================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2010.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to ____________.
Commission file number 0-12697
DYNATRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0398434
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, Utah 84121-6618
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 568-7000
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ___ No X
Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act. Yes ___ No X
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes __ No ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer ___ Smaller reporting company X
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No X
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of September 16, 2010 was approximately $7.8
million, based on the average bid and asked price on that date.
As of September 21, 2010, there were approximately 13.4 million shares of the
registrant's common stock outstanding.
Documents Incorporated by Reference
The issuer hereby incorporates information required by Part III (Items 10, 11,
12, 13, and 14) of this report by reference to the registrant's definitive proxy
statement for the fiscal year ended June 30, 2010 to be filed pursuant to
Regulation 14A and provided to stockholders subsequent to the filing of this
report.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
ii
TABLE OF CONTENTS
PART I
Item 1. Business..........................................................1
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................10
Item 4. [Removed and Reserved]
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..............10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................12
Item 8. Financial Statements and Supplementary Data......................21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................21
Item 9A. Controls and Procedures..........................................21
Item 9B. Other Information................................................22
PART III
Item 10. Directors, Executive Officers, and Corporate Governance..........22
Item 11. Executive Compensation...........................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters....................22
Item 13. Certain Relationships and Related Transactions, and
Director Independence.........................................22
Item 14. Principal Accounting Fees and Services...........................23
PART IV
Item 15. Exhibits, Financial Statement Schedules..........................23
Signatures .................................................................25
Certifications ...............................................................26
iii
PART I
Unless the context otherwise requires, all references in this report to
"registrant," "we," "us," "our," "Dynatronics" or the "Company" refer to
Dynatronics Corporation, a Utah corporation and its wholly owned subsidiary.
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking information.
Forward-looking information includes statements relating to future actions,
prospective products, future performance or results of current or anticipated
products, sales and marketing efforts, costs and expenses, interest rates,
outcome of contingencies, financial condition, results of operations, liquidity,
business strategies, cost savings, objectives of management and other matters.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking information in order to encourage companies to provide
prospective information about themselves without fear of litigation, so long as
that information is identified as forward-looking and is accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the information.
Forward-looking information may be included in this Annual Report on Form 10-K
or may be incorporated by reference from other documents filed by us with the
Securities and Exchange Commission. You can find many of these statements by
looking for words including, for example, "believes," "expects," "anticipates,"
"estimates" or similar expressions in this Annual Report on Form 10-K or in
documents incorporated by reference in this Annual Report on Form 10-K. Except
as otherwise required by applicable law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information or future events.
We have based the forward-looking statements relating to our operations on
management's current expectations, estimates and projections about us and the
industry in which we operate. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that we cannot
predict. In particular, we have based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
our actual results may differ materially from those contemplated by these
forward-looking statements. Any differences could result from a variety of
factors, including, but not limited to the following:
o strategies, outlook and growth prospects;
o future plans and potential for future growth;
o liquidity, capital resources and capital expenditures;
o growth in demand for our products;
o economic outlook and industry trends;
o developments of our markets;
o the impact of regulatory initiatives;
o new state or federal legislation; and
o the strength of our competitors.
Our Company
Dynatronics is a Utah corporation formed on April 29, 1983. Our
predecessor company, Dynatronics Research Company, was formed in 1979. Our
principal business is the design, manufacture, marketing and distribution of
physical medicine products and aesthetic products. We operate on a fiscal year
basis, ending June 30. For example, reference to fiscal year 2010 refers to the
fiscal year ended June 30, 2010. All references to financial statements in this
report refer to the consolidated financial statements of Dynatronics Corporation
and its subsidiary company Dynatronics Distribution Co. LLC.
1
Recent Developments
On July 6, 2010, Dynatronics launched its new e-commerce website at
www.Dynatronics.com, offering thousands of products online for clinics and
medical practitioners, as well as retail customers. The new, easy-to-use website
targets the physical medicine market and is a key marketing and sales tool which
we believe will facilitate sales growth. The website is an important step for
our expansion into the national account and group purchasing organization
segments of the market, which require online ordering capability. In addition,
it exposes our products to other new groups of online customers including
patients of practitioners who may be interested in purchasing our products.
Functionally, the website creates new ways for customers to communicate with us
to request information and check on their account status.
Customers receive the best pricing on products by ordering online and can
track their product shipments and know when their orders will be delivered. A
companion feature to the new website is our new e-quote system that allows sales
representatives to build quotes for customers quickly and accurately making our
sales representatives more efficient and timely in responding to customer needs.
The new website is projected to lead to reduced transaction costs,
decreased order-entry errors and increased order processing efficiencies, which
are expected to boost our competitive edge in the market and, most importantly,
improve profitability.
Fiscal year 2010 was the first full year of selling our new V-Force
vibration therapy device. This unit employs powerful, whole-body vibration
technology, which provides neuromuscular training to increase strength, improve
balance and enhance flexibility. Whole-body vibration therapy has been the
subject of extensive research for many years with numerous clinical studies
demonstrating its effectiveness in the areas of balance/fall prevention,
circulation, knee rehabilitation, low back pain, range of motion and a host of
other neuromuscular conditions.
Description of Products
We manufacture and distribute a broad line of medical equipment for
physical medicine applications including therapy devices, medical supplies and
soft goods, treatment tables and rehabilitation equipment. Our products are used
primarily by physical therapists, chiropractors, sports medicine practitioners,
podiatrists, physicians and other physical medicine professionals.
We also manufacture and distribute a line of aesthetic equipment including
aesthetic massage and microdermabrasion devices, as well as skin care products.
These products are used by aestheticians, plastic surgeons, dermatologists and
other aesthetic services providers.
Physical Medicine Products
Electrotherapy - The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over five decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies to produce patient comfort and successful treatment of
pain and related physical ailments. Medium frequency alternating currents, which
we use primarily in our electrotherapy devices, are believed to be the most
effective and comfortable for patients. Electrotherapy can be effective in
treating chronic intractable pain and/or acute post-traumatic pain, increasing
local blood circulation, relaxation of muscle spasms, prevention or retardation
of disuse atrophy, and muscle re-education.
Therapeutic Ultrasound - Ultrasound therapy provides therapeutic deep heat
to soft tissue through the introduction of sound waves into the body. It is one
of the most common modalities used in physical therapy for treating pain, muscle
spasms and joint contractures.
We market a broad line of devices that include electrotherapy, ultrasound
or a combination of both of these modalities in a single device. The Dynatron
125 ultrasound and the Dynatron 525 electrotherapy devices target the low-priced
segment of the market. The "50 Series Plus" products offer combinations of
electrotherapy and ultrasound modalities at a reasonable cost to the
practitioner. The Dynatron Solaris(TM) products provide our most advanced
technology in combination therapy devices by adding infrared light therapy
capabilities to enhanced electrotherapy and ultrasound combination devices. See
"Schedule of Therapy Products" on page 3. We intend to continue development of
our electrotherapy and ultrasound technology and remain a leader in the design,
manufacture and sale of therapy devices.
2
Infrared Light Therapy - Our five Dynatron Solaris units, the Dynatron
Solaris 702, and the Dynatron X3 and DX2 devices, all feature infrared light
therapy technology. These units are capable of powering various cluster probes
at different wavelengths for treating a variety of medical conditions including
pain and stiffness associated with arthritis, as well as muscle and joint pain.
The Dynatron Xp light pad is capable of treating larger areas of the body via
unattended infrared light therapy. This light pad can be powered by several of
our devices including the Dynatron 702, Dynatron X3, and Dynatron DX2. The
benefits of light therapy have been documented by numerous research studies
published over the past four decades.
Oscillation Therapy - Soft tissue oscillation therapy has been used for
the treatment of pain in Europe for over 15 years, yet it is relatively new to
the United States market. The Dynatron X5 Oscillation Therapy device creates an
electrostatic field within the patient, resulting in a highly effective
treatment for reducing minor muscle aches and pains.
Iontophoresis - Iontophoresis uses electrical current to transdermally
deliver drugs such as lidocaine for localized treatment of inflammation without
the use of needles. The Dynatron iBox, our proprietary iontophoresis device, is
capable of delivering two treatments simultaneously. We also distribute a line
of proprietary iontophoresis electrodes under the brand name of Dynatron Ion
electrodes. These electrodes replace the line of electrodes we previously
distributed for other manufacturers.
Vibration Therapy - We introduced our V-Force vibration therapy device in
June 2009. Originally developed for the Russian space program to compensate for
bone and muscle loss resulting from extended periods in space, whole-body
vibration therapy provides neuromuscular training to increase strength, improve
balance and enhance flexibility. A number of clinical studies have demonstrated
its effectiveness in the areas of balance/fall prevention, circulation
improvement, knee rehabilitation, low back pain relief, range of motion
expansion and many other neuromuscular conditions.
The following chart lists the therapy device products that we manufacture
and distribute.
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
Product Name Description
Dynatron(R) 125 Ultrasound
Dynatron(R) 525 Electrotherapy
Dynatron(R) 150 Plus** Ultrasound
Dynatron(R) 550 Plus** Multi-modality Electrotherapy
Dynatron(R) 650 Plus** Multi-modality Electrotherapy
Dynatron(R) 850 Plus** Combination Electrotherapy/
Ultrasound
Dynatron(R) 950 Plus** Combination Electrotherapy/
Ultrasound
Dynatron(R) STS Electrotherapy for Chronic Pain
Dynatron(R) STS Rx Electrotherapy for Chronic Pain
Dynatron(R) STSi Multi-modality Electrotherapy
for Chronic Pain
Dynatron Solaris(R) 701 Ultrasound with Infrared Light
Therapy
Dynatron Solaris(R) 702 Infrared Light Therapy
Dynatron Solaris(R) 705 Electrotherapy with Infrared
Light Therapy
Dynatron Solaris(R) 706 Electrotherapy with Infrared
Light Therapy
Dynatron Solaris(R) 708 Combination Electrotherapy/
Ultrasound with Infrared Light
Therapy
Dynatron Solaris(R) 709 Combination Electrotherapy/
Ultrasound with Infrared Light
Therapy
Dynatron Solaris(R) 880 Accessory Infrared Light Probe
Dynatron Solaris(R) 890 Accessory Infrared Laser Light
Probe
Dynatron(R) X3 Infrared Light Therapy
DX2 and DynaPro Spinal Health System Combination Traction with
Infrared Light Therapy
Dynatron(R) X5 Turbo Oscillation Therapy
Dynatron(R) iBox Iontophoresis
Dynatron(R) TX900 Traction Therapy
V-Force Vibration Therapy
_____________________
Dynatron(R) and Dynatron Solaris(R) are registered trademarks owned by
Dynatronics
** "50 Series Plus" Product Line
3
Medical Supplies and Soft Goods - We currently manufacture or have
manufactured for us over 700 medical supply and soft good products including hot
packs, cold packs, exercise balls, therapy wraps, wrist splints, ankle weights,
lumbar supports, cervical collars, slings, cervical pillows, back cushions,
weight racks, and parallel bars. We also distribute products such as hot and
cold therapy products, lotions and gels, paper products, athletic tape, canes
and crutches, reflex hammers, stethoscopes, splints, elastic wraps, exercise
weights, Thera-Band(R) (a registered mark of Hygenic Corp.) tubing, walkers,
treadmills, stair climbers, heating units for hot packs, whirlpools, gloves,
electrodes, and Transcutaneous Electrical Nerve Stimulation or "TENS" devices.
