Dynatronics
Annual Report 2015

Plain-text annual report

2015 ANNUAL REPORT Improving Outcomes Letter to Shareholders Market Expansion International Expansion Board of Directors and Management Management’s Discussion and Analysis Report of Independent Registered Public Accounting Firm Financial Statements Notes to Financial Statements Corporate Information 2 3 6 7 8 9 17 18 23 33 ImprovIng outcomes Improving outcomes with Light Therapy is the focus for therapy in the treatment of Plantar Fasciitis. Following the Dynatronics’ 2016 marketing campaign. An avalanche of study, Dr. Guffey stated: “Adding Light Therapy to traditional research is now available substantiating that adding light treatment protocols can make a therapy to traditional treatment therapies improves outcomes. significant difference on both function Many of these research projects utilized Dynatronics’ devices. and pain.” Results of Dr. Guffey’s study Dr. J. Stephen Guffey, P.T., Ed., D., Professor of Physical can be seen in a two minute video Therapy at Arkansas State University, and his research team accessed by scanning the accompanying explored the use of Light Therapy when added to traditional QR Code. 2 Letter to Shareholders In fiscal year 2015 we opened a new chapter in the story of Dynatronics. This chapter began near the end of fiscal year 2014. After experiencing consecutive years of declining sales in fiscal years 2013 and 2014, management determined it was necessary to take aggressive actions to change the direction of the company. Over our more than 30 years in business, we have shown an ability to make strategic adjustments to changing market conditions. This began in the 1980s when issues with the FDA prevented the introduction of our original laser product. We adapted by developing the first microprocessor-based elec- trotherapy and ultrasound equipment in the physical therapy market. In the 1990s our market showed a trend toward consolidation of physical therapy clinics on a regional and national basis. We responded by making acquisitions that allowed us to broaden our product offering and become a more complete supplier to the market. When a large competitor began buying up distribution in our market at the beginning of the new millennium, we responded by securing our distribution channels by acquiring the best dealers and distributors in our market. Recently, faced with changing market conditions related to healthcare reform and recessionary pressures, we felt it was once again time to adapt. But this time the change is much more significant. During the early part of the fiscal year, we embarked on a strategy to acquire a new, exciting technology with the goal of leveraging our sales force and expanding our presence into the orthopedic market. This acquisition was terminated after the completion of our due diligence revealed insurmountable incompatibilities. However, during that process, we became acquainted with Prettybrook Partners. When we terminated the acquisition, Prettybrook indicated a willingness to consider funding a new growth strategy for Dynatronics. We are approached almost weekly by firms willing to provide capital to the company … at a cost, of course. While Prettybrook was willing to invest funds, the attraction was far greater than simply receiving an infusion of capital for Dynatronics. The principals of Prettybrook have a proven track record of growth, knowledge of capital markets and clear access to additional capital and deal flow. Months of due diligence and negotiation culminated on June 30, 2015, when we closed on the sale of Series A Preferred Convertible Stock to affiliates of Prettybrook Partners. That investment in Dynatronics’ preferred stock raised $4,025,000 of new capital. The preferred stock was purchased at $2.50 per share and is convertible into common on a one-to-one basis. The stock earns an 8 percent dividend payable in cash or stock. Each share of preferred stock was coupled with a warrant to purchase another 1.5 shares of Letter to Shareholders 3 2015LETTER TOSHAREHOLDERScommon stock at $2.75 per share. The preferred stock also down inventories by $830,000 in addition to the $120,000 we features certain voting rights. The preferred shareholders as had accrued during the year. These write-downs were taken a group may appoint up to three members of the company’s as a result of changing strategic plans finalized in the fourth seven-member board of directors. We believe these were quarter of the year associated with the sale of preferred stock, equitable terms to not only help strengthen our company, which resulted in some product lines such as the Synergie but more importantly, to link us with new partners who had line, Quad 7 and others being discontinued, de-emphasized excellent ideas for strategic growth and a proven record to or re-evaluated. perform on those strategies. In addition to the “beneficial conversion feature” and the Stuart Essig, one of Prettybrook’s principals, guided write-down of inventories, our 2015 results were affected by a Integra Life Sciences from less than $20 million in sales in required valuation allowance against the deferred tax assets the late 1990s to more than $928 million in 2014. In that recorded during the fourth quarter. Because we had incurred process, he shepherded over 50 acquisitions. He remains several years of operating losses and a significant loss for the chairman of the board of Integra. Erin Enright, the other fourth quarter, GAAP deems such losses to be substantial principal of Prettybrook, spent 10 years as managing director evidence that we may never be able to utilize net operating losses of Equity Capital Markets for Citigroup and many years as an and other tax attributes which had previously been recorded executive of medtech companies. The business experience as deferred tax assets. Therefore, in 2015 we recorded a 100 and credibility of these partners is of much greater value than percent reserve (totaling approximately $1.4 million) against the financial capital they have supplied. all deferred tax assets resulting in approximately $849,000 Our growth strategy is simple. We will utilize the new in a deferred income tax expense. If we achieve profitability investment to fund initiatives for the legacy business and in the future, this reserve will be removed and the value of the pursue opportunities for new growth through mergers and deferred tax assets will be restored. acquisitions (“M&A”). The legacy management team has Finally, we recorded expenses of approximately $260,000 the vision and ability to execute on organic growth. The new during the year, associated with the terminated acquisition investors, led by Prettybrook, bring the M&A expertise. mentioned earlier. This new strategy will not materialize overnight. In the These extraordinary items contributed to a net loss of early stages, costs will be incurred to build the platform for $2.3 million and a $5.1 million net loss applicable to common growth. M&A activity is unpredictable, but we conservatively shareholders for fiscal year 2015. It is ironic that such a loss anticipate doing an acquisition sometime in calendar year actually bodes well for our future. In reality, when the one-time 2016 and closing one acquisition each year thereafter. While adjustments are pushed aside, the loss before tax for the year there can be no assurance we will hit these targets, they was about $300,000 compared to $400,000 last year. This remain the objectives we will work toward. improvement was due to a 6 percent sales growth in fiscal year This is a significant strategic change in the direction of the 2015 after two consecutive years of 7 percent sales declines. company. However, it is a change we feel is important not only With the dust of healthcare reform settling, sales improving to preserve, but to assure future growth and enhancement of and new capital investment in the company, we believe we are shareholder value. It helps us break out of the historical trends poised to see new growth that is potentially unprecedented in and provide new interest in the future of the company. our history. That growth is made possible by combining our The financial statements presented for fiscal year core infrastructure, management, innovative products and 2015 reflect the financial outcomes and related disclosures sales force with the experience, capital and access to deal associated with our initial investment in this change in flow of Prettybrook Partners. It is an explosive combination strategic direction. that creates significant optimism for our future – a future with The nature of the investment by the preferred shareholders many more chapters left to write. created what is known as a “beneficial conversion feature.” A beneficial conversion feature arises when the conversion price of a convertible instrument, such as the convertible preferred stock we issued, is less than the per-share trading value of the underlying stock into which it is converted on the date of the transaction. The approximate $2.9 million difference in value Kelvyn H. cullImore, Jr. was recorded as a non-cash dividend that increased the net Chairman, President and CEO loss applicable to common shareholders in fiscal year 2015. Also, at the end of fiscal year 2015, we decided to write 4 Letter to Shareholders Kelvyn H. cullImore, Jr. Chairman, President and CEO Letter to Shareholders 5 mArKet eXpAnsIon Leveraging cutting-edge technology in the field of Light Therapy has given Dynatronics the momentum to expand sales into new markets. Podiatry, Home Health, Long-Term Care, Veterinary, and Cardiac Rehab markets, once thought of as peripheral, are now beginning to play a major role in Dynatronics’ market expansion. With public demand increasing for each of these markets in their own right, they are virtually untapped from the perspective of adding Dynatronics’ technology to their treatment regimes. Increasing Dynatronics’ sales representatives to include experts in these new markets will add to Dynatronics’ successful market expansion and subsequent profitability. 