely extend it until January 31, 2015 to allow us time to find a In January 2013, all medical device manufacturers, including new lending partner. We intend to seek a new credit facility with the Company, became subject to the medical device tax or other lenders. We have also entered into an agreement with “MDT” provisions of the Health Care Reform Law. The MDT a placement agent to seek equity funding to provide working requires that medical device manufacturers and importers capital for the Company. Failure to obtain a new credit facility pay a 2.3% excise tax on sales of all qualified medical devices. with another lender or to obtain the equity funding will have a Some exemptions in the law allow us to exclude a large portion material adverse effect on our business operations. of sales from being subject to the MDT. For instance, products Subject to the risk described above, we believe that that are sold internationally are not subject to the MDT. Some amounts available under the line of credit as well as cash rehabilitation products that are generally sold at retail are not generated from operating activities will continue to be subject to the MDT. Income from our distribution and sale of sufficient to meet our short term operating requirements. products manufactured by others is not taxable to us under the As previously explained in this report, in order to assure MDT (although many of the manufacturers of these products adequate availability of operating capital under our line of credit are raising prices to their customers, including the Company, and to more fully take advantage of accumulated deferred tax to cover their cost of the MDT). Given these exemptions, we assets, on August 8, 2014, we sold our building that houses estimate that approximately 33% of our total sales are subject operations in Utah and leased back the premises for a term of to the MDT. During fiscal year 2014, we paid approximately 15 years. The sales price was $3,800,000. Proceeds from the $159,920, compared to $81,726 in 2013 in MDT. The MDT sale were used to pay off the mortgage on the property, to pay began January 1, 2013 and only affected operations for the last down amounts outstanding on our line of credit and to reduce half of fiscal year 2013, compared to the full fiscal year 2014. debt obligations of the Company. The profit generated from Accounts Payable the sale will be sufficient to utilize the majority, if not all of our deferred tax assets. As a result of this repayment of debt, our Accounts payable decreased $318,360, or 11.6%, to maximum credit facility under the line of credit was changed to $2,433,534 as of June 30, 2014, from $2,751,894 as of June $2,500,000 in August 2014. Our outstanding balance under 30, 2013. Over the year, management has made a concerted the line as of September 14, 2014 was approximately $827,000. effort to reduce outstanding payables. We take advantage of available early payment discounts when offered by our vendors. Debt Line of Credit Long-term debt, excluding current installments decreased $306,643 to $1,255,133 as of June 30, 2014, compared The outstanding balance on our line of credit increased to $1,561,776 as of June 30, 2013. Long-term debt is $24,819 to $3,521,209 as of June 30, 2014, compared to comprised primarily of the mortgage loans on our office $3,496,390 as of June 30, 2013. Interest on the line of and manufacturing facilities in Utah and Tennessee. The credit is based on the 90-day LIBOR rate (0.23% as of June principal balance on the mortgage loans at June 30, 2014 was 30, 2014) plus 3.5%. The line of credit is collateralized by approximately $1,498,051, of which $1,291,646 is classified as accounts receivable and inventories. Borrowing limitations long-term debt, with monthly principal and interest payments 14 Management’s Discussion and Analysis of Financial Condition of $30,263. Our mortgage loans mature in 2017 and 2021. of standard cost, which approximates actual cost (first-in, In conjunction with the sale/leaseback of our Utah facility, first-out) or market. Raw materials are recorded at the lower of approximately $632,000 of mortgage debt was paid to the cost (first-in, first-out) or market. Inventory valuation reserves lender. Of this amount, approximately $170,900 was included are maintained for the estimated impairment of the inventory. as current portion of long-term debt as of June 30, 2014. Impairment may be a result of slow-moving or excess Inflation inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, we Our revenues and net income have not been unusually analyze the following, among other things: affected by inflation or price increases for raw materials and parts from vendors. Stock Repurchase Plans • Current inventory quantities on hand; • Product acceptance in the marketplace; • Customer demand; Our Board of Directors adopted a stock repurchase plan • Historical sales; authorizing repurchases of shares in the open market, through • Forecast sales; block trades or otherwise. Decisions to repurchase shares • Product obsolescence; under this plan are based upon market conditions, the level • Technological innovations; and of our cash balances, general business opportunities, and • Character of the inventory as a distributed item, finished other factors. Our Board of Directors periodically approves manufactured item or raw material. the dollar amounts for share repurchases under the plan. As of June 30, 2014, $448,450 remained available under the Any modifications to estimates of inventory valuation Board’s authorization for purchases under the plan. There reserves are reflected in cost of goods sold within the is no expiration date for the plan. No purchases were made statements of operations during the period in which such under this plan during the three months ended June 30, 2014. modifications are determined necessary by management. As of June 30, 2014 and 2013, our inventory valuation reserve balance, which established a new cost basis, was $335,355 CRITICAL ACCOuNTING POLICIES and $327,519, respectively, and our inventory balance was Management’s discussion and analysis of financial condition and $6,157,848 and $6,407,553, net of reserves, respectively. results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Revenue Recognition generally accepted accounting principles. The preparation of Our sales force and distributors sell our products to end users, these financial statements requires estimates and judgments including physical therapists, professional trainers, athletic that affect the reported amounts of our assets, liabilities, net trainers, chiropractors, medical doctors and aestheticians. sales and expenses. Management bases estimates on historical Sales revenues are recorded when products are shipped FOB experience and other assumptions it believes to be reasonable shipping point under an agreement with a customer, risk of given the circumstances and evaluates these estimates on an loss and title have passed to the customer, and collection ongoing basis. Actual results may differ from these estimates of any resulting receivable is reasonably assured. Amounts under different assumptions or conditions. billed for shipping and handling of products are recorded as We believe that the following critical accounting policies sales revenue. Costs for shipping and handling of products to involve a high degree of judgment and complexity. See Note customers are recorded as cost of sales. 