As a result of our acquisition of six independent distributors in June and
July 2007, we significantly expanded the number of products we now distribute to
include additional exercise equipment, massage therapy products, chiropractic
tables, hand therapy products, pilates and yoga equipment, nutritional
supplements, emergency care products and portable electrotherapy products. A new
400-page full-line catalog was introduced to the market in 2009 and updated in
2010, containing over 13,000 rehabilitation products. This new catalog is a
major step in presenting our new image to the market following the assimilation
of these dealers. It represents a more consolidated approach to selling our
high-quality manufactured products, as well as hundreds of lines of distributed
products that we now represent.
We market our products through direct sales representatives, independent
dealers, our e-commerce website and our product catalog. We are also continually
seeking to update our line of manufactured and distributed medical supplies and
soft goods.
Treatment Tables and Rehabilitation Equipment - We manufacture and
distribute motorized and manually operated physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products.
Aesthetic Products
We manufacture and market a line of aesthetic products under the brand
name of Synergie(TM). The Synergie Elite Aesthetic Massage System ("AMS")
applies therapeutic vacuum massage to skin and subcutaneous tissues to achieve a
temporary reduction in the appearance of cellulite and reduces the
circumferential body measurements of the treated areas.
The results of a Dynatronics-sponsored research study available at our
offices show that 91% of Synergie participants experienced a reduction in the
appearance of cellulite. In addition, participants on average reported a
cumulative reduction of six-inches in girth around the hips, thighs, and waist.
We also manufacture and market the Synergie Elite microdermabrasion device
as a companion to the AMS device. The microdermabrasion device gently exfoliates
the upper layers of skin, exposing softer, smoother skin. In conjunction with
the microdermabrasion devices, we offer a unique line of skin care products
under the trademark Calisse(TM) which is designed to enhance the effects of the
microdermabrasion treatments.
As part of the aesthetics line of products, we market the Synergie Elite
LT device which provides light therapy for aesthetic applications. Light therapy
is popular in spas and health clubs for improving skin tone and appearance.
Combining elements of the AMS vacuum massage techniques with microdermabrasion
and Synergie Elite LT for light therapy has provided aestheticians with the
ability to provide an enhanced "ultimate facial" available only with the use of
Synergie devices.
Allocation of Sales Among Key Products
No product accounted for more than 10% of total revenues during the fiscal
years ended June 30, 2010 and 2009.
Patents and Trademarks
Patents. We hold a United States patent on the multi-frequency ultrasound
technology that will remain in effect until June 2013, and a United States
patent on the microdermabrasion device that will remain in effect until February
2020. In addition, we hold a United States patent on the STS technology for
treating chronic pain that will remain in effect until July 2021, and a United
States patent on the combination of our aesthetic massage and microdermabrasion
technologies that will remain in effect until February 2020. We also hold two
design patents on the microdermabrasion device that will remain in effect until
November 2015. We hold a patent on our light therapy technology that will remain
in effect until August 2025. Three additional patent applications pertaining to
our infrared light therapy technology and combination traction/light therapy
technology have been filed with the United States Patent and Trademark Office
and are currently pending. We also own the exclusive, worldwide rights (under a
license agreement) to patent protection on the STS technology for the treatment
of chronic pain.
4
Trademarks. We have developed and we use registered trademarks in our
business, particularly relating to our corporate and product names. The
trademark "Dynatron" has been registered with the United States Patent and
Trademark Office. In addition, United States trademark registrations have been
obtained for the trademarks: "Synergie," "Synergie Peel," "Sympathetic Therapy,"
and "Dynatron Solaris," and trademark registrations have been obtained for
various other product trademarks. Company materials are also protected under
copyright laws, both in the United States and internationally.
Federal registration of a trademark enables the registered owner of the
mark to bar the unauthorized use of the registered mark in connection with a
similar product in the same channels of trade by any third-party anywhere in the
United States, regardless of whether the registered owner has ever used the
trademark in the area where the unauthorized use occurs. We have filed
applications and own trademark registrations, and we intend to register
additional trademarks in countries where our products are or may be sold in the
future. Protection of registered trademarks in some jurisdictions may not be as
extensive as the protection in the United States.
We also claim ownership and protection of certain product names,
unregistered trademarks, and service marks under common law. Common law
trademark rights do not provide the same level of protection that is afforded by
the registration of a trademark. In addition, common law trademark rights are
limited to the geographic area in which the trademark is actually used. We
believe these trademarks, whether registered or claimed under common law,
constitute valuable assets, adding to recognition of Dynatronics and the
effective marketing of Dynatronics products. Trademark registration once
obtained is essentially perpetual, subject to the payment of a renewal fee. We
therefore believe that these proprietary rights have been and will continue to
be important in enabling us to compete.
Trade Secrets. We own certain intellectual property, including trade
secrets that we seek to protect, in part, through confidentiality agreements
with key employees and other parties involved in research and development. Even
where these agreements exist, there can be no assurance that these agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or independently
developed by competitors. Our proprietary product formulations are generally
considered trade secrets, but are not otherwise protected under intellectual
property laws.
We intend to protect our legal rights concerning intellectual property by
all appropriate legal action. Consequently, we may become involved from time to
time in litigation to determine the enforceability, scope, and validity of any
of the foregoing proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical personnel.
Warranty Service
We provide a warranty on all products we manufacture for time periods
ranging in length from 90 days to five years from the date of sale. We service
warranty claims on these products at our Salt Lake City, Utah and Chattanooga,
Tennessee facilities according to the service required. Our warranty policies
are comparable to warranties generally available in the industry. Warranty
claims were approximately $161,000 and $242,000 in fiscal years 2010 and 2009,
respectively.
Products we distribute carry warranties provided by the manufacturers of
those products. We do not generally supplement these warranties or provide
warranty services for distributed products. We also sell accessory items for our
manufactured products that are supplied by other manufacturers. These accessory
products carry warranties from their original manufacturers without supplement
from us.
Customers and Markets
We sell our products primarily to licensed practitioners such as physical
therapists, chiropractors, podiatrists, sports medicine specialists, medical
doctors, hospitals and clinics, plastic surgeons, dermatologists and
aestheticians. We currently have 53 direct sales representatives selling our
products in 40 states. We also make use of a network of over 150 independent
dealers throughout the United States and internationally. These dealers purchase
and take title to the products, which they then sell to licensed practitioners.
We have entered into direct sales relationships with certain national and
regional chains of physical therapy clinics and hospitals. We sell our products
directly to these clinics and hospitals pursuant to preferred pricing
arrangements. We also have preferred pricing arrangements with key dealers who
commit to purchase certain volumes and varieties of products. No single dealer
or national account or group of related accounts was responsible for 10% or more
of total sales in fiscal years 2010 and 2009.
5
We export products to approximately 30 different countries. Sales outside
North America totaled approximately $533,452, or 1.6% of net sales, in fiscal
year 2010 compared to $764,919, or 2.3% of net sales, in fiscal year 2009. We
are working to establish effective distribution for our products in
international markets. Our Utah facility is certified to the ISO 13485 quality
standard for medical device manufacturing. Many of our therapy devices carry the
CE Mark, a designation required for marketing products in the European community
that signifies the device or product was manufactured pursuant to a certified
quality system. We have no foreign manufacturing operations. However, we
purchase certain products and components from foreign manufacturers.
Competition
We believe our key products are distinguished competitively by our use of
the latest technology. Many of our products are protected by patents. We believe
that the integration of advanced technology in the design of each product has
distinguished Dynatronics branded products in a very competitive market. We were
the first company to integrate infrared light therapy as part of a combination
therapy device. By manufacturing many of the medical supplies, soft goods and
tables that we sell, we can focus on quality manufacturing at competitive
prices. We believe these factors give us an edge over many competitors who are
solely distributors of competing products. Furthermore, the acquisition of six
key distributors in June and July 2007 and the addition of direct sales
representatives over the course of the last three years have provided us with
expanded direct distribution of products into 40 states. This vertical
integration allows us to exercise better control over the sale and distribution
of our manufactured products as well as products of other manufacturers that we
distribute including products from competitors such as Mettler, MedX, and DJO
and many manufacturers of treatment tables, medical supplies and soft goods.
Generally, since the migration from being primarily a manufacturer to being a
manufacturer and distributor, the competitive landscape takes on different
dimensions as outlined below. Dynatronics is one of only two companies in the
physical medicine industry that have a direct sales force; the other is Sammons
Preston.
Information necessary to determine or reasonably estimate our market share
or that of any competitor in any of these markets is not readily available.
Electrotherapy/Ultrasound
We compete in the clinical market for electrotherapy and ultrasound
devices with both domestic and foreign companies. Approximately one dozen
companies produce electrotherapy and/or ultrasound devices. Some of these
competitors are larger and better established, and have greater resources than
us. Other than Dynatronics, few companies, domestic or foreign, provide
multiple-modality devices, which is one important distinction between us and our
competition. Furthermore, we believe no competitor offers three frequencies on
multiple-sized soundheads for which we hold a patent. We believe that our
primary domestic competitors that manufacture competitive clinical
electrotherapy and ultrasound equipment include DJO (Chattanooga Group
division), Rich-Mar, and Mettler Electronics.
Light Therapy
Competitors that manufacture and market light therapy devices include DJO,
Rich-Mar, Erchonia, Anodyne and MedX. These and other competitors offer light
therapy units that are not as powerful as our units. We are aware of only two
competitors, DJO and Rich-Mar, who offer a combination light therapy device that
includes electrotherapy and ultrasound capabilities.
Vibration Therapy
The primary competitors that manufacture and market vibration therapy
devices include PowerPlate and Wave Manufacturing. These competitors offer units
that are more expensive than our unit. In addition, we offer a better warranty
and we believe that we provide better training and customer service than these
competitors.
Medical Supplies and Soft Goods
We compete against various manufacturers and distributors of medical
supplies and soft goods, some of which are larger, more established and have
greater resources than us. Excellent customer service along with providing value
to customers is of key importance for us to remain competitive in this market.
While there are many specialized manufacturers in this area such as DJO and
Fabrication Enterprises, most of our competitors are primarily distributors such
as North Coast Medical, Sammons Preston (a division of Patterson Medical), and
Meyer Distributing. It is not common for manufacturers of products in this
category to have any direct distribution of their products. They typically rely
on distribution companies like Dynatronics or the competitors mentioned in this
section for sale of their products. We enjoy cost advantages on the products we
manufacture and distribute directly to end users compared to companies that only
distribute similar products. And as mentioned above, we and Sammons Preston are
the only two companies with a direct sales force. All other competitors are
primarily catalog or internet sales companies.