6 Letter to ShareholdersInternAtIonAl eXpAnsIon Substantial gains toward increasing 2016 International Sales occurred when Dynatronics Solaris Plus and 25 Series devices were recently awarded the international CE Mark. This mandatory designation opens the sales portal to the 27 countries of the European Union as well as many countries requiring the same rules of conformity, such as the Baltic Nations, Scandinavia, Australia, and New Zealand. In anticipation of this approval, substantial groundwork was laid, establishing qualified dealers and obtaining additional import permission in countries with organizations similar to the FDA. As a result, Dynatronics stands ready to move forward in 2016 with dealers under contract in the United Kingdom, Portugal and Spain, as well as in Mexico, South America, and Asia. Products are already sold and shipping to these international destinations and the response to Dynatronics’ products has been very positive. These relationships should prove profitable to Dynatronics for years to come. 7 Letter to ShareholdersBoArd of dIrectors 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 Howard l. edwards Former General Attorney for Atlantic Richfield Company r. scott Ward, ph.d. Chairman of the Department of Physical Therapy at the University of Utah erin s. enright Managing Partner of Prettybrook Partners, LLC Brian m. larkin Senior Vice President of Acelity LP richard J. linder President and CEO of CoNextions mAnAgement teAm Kelvyn H. cullimore, Jr. Chairman, President and CEO larry K. Beardall Executive Vice President of Sales and Marketing terry m. Atkinson, cpA Chief Financial Officer robert J. (Bob) cardon Vice President of Administration, Secretary/Treasurer douglas g. sampson Vice President of Production and R&D Bryan d. Alsop Vice President of Information Technology 8 Board of Directors and Management  MANAGEMENT DISCUSSION AND ANALYSIS 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 Sept. 29, 2015. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section of the Annual Report entitled “Item 1A. Risk Factors.” overvIeW Our principal business is the manufacturing, distribution and marketing of physical medicine products. We offer a broad line of medical equipment including therapy devices, medical supplies and soft goods, treatment tables and rehabilitation equipment. Our products are sold to and used primarily by physical therapists, chiropractors, sports medicine practitioners, and podiatrists. Our fiscal year ends on June 30. Reference to fiscal year 2015 refers to the year ended June 30, 2015. results of operAtIons Fiscal Year 2015 Compared to Fiscal Year 2014 Net Sales Net sales in fiscal year 2015 increased $1.7 million or 6.1% to $29.1 million, compared to $27.4 million in fiscal year 2014. Net sales in the fourth quarter of fiscal year 2015 increased $0.9 million or 12% to $7.9 million, compared to $7.1 million in the fourth quarter of 2014. The acceleration in the rate of sales growth throughout fiscal 2015 was driven Management’s Discussion and Analysis of Financial Condition 9 by new clinic openings and increased international orders as Research and Development well as strengthening demand in our core domestic market. Research and development, or R&D expenses for 2015 were Sales of therapeutic modality products (both proprietary $0.9 million compared to $1.0 million in 2015. Over the and distributed), exercise equipment and treatment tables past three years, we have introduced more new products were the leading growth categories in 2015. The upward than any previous three-year period in our history. The trend in sales indicates increased customer confidence in new product introductions include the SolarisPlus line of our markets. electrotherapy/ultrasound/phototherapy units, the Ultra 2 Sales of proprietary manufactured physical medicine and Ultra 3 motorized treatment tables, the 25 Series line products represented approximately 46% and 47% of total of electrotherapy and ultrasound products, as well as the physical medicine product sales in fiscal years 2015 and 2014, Dynatron ThermoStim Probe. We believe that developing respectively. Distribution of products manufactured by other new products is a key element in our strategy and critical to suppliers accounted for the balance of our physical medicine moving purchasing momentum in a positive direction. R&D product sales in those years. costs are expensed as incurred and are expected to remain In fiscal years 2015 and 2014, sales of physical medicine at current levels in the coming year. R&D expense decreased products accounted for 91% of total sales in both years. as a percentage of net sales in fiscal year 2015 to 3.2% from Chargeable repairs, billable freight and a small amount of 3.6% of net sales in fiscal year 2014. revenue from products outside of physical medicine accounted for the balance of revenues in both years. Interest Expense Gross Profit Interest expense increased by $0.1 million, to $0.3 million in fiscal year 2015 compared to $0.2 million in fiscal year 2015, Gross profit totaled $9.1 million, or 31.1% of net sales, in due to a higher interest rate on our line of credit facility and fiscal year 2015, compared to $10.0 million, or 36.5% of net recording imputed interest from the sale/leaseback of our sales, in fiscal year 2014. We recorded a $952,000 non-cash corporate headquarters facility. In August 2014, we sold our charge to write off inventory based on strategic decisions Cottonwood Heights facility housing our principal executive made during the fourth quarter to discontinue, re-evaluate or offices and manufacturing facilities to an investment group de-emphasize some product lines. These decisions created and leased the facility back for a 15-year term. We used the some obsolescence and slow moving inventory that upon proceeds from this sale to retire the mortgage loan on the analysis warranted the inventory write off charge. Excluding property and to pay down our line of credit. Imputed interest this charge, gross profit would have been reported as $9.9 related to the lease was $0.2 million in 2015. million which as a percentage of net sales would have been 34.0%. Increased sales of distributed products, which carry Loss Before Income Tax Benefit lower-than-average margins, was a primary contributor to Pre-tax loss in fiscal year 2015 was $1.4 million, compared to the reduced gross profit as a percentage of net sales in 2015 $0.4 million in fiscal year 2014. The increase in pre-tax loss compared to 2014. is due to the $1.0 million non-cash inventory write offand $0.3 Management has developed plans for increasing gross million increase in expenses associated with a terminated profits by focusing sales on the company’s proprietary acquisition, as discussed above. Excluding the inventory therapeutic devices. Increasing sales of capital equipment charge and terminated acquisition costs, pre-tax loss from products will be one of the keys to improving gross profit operations in 2015 was $0.3 million compared to $0.4 million margins going forward. in 2014. Selling, General and Administrative Expenses Income Taxes Selling, general and administrative, or SG&A expenses Income tax provision was $0.9 million in fiscal year 2015, were $9.2 million, or 31.7% of net sales, in fiscal year 2015, compared to income tax benefit of $0.1 million in fiscal compared to $9.2 million, or 33.6% of net sales, in fiscal year year 2014. In 2015, we recorded a full valuation allowance 2014. During fiscal year 2015, approximately $0.3 million of $1.4 million on our net deferred tax assets. As a result in expense was charged, primarily in the second and third of the valuation allowance, we recorded a tax expense for the quarters, related to a terminated acquisition. This increased fiscal year 2015 despite reporting an operating loss making expense was offset mostly by lower labor costs during the the calculation of an effective tax rate incalculable. Our fiscal year compared to fiscal year 2014. effective tax benefit rate was 31.7% in 2014. See Note 9 10 Management’s Discussion and Analysis of Financial Condition to the consolidated financial statements as well as “Critical from non-GAAP financial measures used by other companies. Accounting Policies and Estimates – Deferred Income Tax The presentation of this financial information is not intended Assets” for more information regarding the valuation allowance to be considered in isolation of, or as a substitute for, the and its impact on the effective tax rate for 2015. financial information prepared and presented in accordance Net Loss with generally accepted accounting principles (GAAP). The reconciliation of these non-GAAP financial measures is Net loss for the year was $2.3 million, compared to $0.3 million included in the Statement of Operations in this report. for the year ended June 30, 2014. Our 2015 results include a $1.4 million non-cash deferred tax asset valuation allowance, a $1.0 million non-cash inventory write off and $0.3 million lIquIdIty And cApItAl resources increase in expenses associated with a terminated acquisition, We have financed operations through cash from operations, as discussed above. available cash reserves, and borrowings under a line of credit facility. Working capital increased by $4.8 million to $8.2 Net Loss Applicable to Common Shareholders million as of June 30, 2015, inclusive of the current portion Net loss Applicable to Common Shareholders was $5.1 million of long-term obligations and credit facilities, compared to for the year, compared to $0.3 million for the year ended June working capital of $3.3 million as of June 30, 2014. As of June 30, 2014. An effect of the sale of preferred stock announced 30, 2015, we had approximately $0.7 million of available credit on June 30, 2015, was the creation of a beneficial conversion under a credit facility. The current ratio was 2.5 to 1 as of June feature reflecting the difference between the conversion price of 30, 2015 compared to 1.5 to 1 as of June 30, 2014. Current the preferred stock adjusted in compliance with accounting rules assets were 69.5% of total assets as of June 30, 2015 and and the actual trading price of the common stock on the date 73% of total assets as of June 30, 2014. of the transaction into which the preferred is convertible. That beneficial conversion feature totaled approximately $2.9 million Cash and Cash Equivalents and is reported as a one-time non-cash dividend during the Our cash and cash equivalents position as of June 30, 2015, fourth quarter of fiscal year 2015. In addition, the $1.4 million was $3.9 million, compared to cash and cash equivalents of valuation allowance recorded in fiscal year 2015 increased $0.3 million as of June 30, 2014. the net loss and net loss applicable to common shareholders. Historically, our cash position varied throughout the year, Exclusive of the effects of the beneficial conversion feature but typically stayed within a range of $0.2 million to $0.4 and valuation allowance, net loss per common share in 2015 million. However, the sale of Preferred Stock to affiliates of was $.32 per common share compared to $0.11 per common Prettybrook partners as explained in this report infused share in the same quarter last year. Additionally our results approximately $4,000,000 of cash into our operations. We include a $1.0 million inventory write off and $0.3 million expect that cash flows from operating activities, together increase in expenses associated with a terminated acquisition, with the cash proceeds from the sale of preferred stock and as discussed above. amounts available through an existing line-of-credit facility, will be sufficient to cover operating needs in the ordinary course of business