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
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3
6
7
8
10
11
19
20
25
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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
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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.
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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
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.
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
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.
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
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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
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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