6
Iontophoresis
Our competitors in the iontophoresis market include DJO (EMPI and Iomed
divisions) Richmar and ActivaTek Inc. We believe that DJO enjoys the largest
market share of the iontophoresis market. We also believe that our strong
distribution network is important to our continued ability to compete in this
increasingly competitive market. In addition, our products target a lower
selling price than the products of DJO. Our Dynatron iBox iontophoresis device
is helping expand our presence in this market.
Treatment Tables
Our primary competition in the treatment table market is from domestic
manufacturers including Hill Laboratories Company, Hausmann Industries, Sammons
Preston, Bailey Manufacturing, Tri-W-G, DJO (Chattanooga Division), Armedica,
and Clinton Industries. We believe we compete based on our industry experience
and product quality. In addition, certain components of the treatment tables are
manufactured overseas, which we believe allows for pricing advantages over
competitors.
Aesthetic Products
Our two primary competitors in the therapeutic massage industry are LPG
Systems, and Silhouette Tone. Other competitors include Cynosure, Inc., Palomar
Medical, Eleme Medical, and Syneron. The Synergie Elite AMS device utilizes
proprietary technology that has been proven effective in a research study and in
ten years of use by doctors and spas. In addition, we provide a comprehensive
training and certification program for aestheticians and medical practitioners.
Our aesthetic massage equipment is priced lower than competitors' units,
providing a significant advantage in the marketplace. We are striving to develop
a network of domestic and international distributors and national accounts,
which is expected to provide another competitive advantage in the marketplace
for these products.
There are a number of competitors in the microdermabrasion market
including Mega Peel, Diamond Peel, DermaGenesis, DermaMed, E-Med, Integremed,
Medical Alliance, Palomar, Slimtone USA and Soundskin Corp. The Synergie
microdermabrasion device incorporates a patented anti-clogging design for the
crystals, which sets it apart from competitors' units. In addition, the system
has an innovative disposable system for the abrasive material, which prevents
unwanted contact with the spent crystals following treatment. Powered by the
Synergie Elite AMS device, the Synergie Elite microdermabrasion device is one of
the most powerful and easy to control units on the market.
Competitors in the light therapy segment of the aesthetic market include
Revitalite, Silhouette Tone, Photo Actif, and DermaPulse. We believe the
Synergie Elite LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.
Manufacturing and Quality Assurance
We manufacture therapy devices, soft goods and other medical products at
our facilities in Salt Lake City, Utah and Chattanooga, Tennessee. We purchase
some components for our manufactured products from third-party suppliers. All
parts and components purchased from these suppliers meet specifications we have
established. Trained staff performs all sub-assembly, final assembly and quality
assurance procedures. Every effort is made to design Dynatronics products to
incorporate component parts and raw materials that are readily available from
suppliers.
The development and manufacture of many of our products is subject to
rigorous and extensive regulation by the United States Food and Drug
Administration, or FDA, and other regulatory agencies and authorities in the
United States and abroad. In compliance with the FDA's Good Manufacturing
Practices, or GMP, we have developed a comprehensive program for processing
customer feedback and analyzing product performance trends. By ensuring prompt
processing of timely information, we are better able to respond to customer
needs and insure proper operation of the products.
7
Our Salt Lake facility is certified to ISO 13485:2003 standards for
medical products. ISO 13485 is an internationally recognized quality management
system standard adopted by over 90 countries. In addition, we have qualified for
the CE Mark certification on our electrotherapy, ultrasound and light therapy
products. With the CE Mark certification, we are qualified to market these
products throughout the European Union and in other countries where CE Mark
certification and ISO 13485 certification are recognized.
Products manufactured at our facility in Tennessee are subject to our own
internal quality system which mimics the quality system implemented at our
facility in Utah. While we have not sought ISO certification for the Tennessee
facility, we believe our quality system is rigorous and adequate for producing
the type of quality product to which our customers have become accustomed.
Research and Development
Total research and development ("R&D") expenses in fiscal year 2010 were
$914,933 compared to $993,338 in fiscal year 2009. R&D expenses represented
approximately 2.8% and 3.1% of our net sales in fiscal years 2010 and 2009,
respectively. The decrease in R&D expenditures as a percentage of net sales in
fiscal year 2010 is due to certain cost cutting measures performed by the
Company. R&D expenditures are expected to ramp up in 2011 as we anticipate the
introduction of some key new products toward the end of fiscal year 2011. We
have always been oriented toward developing new and innovative products. That
commitment is expected to be manifest to a greater degree in the coming fiscal
year.
Regulatory Matters
The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of our products are subject to regulation by numerous national and
local governmental agencies in the United States and other countries. In the
United States, the FDA regulates our products pursuant to the Medical Device
Amendment of the Food, Drug, and Cosmetic Act, or FDC Act and regulations
promulgated thereunder. Advertising and other forms of promotion and methods of
marketing of the products are subject to regulation by the Federal Trade
Commission, or FTC, under the Federal Trade Commission Act.
As a device manufacturer, we are required to register with the FDA and
once registered we are subject to inspection for compliance with the FDA's
Quality Systems regulations. These regulations require us to manufacture our
products and maintain our documents in a prescribed manner with respect to
manufacturing, testing, and control activities. Further, we are required to
comply with various FDA requirements for reporting. The FDC Act and medical
device reporting regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been caused or contributed to by the
use of our products, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to occur. The FDA
also prohibits an approved device from being marketed for unapproved uses. All
of our therapeutic and aesthetic treatment devices as currently designed are
cleared for marketing under section 510(k) of the Medical Device Amendment to
the FDC Act or are considered 510(k) exempt. If a device is subject to section
510(k), the FDA must receive premarket notification from the manufacturer of its
intent to market the device. The FDA must find that the device is substantially
equivalent to a legally marketed predicate device before the agency will clear
the new device for marketing. We intend to continuously improve our products
after they have been introduced to the market. Certain modifications to our
marketed devices may require a premarket notification and clearance under
section 510(k) before the changed device may be marketed, if the change or
modification could significantly affect safety or effectiveness. As appropriate,
we may therefore submit future 510(k) notifications, Pre-Market Approval ("PMA")
or PMA supplement applications to the FDA. No assurance can be given that
clearance or approval of such new applications will be granted by the FDA on a
timely basis, or at all. Furthermore, we may be required to submit extensive
preclinical and clinical data depending on the nature of the product changes.
All of our devices, unless specifically exempted by regulation, are subject to
the FDC Act's general controls, which include, among other things, registration
and listing, adherence to the Quality System Regulation requirements for
manufacturing, Medical Device Reporting and the potential for voluntary and
mandatory recalls described above.
The FDA is currently evaluating the classification of iontophoresis
products. Since the passage of the Medical Device Amendment in 1975, these
products have been listed as Class III products. However, the FDA has never
called for a PMA for these products. Instead, it has allowed iontophoresis
products to proceed to market as though they were Class II. Two years ago, FDA
indicated they intend to make a final decision to either call for a PMA for
iontophoresis products or reclassify them to Class II. We submitted to FDA the
required information to allow continued marketing of our proprietary
iontophoresis products until the final FDA decision is made. In our submission
we urged that the products be reclassified to Class II. If the FDA does not
change the classification of iontophoresis products and requires a PMA, we will
be required to provide a PMA or, in the alternative, cease distributing our
proprietary line and distribute competitor products that comply with the FDA
requirements.
8
During fiscal year 2003, Congress enacted the Medical Device User Fee and
Modernization Act (MDUFMA). Among other things, this act imposes for the first
time a user fee on medical device manufacturers. Under the provisions of MDUFMA,
manufacturers seeking clearance to market a new device must pay a fee to the FDA
in order to have their applications reviewed. We submit new products for
clearance primarily under section 510(k) of the Medical Device Amendment of the
FDC Act.
Failure to comply with applicable FDA regulatory requirements may result
in, among other things, injunctions, product withdrawals, recalls, product
seizures, fines, and criminal prosecutions. Any such action by the FDA could
materially adversely affect our ability to successfully market our products. Our
Utah facility is inspected periodically by the FDA for compliance with the FDA's
GMP and other requirements, including appropriate reporting regulations and
various requirements for labeling and promotion. The FDA Quality Systems
Regulations are similar to the ISO 13485 Quality Standard. The GMP regulation
requires, among other things, that (i) the manufacturing process be regulated
and controlled by the use of written procedures, and (ii) the ability to produce
devices that meet the manufacturer's specifications be validated by extensive
and detailed testing of every aspect of the process.
Advertising of our products is subject to regulation by the FTC under the
FTC Act. Section 5 of the FTC Act prohibits unfair methods of competition and
unfair or deceptive acts or practices in or affecting commerce. Section 12 of
the FTC Act provides that the dissemination or the causing to be disseminated of
any false advertisement pertaining to, among other things, drugs, cosmetics,
devices or foods, is an unfair or deceptive act or practice. Pursuant to this
FTC requirement, we are required to have adequate substantiation for all
advertising claims made about its products. The type of substantiation required
depends upon the product claims made.
If the FTC has reason to believe the law is being violated (e.g., the
manufacturer or distributor does not possess adequate substantiation for product
claims), it can initiate an enforcement action. The FTC has a variety of
processes and remedies available to it for enforcement, both administratively
and judicially, including compulsory process authority, cease and desist orders,
and injunctions. FTC enforcement could result in orders requiring, among other
things, limits on advertising, consumer redress, divestiture of assets,
rescission of contracts, and such other relief as may be deemed necessary.
Violation of such orders could result in substantial financial or other
penalties. Any such action by the FTC could materially adversely affect the
Company's ability to successfully market its products.
From time to time, legislation is introduced in the Congress of the United
States or in state legislatures that could significantly change the statutory
provisions governing the approval, manufacturing, and marketing of medical
devices and products like those we manufacture. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. It is impossible to predict
whether legislative changes will be enacted, or FDA regulations, guidance, or
interpretations will be changed, and what the impact of such changes, if any,
may be on our business and our results of operations. We cannot predict the
nature of any future laws, regulations, interpretations, or applications, nor
can we determine what effect additional governmental regulations or
administrative orders, when and if promulgated, domestically or internationally,
would have on our business in the future. They could include, however,
requirements for the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products, additional record keeping,
expanded documentation of the properties of certain products, expanded or
different labeling, and additional scientific substantiation. Any or all such
requirements could have a material adverse effect on our business, results of
operations or financial condition.
We believe all of our present products are in compliance in all material
respects with all applicable performance standards as well as GMP, record
keeping and reporting requirements in the production and distribution of the
products.
Environment
Environmental regulations and the cost of compliance with them are not
material to our business. We do not discharge into the environment any
pollutants that are regulated by a governmental agency with the exception of the
requirement to provide proper filtering of discharges into the air from the
painting processes at our Tennessee location.
9
Seasonality
We believe that the effect of seasonality on the results of our operations
is not material.
Backlog
We had a backlog of orders of approximately $754,000 at June 30, 2010,
compared to approximately $500,000 at June 30, 2009.
Employees
On June 30, 2010, we had a total of 144 full-time employees and eight
part-time employees, compared to 148 full-time employees and five part-time
employees on June 30, 2009.