1 to our consolidated financial statements for fiscal year 2014, for a complete discussion of our significant accounting Allowance for Doubtful Accounts policies. The following summary sets forth information We must make estimates of the collectability of accounts regarding significant estimates and judgments used in the receivable. In doing so, we analyze historical bad debt trends, preparation of our consolidated financial statements. customer credit worthiness, current economic trends and Inventory Reserves changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. Our The nature of our business requires that we maintain sufficient accounts receivable balance was $3,165,396 and $3,246,712, inventory on hand at all times to meet the requirements of our net of allowance for doubtful accounts of $325,355 and customers. We record finished goods inventory at the lower $247,708, as of June 30, 2014 and 2013, respectively. Management’s Discussion and Analysis of Financial Condition 15 Deferred Income Tax Assets trotherapy treatments and three frequencies of ultrasound, In assessing the deferred income tax assets, management including our proprietary three-frequency ultrasound considers whether it is more likely than not that some portion transducers. They are capable of delivering between three or all of the deferred income tax assets will not be realized. The and five separate treatments simultaneously, depending on ultimate realization of deferred income tax assets is dependent the model. The ability to provide multiple treatments simul- upon the generation of future taxable income during the years taneously is expected to be very helpful in busy clinics and in which those temporary differences become deductible. training rooms, or for patients needing treatment of multiple Management considers the scheduled reversal of deferred areas of the body. The Dynatron 25 Series of products was income tax liabilities, projected future taxable income, and tax specifically designed to replace the aging Dynatron 50 Plus planning strategies in making this assessment. The sale and series of products. This product line was also positioned lease-back of our Utah facility generated sufficient profitability to be sold through our expanding channel of general line to use all existing deferred tax assets making the evaluation of distributors. The predecessor 50 Series Plus line of products any impairment of deferred tax assets unnecessary for fiscal was only available to direct sales representatives and dealers year 2014 and 2015. authorized to sell our specialty line of products. Making the We have available at June 30, 2014 and 2013 federal and 25 Series available to all distributors is a departure from past state net operating loss (“NOL”) carry forwards of $745,605 practice and designed to increase sales of these products. and $974,484, respectively. The federal NOLs will expire in Initial results indicate that sales of 25 Series products have 2030. The state NOLs will expire depending upon the various fallen short of expectations, but upselling from the lower rules in the states in which we operate. Our federal and state price 25 Series to the SolarisPlus devices appears to be income tax returns for June 30, 2011, 2012 and 2013 are open more successful than upselling from the 50 Series Plus line tax years. of products. BuSINESS PLAN AND OuTLOOK In December 2012, we introduced a line of motorized treatment tables. The Ultra 2 and Ultra 3 are the first two of possibly several other future treatment tables manufactured During the past three years, we have focused much of our for us by Enraf-Nonius, a well-established manufacturer resources and energy on developing new and innovative of physical therapy products in Europe. These tables offer products. The scope of that R&D effort has been more features popular to the practitioner such as full-length foot significant than at any time in our history. Looking ahead, we bars that elevate and lower the table height together with a intend to build upon the investments of the past few years. unique wheel raising system that lifts the table allowing an Those investments are the foundation for our growth and easy change between mobility and stability. Enraf tables are business success. Highlights include the following: known for their high quality standards and are competitively In December 2013, we introduced the ThermoStim probe priced for the US market. – one of the most innovative and revolutionary products in our In August 2012, we introduced to the market our Dynatron history. The ThermoStim probe offers the ability to deliver SolarisPlus line of electrotherapy/ultrasound/ phototherapy thermal therapy (hot and cold) and/or electrotherapy in a units. This product line consists of four units: the Dynatron targeted, attended treatment. The hand held probe is an SolarisPlus 709, 708, 706, and 705. These attractive units accessory to the Dynatron SolarisPlus family of products. The provide our most advanced technology in combination therapy ThermoStim probe utilizes thermoelectric chip technology devices by adding phototherapy capabilities to enhanced elec- to generate the thermal therapy. This innovative product is trotherapy and ultrasound combination devices. The Dynatron generating demand not only for the probe, but also for the SolarisPlus line of products features a Tri-Wave phototherapy SolarisPlus units which serve as the control console for the probe and a Tri-Wave phototherapy pad. Tri-wave phototherapy probe. Based on sales of the last six months of the fiscal year, features infrared, red and blue wavelength light. The Dynatron 80% of all ThermoStim probe sales were accompanied by the Solaris Tri-Wave phototherapy pad is capable of treating large sale of a Dynatron SolarisPlus device. areas of the body via unattended infrared, red and blue In June 2013, we began shipping our Dynatron® 25 wavelength phototherapy. The Tri-Wave phototherapy probe Series electrotherapy/ultrasound line of combination therapy allows the practitioner to treat specific, targeted areas of the devices. This line consists of four separate devices: the body in an attended treatment. As part of the SolarisPlus Dynatron 925, Dynatron 825, Dynatron 625 and Dynatron product line, we also introduced a display cart specifically 525. These four units provide seven different types of elec- designed for these units. The SolarisPlus line has become 16 Management’s Discussion and Analysis of Financial Condition popular for its power and versatility. The units are capable widely available is expected to increase our ability to expand of simultaneously powering five electrotherapy channels, distribution of not only our own proprietary products, but also ultrasound therapy, a phototherapy probe and phototherapy those we distribute on behalf of other manufacturers. pad. No other device on the market offers such powerful Pursuit of national accounts, including Group Purchasing simultaneous combination therapies. Organizations (GPO) continues to be a strategic endeavor. The introduction of so many new products in the last During fiscal year 2014, we signed an exclusive, sole-source two years marks the most productive two year period of new agreement with Amerinet, one of the five largest GPO’s in product introductions in our history. With most of the planned the United States, to supply medical products to their acute new products now released, R&D costs in 2014 cycled back to care and alternate care members. Amerinet is one of the a lower level more in line with historical amounts. Management nation’s leading healthcare GPOs, helping its members to is confident the investments made in R&D will yield long-term reduce healthcare costs and improve healthcare quality. The benefits and are important to assuring that we maintain our three-year agreement with Amerinet became effective July 1, reputation in the industry for being an innovator and leader in 2014. The prior vendor reported approximately $6,000,000 product development. per year in sales to Amerinet members. We do not expect Our product catalog not only includes our proprietary that this contract will rise to that level for various reasons products previously discussed, but also our expansive offering and we anticipate that it will take several months to ramp up of non-proprietary products (approximately 13,000 SKUs) to sales under this contract. We expect that sales under this service the broader needs of our customers. It also provides contract will gradually increase over the life of the contract an excellent sales tool for our sales representatives in the field to a rate of approximately $3,000,000 annually. In 2013, and the foundation for our e-commerce platform. The catalog we were successful in qualifying to be an approved vendor to includes an online electronic version of the catalog that is the federal government, including the Veterans Administra- incorporated into our e-commerce website. The catalog has tion hospitals and medical facilities associated with military been praised for its clarity and ease of use. installations. Over the past few years, consolidations in our market Economic pressures from the recent recession in the have changed the landscape of our industry’s distribution United States have affected available credit that would