for at least the next 12 months. If we experience an non-gAAp fInAncIAl meAsures adverse operating environment, or unusual capital expenditure This annual report on Form 10-k includes the following requirements, additional financing may be required. No “non-GAAP financial measures” as defined by the Securities assurance can be given that additional financing, if required, and Exchange Commission: 1) “Excluding this charge, gross would be available on terms favorable to us, or at all. profit would have been reported as $9.9 million which as a percentage of net sales would have been 34.0%,” 2) “Excluding Accounts Receivable the inventory adjustment and terminated acquisition costs, Trade accounts receivable, net of allowance for doubtful pre-tax loss from operations in 2015 was $0.3 million accounts, increased $0.2 million, or 5.7%, to $3.3 million as of compared to $0.4 million in 2014,” and 3) “Exclusive of the June 30, 2015, compared to $3.2 million as of June 30, 2014. effects of the beneficial conversion feature and valuation Trade accounts receivable represent amounts due from our allowance, net loss per common share in 2015 was $0.32 per customers including medical practitioners, clinics, hospitals, common share compared to $0.11 per common share in the colleges and universities and sports teams as well as dealers same quarter last year.” These measures may be different and distributors that purchase our products for redistribution. Management’s Discussion and Analysis of Financial Condition 11 We believe that our estimate of the allowance for doubtful of approximately $700,000 by the end of July 2015. We believe accounts is adequate based on our historical knowledge and that amounts available under the new line of credit combined relationship with these customers. Accounts receivable are with the cash infused from the sale of preferred stock and cash generally collected within 30 days of the agreed terms. generated from operating activities will continue to be sufficient Inventories All borrowings under the line of credit are presented Inventories, net of reserves, decreased $0.7 million, or as current liabilities in the accompanying consolidated to meet our annual operating requirements. 12.0%, to $5.4 million as of June 30, 2015, compared to balance sheet. $6.2 million as of June 30, 2014. During fiscal year 2015, we recorded a $1.0 million non-cash write off of inventory Debt based on strategic decisions made during the fourth quarter Long-term debt, excluding current installments decreased to discontinue, re-evaluate or de-emphasize some product $0.6 million to $0.7 million as of June 30, 2015, compared to lines. These decisions created some obsolescence and slow $1.3 million as of June 30, 2014. This reduction was achieved moving inventory that upon analysis warranted the write off through the sale of our Utah facility and the subsequent payoff of inventory. Inventory levels fluctuate based on the timing of of the mortgage on that building. The remaining long-term large inventory purchases from overseas suppliers. debt is comprised primarily of the mortgage loan on our Accounts Payable office and manufacturing facility in Tennessee. The principal balance on the mortgage loan is approximately $0.7 million, of Accounts payable increased $0.1 million, or 3.6%, to $2.5 which $0.6 million is classified as long-term debt, with monthly million as of June 30, 2015, from $2.4 million as of June principal and interest payments of $13,278. Our mortgage 30, 2014. We continue to take advantage of available early loan matures in 2021. payment discounts when offered by our vendors. As discussed above, in conjunction with the sale and Line of Credit leaseback of our corporate headquarters in August 2014, we entered into a $3.8 million lease for a 15-year term with an In March 2015, we moved the line of credit to a new lender. investor group. The building lease is recorded as a capital lease The outstanding balance on our line of credit decreased $1.6 with the related amortization being recorded on a straight line million to $1.9 million as of June 30, 2015, compared to $3.5 basis over 15 years. Lease payments of approximately $27,000 million as of June 30, 2014. This reduction was made possible are payable monthly. Total accumulated amortization related by the sale and leaseback of our Cottonwood Heights, Utah to the leased building is $230,939 at June 30, 2015. Future facility, which generated approximately $2.1 million in net cash minimum gross lease payments required under the capital to pay down our line of credit. Interest on the new line of credit lease as of June 30, 2015 are as follows: 2016, $328,384; is based on the prime rate plus 5%. The $3 million line of 2017, $334,950; 2018, $341,648; 2019, $348,478; 2020, credit is collateralized by accounts receivable and inventories. $355,450 and $3,607,692 thereafter. Included in the above Borrowing limitations are based on 85% of eligible accounts lease payments is $1,637,238 of imputed interest. receivable and $0.7 million of eligible inventory. The current borrowing base on the new line of credit is approximately $2.6 Inflation million. Interest payments on the line are due monthly. All Our revenues and net income have not been unusually borrowings under the line of credit are presented as current affected by inflation or price increases for raw materials and liabilities in the accompanying consolidated balance sheet. parts from vendors. The line of credit matures on March 5, 2016. Management expects to be able to renew this credit facility when it matures Stock Repurchase Plans with the current lender or another lender. Failure to renew In 2011, our Board of Directors adopted a stock repurchase this credit facility could have a material adverse effect on our plan authorizing repurchases of shares in the open market, business operations. The terms of this new credit facility are not through block trades or otherwise. Decisions to repurchase as favorable as our bank line of credit had been. The effective shares under this plan are based upon market conditions, the interest rate on borrowed money is approximately 10% including level of our cash balances, general business opportunities, interest and origination fees. The infusion of cash from the sale and other factors. The Board periodically approves the dollar of preferred stock the end of June, 2015, facilitated the line of amounts for share repurchases under the plan. As of June credit being paid down to its minimum borrowing requirement 30, 2015, $448,450 remained available under the Board’s 12 Management’s Discussion and Analysis of Financial Condition authorization for purchases under the plan. There is no Any modifications to estimates of inventory valuation expiration date for the plan. No purchases were made under reserves are reflected in cost of goods sold within the this plan during the fiscal quarter and year ended June 30, statements of operations during the period in which such 2015 or during the past three fiscal years. modifications are determined necessary by management. As of June 30, 2015 and 2014, our inventory valuation reserve balance, which established a new cost basis, was $0.4 million crItIcAl AccountIng polIcIes and $0.3 million, respectively, and our inventory balance was Management’s Discussion and Analysis of Financial Condition $5.4 million and $6.2 million, net of reserves, respectively. and Results of Operations is based upon our consolidated During fiscal year 2015, we recorded a $1.0 million financial statements, which have been prepared in accordance non-cash write off of inventory based on strategic decisions with U.S. generally accepted accounting principles. The made during the fourth quarter to discontinue, re-evaluate or preparation of these financial statements requires estimates de-emphasize some product lines. These decisions created and judgments that affect the reported amounts of our assets, some obsolescence and slow moving inventory that upon liabilities, net sales and expenses. Management bases estimates analysis warranted the write off of inventory. on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these Revenue Recognition estimates on an ongoing basis. Actual results may differ from Our sales force and distributors sell our products to end users, these estimates under different assumptions or conditions. including physical therapists, professional trainers, athletic We believe that the following critical accounting policies trainers, chiropractors, and medical doctors. Sales revenues involve a high degree of judgment and complexity. See Note are recorded when products are shipped FOB shipping point 1 to our consolidated financial statements for fiscal year under an agreement with a customer, risk of loss and title 2015, for a complete discussion of our significant accounting have passed to the customer, and collection of any resulting policies. The following summary sets forth information receivable is reasonably assured. Amounts billed for shipping regarding significant estimates and judgments used in the and handling of products are recorded as sales revenue. preparation of our consolidated financial statements. Costs for shipping and handling of products to customers are recorded as cost of sales. Inventory Reserves The nature of our business requires that we maintain sufficient Allowance for Doubtful Accounts inventory on hand at all times to meet the requirements of our We must make estimates of the collectability of accounts customers. We record finished goods inventory at the lower receivable. In doing so, we analyze historical bad debt trends, of standard cost, which approximates actual cost (first-in, customer credit worthiness, current economic trends and first-out) or market. Raw materials are recorded at the lower of changes in customer payment patterns when evaluating cost (first-in, first-out) or market. Inventory valuation reserves the adequacy of the allowance for doubtful accounts. Our are maintained for the estimated impairment of the inventory. accounts receivable balance was $3.3 million and $3.2 million, Impairment may be a result of slow-moving or excess net of allowance for doubtful accounts of $0.4 million and $0.3 inventory, product obsolescence or changes in the valuation million, as of June 30, 2015 and 2014, respectively. of the inventory. In determining the adequacy of reserves, we analyze the following, among other things: Deferred Income Tax Assets • Current inventory quantities on hand; uncertainty as to the realizability of deferred tax assets. • Product acceptance in the marketplace; The ability to realize deferred tax assets is dependent upon A valuation allowance is required when there is significant • Customer demand; • Historical sales; • Forecast sales; • Product obsolescence; our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of • Strategic marketing and production plans