Item 2. Properties
Our corporate headquarters and principal executive offices are located at
7030 Park Centre Drive, Salt Lake City, Utah. The headquarters consist of a
single facility housing administrative offices and manufacturing space totaling
approximately 36,000 square feet. We own the land and building, subject to
mortgages requiring a monthly payment of approximately $24,000. The mortgages
mature in 2013 and 2017. We also own a 53,200 sq. ft. manufacturing facility in
Ooltewah, Tennessee (near Chattanooga), and accompanying undeveloped acreage for
future expansion subject to a mortgage requiring monthly payments of
approximately $13,000 and maturing in 2021. In addition, we rent office and
warehouse space in Pleasanton, California; Houston, Texas; Detroit, Michigan;
Minneapolis, Minnesota; and Girard, Ohio.
We believe the facilities described above are adequate and able to
accommodate our presently expected growth and operating needs. As our business
continues to grow, additional facilities or the expansion of existing facilities
may be required.
We own equipment used in the manufacture and assembly of our products. The
nature of this equipment is not specialized and replacements may be readily
obtained from any of a number of suppliers. In addition, we own computer
equipment and engineering and design equipment used in research and development
programs.
Item 3. Legal Proceedings
There are no pending legal proceedings of a material nature to which we
are a party or to which any of our property is the subject.
Item 4. [Removed and Reserved]
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information
As of September 21, 2010, we had approximately 13.4 million shares of
common stock issued and outstanding. Our common stock is listed on the NASDAQ
Capital Market (symbol: DYNT). The following table shows the range of high and
low sale prices for the common stock as quoted on the NASDAQ system for the
quarterly periods indicated:
10
Fiscal Year Ended June 30,
2010 2009
High Low High Low
1st Quarter (July-September) $1.05 $.59 $1.03 $0.17
2nd Quarter (October-December) $1.05 $.57 $0.64 $0.26
3rd Quarter (January-March) $1.44 $.80 $0.48 $0.20
4th Quarter (April-June) $1.10 $.66 $0.75 $0.27
Stockholders
As of September 21, 2010, the approximate number of stockholders of record
was 430. This number does not include beneficial owners of shares held in
"nominee" or "street" name. Including beneficial owners, we estimate that the
total number of stockholders exceeds 2,000.
Dividends
We have never paid cash dividends on our common stock. Our anticipated
capital requirements are such that we intend to follow a policy of retaining
earnings in order to finance the development of the business.
NASDAQ Deficiency Notice
On June 16, 2010, we received a deficiency letter from the NASDAQ Stock
Market, indicating that we had failed to comply with the minimum bid requirement
for continued inclusion under Marketplace Rule 4310(c)(4). Under the deficiency
notice, our common stock is subject to potential delisting because, for a period
of 30 consecutive business days, the bid price of the common stock closed below
the minimum $1.00 per share requirement for continued inclusion. The deadline
for compliance with the rule is December 13, 2010. If prior to that date the bid
price of our common stock closes at $1.00 per share or more for a minimum of 10
consecutive business days, NASDAQ staff may provide written notification that we
have achieved compliance with the rule.
We are using our best efforts to regain compliance with the minimum bid
price rule. However, there can be no assurance that compliance will be achieved
given the overall current condition of financial and stock markets in the United
States. If compliance is not achieved and our stock is delisted, we expect that
the common stock will begin trading on the OTC bulletin board where there is no
minimum bid requirement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information related to our equity compensation
plans as of June 30, 2010:
Number of Number of securities
securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation plans
options, options, (excluding
warrants and warrants securities reflected
rights and rights in column (a))
Plan Category (a) (b) (c)
--------------------------------------- ----------------- ---------------------
Equity compensation
plans approved by
security holders 932,805 $1.35 1,038,411
Equity compensation
plans not approved
by security holders - - -
------------------ ---------------------
Total 932,805 1,038,411
================== =====================
11
Recent Sales of Unregistered Securities
We did not sell any securities without registration under the Securities
Act of 1933 during the two years ended June 30, 2010.
Purchases of Equity Securities
On September 3, 2003, our board of directors adopted and announced a stock
repurchase program for the expenditure of up to $500,000 to purchase our common
stock on the open market pursuant to regulatory restrictions governing such
repurchases. In December 2008, the board authorized an additional $250,000 for
repurchases under the program. During fiscal year 2009, we purchased 13,600
shares for $10,138. In fiscal year 2010, we purchased 91,504 shares for $97,378.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our
consolidated financial statements and notes to those consolidated financial
statements, included elsewhere in this Annual Report on Form 10-K. In addition
to historical information, this discussion contains forward-looking statements
that involve risks, uncertainties and assumptions that could cause actual
results to differ materially from our expectations.
Overview
Our principal business is the design, manufacture, marketing, distribution
and sales of physical medicine products and aesthetic products. We manufacture
and distribute a broad line of medical equipment including therapy devices,
medical supplies and soft goods, treatment tables and rehabilitation equipment.
Our line of aesthetic equipment includes aesthetic massage and microdermabrasion
devices, as well as skin care products. Our products are sold to and used
primarily by physical therapists, chiropractors, sports medicine practitioners,
podiatrists, plastic surgeons, dermatologists, aestheticians and other aesthetic
services providers. We operate on a fiscal year ending June 30. For example,
reference to fiscal year 2010 refers to the year ended June 30, 2010.
Recent Developments
On July 6, 2010, we launched a new e-commerce website at
www.Dynatronics.com offering thousands of products online for clinics and
medical practitioners, as well as retail customers. The new, easy-to-use website
targets the physical medicine market and is a key marketing and sales tool which
we believe will facilitate sales growth. The website is an important step for
our expansion into the national account and group purchasing organization
segments of the market, which require online ordering capability. In addition,
it exposes our products to other new groups of online customers including
patients of practitioners who may be interested in purchasing our products.
Functionally, the website creates new ways for customers to communicate with us
to request information and check on their account status.
Customers receive the best pricing on products by ordering online and can
track their product shipments and know when their orders will be delivered. A
companion feature to the new website is our new e-quote system that allows sales
representatives to build quotes for customers quickly and accurately making our
sales representatives more efficient and timely in responding to customer needs.
The new website is projected to lead to reduced transaction costs,
decreased order-entry errors and increased order processing efficiencies, which
are expected to boost our competitive edge in the market and, most importantly,
improve profitability.
Fiscal year 2010 was the first full year of selling our new V-Force
vibration therapy device. This unit employs powerful, whole-body vibration
technology, which provides neuromuscular training to increase strength, improve
balance and enhance flexibility. Whole-body vibration therapy has been the
subject of extensive research for many years with numerous clinical studies
demonstrating its effectiveness in the areas of balance/fall prevention,
circulation, knee rehabilitation, low back pain, range of motion and a host of
other neuromuscular conditions.
How We Assess the Performance of Our Business
We consider a variety of performance and financial measures in assessing
the performance of our business. The key measures for determining how our
business is performing are net sales, gross profit margin and selling, general
and administrative expense. In addition, the status of borrowings and other
financial ratios related to the balance sheet help provide insight into how we
are performing.
12
Net Sales
Net sales constitute gross sales net of any returns and sales discounts.
Gross Profit
Gross profit is equal to our net sales minus our cost of goods sold. Gross
margin measures gross profit as a percentage of net sales. Cost of goods sold
for manufactured products includes direct material and labor costs as well as
allocated indirect costs of labor and overhead. Cost of goods sold for
distributed products includes the direct cost of purchased products,
distribution center costs, and all freight costs incurred. The components of our
cost of goods sold may not be comparable to those of other manufacturers or
distributors of similar products within our industry.
Changes in the mix of our products, such as changes in the proportion of
manufactured products, may impact our overall cost of goods sold. We review our
inventory levels on an ongoing basis in order to identify slow-moving products
in inventory. We may offer incentives or mark-downs on these products. The
timing and level of markdowns are not seasonal in nature but are driven by
customer acceptance and sales. If we misjudge the market for our products, we
may be faced with excess inventories for some products and be required to mark
down those products in order to sell them. Historically markdowns have not been
a material factor in our business.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration,
share-based compensation and occupancy costs. These expenses do not generally
vary proportionally with net sales. As a result, selling, general and
administrative expense as a percentage of net sales is usually higher in lower
volume quarters and lower in higher volume quarters.
Share-based compensation expense related to stock options was $32,991 and
$30,524 for fiscal years 2010 and 2009, respectively. We granted options to
purchase an aggregate of 89,336 and 79,455 shares of common stock in fiscal
years 2010 and 2009, respectively. These and any future stock option grants will
increase our share-based compensation expense in fiscal year 2011 and in future
fiscal years compared to fiscal year 2010. See "Critical Accounting Policies".
We rely on an operating line of credit from a commercial bank. The
relationship between the borrowing base that establishes maximum borrowings
permitted and the actual borrowings indicates available borrowings for financing
operations and providing working capital. Ultimately, through profitability and
earnings we desire to eliminate all line of credit borrowings. Until that goal
is achieved, the available borrowings are carefully monitored as an indicator of
keeping proper balances between inventories, receivables, and payables as well
as financing capital expenditures.
Likewise, maintaining good Current Ratios and Debt to Equity ratios is a
measure of good financial health and is monitored closely.
Results of Operations
Fiscal Year 2010 Compared to Fiscal Year 2009
Net Sales
Net sales increased 1.7%, to $32,962,392 in fiscal year 2010, from
$32,406,891 in fiscal year 2009. Despite the difficult economic conditions in
the United States, we generated increased sales of both rehabilitation capital
equipment and medical supplies ahead of last year's results. This is a positive
indicator attributable to the aggressive marketing efforts in which we have been
engaged and which have been announced during the year as well as possible
lessening of recessionary pressures.
Sales in some geographic regions of the United States realized significant
decreases due to harsher local economies and unemployment. Declining sales in
these areas were offset by improved performance in other parts of the country.
Without the improvements shown in other regions, these decreases would have
diminished sales by approximately 6.3% when compared to sales in the last two
years. It is notable that the 1.7% increase in total sales reflects increased
sales in other parts of the United States sufficient to not only offset the
losses in the more economically depressed areas, but also to boost overall sales
by almost 2% year over year.
13
Sales of manufactured physical medicine products represented approximately
44% of our physical medicine product sales in both fiscal years 2010 and 2009.
Distribution of products manufactured by other suppliers accounted for the
balance of our physical medicine product sales in those years. Sales of
manufactured aesthetic products in fiscal years 2010 and 2009 represented
approximately 74% and 83% of our aesthetic product sales, respectively, with
distributed products making up the balance.
The majority of our sales revenues come from the sale of physical medicine
products, both manufactured and distributed. In fiscal years 2010 and 2009,
sales of physical medicine products accounted for 92% of total sales. Chargeable
repairs, billable freight revenue, aesthetic product sales and other
miscellaneous revenue accounted for approximately 8% of total revenues in 2010
and 2009.
Gross Profit
Gross profit increased $235,119 to $12,645,574, or 38.4% of net sales, in
fiscal year 2010, from $12,410,455 or 38.3% of net sales in fiscal year 2009.