channels. At the present time, we believe that there remain facilitate large capital purchases, and have also reduced only two companies with a national direct sales force selling demand for discretionary services such as those provided proprietary and distributed products: Dynatronics and by the purchasers of our aesthetic products. As a result, Patterson Medical. All other distribution in our market is we reduced our expenses in the Synergie department. We directed through catalog companies with a limited direct believe that our aesthetic devices remain the best value on the sales force, or through independent local dealers that have market and we are seeking innovative ways to market these limited geographical reach. Our national direct sales force products, including strategic partnerships, both domestic and consists of direct sales employees and independent sales international, to help enhance sales momentum. representatives. In addition to these direct sales representa- We have long believed that international markets present tives, we continue to enjoy a strong relationship with scores an untapped potential for growth and expansion. Adding of independent dealers. We believe we have the best trained new distributors in several countries will be the key to this and most knowledgeable sales force in the industry. We are expansion effort. We remain committed to finding the most actively seeking to expand our market penetration through effective ways to expand our markets internationally. Over increased distribution. To accomplish this, during fiscal the coming year, our efforts will be focused on partnering with year 2014, for the first time in our history, we made available key manufacturers and distributors interested in our product to all distributors and qualified sales persons, a family of line or technology. Our Utah facility, where all electrotherapy, proprietary combination therapy devices, the Dynatron 25 ultrasound, traction, phototherapy and Synergie products are Series. The availability of these products is attracting new manufactured, is certified to ISO 13485:2003, an interna- distributors and sales persons. In addition, where these sales tionally recognized standard of excellence in medical device persons have had limited or no access to premier lines like the manufacturing. This designation is an important requirement Dynatron SolarisPlus products, they are now able to access in obtaining the CE Mark certification, which allows us to these products in certain geographical areas through the market our products in the European Union and in other authorized sales representative or dealer who has the rights to international locations. The introduction of several important the products in those territories. Making these products more new products has generated new interest on the part of some Management’s Discussion and Analysis of Financial Condition 17 foreign distributors in Asia, Europe and South America. We are • Exploring strategic business alliances that will leverage focusing specifically on distribution in China, Japan, Central and complement our competitive strengths, increase and South America. We are also examining the potential for market reach and supplement capital resources. distribution within Europe more seriously than in the past. As we secure CE Mark Certification and meet local regulatory Market Information requirements for our products we will be better able to explore As of September 18, 2014, we had approximately 2,520,389 the interest of distributors in these markets. shares of common stock issued and outstanding. Our Refining our business model for supporting sales common stock is included on the NASDAQ Capital Market representatives and distributors will also be a focal point of (symbol: DYNT). The following table shows the range of high operations. We will continue to evaluate the most efficient and low sale prices for our common stock as quoted on the ways to maintain our satellite sales offices and warehouses. NASDAQ system for the quarterly periods indicated. All The ongoing refinement of this model is expected to yield common stock share and per share information in the tables further efficiencies that will better achieve sales goals while, below have been adjusted to reflect retrospective application at the same time, reduce expenses. For instance, on June 30, of the reverse stock split that was effected in December 2012. 2014 we closed our office in Youngstown, OH. Our efforts to prudently reduce costs in the face of some economic uncertainty have made us a leaner operation. During fiscal year 2013, we implemented almost $1,000,000 in expense reductions. In fiscal 2014, we reduced costs by an additional $648,000. We will continue to be vigilant in Fiscal Year maintaining appropriate overhead costs and operating costs Ended June 30: 2013 2014 while still providing support for anticipated increases in sales from our new products. High Low High Low Based on our defined strategic initiatives, we are focusing 1st Quarter Jul-Sep $3.25 $2.35 $7.94 $2.33 our resources in the following areas: • Increasing market share of manufactured capital products by promoting sales of our new state-of-the-art Dynatron 3rd Quarter Jan-Mar $3.95 $2.30 $5.57 $2.94 ThermoStim Probe, SolarisPlus and 25 Series products. • Seeking to improve distribution of our products through 4th Quarter Apr-Jun $2.86 $2.45 $4.44 $2.86 2nd Quarter Oct-Dec $4.24 $2.00 $4.85 $2.74 recruitment of additional qualified sales representatives and dealers attracted by the many new products being offered and expanding the availability of proprietary combination therapy devices. • Developing sales through the recently acquired Amerinet contract. • Continuing to seek ways of increasing business with Stockholders regional and national accounts including other group As of September 18, 2014, the approximate number of purchasing organizations such as Amerinet and the U.S. shareholders of record was 385. This number does not Government. include beneficial owners of shares held in “nominee” or • Improving operational efficiencies by scaling costs to be “street” name. Including such beneficial owners, we estimate reflective of current levels of sales. that the total number of beneficial owners of our common • Strengthening pricing management and procurement stock is approximately 2,200. methodologies. • Focusing international sales efforts on identifying key Dividends distributors and strategic partners who could represent We have never paid cash dividends on our common stock. Our the Company’s product line, particularly in China, Japan, anticipated capital requirements are such that we intend to Southeast Asia, Central and South America as well as follow a policy of retaining earnings, if any, in order to finance portions of Europe. the development of the business. 18 Management’s Discussion and Analysis of Financial Condition BOARD Of DIRECTORS AND STOCKHOLDERS Of TO THE BOARD Of DIRECTORS AND STOCKHOLDERS Of DYNATRONICS CORPORATION AND SuBSIDIARY DYNATRONICS CORPORATION We have audited the accompanying consolidated balance We have audited the accompanying balance sheet of sheet of Dynatronics Corporation and subsidiary (collectively, Dynatronics Corporation and subsidiary (collectively, the the Company) as of June 30, 2014 and the related consolidated Company) as of June 30, 2013, and the related statements of statements of operations, stockholders’ equity, and cash flows income, stockholders’ equity, and cash flows for the year then for the year then ended. These financial statements are the ended. These financial statements are the responsibility of the responsibility of the Company’s management. Our responsi- Company’s management. Our responsibility is to express an bility is to express an opinion on these financial statements opinion on these financial statements based on our audits. based on our audit. We conducted our audit in accordance with the standards We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. the financial statements are free of material misstatement. The company is not required to have, nor were we engaged The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes Accordingly, we express no such opinion. An audit also examining, on a test basis, evidence supporting the amounts includes examining, on a test basis, evidence supporting and disclosures in the financial