our deferred tax assets: • Technological innovations; and • Character of the inventory as a distributed item, finished • Future reversals of existing taxable temporary differences; manufactured item or raw material. • Future taxable income or loss, exclusive of reversing Management’s Discussion and Analysis of Financial Condition 13 temporary differences and carryforwards; Prettybrook will allow Dynatronics to not only strengthen • Tax-planning strategies; and the legacy business, but also to position the company for • Taxable income in prior carryback years. growth through strategic acquisitions. In July 2015, we received the CE Mark approval for our We considered both positive and negative evidence in SolarisPlus and “25 Series” therapeutic modality products. determining the continued need for a valuation allowance, This approval allows us to sell these products in Europe and including the following: Positive evidence: many other countries around the world. Over the past several years, we have increased our emphasis on international sales. During the fiscal year we also received clearance for these • Current forecasts indicate that we will generate pre-tax same products in Japan. Efforts are currently underway to income and taxable income in the future. However, there obtain approvals in Mexico, China, Peru, and other Southeast can be no assurance that the new strategic plans will Asian countries. With the CE Mark in hand, we can further result in profitability. expand throughout Europe and into areas of the world that • A majority of our tax attributes have indefinite recognize and require this distinguished mark of quality. As carryover periods. a result, we expect international sales growth to accelerate as we extend our geographical reach and become a provider of Negative evidence: these products on a global basis. • We have several years of cumulative losses as of In the last three years we have released more new and June 30, 2015. innovative products than during any other similar period in our history. The introduction of the Solaris Plus family of We place more weight on objectively verifiable evidence combination electrotherapy/ultrasound/phototherapy units, than on other types of evidence and management currently the 25 Series combination electrotherapy/ultrasound units, believes that available negative evidence outweighs the the line of Ultra treatment tables, and the ThermoStim probe available positive evidence. We have therefore determined (an accessory to the Solaris Plus family of products) make up that we do not meet the “more likely than not” threshold that most of these innovative new products. deferred tax assets will be realized. Accordingly, a valuation The introduction of these products has been a major allowance is required. Any reversal of the valuation allowance strategic component of attracting new sales representa- will favorably impact the Company’s results of operations in tives and dealers in order to expand our distribution across the period of reversal. North America and into international territories. Adding At June 30, 2015, we recorded a full valuation allowance these new sales reps and dealers along with liberalizing against our deferred tax assets and no valuation allowance at policies of who can sell our proprietary products is part of June 30, 2014. our strategic plan for expanding our distribution reach and We had available at June 30, 2014, estimated federal and strengthening sales. state net operating loss (“NOL”) carry forwards of $745,605, Our efforts in past years to prudently reduce costs in which were used for federal and state income tax purposes to the face of some economic uncertainty made us a leaner offset the gain on the sale leaseback transaction involving our operation. Over the past two fiscal years, we implemented Utah facility in August 2014(see Note 8). approximately $1.6 million in annualized expense reductions. The Company’s federal and state income tax returns for We will continue to be vigilant in maintaining appropriate June 30, 2012, 2013 and 2014 are open tax years. overhead costs and operating costs while still providing support for sales from our new products and supporting new initiatives for growth. BusIness plAn And outlooK Based on our defined strategic initiatives, we are focusing On June 30, 2015, we completed a private placement our resources in the following areas: of convertible preferred stock for gross proceeds of approximately $4.0 million. The investors in the private • Exploring strategic business acquisitions using the placement were affiliates of Prettybrook Partners, LLC. capital infusion from the sale of preferred stock. This Combining the solid corporate infrastructure we have built will leverage and complement our competitive strengths, over the last three decades with the business acumen, increase market reach and allow us to potentially expand access to capital and access to deal flow provided by into broader medical markets. 14 Management’s Discussion and Analysis of Financial Condition • Improving gross profit margins by, among other Stockholders initiatives, increasing market share of manufactured As of September 18, 2015, the approximate number of capital products by promoting sales of our state-of-the- shareholders of record was 383. This number does not include art Dynatron ThermoStim probe, SolarisPlus and 25 beneficial owners of shares held in “nominee” or “street” name. Series products. Including such beneficial owners, we estimate that there are a • Seeking to improve distribution of our products through total of 2,200 beneficial owners of our common stock. recruitment of additional qualified sales representatives and dealers attracted by the many new products being Dividends offered and expanding the availability of proprietary We currently have approximately 1.6 million of Series A combination therapy devices. preferred stock outstanding. Dividends payable on these • Increasing international sales by 1) leveraging the CE Mark shares accrue at the rate of 8% per year and are payable approval in Europe and other countries by identifying quarterly in stock or cash. appropriate distributors for the approved products, 2) We have never paid cash dividends on our common stock. Finalizing regulatory approvals in countries such as China, Our anticipated capital requirements are such that we intend Mexico, Peru and other countries in Southeast Asia, and 3) to follow a policy of retaining earnings, if any, in order to further developing relationships with existing distributors finance the development of the business. in countries such as Japan in order to increase sales in those countries where products are approved. Purchases of Equity Securities • Continuing to seek ways of increasing business with In February 2011, the Board of Directors approved $1,000,000 regional and national accounts including group purchasing for open market share repurchases of the Company’s organizations, national accounts and the U.S. Government. common stock. Approximately $0.5 million remained on this • Strengthening pricing management and procurement authorization as of June 30, 2015. We did not purchase any methodologies. shares of common stock during the fiscal quarter or the year • Updating and improving our selling and marketing efforts ended June 30, 2015 or in the prior three fiscal years. including electronic commerce options, as well as developing better tools for our sales force to improve their efficiency. Preferred Stock Market Information On June 30, 2015, we completed a private placement with affiliates of Prettybrook Partners, LLC (“Prettybrook”) and As of September 18, 2015, we had approximately 2,643,583 certain other purchasers (collectively with Prettybrook, the shares of common stock issued and outstanding. Our “Preferred Investors”) for the offer and sale of shares of common stock is included on the NASDAQ Capital Market our Series A 8% Convertible Preferred Stock (the “Series (symbol: DYNT). The following table shows the range of high A Preferred”) in the aggregate amount of approximately and low sales prices for our common stock as quoted on the $4 million. The Preferred Investors purchased a total of NASDAQ system for the quarterly periods indicated. 1,610,000 shares of Series A Preferred Stock, and received Fiscal Year Ended June 30: in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of our common stock, and (ii) B-Warrants, exercisable by “cashless 2015 2014 exercise”, to purchase 1,207,500 shares of our common stock. Proceeds from this private placement will be used to High Low High Low promote organic growth through expansion of the Company’s 1st Quarter Jul-Sep $5.00 $3.69 $7.94 $2.33 sales distribution channels both domestically and internation- ally, improve our infrastructure and operating systems, and 2nd Quarter Oct-Dec $5.76 $3.34 $4.85 $2.74 support strategic acquisition opportunities. 3rd Quarter Jan-Mar $3.89 $2.78 $5.57 $2.94 price that creates an embedded beneficial conversion feature. A beneficial conversion feature arises when the conversion 4th Quarter Apr-Jun $3.51 $2.70 $4.44 $2.86 price of a convertible instrument is below the per share fair The Series A Preferred includes a conversion right at a value of the underlying stock into which it is convertible. The conversion price is ‘in the money’ and the holder realizes Management’s Discussion and Analysis of Financial Condition 15 a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred do not have a stated life and, therefore, all of the beneficial conversion feature amount of $2,858,887 was amortized to dividends on the same date the preferred shares were issued. The $2,858,887 dividend is added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the year ended June 30, 2015. On July 1, 2015, we filed a Current Report on Form 8-K to disclose this transaction. Additional details regarding the transaction, as well as the transaction documents, are included in the Current Report. 