The increase in gross profit resulted from (1) higher sales generated in fiscal
year 2010, (2) implementation of a number of refinements to our business
operations which lowered our costs through better pricing and terms obtained
from vendors, and (3) product mix more favorable to some of our higher-margin
medical devices, including the new V-Force device and our electrotherapy
products, together with certain medical supply products and treatment tables. As
economic conditions gradually improve, demand for higher margin capital products
is expected to increase, which we expect would further improve gross margins in
future periods.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $113,917,
to $10,641,795, or 32.3% of net sales, in fiscal year 2010, from $10,755,712, or
33.2% of net sales in fiscal year 2009. In fiscal year 2009, we recorded a
reversal of an accrued liability of approximately $462,000 resulting from the
cancellation of retirement benefits previously provided by contract to two
executive officers, Kelvyn Cullimore, Jr. and Larry Beardall. The benefits were
cancelled when the employment agreements in which they were granted were
terminated in March 2009. Both executives subsequently entered into new
employment agreements in June 2009. The new agreements do not include retirement
benefits such as those that had been a part of the terminated agreements.
During fiscal 2010, we were able to reduce SG&A by $113,917 compared to
fiscal 2009 SG&A costs that included the previously described gain of
approximately $462,000. This was accomplished through our ongoing cost reduction
campaign to improve efficiencies. Over the past two years, we have focused on
lowering transaction costs, streamlining customer service and production
processes, and improving our sales support functions.
Research and Development
Research and development ("R&D") expense decreased $78,406, to $914,932 in
fiscal year 2010, from $993,338 in 2009. R&D expense also decreased as a
percentage of net sales in fiscal year 2010, to 2.8% from 3.1% of net sales in
fiscal year 2009. R&D costs are expensed as incurred. We expect to continue our
commitment to developing innovative products for the physical medicine market in
fiscal year 2011 and in future periods in order to position us for growth. We
anticipate that R&D expense will increase in 2011 to approximately $1,400,000 in
anticipation of a number of new products currently under development and
scheduled for release at the end of fiscal year 2011.
Interest Expense
Interest expense decreased by $119,744 to $433,429 in fiscal year 2010 due
to lower rates and decreased borrowings and lower carrying balances on our bank
line of credit compared to fiscal year 2009. During the year, we renegotiated
the rate on one of our mortgages and reduced the rate from 9.1% to 5.6%.
14
Pre-tax Income
Pre-tax income improved significantly in fiscal year 2010 to $700,045
compared to $139,260 in fiscal year 2009. The improvement in pre-tax income for
fiscal year 2010 was a result of higher sales and gross profit generated during
the year, together with lower SG&A, R&D and interest expenses. As already
mentioned, the profit attained in 2009 reflected the effect of the reversal of
$462,000 in expense associated with the termination of the retirement benefits
for Kelvyn H. Cullimore Jr. and Larry Beardall.
Income Tax Expense
Income tax expense was $276,068 in fiscal year 2010, compared to $35,936
in fiscal year 2009. The effective tax rate for fiscal year 2010 was 39.4%
compared to 25.8% in 2009. The lower tax accrual rate in 2009 is primarily the
result of tax credits from prior years.
Net Income
Net income increased to $423,977 ($.03 per share) in fiscal year 2010,
compared to $103,324 ($.01 per share) in fiscal year 2009. Major factors
contributing to the improvement in fiscal year 2010 were higher sales and gross
profits, together with the reduction in SG&A, R&D and interest expenses as
discussed above.
Liquidity and Capital Resources
We have financed operations through available cash reserves and borrowings
under a line of credit with a bank. Working capital was $4,923,533 as of June
30, 2010, inclusive of the current portion of long-term obligations and credit
facilities, compared to working capital of $4,217,187 as of June 30, 2009.
During fiscal 2010, we generated $2,885,375 in cash from operating activities,
an increase of $1,410,963 from fiscal 2009. The increase in cash provided by
operating activities was mainly related to the following factors:
o The increase in net income due to the factors discussed above
o A reduction in the net deferred income tax asset that was
approximately $654,000 greater in fiscal 2010 than the
decrease in fiscal 2009, mainly due to the carry back of net
operating losses that resulted in an income tax refund of
approximately $500,000
o A decrease in accounts receivable that was approximately
$597,000 greater in fiscal 2010 than the accounts receivable
decrease in fiscal 2009
o A decrease in inventory that was approximately $227,000
greater in fiscal 2010 than the inventory decrease in fiscal
2009.
These items were offset partially by a decrease in accounts payable and
accrued expenses of approximately $380,000 compared to an increase in accounts
payable and accrued expenses of approximately $314,000.
Cash used in investing activities was $373,431 in fiscal 2010 compared to
$68,624 in fiscal 2009. The increase is due to an increase in capital
expenditures in fiscal 2010.
Cash used in financing activities was $2,269,902 in fiscal 2010 compared
to $1,552,555 in fiscal 2009. The improvement in cash used in financing
activities in 2010 is due to a significant reduction in borrowings under the
line of credit during fiscal 2010. During the year ended June 30, 21010, we were
able to reduce the outstanding line of credit balance by $1,834,159.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
decreased $1,004,476, or 21.2%, to $3,735,251 as of June 30, 2010, compared to
$4,739,727 as of June 30, 2009. For the past two years, management has placed
special emphasis on collecting receivables more timely. The reduction in trade
accounts receivable in 2010 is indicative of the success of this effort. Trade
accounts receivable represent amounts due from our dealer network as well as
from medical practitioners and clinics. We believe that our estimate of the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the agreed terms.
15
Inventories
Inventories, net of reserves, decreased $432,451 or 7.0%, to $5,766,800 as
of June 30, 2010, compared to $6,199,251 as of June 30, 2009. As expected,
inventories decreased following consolidation of eight distribution points to
three central distribution facilities following the completion of the
acquisitions in fiscal year 2008. In addition, the amount of inventory we carry
fluctuates each period based on the timing of large inventory purchases from
overseas suppliers.
Accounts Payable
Accounts payable decreased $391,498, or 21.8%, to $1,404,022 as of June
30, 2010, from $1,795,520 as of June 30, 2009. The decrease in accounts payable
is a result of the timing of our weekly payments to suppliers and the timing of
purchases of product components. Accounts payable are generally not aged beyond
the terms of our suppliers. We take advantage of available early payment
discounts when offered by our vendors.
Cash and Cash Equivalents
Our cash position as of June 30, 2010 was $383,756, an increase of 171%,
or $242,042, from cash of $141,714 as of June 30, 2009. We expect that cash
flows from operating activities, together with amounts available through an
existing line of credit facility, will be sufficient to cover operating needs in
the ordinary course of business for the next twelve months. If we experience an
adverse operating environment, including a further worsening of the general
economy in the United States, or unusual capital expenditure requirements,
additional financing may be required. However, no assurance can be given that
additional financing, if required, would be available on terms favorable to us,
or at all.
Line of Credit
During fiscal year 2010, we paid down the outstanding balance on our line
of credit with a bank by $1,834,159, leaving a remaining balance outstanding of
$2,768,492 as of June 30, 2010, compared to $4,602,651 as of June 30, 2009. The
current balance on the line of credit is the lowest it has been since the
acquisition of six dealers in June and July 2007 and down approximately
$3,430,000 from the line at its highest point in fiscal year 2009. The decrease
in the line of credit was primarily the result of improved collections of
accounts receivable, lower inventory levels, profits generated during fiscal
year 2010 and cash flows from operating activities. In addition, we filed for
and received a tax refund of approximately $500,000 by carrying back net
operating losses against prior year taxes paid as permitted by the Worker,
Homeownership, and Business Assistance Act, PL 111-92.
Interest on the line of credit is based on the 90-day LIBOR rate (0.53% as
of June 30, 2010) plus 4%. The line of credit is collateralized by accounts
receivable and inventories, as well as a security interest in our headquarters
facility in Salt Lake City, Utah. Borrowing limitations are based on
approximately 45% of eligible inventory and up to 80% of eligible accounts
receivable, up to a maximum credit facility of $7,000,000. Interest payments on
the line are due monthly. As of June 30, 2010, the borrowing base was
approximately $5,500,000, resulting in approximately $2,700,000 available on the
line. The line of credit is renewable on December 15, 2010 and includes
covenants requiring us to maintain certain financial ratios. As of June 30,
2010, we were in compliance with the loan covenants.
The current ratio was 1.9 to 1 as of June 30, 2010 compared to 1.5 to 1 as
of June 30, 2009. Current assets represented 70% of total assets as of June 30,
2010 and 2009.
Debt
Long-term debt excluding current installments totaled $2,604,772 as of
June 30, 2010, compared to $2,881,659 as of June 30, 2009. Long-term debt is
comprised primarily of the mortgage loans on our office and manufacturing
facilities in Utah and Tennessee. The principal balance on the mortgage loans is
approximately $2,716,500 with monthly principal and interest payments of
$37,323. For a more complete explanation of the long-term debt, see Note 7 in
the financial statements.
16
Inflation and Seasonality
Our revenues and net income from continuing operations have not been
unusually affected by inflation or price increases for raw materials and parts
from vendors.
Our business operations are not materially affected by seasonality
factors.
Recent Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued Accounting Standards Update No. 2009-13
(FASB ASU 09-13), Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force). FASB ASU
09-13 updates the existing multiple-element arrangement guidance currently in
FASB Topic 605-25 (Revenue Recognition - Multiple-Element Arrangements). This
new guidance eliminates the requirement that all undelivered elements have
objective evidence of fair value before a company can recognize the portion of
the overall arrangement fee that is attributable to the items that have already
been delivered. Further, companies will be required to allocate revenue in
arrangements involving multiple deliverables based on the estimated selling
price of each deliverable, even though such deliverables are not sold separately
by either the company itself or other vendors. This new guidance also
significantly expands the disclosures required for multiple-element revenue
arrangements. The revised guidance will be effective for the first annual period
beginning on or after June 15, 2010. The Company may elect to adopt the
provisions prospectively to new or materially modified arrangements beginning on
the effective date or retrospectively for all periods presented. The Company
does not expect FASB ASU 09-13 to have a significant impact on its consolidated
financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14
(FASB ASU 09-14), Certain Revenue Arrangements That Include Software Elements--a
consensus of the FASB Emerging Issues Task Force, that reduces the types of
transactions that fall within the current scope of software revenue recognition
guidance. Existing software revenue recognition guidance requires that its
provisions be applied to an entire arrangement when the sale of any products or
services containing or utilizing software when the software is considered more
than incidental to the product or service. As a result of the amendments
included in FASB ASU No. 2009-14, many tangible products and services that rely
on software will be accounted for under the multiple-element arrangements
revenue recognition guidance rather than under the software revenue recognition
guidance. Under this new guidance, the following components would be excluded
from the scope of software revenue recognition guidance: the tangible element of
the product, software products bundled with tangible products where the software
components and non-software components function together to deliver the
product's essential functionality, and undelivered components that relate to
software that is essential to the tangible product's functionality. FASB ASU
09-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). This guidance will be effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company may elect to adopt the
provisions prospectively to new or materially modified arrangements beginning on
the effective date or retrospectively for all periods presented. However, the
Company must elect the same transition method for this guidance as that chosen
for FASB ASU No. 2009-13. The Company does not expect FASB ASU 09-14 to have a
significant impact on its consolidated financial statements.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires estimates and judgments that
affect the reported amounts of our assets, liabilities, net sales and expenses.