statements, assessing the the amounts and disclosures in the financial statements, accounting principles used and significant estimates made assessing the accounting principles used and significant by management, as well as evaluating the overall financial estimates made by management, as well as evaluating the statement presentation. We believe that our audits provide a overall financial statement presentation. We believe that our reasonable basis for our opinion. audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of referred to above present fairly, in all material respects, the Dynatronics Corporation and subsidiary as of June 30, 2013, financial position of Dynatronics Corporation and subsidiary and the results of its operations and its cash flows for the year at June 30, 2014, and the results of its operations and its cash then ended in conformity with accounting principles generally flows for the year then ended, in conformity with accounting accepted in the United States of America. principles generally accepted in the United States of America. /s/ Mantyla McReynolds, LLC Salt Lake City, Utah September 26, 2014 /s/Larson & Company PC Salt Lake City, UT September 30, 2013 Report of Independent Registered Public Accounting Firm 19 Balance Sheets Years ended June 30: Assets Current assets: 2014 2013 Cash and cash equivalents $ 332,800 302,050 Trade accounts receivable, less allowance for doubtful accounts of 3,165,396 3,246,712 $325,355 as of June 30, 2014 and $247,708 as of June 30, 2013 Other receivables Inventories, net Prepaid expenses and other assets Prepaid income taxes Current portion of deferred income tax assets 15,594 27,197 6,157,848 6,407,553 298,370 506,836 — — 408,919 389,101 Total current assets 10,378,927 10,879,449 Property and equipment, net Intangible asset, net Other assets Deferred income tax assets, net of current portion 2,980,677 3,324,947 235,440 396,456 303,644 280,078 422,672 197,441 Total assets $ 14,295,144 15,104,587 Liabilities and Stockholders’ Equity Current liabilities: Current portion of long-term debt Line of credit Warranty reserve Accounts payable Accrued expenses Accrued payroll and benefits expenses Income tax payable $ 302,274 322,573 3,521,209 3,496,390 157,753 178,148 2,433,534 2,751,894 342,716 243,394 30,452 347,221 216,266 21,369 Total current liabilities 7,031,332 7,333,861 Long-term debt, net of current portion 1,255,133 1,561,776 Total liabilities 8,286,465 8,895,637 Commitments and contingencies Stockholders’ equity: Common stock, no par value: Authorized 50,000,000 shares; 2,520,389 7,149,812 7,078,941 shares and 2,518,904 shares issued and outstanding at June 30, 2014 shares as of June 30, 2013, respectively Accumulated deficit (1,141,133) (869,991) Total stockholders’ equity 6,008,679 6,208,950 Total liabilities and stockholders’ equity $ 14,295,144 15,104,587 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . 20 Dynatronics Corporation Consolidated Balance Sheets June 30, 2014 and 2013 Statements of Operations Years ended June 30: Net sales Cost of sales Gross profit Selling, general, and administrative expenses Research and development expenses Operating income Other Income (expense): Interest income Interest expense Other income, net 2014 2013 $ 27,444,223 29,538,275 17,423,851 18,451,673 10,020,372 11,086,602 9,213,433 9,860,964 992,729 1,120,887 (185,790) 104,751 44 681 (231,865) (260,699) 20,446 24,142 Total other income (expense) (211,375) (235,876) Loss before income tax benefit (397,165) (131,125) Income tax benefit Net loss Basic and diluted net loss per common share 126,023 86,754 (271,142) (44,371) ( 0.11) (0.02) $ $ Weighted-average basic and diluted common shares outstanding: 2,519,490 2,526,533 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . Dynatronics Corporation Consolidated Statements of Operations Years Ended June 30, 2014 and 2013 21 Statements of Stockholders’ Equity Years ended June 30: Number of shares* Common Accumulated Stockholders’ stock Deficit Equity Total Shares issued due to stock split rounding Net loss 63 — — (44,371) (44,371) Balances at June 30, 2013 2,518,904 $ 7,078,941 (869,991) 6,208,950 Repurchase of common stock — — Stock-based compensation 1,485 70,871 Issuance of common stock upon exercise of employee stock options Shares issued due to stock split rounding Net loss — — — — — — — — — — — 70,871 — — (271,142) (271,142) Balances as of June 30, 2014 2,520,389 $ 7,149,812 (1,141,331) 6,008,679 *Reflects adjusted shares due to 1:5 reverse stock split effective December 19, 2012 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . 22 Dynatronics Corporation Consolidated Statements of Stockholders’ Equity Year’s Ended June 30, 2014 and 2013 Statements of Cash flows Years ended June 30: Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation & amortization of property & equipment Amortization of intangible and other assets Gain on sale 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 2014 2013 $ (271,142) (44,371) 433,014 147,901 — 70,871 (126,021) 96 ,000 120,000 (3,081) 129,705 216,324 20,248 (327,297) 435,366 118,335 (2,993) 86,639 (86,754) 180,000 206 ,460 224,895 (515,416) (281,855) 23 ,615 299,185 Net cash provided by operating activities 506,522 643,106 Cash flows from investing activities: Purchase of property and equipment Proceeds from sale of property and equipment (176,958) (100,438) — 345 Net cash used in investing activities (176,958) (100,093) Cash flows from financing activities: Principal payments on long-term debt Net change in line of credit Proceeds from issuance of common stock Purchase and retirement of common stock (323,633) (418,386) 24,819 — — (1,207) 364 (99,997) Net cash used in financing activities (298,814) (519,226) Net change in cash and cash equivalents 30,750 23,787 Cash and cash equivalents at beginning of the year 302,050 278,263 Cash and cash equivalents at end of the year 332,800 302,050 Supplemental disclosures of cash flow information: Cash paid for interest 232,571 259 ,794 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . Dynatronics Corporation Consolidated Statements of Cash Flows Years Ended June 30, 2014 and 2013 23 (1) BASIS Of PRESENTATION AND SummARY Of SIGNIfICANT ACCOuNTING POLICIES (a) Description of Business plastic surgeons, dermatolo- orthopedists, chiropractors, Dynatronics Corporation (the Company), a Utah corporation, distributes and markets a broad line of medical and rehabilitation equipment, medical supplies and soft manufactured by the Company. Among the products goods, treatment tables and aesthetic medical devices to an expanding market of physical therapists, podiatrists, offered by the Company are therapeutic, diagnostic, and aesthetic products, many of which are designed and NOTES FINANCIAL STATEMENTS The consolidated financial statements include the accounts (b) Principles of Consolidation professionals. other medical gists, and and operations of Dynatronics Corporation and its wholly owned subsidiary, Dynatronics Distribution Company, LLC. All significant intercompany account balances and transactions have been eliminated in consolidation. (c) Cash 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 (first-in, first-out method), which approximates actual cost, or market. Raw materials are stated at the lower of cost (first in, first out method) or market. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its 25 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 assessment of slow moving or obsolete inventory. Write-downs (i) Revenue Recognition and write-offs are charged against the reserve. The Company recognizes revenue when products are shipped (e) Trade Accounts Receivable FOB shipping point under an agreement with a customer, risk of loss and title have passed to the customer, and collection Trade accounts receivable are recorded at the invoiced amount of any resulting receivable is reasonably assured. Amounts and do not bear interest, although a finance charge may be billed for shipping and handling of products are recorded as applied to such receivables that are past the due date. The sales revenue. Costs for shipping and handling of products to allowance for doubtful accounts is the Company’s best estimate customers are recorded as cost of sales. of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the (j) Research and Development Costs allowance based on a combination of statistical analysis, Direct research and development costs are expensed as historical collections, customers’ current credit worthiness, incurred. the age of the receivable balance both individually and in the aggregate and general economic conditions that may affect the (k) Product Warranty Costs customer’s ability to pay. All account balances are reviewed on Costs estimated to be incurred in connection with the an individual basis. Account balances are charged off against Company’s product warranty programs are charged to the allowance when the potential for recovery is considered expense as products are sold based on historical warranty remote. Recoveries of receivables previously charged off are rates. recognized when payment is received. (l) Net Income (Loss) per Common Share (f) Property and Equipment Net income (loss) per common share is computed based Property and equipment are stated at cost less accumulated on the weighted-average number of common shares depreciation. Depreciation is computed using the straight outstanding and, when appropriate, dilutive common stock line method over the estimated useful lives of the assets. The equivalents outstanding during the year. Stock options building and its component parts are being depreciated over are considered to be common stock equivalents. The their estimated useful lives that range from 5 to 31.5 years. computation of diluted net income (loss) per common share Estimated lives for all other depreciable assets range from 3 does not assume exercise or conversion of securities that to 7 years. (g) Long-Lived Assets would have an anti-dilutive effect. Basic net income (loss) per common share is the amount of net income (loss) for the year available to each weighted- Long–lived assets, such as property and equipment, are average share of common stock outstanding during the year. reviewed for impairment whenever events or changes in Diluted net income (loss) per common share is the amount circumstances indicate that the carrying amount of an asset of net income (loss) for the year available to each weighted- may not be recoverable. Recoverability of assets to be held and average share of common stock outstanding during the year used is measured by a comparison of the carrying amount of and to each common stock equivalent outstanding during the an asset to estimated undiscounted future cash flows expected year, unless inclusion of common stock equivalents would to be generated by the asset. If the carrying amount of an have an anti-dilutive effect. asset exceeds its estimated future cash flows, an impairment On December 19, 2012, the Company completed a charge is recognized for the difference between the carrying 1-for-5 reverse split of its common stock. All common stock amount of the asset and the fair value of the asset. Assets to share and per share information in the accompanying be disposed of are separately presented in the balance sheet consolidated financial statements and notes thereto have and reported at the lower of the carrying amount or fair value been adjusted to reflect retrospective application of the less costs to sell, and are no longer depreciated. reverse stock split, except for par value per share and the number of authorized shares, which were not affected by the (h) Intangible Assets reverse stock split. Costs associated with the acquisition of trademarks, trade The reconciliation between the basic and diluted weighted- names, license rights and non-compete agreements are average number of common shares for the years ended June capitalized and amortized using the straight-line method over 30, 2014 and 2013 is summarized as follows: periods ranging from 3 months to 20 years. 26 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 Basic weighted-average number of common shares outstanding during the year 2,519,490 2,526,533 Weighted-average number of dilutive common stock options outstanding during the year — — Diluted weighted-average number of common and common 2,519,490 2,526,533 equivalent shares outstanding during the year 2014 2013 Outstanding options not included in the computation of differences, a valuation allowance is recorded. diluted net loss per common share totaled 145,987 as of June 30, 2014 and 161,454 as of June 30, 2013. These common (n) Stock-Based Compensation stock equivalents were not included in the computation The Company accounts for stock-based compensation because to do so would have been antidilutive. in accordance with FASB ASC 718, Stock Compensation. (m) Income Taxes Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as The Company recognizes an asset or liability for the deferred expense over the applicable vesting period of the stock award income tax consequences of all temporary differences between (generally five years) using the straight-line method. the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable (o) Concentration of Risk or deductible amounts in future years when the reported amounts In the normal course of business, the Company provides of the assets and liabilities are recovered or settled. Accruals for unsecured credit to its customers. Most of the Company’s uncertain tax positions are provided for in accordance with the customers are involved in the medical industry. The Company requirements of Financial Accounting Standards Board (FASB) performs ongoing credit evaluations of its customers and Accounting Standards Codification (ASC) 740-10, Income Taxes. maintains allowances for probable losses which, when Under ASC 740-10, the Company may recognize the tax benefits realized, have been within the range of management’s from an uncertain tax position only if it is more likely than not that expectations. The Company maintains its cash in bank deposit the tax position will be sustained on examination by the taxing accounts which at times may exceed federally insured limits. authorities, based on the technical merits of the position. The The Company believes it is not exposed to any significant tax benefits recognized in the financial statements from such credit risks with respect to cash or cash equivalents. a position are measured based on the largest benefit that has As of June 30, 2014, the Company has approximately a greater than 50% likelihood of being realized upon ultimate $82,800 in cash and cash equivalents in excess of the FDIC limits. settlement. ASC 740-10 also provides guidance on derecognition The Company has not experienced any losses in such accounts. of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest (p) Operating Segments and penalties associated with tax positions, and income tax The Company operates in one line of business: the disclosures. Judgment is required in assessing the future tax development, marketing, and distribution of a broad line of consequences of events that have been recognized in the financial medical products for the physical therapy and aesthetics statements or tax returns. Variations in the actual outcome of these markets. As such, the Company has only one reportable future tax consequences could materially impact the Company’s operating segment. financial position, results of operations and cash flows. The Company groups its sales into physical medicine The Company evaluates the need for a valuation products and aesthetic products. Physical medicine products allowance on deferred taxes on a quarterly and annual base. made up 91% of net sales for both the years ended June 30, This evaluation considers the level of historical taxable income 2014 and 2013. Aesthetics products made up 1% of net sales and projections for future taxable income over the periods for both the years ended June 30, 2014 and 2013. Chargeable which the deferred income tax assets are deductible. If repairs, billable freight and other miscellaneous revenues management determines that it is more likely than not that account for the remaining 8% of net sales for both the years the Company will not realize the benefits of these deductible ended June 30, 2014 and 2013. Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 27 (q) Use of Estimates receivables, income taxes, and inventories; accrued product Management of the Company has made a number of estimates warranty costs; and estimated recoverability of intangible and assumptions relating to the reporting of assets, liabilities, assets. Actual results could differ from those estimates. revenues and expenses, and the disclosure of contingent assets and liabilities in accordance with US Generally Accepted (r) Advertising Costs Accounting Principles (US GAAP). Significant items subject Advertising costs are expensed as incurred. Advertising to such estimates and assumptions include the carrying expense for the years ended June 30, 2014 and 2013 was amount of property and equipment; valuation allowances for approximately $111,900 and $127,400, respectively. (2) INVENTORIES (4) INTANGIBLE ASSETS Inventories consist of the following as of June 30: Identifiable intangible assets and their useful lives consist of the following as of June 30: Raw materials Finished goods 2014 2013 $ 2,783,306 2,732,363 2014 2013 3,709,897 4,002,709 Trade name—5 years $ 339,400 Inventory reserve (335,355) (327,519) Domain name—15 years $ 6,157,848 6,407,553 —4 years Non-compete covenant 5,400 149,400 339,400 5,400 149,400 (3) PROPERTY AND EquIPmENT Customer relationships 120,000 120,000 —7 years Trademark licensing 45,000 45,000 agreement—20 years Backlog of orders —3 months 2,700 2,700 Property and equipment consist of the following as of June 30: Customer database 38,100 38,100 —7 years License agreement 73,240 73,240 2014 2013 —10 years Land Buildings Machinery and equipment Office equipment Computer equipment Vehicles $ 354,743 354,743 Total identifiable 773,240 773,240 3,758,524 1,598,770 266,563 1,980,746 236,987 3,746,472 intangibles 1,550,633 Less accumulated (537,800) (493,162) 263,861 amortization 1,963,414 266,946 Net carrying amount $ 235,440 280,078 Less accumulated depreciation (5,215,656) (4,821,122) 8,196,333 8,146,069 and amortization $ 2,980,677 3,324,947 assets was $44,637 for both fiscal years 2014 and 2013. Amortization expense associated with the intangible Estimated amortization expense for the identifiable intangibles is expected to be as follows: 2015, $30,680; 2016, $30,680; 2017, $30,680; 2018, 26,430; 2019, 26,430 and thereafter $90,540. Depreciation expense for the years ended June 30, 2014 and 2013 was $433,686 and $435,366, respectively. 28 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 (5) WARRANTY RESERVE A reconciliation of the change in the warranty reserve consists (7) LONG TERm DEBT of the following for the fiscal years ended June 30: Long term debt consists of the following as of June 30: 2014 2013 2014 2013 Beginning warranty $ 178,148 181,000 6.44% promissory $ 853,090 953,929 reserve balance Warranty repairs Warranties issued Changes in estimated warranty costs (141,471) 153,648 (32,572) (160,267) 127,863 29,552 note secured by trust deed on real property, maturing January 2021, payable in monthly installments of $13,278 5.235% promissory note 644,962 808,326 Ending warranty reserve $ 157,753 178,148 (6) LINE Of CREDIT The Company has a revolving line-of-credit facility with a secured by building, maturing December 2017, payable in monthly installments of $16,985 Promissory note secured by a vehicle, payable in monthly installments of $639 through February 2019 8.49% promissory note secured by equipment, payable in monthly installments of $2,097 33,913 43,449 12,279 35,332 commercial bank in the amount of $4,500,000. Borrowing through December 2014 limitations are based on 45% of eligible inventory and up to 5.887% promissory note 12,140 15,970 80% of eligible accounts receivable resulting in a borrowing base of $4,845,000, subject to the $4,500,000 limitation as described above, as of June 30, 2014. As of June 30, 2014 and secured by a vehicle, payable in monthly installments of $390 through March 2017 13.001% promissory note 1,023 1,683 2013, the outstanding balance was approximately $3,521,000 secured by equipment, and $3,496,000, respectively. Available borrowings as of June 30, 2014 were $979,000. The line of credit is collateralized by inventory and accounts receivable and bears interest at a payable in monthly installments of $70 through October 2015 14.305% promissory note — 23,965 rate based on the lender’s 90-day LIBOR rate plus 3%. The secured by equipment, interest rate was 3.7% and 3.8% as of June 30, 2014 and 2013, respectively. This line is subject to biennial renewal and matures on October 31, 2014. However, if the line of credit is payable in monthly installments of $2,338 through May 2014 5.75% promissory note — 1,695 not extended, the Company will need to find additional sources secured by a vehicle, payable of financing. Failure to obtain additional financing would have a material adverse effect on our business operations. All borrowings under the line of credit are presented as current liabilities in the accompanying condensed consolidated balance sheet. Accrued interest is payable monthly. The Company’s revolving line of credit agreement includes covenants requiring the Company to maintain certain financial ratios. As of June 30, 2014, the Company was not in compliance with one of the loan covenants, however, the bank granted a waiver for the period. in monthly installments of $435 through October 2013 Less accumulated amortization 1,557,407 (302,274) 1,884,349 (322,573) $ 1,255,133 1,561,776 The Company believes that amounts available under The aggregate maturities of long term debt for each of the the line of credit as well as cash generated from operating years subsequent to 2014 are as follows: 2015, $302,274; activities will continue to be sufficient to meet our short term 2016, $307,773; 2017, $325,687; 2018, $240,098; 2019, operating requirements. $144,707 and thereafter $236,868. Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 29 (8) LEASES During fiscal year 2014, the office and warehouse spaces in Detroit, Michigan and Hopkins, Minnesota were leased The Company leases vehicles under noncancelable on an annual/monthly basis from employees/stockholders; operating lease agreements. Lease expense for the years or entities controlled by stockholders, who were previously ended June 30, 2014 and 2013, was $16,106 and $15,076, principals of the dealers acquired in July 2007. The leases are respectively. Future minimum lease payments required related-party transactions with two employee/stockholders, under noncancelable operating leases that have initial or however, management believes the lease agreements have remaining lease terms in excess of one year as of 2014 are been conducted on an arms-length basis and the terms as follows: 2015, $16,106 and 2016, $7,403. are similar to those that would be available to other third The Company rents office, warehouse and storage space parties. During fiscal year 2013 the Company also leased and office equipment under agreements which run one year or office and warehouse space in Pleasanton, California from more in duration. The rent expense for the years ended June an employee/stockholder. In December, 2012, the Company 30, 2014 and 2013 was $203,361 and $191,659, respectively. moved its Pleasanton operation to a new, larger location in Future minimum rental payments required under operating Livermore, California and entered into a lease agreement with leases that have a duration of one year or more as of June an unaffiliated third party. The expense associated with these 30, 2014 are as follows: 2015, $94,752; 2016, $84,777; 2017, related-party transactions totaled $52,200 and $93,300 $54,852; 2018, $5,088 and 2019, $2,544. expense for the fiscal years ended June 30, 2014 and 2013. (9) INCOmE TAXES Income tax benefit (provision) for the ears ended June 30 consists of: 2014: U.S. federal State and Local 2013: U.S. federal State and Local Current — — — Current — — — $ $ $ $ Deferred 107,439 18,584 Total 107,439 18,584 126,023 126,023 Deferred 83,198 3,556 Total 83,198 3,556 86,754 86,754 The actual income tax benefit (provision) differs from Expected tax benefit $ 135,036 44,583 the “expected” tax benefit (provision) computed by applying (provision) the U.S. federal corporate income tax rate of 34% to income State taxes, net of 12,265 2,359 (loss) before income taxes for the years ended June 30, are federal tax benefit 2014 2013 as follows: R&D tax credit Incentive stock options Other, net — (4,852) (16,426) 55,000 (10,213) (4,975) $ 126,023 86,754 30 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 Deferred income tax assets and liabilities related to the tax In assessing the realizability of deferred income tax effects of temporary differences are as follow as of June 30: assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred 2014 2013 income tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, Net deferred income tax assets – current: Inventory $ 68,748 72,058 projected future taxable income, and tax planning strategies capitalization for income tax purposes Inventory reserve Warranty reserve Accrued product liability Allowance for doubtful accounts 130,788 61,524 20,970 127,732 69,477 23,228 in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred income tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The Company has available at June 30, 2014 and 2013 126,889 96,606 estimated federal and state net operating loss (“NOL”) carry forwards of $745,605 and $974,484, respectively. The federal NOL will expire in 2030. The state NOLs will expire depending Total deferred income $ 408,919 389,101 upon the various rules in the states in which the Company tax assets – current operates. The Company’s federal and state income tax returns for June 30, 2011, 2012 and 2013 are open tax years. 