16 Management’s Discussion and Analysis of Financial Condition BoArd of dIrectors And stocKHolders of dynAtronIcs corporAtIon And suBsIdIAry We have audited the accompanying consolidated balance sheets of Dynatronics Corporation and subsidiary as of June 30, 2015 and 2014 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the respon- sibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dynatronics Corporation as of June 30, 2015 and 2014, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Mantyla McReynolds, LLC Salt Lake City, Utah September 28, 2015 Report of Independent Registered Public Accounting Firm 17 Balance sheets Years ended June 30: Assets Current assets: 2015 2014 Cash and cash equivalents $ 3,925,967 332,800 Trade accounts receivable, less allowance for doubtful accounts of 3,346,770 3,165,396 $417,444 and $325,355 as of June 30, 2015 and 2014 respectively Other receivables Inventories, net Prepaid expenses and other assets Prepaid income taxes Current portion of deferred income tax assets 6,748 15,594 5,421,787 6,157,848 273,629 338,108 298,370 — — 408,919 Total current assets 13,313,009 10,378,927 Property and equipment, net Intangible asset, net Other assets Deferred income tax assets, net of current portion 5,025,076 2,980,677 190,803 623,342 — 235,440 396,456 303,644 Total assets $ 19,152,230 14,295,144 Liabilities and Stockholders’ Equity Current liabilities: Current portion of long-term debt Current portion of capital lease Current portion of deferred gain Line of credit Warranty reserve Accounts payable Accrued expenses Accrued payroll and benefits expenses Income tax payable $ 121,884 173,357 150,448 302,274 — — 1,909,919 3,521,209 153,185 157,753 2,520,327 2,433,534 279,547 263,092 — 342,716 243,394 30,452 Total current liabilities 5,571,759 7,031,332 Long-term debt, net of current portion Capital lease, net of current portion Deferred gain, net of current portion Deferred rent Deferred income tax liabilities 651,118 1,255,133 3,464,850 1,980,897 41,150 136,128 — — — — Total liabilities 11,845,902 8,286,465 Commitments and contingencies Stockholders’ equity: “Preferred stock, no par value: Authorized 5,000,000 shares; 3,087,554 — 1,610,000 shares issued and outstanding at June 30, 2015” “Common stock, no par value: Authorized 50,000,000 shares; 7,610,244 7,149,812 2,642,389 shares and 2,520,389 shares issued and outstanding at June 30, 2015 and 2014, respectively” Accumulated deficit (3,391,470) (1,141,133) Total stockholders’ equity 7,306,328 6,008,679 Total liabilities and stockholders’ equity $ 19,152,230 14,295,144 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . 18 Dynatronics Corporation Consolidated Balance Sheets June 30, 2015 and 2014 statements of operations Years ended June 30: Net sales Cost of sales Gross profit Selling, general, and administrative expenses Research and development expenses 2015 2014 $ 29,117,528 27,444,223 20,048,069 17,423,851 9,069,459 10,020,372 9,229,405 9,213,433 926,954 992,729 Operating loss (1,086,900) (185,790) Other Income (expense): Interest income Interest expense Other income, net 4,920 44 (330,842) (231,865) 13,577 20,446 Total other income (expense) (312,345) (211,375) Loss before income tax benefit (1,399,245) (397,165) Income tax benefit Net loss Deemed dividend on 8% convertible preferred stock 8% Convertible preferred stock dividend (851,092) 126,023 $ (2,250,337) (271,142) (2,858,887) (882) — — Net loss applicable to common stockholders (5,110,106) (271,142) Basic and diluted net loss per common share $ ( 2.03) ( 0.11) Weighted-average basic and diluted common shares outstanding: 2,520,723 2,519,490 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . Dynatronics Corporation Consolidated Statements of Operations Years Ended June 30, 2015 and 2014 19 statements of stockholders’ equity Years ended June 30, 2015 and 2014 Common Common Preferred Preferred Total Stock Shares Stock Amount Stock Shares Stock Accumulated Stockholders’ Amount Deficit Equity Balances as of July 1, 2013 2,518,904 $ 7,078,941 — $ Shares issued due to 1,485 70,871 stock split rounding Net loss — — Balances at June 30, 2014 2,520,389 7,149,812 Stock-based compensation — 66,372 Issuance of common 122,000 394,060 — — — — — — — — — — — (869,991) $ 6,208,949 — 70,871 (271,142) (271,142) (1,141,133) 6,008,679 — — 66,372 394,060 stock in association with capital raise Issuance of preferred stock and warrants, net of issuance costs Preferred stock dividend Preferred stock beneficial conversion feature Dividend of beneficial conversion feature — — — 1,610,000 3,088,436 — 3,088,436 — (882) — (882) 2,858,887 2,858,887 (2,858,887) (2,858,887) Net loss — — — — (2,250,337) (2,250,337) Balances as of June 30, 2015 2,642,389 7,610,244 1,610,000 3,087,554 (3,391,470) 7,306,328 *Reflects adjusted shares due to 1:5 reverse stock split effective December 19, 2012 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . 20 Dynatronics Corporation Consolidated Statements of Stockholders’ Equity Year’s Ended June 30, 2015 and 2014 statements of cash flows Years ended June 30: Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment Amortization of intangible assets Amortization of other assets Amortization of building lease Stock-based compensation expense Change in deferred income taxes Change in provision for doubtful accounts receivable Change in provision for inventory obsolescence Deferred gain on sale/leaseback Change in operating assets and liabilities: Receivables, net Inventories, net Prepaid expenses and other assets Other assets Prepaid income taxes Income tax payable 2015 2014 $ (2,250,337) (271,142) 350,959 44,637 51,372 230,939 66,372 433,014 96,529 51,372 — 70,871 848,691 (126,021) 92,089 23,190 (137,910) (264,617) 712,871 (265,968) (278,258) — (368,560) 96 ,000 120,000 — (3,081) 129,705 216,324 — 20,248 — Accounts payable and accrued expenses 79,022 (327,297) Net cash provided by (used in) operating activities (1,065,508) 506,522 Cash flows from investing activities: Purchase of property and equipment Proceeds from sale of property and equipment (66,333) (176,958) 3,800,000 — Net cash used by (used in) investing activities 3,733,667 (176,958) Cash flows from financing activities: Principal payments on long-term debt Principal payments on long-term capital lease Net change in line of credit Proceeds from issuance of preferred stock (784,405) (161,793) (1,611,290) 3,482,496 (323,633) — 24,819 — Net cash provided by (used in) financing activities 925,008 (298,814) Net change in cash and cash equivalents 3,593,167 30,750 Cash and cash equivalents at beginning of the year 332,800 302,050 Cash and cash equivalents at end of the year 3,925,967 332,800 Supplemental disclosures of cash flow information: Cash paid for interest Cash paid for income taxes Supplemental disclosures of non-cash flow investing and financing activities: Capital lease - building Deemed dividend on 8% convertible preferred stock Preferred stock issuance costs paid in common stock 324,314 356,151 3,800,000 2,858,887 394,060 232,571 — — — — S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . Dynatronics Corporation Consolidated Statements of Cash Flows Years Ended June 30, 2015 and 2014 21  NOTES TO FINANCIAL STATEMENTS (1) BAsIs of presentAtIon And summAry of sIgnIfIcAnt AccountIng polIcIes (a) Description of Business Dynatronics Corporation (the Company), a Utah corporation, distributes and markets a broad line of medical products, many of which are designed and manufactured by the Company. Among the products offered by the Company are therapeutic, diagnostic, and rehabilitation equipment, medical supplies and soft goods and treatment tables to an expanding market of physical therapists, podiatrists, orthopedists, chiropractors, and other medical professionals. (b) Principles of Consolidation The consolidated financial statements include the accounts and operations of Dynatronics Corporation and its wholly owned subsidiary, Dynatronics Distribution Company, LLC. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). 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 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 23 cost (first in, first out method) or market. The Company (h) Intangible Assets periodically reviews the value of items in inventory and Costs associated with the acquisition of trademarks, trade provides write-downs or write-offs of inventory based on its names, license rights and non-compete agreements are assessment of slow moving or obsolete inventory. Write-downs capitalized and amortized using the straight-line method over and write-offs are charged against the reserve. periods ranging from 3 months to 20 years. (e) Trade Accounts Receivable (i) Revenue Recognition Trade accounts receivable are recorded at the invoiced The Company recognizes revenue when products are shipped amount and do not bear interest, although a finance charge FOB shipping point under an agreement with a customer, risk may be applied to such receivables that are past the due of loss and title have passed to the customer, and collection date. The allowance for doubtful accounts is the Company’s of any resulting receivable is reasonably assured. Amounts best estimate of the amount of probable credit losses in billed for shipping and handling of products are recorded as the Company’s existing accounts receivable. The Company sales revenue. Costs for shipping and handling of products to determines the allowance based on a combination of customers are recorded as cost of sales. statistical analysis, historical collections, customers’ current credit worthiness, the age of the receivable (j) Research and Development Costs balance both individually and in the aggregate and general Direct research and development costs are expensed as economic conditions that may affect the customer’s ability incurred. to pay. All account balances are reviewed on an individual basis. Account balances are charged off against the (k) Product Warranty Costs allowance when the potential for recovery is considered Costs estimated to be incurred in connection with the remote. Recoveries of receivables previously charged off are Company’s product warranty programs are charged to recognized when payment is received. expense as products are sold based on historical warranty (f) Property and Equipment rates. Property and equipment are stated at cost less accumulated (l) Net Income (Loss) per Common Share depreciation. Depreciation is computed using the straight Net loss per common share is computed based on the line method over the estimated useful lives of the assets. weighted-average number of common shares outstanding Buildings and their component parts are being depreciated and, when appropriate, dilutive common stock equivalents over their estimated useful lives that range from 5 to 31.5 outstanding during the year. Convertible preferred stock and years. Estimated lives for all other depreciable assets range stock options and warrants are considered to be common from 3 to 7 years. (g) Long-Lived Assets stock equivalents. The computation of diluted net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect. Long–lived assets, such as property and equipment, are Basic net loss per common share is the amount of net reviewed for impairment whenever events or changes in loss for the year available to each weighted-average share of circumstances indicate that the carrying amount of an common stock outstanding during the year. Diluted net loss asset may not be recoverable. Recoverability of assets to be per common share is the amount of net loss for the year held and used is measured by a comparison of the carrying available to each weighted-average share of common stock amount of an asset to estimated undiscounted future cash outstanding during the year and to each common stock flows expected to be generated by the asset. If the carrying equivalent outstanding during the year, unless inclusion of amount of an asset exceeds its estimated future cash flows, common stock equivalents would have an anti-dilutive effect. an impairment charge is recognized for the difference The reconciliation between the basic and diluted weighted- between the carrying amount of the asset and the fair average number of common shares for the years ended June value of the asset. Assets to be disposed of are separately 30, 2015 and 2014, is summarized as follows: presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. 