Management bases estimates on historical experience and other assumptions it
believes to be reasonable given the circumstances and evaluates these estimates
on an ongoing basis. Actual results may differ from these estimates under
different assumptions or conditions.
We believe that the following critical accounting policies involve a
higher degree of judgment and complexity. See Note 1 to our consolidated
financial statements for the fiscal year ended June 30, 2010 for a complete
discussion of our significant accounting policies. The following reflect the
significant estimates and judgments used in the preparation of our consolidated
financial statements.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory
on hand at all times to meet the requirements of our customers. We record
finished goods inventory at the lower of standard cost, which approximates
actual costs (first-in, first-out) or market. Raw materials are recorded at the
lower of cost (first-in, first-out) or market. Inventory valuation reserves are
maintained for the estimated impairment of the inventory. Impairment may be a
result of slow-moving or excess inventory, product obsolescence or changes in
the valuation of the inventory. In determining the adequacy of reserves, we
analyze the following, among other things:
17
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence;
o Technological innovations; and
o Character of the inventory as a distributed item, finished
manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statements of operations during
the period in which such modifications are determined necessary by management.
As of June 30, 2010 and 2009, our inventory valuation reserve balance, which
established a new cost basis, was $331,071 and $338,788, respectively, and our
inventory balance was $5,766,800 and $6,199,251, net of reserves, respectively.
Revenue Recognition
Historically, the majority of our product sales were to customers who were
independent distributors. In fiscal year 2008, as a result of acquiring six of
our top distributors, a significant portion of our sales were generated through
our new direct sales force. Our sales force and distributors sell our products
to end users, including physical therapists, professional trainers, athletic
trainers, chiropractors, medical doctors and aestheticians. With the acquisition
of the key distributors, we effectively reduced our dependence on sales by
independent distributors. Sales revenues are recorded when products are shipped
FOB shipping point under an agreement with a customer, risk of loss and title
have passed to the customer, and collection of any resulting receivable is
reasonably assured. Amounts billed for shipping and handling of products are
recorded as sales revenue. Costs for shipping and handling of products to
customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In
doing so, we analyze historical bad debt trends, customer credit worthiness,
current economic trends and changes in customer payment patterns when evaluating
the adequacy of the allowance for doubtful accounts. Our accounts receivable
balance was $3,735,251 and $4,739,727, net of allowance for doubtful accounts of
$254,664 and $398,610, as of June 30, 2010 and 2009, respectively.
Deferred Income Tax Assets
In August 2010 and August 2009, our management performed an in-depth
analysis of the deferred income tax assets and their recoverability. Based on
several factors, including our strong earnings history of pre-tax profit
averaging over $500,000 per year in 17 of the last 20 fiscal years and the fact
that the principal causes of the loss in fiscal 2008 (goodwill impairment and
expenses resulting from six acquisitions) are considered to be unusual and are
not expected to recur in the near future, we believe that it is more likely than
not that all of the net deferred income tax assets will be realized. As
previously mentioned, $501,465 of the deferred income tax assets were utilized
to carry back against profits from 2004 and 2005, reducing the deferred income
tax asset by 39%.
18
Business Plan and Outlook
During fiscal year 2010, we achieved significant improvement in our
operating results compared to the prior fiscal year. In fiscal year 2011, we
will continue to pursue a focused strategy to improve sales and overall
operations that includes the following elements:
o strengthening distribution channels by adding direct sales
representatives and dealers in key locations
o pursuing sales with large chains of clinics and national
accounts, including Group Purchasing Organizations
o using tools such as e-commerce solutions and other IT related
methodologies to reduce cost of operations and enhance the
reach of our sales efforts
o enhancing product profit margins through improved
manufacturing processes and negotiating better pricing with
all vendors
o developing and introducing new, state-of-the-art products for
future growth
o Seeking ways to leverage our distribution network to bring new
products to market.
Our goal in implementing this strategy is to improve short-term
profitability without jeopardizing long-term growth.
The landscape of our primary market, the physical medicine marketplace,
continues to change. Past years saw consolidation among manufacturers and
distributors including our own acquisitions completed in fiscal years 2007 and
2008. More recently, two additional significant changes have taken place.
According to its filings under the Securities Exchange Act of 1934, DJO, Inc.
closed its Chattanooga Group operations in the quarter ended July 3, 2010 and
redistributed those manufacturing, R&D and support functions to other DJO
facilities, in and out of the United States. Chattanooga Group has been a
primary competitor of the Company for many years. The effect of this
announcement is that the full operations of the former Chattanooga Group have
been reduced to a product brand sold by DJO through non-proprietary distribution
channels. In addition, DJO, Inc. has disclosed that on June 12, 2009 it sold its
Empi Therapy Solutions catalog division to Patterson Medical (Sammons Preston),
another competitor of the Company. This essentially eliminates Empi as a
significant catalog competitor and further reduces competition in our market.
These consolidations combined with prior year consolidations and
continuing declines in the number of independent distributors have significantly
narrowed distribution channels in our market. At the present time, we believe
that there remain only two companies with a national direct sales force selling
proprietary and distributed products: Dynatronics and Patterson Medical (through
its Sammons Preston subsidiary). All other distribution in our market is
directed through catalog companies with no direct sales force, or through
independent local dealers. However, the network of local independent dealers is
rapidly diminishing due to consolidation efforts and increased competition from
Dynatronics, Sammons Preston and catalog companies. In the past year, we have
reinforced our direct sales team to include 25 direct sales employees and 28
independent sales representatives. In addition to these direct sales
representatives, we continue to enjoy a strong relationship with scores of local
dealers. We believe we have the best trained and most knowledgeable sales force
in the industry. The recent changes within our market provide a unique
opportunity for us to grow market share in the coming years through recruitment
of high-quality sales representatives and dealers.
With the broad line of products we now offer and with a strong sales force
that we expect will grow stronger in the coming year, we believe that we are
well positioned to develop relationships with large chains of clinics and
hospitals, national accounts and Group Purchasing Organizations ("GPO's") that
purchase only on contract. This is a segment of business which was previously
closed to us because we were not an approved vendor with the various GPO's and
national or regional chains of care facilities. With the broader offering of
products now available through our catalog, we are better able to compete for
this high volume business and have seen success this past year in becoming the
preferred vendor to many national and regional accounts.
To further our efforts to recruit high-quality direct sales
representatives and dealers as well as to better appeal to the large GPO's and
national customers, we will continue to improve efficiencies of our operations
and the sales support for the industry. Chief among those changes was the
introduction of our first true e-commerce solution on July 6, 2010. With the
introduction of this e-commerce solution, customers are able to more easily
place orders and obtain information about their accounts. Sales representatives
are increasing their effectiveness with the abundance of information available
to them electronically through our e-quote system which is a companion to the
e-commerce solution introduced. Not only is our e-commerce solution improving
sales, but it should also permit us to reduce our transactional costs thus
enabling us to accommodate higher sales without significantly increasing
overhead.
19
The recent passage of the Patient Protection and Affordable Care Act along
with the Health Care and Educational Reconciliation Act is sure to have an
effect on our future operations. The addition of millions to the rolls of the
insured will undoubtedly increase demand for services. That increased demand is
expected to translate into increased sales of our products. The magnitude of
those increases is difficult to assess at this time. At the same time, this
legislation will impose an excise tax on all manufacturers of medical devices
which we estimate will exceed $500,000 annually for Dynatronics based on the
current statutory language. Because the effects of this legislation will not be
felt until 2013 at the earliest, it is difficult to project the full impact this
legislation will have, especially since there is a likelihood of amendments to
the legislation prior to it becoming fully effective. In the meantime, we are
working to take full advantage of every opportunity presented by this
legislation to increase sales and to offset any negative effects that may
accompany those opportunities.
We will continue to focus on new product innovation. The introduction of
V-Force in June 2009 once again demonstrates our commitment to innovation as we
were the first to introduce this technology to the rehabilitation markets we
serve. Several new products are currently under development and are scheduled
for introduction toward the end of fiscal year 2011. The commitment to
innovation of high-quality products has been a hallmark of Dynatronics and will
continue throughout the coming year.
Economic pressures from the recent recession not only have affected
available credit that would facilitate large capital purchases, but have also
reduced demand for discretionary services such as those provided by our
aesthetic products. As a result, we trimmed back our expenses in the Synergie
division to be more reflective of the current environment. Fortunately, the
Synergie Elite aesthetic product line introduced in April 2008 continues to have
appeal due to its design and price point. We believe that our aesthetic devices
remain the best value on the market. We are seeking innovative ways to market
our products including strategic partnerships, both domestic and international,
to help regain sales momentum. As the economy begins to improve over the coming
year, we expect to see increased sales of these higher margin products.
We have long believed that international markets present an untapped
potential for growth and expansion. Adding new distributors in several countries
will be the key to this expansion effort. Our past efforts to improve
international marketing have yielded only marginal improvements. We remain
committed, however, to finding the most cost effective ways to expand our
markets internationally. Over the coming year our efforts will be focused on
partnering with key manufacturers and distributors interested in our product
line or technology. Our Utah operation, where all electrotherapy, ultrasound,
traction, light therapy and Synergie products are manufactured, is certified to
ISO 13485:2003, an internationally recognized standard of excellence in medical
device manufacturing. This designation is an important requirement in obtaining
the CE Mark certification, which allows us to market our products in the
European Union and other international locations.
Refining our business model for supporting sales representatives and
distributors also will be a focal point of operations. We will continue to
evaluate the most efficient ways to maintain our satellite sales offices and
warehouses. In addition, more emphasis is being placed on pricing management to
protect margins for both manufactured and distributed products. The ongoing
refinement of this model is expected to yield further efficiencies that will
better achieve sales goals while at the same time reduce expenses. We have
identified over $2,000,000 of efficiency improvements that have already been
implemented or that we plan to implement over the coming quarters to drive
greater profitability.
With the sale of our manufactured capital equipment being the largest
contributor to margin generation, we have placed renewed emphasis on improving
manufacturing operations, including considering more offshore manufacturing of
components as well as streamlining manufacturing operations in Utah and
Tennessee. Past experience has shown that when recessionary pressures start to
subside, the pent up demand for capital equipment can be significant. With the
recent increase in capital equipment sales, we believe we are seeing the
beginning of this positive trend. Our recent efforts to prudently reduce costs
during the difficult times have made us a leaner operation and well positioned
for a continued ramp up in demand.
Based on our defined strategic initiatives, we are focusing our resources
in the following areas:
o Reinforcing distribution through a strategy of recruiting
direct sales representatives and working closely with the most
successful distributors of capital equipment.
o Improving sales by focusing sales strategies on pursuing
business opportunities with large chains of clinics, national
and regional accounts, and Group Purchasing Organizations.
o Using our first e-commerce solution in order to facilitate
business opportunities and reduce transactional costs.