2014 2013 SALES BY GEOGRAPHIC LOCATION (10) mAJOR CuSTOmERS AND Net deferred income tax assets (liabilities) – non-current: During the fiscal years ended June 30, 2014 and 2013, sales to any single customer did not exceed 10% of total net sales. The Company exports products to approximately 30 countries. Sales outside North America totaled $749,341 or Property and $ (255,835) (262,726) 2.7% of net sales, for the fiscal year ended June 30, 2014 equipment, principally due to differences in depreciation Research and development credit carryover Other intangibles Operating loss carry forwards compared to $647,047, or 2.2% of net sales, for the fiscal year ended June 30, 2013. 370,757 383,226 (91,822) 280,544 (109,231) 186,172 (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 Total deferred income $ 303,644 197,441 used. In February 2011, the board approved an additional tax assets (liabilities) – non-current $1,000,000 for repurchases under the program. During fiscal 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 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 31 in 2007. During the year ended June 30, 2014, the Company of the market price of the stock at the date of grant. Option did not acquired any shares of common stock. During the terms are determined by the board, and exercise dates may year ended June 30, 2013, the Company acquired and retired range from 6 months to 10 years from the date of grant. 32,786 shares of common stock for $99,997. The fair value of each option grant was estimated on the date During the years ended June 30, 2014 and 2013, the of grant using the Black Scholes option pricing model with the Company granted 1,485 and 13,689 shares, respectively, following assumptions: of restricted common stock to directors and officers in connection with compensation arrangements. The Company maintains a 2005 equity incentive plan for the benefit of employees. Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, Expected dividend yield and other share-based awards may be granted under the Expected stock plan. Awards granted under the plan may be performance- price volatility 2014 2013 0% 69% 0% 69% based. Effective November 27, 2007, the plan was amended, Risk-free interest rate as approved by the shareholders, to increase the number of Expected life of options 2.53% 10 years 1.74% 10 years shares available by 1,000,000 shares. As of June 30, 2014, 117,451 shares of common stock were authorized and reserved for issuance, but were not granted under the terms of the 2005 equity incentive plan as amended. The weighted average fair value of options granted during The Company granted options to acquire common stock fiscal years 2014 and 2013 was $1.89 and $2.03, respectively. under its 2005 equity incentive plan during fiscal years 2014 The following table summarizes the Company’s stock and 2013. The options are granted at not less than 100% option activity during the reported fiscal years: 2014 Number of shares 2014 Weighted average exercise price Weighted average remaining contractual term 2013 Number of shares 2013 Weighted average exercise price 163,868 $ 6.51 4.12 years 173,089 $ 6.48 3,598 — (11,862) 2.42 — 6.01 1,352 (208) (10,365) 2.70 1.75 5.69 6.51 Options outstanding at beginning of the year Options granted Options exercised Options canceled or expired Options outstanding at 155,604 6.45 3.56 years 163,868 end of the year Options exercisable at 137,804 7.09 138,920 7.20 end of the year Range of exercise prices at end of the year $ 1.75 – 8.60 $ 1.75 – 8.60 32 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 The Company recognized $70,871 and $86,639 in Performance Target Could Be Achieved after the Requisite stock-based compensation for the years ended June 30, 2014 Service Period. This Update clarifies the accounting for and 2013, respectively, which is included in selling, general, equity awards in which the performance target (ie IPO) could and administrative expenses in the consolidated statements be achieved after the requisite service period. The guidance of operations. The stock-based compensation includes require a performance target that affects vesting and that amounts for both restricted stock and stock options under could be achieved after the service period be treated as a ASC 718. performance condition and not be reflected in the fair value of As of June 30, 2014 there was $387,855 of unrecognized the award. Therefore, the compensation costs will begin to be stock-based compensation cost that is expected to be recognized when it becomes probable that the performance expensed over periods of four to nine years. target will be achieved. If the requisite service period is The aggregate intrinsic value on the date of exercise of complete, the entire amount of compensation costs should be options exercised during the year ended June 30, 2013 was recognized at that time. This Update is effective for reporting $386. No options were exercised during the fiscal year 2014. periods beginning after December 15, 2015. The Company The aggregate intrinsic value of the outstanding options as of currently does not have any stock-based awards meeting the June 30, 2014 and 2013 was $8,732 and $734, respectively. criteria noted so the Company doesn’t expect this Update to have a significant impact on its financials However, it will evaluate new grants and ensure the guidance is followed if these types of grants are made. (12) EmPLOYEE BENEfIT PLAN In June 2014, the FASB issued ASU 2014-11, Transfers The Company has a deferred savings plan which qualifies and Servicing (Topic 860): Repurchase-to-Maturity under Internal Revenue Code Section 401(k). The plan covers Transactions, Repurchase Financings, and Disclosures. all employees of the Company who have at least six months This Update eliminates different accounting treatments for of service and who are age 20 or older. For fiscal years 2014 repurchase agreements so the accounting for repurchase- and 2013, the Company made matching contributions of to-maturity and linked repurchase financings to secured 25% of the first $2,000 of each employee’s contribution. borrowings is consistent with other repurchase agreements. The Company’s contributions to the plan for 2014 and 2013 The amendment also requires an entity to disclose information were $39,056 and $35,167, respectively. Company matching on transfers accounted for as sales in transactions that contributions for future years are at the discretion of the board are economically similar to repurchase agreements and of directors. (13) SuBSEquENT EVENTS increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. This Update is effective for reporting periods beginning after December 15, 2014. Since the Company does not have the repurchase agreements On August 8, 2014, the Company sold the building that houses identified in the Update, the Company doesn’t expect this its operations in Utah and leased back the premises for a term Update to have a significant impact on its financials. of 15 years. The sale price was $3.8 million. Proceeds from In May 2014, the FASB issued ASU 2014-09, Revenue from the sale were used to reduce debt obligations of the Company. Contracts with Customer (Topic 606). This Update provides The profit generated from the sale will be sufficient to utilize new revenue recognition guidance that will