24 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 Basic weighted-average number of common shares outstanding during the year 2,520,723 2,519,490 Weighted-average number of dilutive common stock equivalents outstanding during the year — — Diluted weighted-average number of common and common equivalent shares 2,520,723 2,519,490 outstanding during the year 2015 2014 Outstanding common stock equivalents not included in income over the periods which the deferred income tax assets the computation of diluted net loss per common share totaled are deductible. If management determines that it is more likely 4,105,290 as of June 30, 2015 and 145,987 as of June 30, than not that the Company will not realize the benefits of these 2014. These common stock equivalents were not included in deductible differences, a valuation allowance is recorded. the computation because to do so would have been antidilutive. (n) Stock-Based Compensation (m) Income Taxes The Company accounts for stock-based compensation The Company recognizes an asset or liability for the deferred in accordance with FASB ASC 718, Stock Compensation. income tax consequences of all temporary differences between Stock-based compensation cost is measured at the grant the tax bases of assets and liabilities and their reported amounts date based on the fair value of the award and is recognized as in the consolidated financial statements that will result in expense over the applicable vesting period of the stock award taxable or deductible amounts in future years when the reported (generally five years) using the straight-line method. amounts of the assets and liabilities are recovered or settled. Accounting standards require the consideration of a valuation (o) Concentration of Risk allowance for deferred tax assets if it is “more likely than not” In the normal course of business, the Company provides that some component or all of the benefits of deferred tax assets unsecured credit to its customers. Most of the Company’s will not be realized. Accruals for uncertain tax positions are customers are involved in the medical industry. The Company provided for in accordance with the requirements of Financial performs ongoing credit evaluations of its customers and Accounting Standards Board (FASB) Accounting Standards maintains allowances for probable losses which, when Codification (ASC) 740-10, Income Taxes. Under ASC 740-10, the realized, have been within the range of management’s Company may recognize the tax benefits from an uncertain tax expectations. The Company maintains its cash in bank deposit position only if it is more likely than not that the tax position will accounts which at times may exceed federally insured limits. be sustained on examination by the taxing authorities, based on The Company believes it is not exposed to any significant the technical merits of the position. The tax benefits recognized credit risks with respect to cash or cash equivalents. in the financial statements from such a position are measured As of June 30, 2015, the Company has approximately based on the largest benefit that has a greater than 50% $3,675,950 in cash and cash equivalents in excess of the FDIC likelihood of being realized upon ultimate settlement. ASC 740-10 limits. The Company has not experienced any losses in such also provides guidance on derecognition of income tax assets accounts. and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties (p) Operating Segments associated with tax positions, and income tax disclosures. The Company operates in one line of business: the Judgment is required in assessing the future tax consequences development, marketing, and distribution of a broad line of of events that have been recognized in the financial statements medical products for the physical therapy markets. As such, or tax returns. Variations in the actual outcome of these future tax the Company has only one reportable operating segment. consequences could materially impact the Company’s financial Physical medicine products made up 91% of net sales for position, results of operations and cash flows. The Company both the years ended June 30, 2015 and 2014. Chargeable evaluates the need for a valuation allowance on deferred taxes on repairs, billable freight and other miscellaneous revenues a quarterly and annual base. This evaluation considers the level account for the remaining 9% of net sales for both the years of historical taxable income and projections for future taxable ended June 30, 2015 and 2014. Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 25 (q) Use of Estimates warranty costs; and estimated recoverability of intangible Management of the Company has made a number of estimates assets. Actual results could differ from those estimates. and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets (r) Advertising Costs and liabilities in accordance with US GAAP. Significant items Advertising costs are expensed as incurred. Advertising subject to such estimates and assumptions include the carrying expense for the years ended June 30, 2015 and 2014 was amount of property and equipment; valuation allowances for approximately $93,700 and $111,900, respectively. receivables, income taxes, and inventories; accrued product (2) InventorIes Included in ”Buildings” at June 30, 2015 are assets held Inventories consist of the following as of June 30: under a capital lease obligation totaling $3,800,000 (gross) 2015 2014 30, 2014. Depreciation and amortization expense for the and $3,569,061 (net). There was no capital lease as of June Raw materials Finished goods Inventory reserve $ 2,086,411 3,693,921 (358,545) 2,783,306 3,709,897 (335,355) years ended June 30, 2015 and 2014 was $350,959 and $433,686, respectively. $ 5,421,787 6,157,848 Identifiable intangible assets and their useful lives consist of (4) IntAngIBle Assets the following as of June 30: Included in cost of goods sold for the years ended June 30, 2015 and 2014, is a write off of slow moving and obsolete inventory Trade name—15 years $ totaling $952,212 and $120,000, respectively. The $952,212 Domain name—15 years non-cash charge reflects a write off of inventory related to strategic Non-compete covenant 339,400 5,400 149,400 339,400 5,400 149,400 decisions made during the fourth quarter resulting in some —4 years product lines being discontinued, re-evaluated or de-emphasized. Customer relationships 120,000 120,000 These decisions created additional obsolescence that upon —7 years analysis warranted the inventory write off. Trademark licensing 45,000 45,000 2015 2014 (3) property And equIpment 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 2015 2014 License agreement — 73,240 —7 years Land Buildings $ 30,287 354,743 —10 years 5,586,777 3,758,524 Total identifiable 700,000 773,240 Machinery and equipment 1,635,386 1,598,770 intangibles Office equipment 273,420 266,563 Less accumulated (509,197) (537,800) Computer equipment 1,984,046 1,980,746 amortization Vehicles 247,571 236,987 Net carrying amount $ 190,803 235,440 Less accumulated depreciation (4,732,411) (5,215,656) 9,757,487 8,196,333 and amortization $ 5,025,076 2,980,677 assets was $44,637 and $96,529 for the fiscal years ended June 30, 2015 and 2014, respectively. Estimated amortization Amortization expense associated with the intangible 26 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 expense for the identifiable intangibles is expected to be as (7) long term deBt follows: 2016, $30,680; 2017, $30,680; 2018, $26,430; 2019, Long term debt consists of the following as of June 30: $26,430; 2020, $26,430 and thereafter $50,153. 2015 2014 (5) WArrAnty reserve 6.44% promissory $ 745,562 853,090 A reconciliation of the change in the warranty reserve consists of the following for the fiscal years ended June 30: 2015 2014 Beginning warranty $ 157,753 178,148 reserve balance Warranty repairs Warranties issued Changes in estimated warranty costs (145,698) 145,267 (4,137) (141,471) 153,648 (32,572) Ending warranty reserve $ 153,185 157,753 note secured by trust deed on real property, maturing January 2021, payable in monthly installments of $13,278 5.235% promissory note 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 through December 2014 5.887% promissory note secured by a vehicle, payable in monthly installments of $390 through March 2017 — 644,962 27,168 33,913 — 12,279 — 12,140 (6) lIne of credIt 13.001% promissory note 272 1,023 Until March 2015, the Company maintained a line of credit secured by equipment, with a bank. In March 2015, the Company moved the line of credit to a new lender. Interest on the new line of credit is based on the prime rate plus 5%, with a minimum rate of 8.25%. At June 30, 2015 the rate was 8.25%. Payments payable in monthly installments of $70 through October 2015 are due monthly, with minimum monthly interest of $5,000. Less accumulated amortization 773,002 (121,884) 1,557,407 (302,274) The borrowing base on the new line of credit is approximately $2,600,000 and is collateralized by accounts receivable and inventory. Borrowing limitations under the new line of credit are based on 85% of eligible accounts receivable and $700,000 of eligible inventory, up to a maximum credit facility $ 651,118 1,255,133 of $3,000,000. The new line of credit matures on March 5, The aggregate maturities of long term debt for each of the 2016. The line of credit has no negative loan covenants, years subsequent to June 30, 2015 are as follows: 2016, however, there are affirmative covenants to provide accounts $121,884; 2017, $129,428; 2018, $137,756; 2019, $144,707; receivable ageing and financial statements within 90 days of 2020, $148,249 and thereafter $90,978. month end and are in compliance with these covenants. The outstanding balance on the line of credit decreased (8) leAses $1,611,290 to $1,909,919 as of June 30, 2015, compared to Operating Leases $3,521,209 as of June 30, 2014. This reduction was primarily The Company leases vehicles under noncancelable operating made possible by the sale and leaseback of the Company’s lease agreements. Lease expense for the years ended June Utah facility which provided approximately $2,100,000 in net 30, 2015 and 2014, was $16,106 and $16,106, respectively. cash to pay down the line of credit (see Note 8). Future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in