20
o Significantly improving operational efficiencies through
implementation of ideas generated by the operational analysis
conducted with the help of Vici Capital Partners. These ideas
include lowering manufacturing and transactional costs,
automating processes, redefining policies and procedures and
working to make every customer a profitable customer.
o Strengthening pricing management and procurement
methodologies.
o Minimizing expense associated with the Synergie product line
until the economy improves and demand for capital equipment
re-emerges, and, in the meantime, seeking additional
independent distributors and strategic partnerships.
o Focusing international sales efforts on identifying key
distributors and strategic partners who could represent the
Company's product line, particularly in Europe.
o Continuing development of new, state-of-the-art products, both
high-tech and commodity, in fiscal year 2011, for both the
rehabilitation and aesthetic markets.
o Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase
market reach and supplement capital resources.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements required to be filed are indexed on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness, as of June 30, 2010, of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of
this evaluation was to determine whether as of the evaluation date our
disclosure controls and procedures were effective to provide reasonable
assurance that the information we are required to disclose in our filings with
the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. Based on
their evaluation, our management has concluded, that our disclosure controls and
procedures were effective as of June 30, 2010.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Exchange
Act Rule 13a-15(f). Our internal control system was designed to provide
reasonable assurance to our management regarding the reliability of financial
reporting and the preparation of the Company's financial statements for external
purposes in accordance with U.S. GAAP. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of June 30, 2010. In conducting the
evaluation, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO, in Internal
Control-Integrated Framework (the COSO criteria). Based on our evaluation under
the COSO criteria, our management concluded that our controls over financial
reporting as of June 30, 2010 were not operating effectively due to a lack of
documentation regarding IT controls. This was not deemed to be a material
weakness and management is taking steps to provide appropriate documentation of
its IT controls to cure the deficiency.
21
This Annual Report on Form 10-K does not include an attestation report of
the Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to the rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this Annual Report on Form 10-K.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June
30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial
reporting, including ours, is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating the
controls and procedures, and the inability to completely eliminate misconduct.
Accordingly, any system of internal control over financial reporting, including
ours, no matter how well designed and operated, can only provide reasonable, not
absolute assurances. In addition, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. We intend to continue to monitor and
upgrade our internal controls as necessary or appropriate for our business, but
cannot assure you that such improvements will be sufficient to provide us with
effective internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2010.
Item 11. Executive Compensation
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2010.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2010.
22
Item 14. Principal Accounting Fees and Services
The information for this Item is incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A under the
Exchange Act, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2010.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this report:
(1) Financial statements as indexed below;
(2) Financial statement schedules required to be filed by Item 8
of this form and by paragraph (b) of Item 15, below (included
in the financial statements as required); and
(3) Those exhibits required by Item 601 of Regulation S-K, indexed
in (b), below.
(b) Exhibits required by Item 601 of Regulation S-K:
Exhibit No. Description
3.1 Articles of Incorporation and Bylaws of Dynatronics
Laser Corporation. Incorporated by reference to a
Registration Statement on Form S-1 (No. 2-85045) filed
with the Securities and Exchange Commission and
effective November 2, 1984.
3.2 Articles of Amendment dated November 21, 1988
(previously filed)
3.3 Articles of Amendment dated November 18, 1993
(previously filed)
3.4 Company Bylaws dated May 19, 1983 (previously filed)
4.1 Form of certificate representing Dynatronics Laser
Corporation common shares, no par value. Incorporated by
reference to a Registration Statement on Form S-1 (No.
2-85045) filed with the Securities and Exchange
Commission and effective November 2, 1984.
10.2 Employment contract with Kelvyn H. Cullimore, Jr. (filed
as an Exhibit to a Current Report on Form 8-K on June
16, 2009)
10.2 Employment contract with Larry K. Beardall (filed as an
Exhibit to a Current Report on Form 8-K on June 16,
2009)
10.3 Loan Agreement with Zion Bank (filed as Exhibit to June
30, 2007 Annual Report on Form 10-K)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn
Cullimore, Sr. (previously filed)
10.7 Dynatronics Corporation 2005 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive
Proxy Statement on Schedule 14A filed on October 27,
2005)
10.8 Form of Option Agreement for the 2005 Equity Incentive
Award Plan for incentive stock options (filed as Exhibit
to June 30, 2007 Annual Report on Form 10-K)
10.9 Form of Option Agreement for the 2005 Equity Incentive
Award Plan for non-qualified options (filed as Exhibit
to June 30, 2007 Annual Report on Form 10-K)
23
23.1 Consent of Tanner LLC (filed herewith)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of
principal executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of
principal accounting officer and principal financial
officer (filed herewith)
32.1 Certification under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. SECTION 1350) (filed herewith)
(c) Financial statements and financial statement schedules required by
Regulation S-X:
Report of Independent Registered Public Accounting Firm........F-1
Consolidated Balance Sheets as of June 30, 2010 and 2009.......F-2
Consolidated Statements of Income for the years ended
June 30, 2010 and 2009.........................................F-3
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 2010 and 2009..............F-4
Consolidated Statements of Cash Flows for
the years ended June 30, 2010 and 2009.........................F-5
Notes to Consolidated Financial Statements.....................F-6
24
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Dynatronics Corporation
We have audited the consolidated balance sheets of Dynatronics Corporation and
subsidiary (collectively, the Company) as of June 30, 2010 and 2009, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 audits 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 the Company's
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 2010
and 2009, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ Tanner LLC
Salt Lake City, Utah
September 22, 2010
F-1
DYNATRONICS CORPORATION
Consolidated Balance Sheets
As of June 30, 2010 and 2009
Assets 2010 2009
------------- -------------
Current assets:
Cash and cash equivalents $ 383,756 141,714
Trade accounts receivable, less
allowance for doubtful accounts of
$254,664 as of June 30, 2010 and
$398,610 as of June 30, 2009 3,735,251 4,739,727
Other receivables 70,919 99,110
Inventories, net 5,766,800 6,199,251
Prepaid expenses 262,577 333,273
Prepaid income taxes - 23,210
Current portion of deferred income
tax assets 390,510 466,783
------------- -------------
Total current assets 10,609,813 12,003,068
Property and equipment, net 3,561,271 3,349,239
Intangible asset, net 452,558 541,870
Other assets 314,790 359,171
Deferred income tax assets, net
of current portion 151,897 833,941
------------- -------------
Total assets $ 15,090,329 17,087,289
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 381,841 323,713
Line of credit 2,768,492 4,602,651
Warranty reserve 186,022 191,047
Accounts payable 1,404,022 1,795,520
Accrued expenses 462,641 446,327
Accrued payroll and benefits expense 427,326 426,623
Income tax payable 55,936 -
------------- -------------
Total current liabilities 5,686,280 7,785,881
Long-term debt, net of current portion 2,604,772 2,881,659
------------- -------------
Total liabilities 8,291,052 10,667,540
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value: Authorized
50,000,000 shares; issued 13,591,152 shares
as of June 30, 2010 and 13,675,387 shares
as of June 30, 2009 7,872,250 7,916,699
Accumulated deficit (1,072,973) (1,496,950)
------------- -------------
Total stockholders' equity 6,799,277 6,419,749
------------- -------------
Total liabilities and stockholders'
equity $ 15,090,329 17,087,289
============= =============
See accompanying notes to consolidated financial statements.
F-2
DYNATRONICS CORPORATION
Consolidated Statements of Income
For the Years Ended June 30, 2010 and 2009
2010 2009
------------- -------------
Net sales $ 32,962,392 32,406,891
Cost of sales 20,316,818 19,996,436
------------- -------------
Gross profit 12,645,574 12,410,455
Selling, general, and administrative expenses 10,641,795 10,755,712
Research and development expenses 914,932 993,338
------------- -------------
Operating income 1,088,847 661,405
------------- -------------
Other income (expense):
Interest income 9,394 7,423
Interest expense (433,429) (553,173)
Other income, net 35,233 23,605
------------- -------------
Total other income (expense) (388,802) (522,145)
------------- -------------
Income before income taxes 700,045 139,260
Income tax provision (276,068) (35,936)
------------- -------------
Net income $ 423,977 103,324
============= =============
Basic net income per common share $ 0.03 0.01
Diluted net income per common share $ 0.03 0.01
Weighted-average basic and diluted common
shares outstanding:
Basic 13,633,421 13,665,423
Diluted 13,647,596 13,667,148
See accompanying notes to consolidated financial statements.
F-3
DYNATRONICS CORPORATION
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2010 and 2009
Total
Number Common Accumulated stockholders'
of shares stock deficit equity
------------- ------------- ------------- -------------
Balances as of
June 30, 2008 13,670,807 $ 7,865,913 (1,600,274) 6,265,639
Redemption of
common stock (13,600) (10,138) - (10,138)
Common stock
issued for
compensation 18,180 30,400 - 30,400
Stock based
compensation - 30,524 - 30,524
Net income - - 103,324 103,324
------------- ------------- ------------- -------------
Balances as of
June 30, 2009 13,675,387 7,916,699 (1,496,950) 6,419,749
============= ============= ============= =============
Issuance of common
stock upon
exercise
of employee
stock options 1,716 1,338 - 1,338
Redemption of
common stock (91,504) (97,378) - (97,378)
Common stock
issued for
compensation 5,553 18,600 - 18,600
Stock based
compensation - 32,991 - 32,991
Net income - - 423,977 423,977
------------- ------------- ------------- -------------
Balances as of
June 30, 2010 13,591,152 $ 7,872,250 (1,072,973) 6,799,277
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
DYNATRONICS CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2010 and 2009
2010 2009
------------- -------------
Cash flows from operating activities:
Net income $ 423,977 103,324
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of property
and equipment 285,072 363,627
Amortization of intangible asset 89,312 89,311
Gain on disposal of assets (2,730) (2,183)
Stock-based compensation expense 51,591 60,924
Change in deferred income tax asset 758,317 104,627
Provision for doubtful accounts receivable 108,000 48,000
Provision for inventory obsolescence 120,000 72,000
Deferred compensation - (455,377)
Change in operating assets and liabilities:
Receivables 924,667 327,885
Inventories 312,451 85,619
Prepaid expenses and other assets 115,077 286,775
Accounts payable and accrued expenses (379,506) 314,447
Prepaid income taxes - 97,269
Income tax payable 79,147 (21,836)
------------- -------------
Net cash provided by operating
activities 2,885,375 1,474,412
------------- -------------
Cash flows from investing activities:
Capital expenditures (376,161) (71,224)
Proceeds from sale of property and equipment 2,730 2,600
------------- -------------
Net cash used in investing activities (373,431) (68,624)
------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt (339,703) (326,748)
Net change in line of credit (1,834,159) (1,215,669)
Proceeds from issuance of common stock 1,338 -
Redemption of common stock (97,378) (10,138)
------------- -------------
Net cash used in financing activities (2,269,902) (1,552,555)
------------- -------------
Net change in cash and cash equivalents 242,042 (146,767)
Cash and cash equivalents at beginning of period 141,714 288,481
------------- -------------
Cash and cash equivalents at end of period $ 383,756 141,714
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 442,614 562,457
Cash paid for income taxes 100 36,828
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease and note payable obligations
incurred to acquire property and equipment 120,943 171,591
See accompanying notes to consolidated financial statements.