be applicable for the majority, if not all of the Company’s deferred tax assets. all industries and develops a common revenue standard for As a result of this repayment of debt, our maximum credit GAAP and IFRS. The main purpose of the new guidance is facility under the line of credit was changed to $2,500,000 in to remove inconsistencies, provide a more robust framework, August, 2014. improve comparability among industries, improve disclosure requirements and reduce the number of requirements to which an entity must refer. The guidance outlines the following five steps that should be followed in recognizing revenue: (14) RECENT ACCOuNTING PRONOuNCEmENTS In June 2014, the FASB issued ASU 2014-12, Compensation – 1. Identify contract with customer Stock Compensation (Topic 718): Accounting for Share-Based 2. Identify the performance obligations in the contract Payments When the Terms of an Award Provide That a 3. Determine the transaction price Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 33 4. Allocate the transaction price to the conclude that a service concession arrangement meets the performance obligations in the contract lease criteria in Topic 840. Consequently, the amendments 5. Recognize revenue when the in this update improve financial reporting by clarifying that performance obligation is satisfied. a service concession arrangement within the scope of this update should not be accounted for as a lease in accordance The update also provides disclosure requirements with Topic 840 and, thereby, alleviates the confusion that arises requiring entities to provide sufficient information to for preparers when determining whether a service concession enable users to understand the nature, amount, timing and arrangement is a lease. A service concession arrangement uncertainty of revenue and cash flows arising from contracts is an arrangement between a public-sector entity grantor with customers. This Update is effective for public entities and an operating entity under which the operating entity for reporting periods beginning after December 15, 2016 operates the grantor’s infrastructure (for example, airports, and for all other entities, it is effective for periods beginning roads, and bridges). The operating entity also may provide after December 15, 2017. Due to the extensive nature of the construction, upgrading, or maintenance services of the this Update, the Company is evaluating the impact this new grantor’s infrastructure. The update is effective for annual guidance will have on its financials. periods beginning after December 15, 2014, and interim In March 2014, the FASB issued ASU 2014-07, periods within annual periods beginning after December 15, Applying Variable Interest Entities Guidance to Common 2015. The Company does not receive any service concession Control Leasing Arrangements. Under the amendments in arrangements from any public-sector entity; therefore, the this update, a private company could elect, when certain Company does not believe this update will have a significant conditions exist, not to apply VIE guidance to a lessor entity impact on our financial statements. under common control. This update is not applicable to public In July 2013, the FASB issued ASU 2013-11, Income Taxes business entities; therefore, the update is not applicable to (Topic 740) – Presentation of an Unrecognized Tax Benefit our Company. When a Net Operating Loss Carryforward, a Similar Tax Loss, In March 2014, the FASB issued ASU 2014-06, Technical or a Tax Credit Carryforward Exists. This update indicates Corrections and Improvements Related to Glossary Terms. that an unrecognized tax benefit should be presented in The amendments in this update represent changes to clarify the financial statements as a reduction to a deferred tax the Master Glossary of the Codification, consolidate multiple asset except in circumstances where a net operating loss instances of the same term into a single definition, or make carryforward or tax credit carryforward is not available at the minor improvements to the Master Glossary that are not reporting date under the tax law of the applicable jurisdiction. expected to result in substantive changes to the application This update is effective for years beginning after December of existing guidance or create a significant administrative 15, 2013 for public companies. The adoption of this cost to most entities. Additionally, the amendments will make pronouncement had no significant effect on the Company’s the Master Glossary easier to understand, as well as reduce financial statements. the number of terms appearing in the Master Glossary. The amendments in this update are effective immediately. The Company reviewed and noted the changes made in this update, which can be categorized into four sections: 1) Deletion of Master Glossary Terms, 2) Addition of Master Glossary Term Links, 3) Duplicate Master Glossary Terms, and 4) Other Technical Corrections Related to Glossary Terms. The Company implemented the update upon issuance, but the changes did not have a significant impact on our financial statements. In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements (Topic 853) a consensus of the FASB Emerging Issues Task Force. Current U.S. GAAP does not contain specific guidance for the accounting for service concession arrangements. Depending on the terms of a service concession arrangement, an operating entity may or may not 34 Dynatronics Corporation Notes to Consolidated Statements June 30, 2014 and 2013 AVAILABILITY Of fORm 10-K GENERAL INfORmATION Dynatronics Corporation files an annual report on Form 10-K Dynatronics Corporation, a Utah corporation organized on each year with the Securities and Exchange Commission. A April 29, 1983, manufactures, markets and distributes a broad copy of the Form 10-K for the fiscal year ended June 30, 2014, line of therapeutic, diagnostic and rehabilitation equipment, may be obtained at no charge by sending a written request to: medical supplies and soft goods, treatment tables, and aesthetic massage and microdermabrasion devices to an Mr. Bob Cardon, Vice President of Administration expanding market of physical therapists, sports medicine Dynatronics Corporation 7030 Park Centre Drive, practitioners and athletic trainers, chiropractors, podiatrists, orthopedists, plastic surgeons, dermatologists, aestheticians Cottonwood Heights, Utah 84121 and other medical professionals. OffICERS AND DIRECTORS Kelvyn H. Cullimore, Jr., ANNuAL mEETING The company’s annual shareholder meeting will be held at Chairman of the Board, President and CEO Dynatronics corporate headquarters at a date and time to Larry K. Beardall Executive Vice President of Sales & Marketing & Director 7030 Park Centre Drive, be announced. Cottonwood Heights, Utah 84121 Terry M. Atkinson, CPA Chief Financial Officer Robert J. (Bob) Cardon ACCOuNTANTS, LEGAL COuNSEL AND TRANSfER AGENT Vice President of Administration, Secretary & Treasurer Mantyla McReynolds LLC, Salt Lake City, Utah Douglas Sampson Independent Registered Public Accounting Firm Durham Jones & Pinegar, Salt Lake City, Utah Vice President of Production and R&D Corporate Legal Counsel Bryan D. Alsop Kirton & McConkie, Salt Lake City, Utah Intellectual Property Legal Counsel Vice President of Information Technology Interwest Transfer Company P.O. Box 17136, Salt Lake City, Utah 84117 Transfer Agent Joseph H. Barton (deceased 11/07/14) Director, Retired Sr. Vice President, GranCare Inc. Howard L. Edwards DYNATRONICS CORPORATION HEADquARTERS Director, Retired Corporate Secretary, ARCO Company 7030 Park Centre Drive, Cottonwood Heights, Utah 84121 1.800.874.6251, http://www.dynatronics.com R. Scott Ward, PT PhD Director, Chairman of Department of Physical Therapy, University of Utah Corporate Information 35 This annual report contains forward-looking statements related to anticipated financial performance, product development and similar matters. Securities laws provide a safe harbor for such statements. The company notes that risks inherent in its business and a variety of factors could cause or contribute to a difference between actual results and anticipated results. C Letter to ShareholdersDynatronics Corporation 7030 Park Centre Dr., Cottonwood Heights, Utah 84121 1.800.874.6271 — www.dynatronics.com D Letter to Shareholders

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