excess of one year as of 2015 is as follows: 2016, $7,403. The Company rents office, warehouse and storage space and office equipment under agreements which run one year Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 27 or more in duration. The rent expense for the years ended Capital Leases June 30, 2015 and 2014 was $188,498 and $203,361, On August 8, 2014, the Company sold the building that houses respectively. Future minimum rental payments required its operations in Utah and leased back the premises for a term under operating leases that have a duration of one year or of 15 years. The sale price was $3.8 million. Proceeds from more as of June 30, 2015 are as follows: 2016, $84,777; the sale were primarily used to reduce debt obligations of the 2017, $54,852; 2018, $5,088 and 2019, $2,544. Company. The sale of the building resulted in a $2,269,255 During fiscal year 2015, the office and warehouse spaces gain, which is recorded in the consolidated balance sheet as in Detroit, Michigan and Hopkins, Minnesota were leased deferred gain and will be recognized in Selling, general and on an annual/monthly basis from employees/stockholders; administrative expense over the 15 year life of the lease. or entities controlled by stockholders, who were previously The building lease is recorded as a capital lease with principals of the dealers acquired in July 2007. The leases are the related amortization being recorded on a straight line related-party transactions with two employee/stockholders, basis over 15 years. Total accumulated amortization related however, management believes the lease agreements have to the leased building is $230,939 at June 30, 2015. Future been conducted on an arms-length basis and the terms minimum gross lease payments required under the capital are similar to those that would be available to other third lease as of June 30, 2015 are as follows: 2016, $328,384; parties. The expense associated with these related-party 2017, $334,950; 2018, $341,648; 2019, $348,478; 2020, transactions totaled $70,800 and $52,200 expense for the $355,450 and $3,607,692 thereafter. Included in the above fiscal years ended June 30, 2015 and 2014, respectively. lease payments is $1,637,238 of imputed interest. (9) Income tAXes Income tax benefit (provision) for the ears ended June 30 consists of: 2015: U.S. federal State and Local 2014: U.S. federal State and Local Current (16,981) 14,580 Deferred (678,953) (169,738) Total (695,934) (155,158) (2,401) (848,691) (851,092) Current — — — Deferred 107,439 18,584 Total 107,439 18,584 126,023 126,023 $ $ $ $ 2015 2014 The actual income tax benefit (provision) differs from Expected tax benefit $ 475,743 135,036 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 58,661 12,265 (loss) before income taxes for the years ended June 30, are federal tax benefit as follows: R&D tax credit Valuation allowance Incentive stock options Other, net 28,916 (1,447,247) (3,322) 36,157 — — (4,852) (16,426) $ (851,092) 126,023 28 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 Deferred income tax assets and liabilities related to the tax A valuation allowance is required when there is significant effects of temporary differences are as follow as of June 30: uncertainty as to the realizability of deferred tax assets. The 2015 2014 Company’s ability to generate sufficient taxable income within ability to realize deferred tax assets is dependent upon the Net deferred income tax assets – current: the carryforward periods provided for in the tax law for each tax jurisdiction. The Company has considered the following possible sources of taxable income when assessing the Inventory $ 67,324 68,748 realization of its deferred tax assets: capitalization for income tax purposes Inventory reserve Warranty reserve Accrued product liability Allowance for doubtful accounts 139,832 59,742 9,918 130,788 61,524 20,970 162,803 126,889 • future reversals of existing taxable temporary differences; • future taxable income or loss, exclusive of reversing • temporary differences and carryforwards; • tax-planning strategies; and • taxable income in prior carryback years. The Company considered both positive and negative Warranty reserve (439,619) — evidence in determining the need for a valuation allowance, Total deferred income $ — 408,919 tax assets – current Positive evidence: including the following: • Current forecasts indicate that the Company will generate pre-tax income and taxable income in the future. However, there can be no assurance that the new strategic plans will result in profitability. 2015 2014 • A majority of the Company’s tax attributes Net deferred income tax assets (liabilities) – non-current: Property and $ (67,158) (255,835) have indefinite carryover periods. Negative evidence: • The Company has several years of cumulative losses as of June 30, 2015. equipment, principally due to differences in depreciation Research and development credit carryover Other intangibles Deferred gain on sale lease back Operating loss carry forwards The Company places more weight on objectively verifiable evidence than on other types of evidence and management currently believes that available negative evidence outweighs the available positive evidence. Management has therefore 133,393 370,757 determined that the Company does not meet the “more likely than not” threshold that deferred tax assets will be realized. Accordingly, a valuation allowance is required. Any reversal of (68,970) 874,235 (91,822) the valuation allowance will favorably impact the Company’s — results of operations in the period of reversal. At June 30, 2015, the Company recorded a full valuation — 280,544 allowance against its deferred tax assets. The Company had available at June 30, 2014, estimated Valuation allowance (1,007,628) — federal and state net operating loss (“NOL”) carry forwards of Total deferred income $ (136,128) 303,644 purposes to offset the gain on the sale lease-back transaction $745,605, which were used for federal and state income tax tax assets (liabilities) – non-current (see Note 8). The Company’s federal and state income tax returns for June 30, 2012, 2013 and 2014 are open tax years. Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 29 (10) mAJor customers And sAles By geogrApHIc locAtIon Awards granted under the plan may be performance-based. As of June 30, 2015, 500,000 shares of common stock were During the fiscal years ended June 30, 2015 and 2014, sales authorized and reserved for issuance, but were not granted to any single customer did not exceed 10% of total net sales. under the terms of the 2015 equity incentive plan. No further The Company exports products to approximately 30 grants will be made under the 2005 plan. countries. Sales outside North America totaled $880,500 The Company granted no options under its 2005 or 2015 or 3% of net sales, for the fiscal year ended June 30, 2015 equity incentive plan during fiscal year 2015. The Company compared to $749,000, or 2.7% of net sales, for the fiscal year granted 3,598 options to acquire common stock during fiscal ended June 30, 2014. year 2014. The options are granted at not less than 100% of the market price of the stock at the date of grant. Option terms are determined by the board, and exercise dates may (11) common stocK And common stocK equIvAlents range from 6 months to 10 years from the date of grant. For the year ended June 30, 2015, the Company granted no The fair value of each option grant was estimated on the restricted common stock to directors or officers in connection with date of grant using the Black Scholes option pricing model compensation arrangements. For the year ended June 30, 2014, with the following assumptions: the Company granted 1,485 shares of restricted common stock to directors in connection with compensation arrangements. On June 30, 2015, the Company issued 122,000 shares of restricted common stock to the exclusive placement agent Expected dividend yield and the financial advisor in conjunction with the $4 million Expected stock price volatility capital raise. Risk-free interest rate The Company maintained a 2005 equity incentive plan for Expected life of options the benefit of employees, on June 29, 2015 the shareholders approved a new 2015 equity incentive plan setting aside 2014 0% 69% 2.53% 10 years 500,000 shares. The 2015 plan was filed with the SEC on The weighted average fair value of options granted during September 3, 2015. Incentive and nonqualified stock options, fiscal year 2014 was $1.89. restricted common stock, stock appreciation rights, and The following table summarizes the Company’s stock other share-based awards may be granted under the plan. option activity during the reported fiscal years: 2015 Number of shares 2015 Weighted average exercise price Weighted average remaining contractual term 2014 Number of shares 2014 Weighted average exercise price Options outstanding at beginning of the year Options granted Options exercised Options canceled or expired (64,452) — — — — 8.41 3,598 — (11,862) 155,604 $ 6.45 3.56 years 163,868 $ Options outstanding at 91,152 5.07 2.80 years 155,604 end of the year 6.51 2.42 — 6.01 6.45 Options exercisable at 90,520 5.48 137,804 7.09 end of the year Range of exercise prices at end of the year $ 1.75 – 7.10 $ 1.75 – 8.60 30 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 The Company recognized $66,372 and $70,871 in of shares of Common Stock issuable upon conversion of such stock-based compensation for the years ended June 30, 2015 Series A Preferred held by such holder that exceeds the quotient and 2014, respectively, which is included in selling, general, of (x) the aggregate purchase price paid by such holder of Series and administrative expenses in the consolidated statements A Preferred for its Series A Preferred, divided by (y) the greater of operations. The stock-based compensation includes of (i) $2.50 and (ii) the market price of the Common Stock on amounts for both restricted stock and stock options under the trading day immediately prior to the date of issuance of such ASC 718. holder’s Preferred Stock. The market price of the Common Stock As of June 30, 2015 there was $327,483 of unrecognized on the trading day immediately prior to the date of issuance stock-based compensation cost that is expected to be was $3.19 per share. Based on a $4,025,000 investment and a expensed over periods of four to nine years. $3.19 per share price the number of Common Stock equivalents No options were exercised during the fiscal years 2015 eligible for voting by Preferred shareholders is 1,261,755. and 2014. The aggregate intrinsic value of the outstanding The Preferred Investors purchased a total of 1,610,000 options as of June 30, 2015 and 2014 was $3,289 and shares of Series A Preferred Stock, and received in connection $8,732, respectively. with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of common stock, and (ii) B-Warrants, exercisable by “cashless exercise”, to (12) serIes A 8% convertIBle preferred stocK And purchase 1,207,500 shares of common stock. The warrants common stocK WArrAnts are exercisable for 72 months from the date of issuance and On June 30, 2015, the Company completed a private carry a Black-Scholes put feature in the event of a change in placement with affiliates of Prettybrook Partners, LLC control. The put right is not subject to derivative accounting (“Prettybrook”) and certain other purchasers (collectively as all equity holders are treated the same in the event of a with Prettybrook, the “Preferred Investors”) for the offer and change in control. sale of shares of the Company’s Series A 8% Convertible The Company’s Board of Directors has the authority to Preferred Stock (the “Series A Preferred”) in the aggregate cause us to issue, without any further vote or action by the amount of approximately $4 million. Offering costs incurred shareholders, up to 3,390,000 additional shares of preferred in conjunction with the private placement were recorded stock, no par value per share, in one or more series, to net of proceeds. The Series A Preferred is convertible to designate the number of shares constituting any series, and to common stock on a 1:1 basis. A Forced Conversion can fix the rights, preferences, privileges and restrictions thereof, be initiated based on a formula related to share price and including dividend rights, voting rights, rights and terms trading volumes as outlined in the terms of the private of redemption, redemption price or prices and liquidation placement. The dividend is fixed at 8% and is payable in preferences of such series. either cash or common stock. This dividend is payable The Series A Preferred includes a conversion right at a quarterly and equates to an annual payment of $322,000 price that creates an embedded beneficial conversion feature. A or equivalent value in common stock. Certain redemption beneficial conversion feature arises when the conversion price of rights are attached to the Series A Preferred, but none of the a convertible instrument is below the per share fair value of the redemption rights for cash are deemed outside the control underlying stock into which it is convertible. The conversion price of the Company. The redemption rights deemed outside the is ‘in the money’ and the holder realizes a benefit to the extent control of the Company require common stock payments of the price difference. The issuer of the convertible instrument or an increase in the dividend rate. The Series A Preferred realizes a cost based on the theory that the intrinsic value of includes a liquidation preference under which Preferred the price difference (i.e., the price difference times the number Investors would receive cash equal to the stated value of their of shares received upon conversion) represents an additional stock plus unpaid dividends. In accordance with the terms of financing cost. The conversion rights associated with the Series the sale of the Series A Preferred, the Company was required A Preferred issued by the Company do not have a stated life to register the underlying common shares associated with the and, therefore, all of the beneficial conversion feature amount Series A Preferred and the warrants. of $2,858,887 was amortized to dividends on the same date The Series A Preferred votes on an as-converted basis, one the preferred shares were issued. The $2,858,887 dividend vote for each share of Common Stock issuable upon conversion is added to the net loss to arrive at the net loss applicable to of the Series A Preferred, provided, however, that no holder of common stockholders for purposes of calculating loss per share Series A Preferred shall be entitled to cast votes for the number for the year ended June 30, 2015. Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 31 In August 2014, the FASB issued Accounting Stand (13) employee BenefIt plAn Update (ASU) 2014-15, Presentation of Financial Statements The Company has a deferred savings plan which qualifies – Going Concern: Disclosure of Uncertainties About an Entity’s under Internal Revenue Code Section 401(k). The plan covers Ability to Continue as a Going Concern. This ASU requires all employees of the Company who have at least six months of management to assess an entity’s ability to continue as a service and who are age 20 or older. For fiscal years 2015 and going concern by incorporating and expanding upon certain 2014, the Company made matching contributions of 25% of the principles that are currently in U.S. auditing standards, but first $2,000 of each employee’s contribution. The Company’s not currently in GAAP. Specifically, the amendments (1) contributions to the plan for 2015 and 2014 were $34,099 and provide a definition of the term substantial doubt, (2) require $39,056, respectively. Company matching contributions for an evaluation every reporting period including interim periods, future years are at the discretion of the board of directors. (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of (14) suBsequent events management’s plans, (5) require an express statement and On June 29, 2015 the shareholders approved a new 2015 other disclosures when substantial doubt is not alleviated, equity incentive plan setting aside 500,000 shares. The 2015 and (6) require an assessment for a period of one year after plan was filed with the SEC on September 3, 2015. the date that the financial statements are issued (or available to be issued). This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and (15) recent AccountIng pronouncements interim periods thereafter. Early application is permitted. The In April, 2015, the FASB issued ASU 2015-03, Simplifying Company is currently evaluating the impact that this ASU will the Presentation of Debt Issuance Costs (Subtopic 835-30). have on its financial. This update requires debt issuance costs to be presented in In May 2014, the Financial Accounting Standards Board the balance sheet as a direct deduction from the associated (FASB) issued Accounting Standard Update (ASU) 2014-09 debt liability. Under current standards, debt issuance costs – Revenue from Contracts with Customers, which provides are generally recorded as an asset and amortization of these a single, comprehensive revenue recognition model for all deferred financing costs is recorded in interest expense. contracts with customers. The core principal of this ASU is Under the new standard, debt issuance costs will continue that an entity should recognize revenue when it transfers to be amortized over the life of the debt instrument and promised goods or services to customers in an amount amortization will continue to be recorded in interest expense. that reflects the consideration to which the entity expects ASU 2015-03 is effective for the Company on January 1, 2016, to be entitled in exchange for those goods or services. This and will be applied on a retrospective basis. The Company is ASU also requires additional disclosure about the nature, currently evaluating the impact this guidance will have on our amount, timing and uncertainty of revenue and cash flows consolidated financial statements. arising from customer contracts, including significant In January 2015, the FASB issued ASU 2015-01, Income judgments and changes in judgments and assets recognized Statement – Extraordinary and Unusual Items (Subtopic from costs incurred to obtain or fulfill a contract. This ASU 225-20) Simplifying Income Statement Presentation by is effective for annual periods, and interim periods within Eliminating the Concept of Extraordinary Items. This update those annual periods, beginning after December 15, 2017. eliminates from GAAP the concept of extraordinary items Earlier application is permitted only as of annual reporting as part of its initiative to reduce complexity. Therefore, periods beginning after December 15, 2016, including interim extraordinary classification on the income statement will reporting periods within that reporting period. The Company no longer be used. However, the presentation guidance for is currently evaluating the impact that this ASU will have on its items that are unusual in nature or occur infrequently will financial statements. be retained. The update is effective in fiscal years beginning The Company has reviewed all other recently issued, but after December 15, 2015 and early adoption is permitted. not yet adopted, accounting standards in order to determine This update is not applicable to the Company as it has no their effects, if any, on its results of operations, financial extraordinary items. However, if there are events that are position or cash flows. Based on that review, the Company unusual in nature or occur infrequently, the appropriate believes that none of these pronouncements will have a disclosures will be made. significant effect on its consolidated financial statements. 32 Dynatronics Corporation Notes to Consolidated Statements June 30, 2015 and 2014 AvAIlABIlIty of form 10-K generAl InformAtIon Dynatronics Corporation files an annual report on Form 10-K Dynatronics Corporation, a Utah corporation organized each year with the Securities and Exchange Commission. A on April 29, 1983, manufactures, markets and distributes copy of the Form 10-K for the fiscal year ended June 30, 2015, a broad line of therapeutic, diagnostic and rehabilita- may be obtained at no charge by sending a written request to: tion equipment, medical supplies and soft goods, and treatment tables to an expanding market of physical Mr. Bob Cardon, Vice President of Administration therapists, sports medicine practitioners and athletic Dynatronics Corporation 7030 Park Centre Drive, Cottonwood Heights, Utah 84121 trainers, chiropractors, podiatrists, orthopedists, 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 on December 16, 2015 larry K. Beardall Executive Vice President of Sales & Marketing & Director 7030 Park Centre Drive, at 3:00 pm MT. 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 g. 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 Howard l. edwards Director, Former General Attorney for Atlantic Richfield Company r. scott Ward, pt phd 7030 Park Centre Drive, Cottonwood Heights, Utah 84121 Director, Chairman of the Department of Physical Therapy 1.800.874.6251, http://www.dynatronics.com dynAtronIcs corporAtIon HeAdquArters at the University of Utah erin s. enright Director, Managing Partner of Prettybrook Partners, LLC Brian m. larkin Director, Senior Vice President of Acelity LP richard J. linder Director, President and CEO of CoNextions Corporate Information 33 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. Dynatronics Corporation 7030 Park Centre Dr., Cottonwood Heights, Utah 84121 1.800.874.6271 — www.dynatronics.com 

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