F-5
DYNATRONICS CORPORATION
Notes to Consolidated Financial Statements
June 30, 2010 and 2009
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Description of Business
Dynatronics Corporation (the Company), a Utah corporation,
manufactures, markets, distributes and sells a broad line of
therapeutic, diagnostic, and rehabilitation equipment, medical
supplies and soft goods, treatment tables and aesthetic medical
devices to an expanding market of physical therapists, podiatrists,
orthopedists, chiropractors, plastic surgeons, dermatologists, and
other medical professionals.
(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. All significant
intercompany account balances and transactions have been eliminated
in consolidation.
(c) Accounting Standards Codification
The Financial Accounting Standards Board (FASB) has issued the FASB
Accounting Standards Codification (ASC) that became the single
official source of authoritative U.S. generally accepted accounting
principles (GAAP), other than guidance issued by the Securities and
Exchange Commission (SEC), superseding existing FASB, American
Institute of Certified Public Accountants, Emerging Issues Task
Force and related literature. All other literature is considered
non-authoritative. The ASC does not change GAAP; it introduces a new
structure that is organized in an accessible online research system.
The ASC became effective for the Company on July 1, 2009.
(d) 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.
(e) Inventories
Finished goods inventories are stated at the lower of standard cost
(first-in, first-out method), which approximates actual cost, or
market. Raw materials are stated at the lower of cost (first-in,
first-out) or market.
(f) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest although a finance charge may be applied to such
receivables that are past the due date. The allowance for doubtful
accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable. The
Company determines the allowance based on a combination of
statistical analysis, historical collections, customers' current
creditworthiness, age of the receivable balance both individually
and in the aggregate and general economic conditions that may affect
the customer's ability to pay. All account balances are reviewed on
an individual basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. Recoveries of
receivables previously charged off are recognized when payment is
received. The Company does not have any off-balance-sheet credit
exposure related to its customers.
F-6
(g) Property and Equipment
Property and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of related
assets. The building and its component parts are being depreciated
over their estimated useful lives that range from 5 to 31.5 years.
Estimated lives for all other depreciable assets range from 3 to 7
years.
(h) Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the
difference between the carrying amount of the asset and the fair
value of the asset. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
(i) Intangible Assets
Costs associated with the acquisition of trademarks, trade names,
license rights and non-compete agreements are capitalized and
amortized using the straight-line method over periods ranging from 3
months to 15 years.
(j) Revenue Recognition
The Company recognizes revenue when products are shipped FOB
shipping point under an agreement with a customer, risk of loss and
title have passed to the customer, and collection of any resulting
receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for
shipping and handling of products to customers are recorded as cost
of sales.
(k) Research and Development Costs
Direct research and development costs are expensed as incurred.
(l) Product Warranty Reserve
Costs estimated to be incurred in connection with the Company's
product warranty programs are charged to expense as products are
sold based on historical warranty rates.
(m) Earnings per Common Share
Basic earnings per common share represents the amount of earnings
for the period available to each weighted average share of common
stock outstanding during the reporting period. Diluted earnings per
common share is the amount of earnings for the period available to
each weighted average share of common stock outstanding during the
reporting period and to each weighted average share that would have
been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period,
using the treasury stock method.
F-7
The reconciliation between the basic and diluted weighted-average
number of common shares for the years ended June 30, 2010 and 2009
is summarized as follows:
2010 2009
------------- -------------
Basic weighted-average number of
common shares outstanding during
the year 13,633,421 13,665,423
Weighted-average number of dilutive
common stock options outstanding
during the year 14,175 1,725
------------- -------------
Diluted weighted-average number of
common and common equivalent shares
outstanding during the year 13,647,596 13,667,148
============= =============
Outstanding options not included in the computation of diluted net
income per share totaled 905,370 and 1,033,368 as of June 30, 2010
and 2009, respectively. These common stock equivalents were not
included in the computation because to do so would have been
antidilutive.
(n) Income Taxes
The Company recognizes an asset or liability for the deferred income
tax consequences of all temporary differences between the tax bases
of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or
deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled. Accruals for
uncertain tax positions are provided for in accordance with the
requirements of FASB ASC 740-10. Under ASC 740-10, the Company may
recognize the tax benefits from an uncertain tax position only if it
is more-likely-than-not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. ASC 740-10 also provides guidance
on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with
tax positions, and income tax disclosures. Judgment is required in
assessing the future tax consequences of events that have been
recognized in the financial statements or tax returns. Variations in
the actual outcome of these future tax consequences could materially
impact the Company's financial position, results of operations and
cash flows.
(o) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
FASB ASC 718, Stock Compensation. Under the fair value recognition
provision of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and
is recognized as expense over the applicable vesting period of the
stock award (generally five years) using the straight-line method.
The Company recognized $51,591 and $60,924 in stock-based
compensation for the years ended June 30, 2010 and 2009,
respectively, as selling, general, and administrative expenses in
the consolidated statements of income. The stock-based compensation
includes amounts for both restricted stock and stock options under
ASC 718.
F-8
(p) Concentration of Risk
In the normal course of business, the Company provides unsecured
credit terms to its customers. Most of the Company's customers are
involved in the medical industry. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range of
management's expectations. The Company maintains its cash in bank
deposit accounts which at times may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit risks
on cash or cash equivalents.
(q) Operating Segments
The Company operates in one line of business: the development,
marketing, and distribution of a broad line of medical products for
the physical therapy and aesthetics markets. As such, the Company
has only one reportable operating segment.
The Company groups its sales into physical medicine products and
aesthetic products. Physical medicine products made up 92% and 91%
of net sales for the years ended June 30, 2010 and 2009,
respectively. Aesthetics products made up 1% and 3% of net sales for
the years ended June 30, 2010 and 2009, respectively. Chargeable
repairs, billable freight and other miscellaneous revenue account
for the remaining 7% and 6% of total revenues for the years ended
June 30, 2010 and 2009, respectively.
(r) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
GAAP. Significant items subject to such estimates and assumptions
include the carrying amount of property and equipment; valuation
allowances for receivables, income taxes, and inventories; accrued
product warranty reserve; and estimated recoverability of intangible
assets. Actual results could differ from those estimates.
(s) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for
the years ended June 30, 2010 and 2009 was approximately $175,700
and $288,100, respectively.
(t) Reclassification
Certain items in the prior year have been reclassified to conform to
the current year's presentation.
(2) Inventories
Inventories consist of the following as of June 30:
2010 2009
------------- -------------
Raw materials $ 2,256,197 2,523,375
Finished goods 3,841,674 4,014,664
Inventory reserve (331,071) (338,788)
------------- -------------
$ 5,766,800 6,199,251
============= =============
F-9
(3) Property and Equipment
Property and equipment consist of the following as of June 30:
2010 2009
------------- -------------
Land $ 354,743 354,743
Buildings 3,704,445 3,691,364
Machinery and equipment 1,509,354 1,731,556
Office equipment 1,569,377 1,327,379
Vehicles 266,521 247,892
------------- -------------
7,404,440 7,352,934
Less accumulated depreciation
and amortization (3,843,169) (4,003,695)
------------- -------------
$ 3,561,271 3,349,239
============= =============
(4) Other Intangible Assets
Identifiable intangibles assets and their useful lives consist of the
following as of June 30:
2010 2009
------------- -------------
Trade name - 15 years $ 339,400 339,400
Domain name - 15 years 5,400 5,400
Non-compete covenant - 4 years 149,400 149,400
Customer relationships - 7 years 120,000 120,000
Trademark licensing agreement - 20 years 45,000 45,000
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 38,100
License agreement - 10 years 73,240 73,240
------------- -------------
Total identifiable intangibles 773,240 773,240
Less accumulated amortization (320,682) (231,370)
------------- -------------
Net carrying amount $ 452,558 541,870
============= =============
Amortization expense associated with the intangible assets was $89,312 and
$89,311 for fiscal years 2010 and 2009, respectively. Estimated
amortization expense for the identifiable intangibles is expected to be as
follows: 2011, $83,207; 2012, $44,637; 2013, $44,637; 2014, $44,637; 2015,
$30,680 and thereafter $204,760.
(5) Product Warranty Reserve
A reconciliation of the change in the product warranty reserve consists of
the following for the fiscal years ended June 30:
2010 2009
------------- -------------
Beginning product warranty reserve
balance $ 191,047 209,168
Warranty repairs (160,593) (241,808)
Warranties issued 243,300 251,028
Changes in estimated warranty costs (87,732) (27,341)
------------- -------------
Ending product warranty
reserve balance $ 186,022 191,047
============= =============
F-10
(6) Line of Credit
The Company has a revolving line of credit facility with a commercial bank
in the amount of $7,000,000. Borrowing limitations are based on 45% of
eligible inventory and up to 80% of eligible accounts receivable resulting
in a borrowing limit of $5,500,000. As of June 30, 2010 and 2009, the
outstanding balance was approximately $2,770,000 and $4,600,000,
respectively. Available borrowings as of June 30, 2010 were $2,730,000.
The line of credit is collateralized by inventory and accounts receivable
and bears interest at a rate based on the bank's prime rate. The interest
rate was 4.5% and 5.1% as of June 30, 2010 and 2009, respectively. This
line is subject to annual renewal and matures on December 15, 2010.
Accrued interest is payable monthly.
The Company's revolving line of credit agreement includes covenants
requiring the Company to maintain certain financial ratios. As of June 30,
2010, management believes the Company was in compliance with its loan
covenants.
(7) Long-Term Debt
Long-term debt consists of the following as of June 30:
2010 2009
------------- -------------
5.649% promissory note secured by
building, maturing December
2017, payable in monthly
installments beginning at $16,985 $ 1,241,537 1,353,048
6.44% promissory note secured by
trust deed on real property,
maturing January 2021, payable
in monthly installments of
$13,278 1,220,345 1,298,338
6.21% promissory note secured by a
trust deed on real property,
maturing November 2013, payable
in decreasing installments
currently at $7,373 254,601 321,257
8.49% promissory note secured by
fixed assets, payable in
monthly installments of $2,097
through December 2014 93,865 -
14.305% promissory note secured by
fixed assets, payable in
monthly installments of $2,338
through May 2014 83,741 98,633
5% promissory note unsecured,
payable in monthly installments
of $3,660 through March 2011 32,141 73,802
7.95% promissory note secured by
fixed assets, payable in
monthly installments of $724
through July 2013 23,684 29,472
5.75% promissory note secured by
fixed assets, payable in
monthly installments of $435
through October 2013 15.779 -
10.15% promissory note secured
by fixed assets, payable in
monthly installments of $448
through December 2012 11,835 15,793
16.35% promissory note secured
by fixed assets, payable in
monthly installments of $409
through October 2011 5,838 9,458
9.69% promissory note secured
by fixed assets, payable in
monthly installments of $318
through October 2011 3,247 5,571
------------- -------------
Total long-term debt 2,986,613 3,205,372
Less current installments 381,841 323,713
------------- -------------
Long-term debt, net of current installments $ 2,604,772 2,881,659
============= =============
F-11
The aggregate maturities of long-term debt for each of the years
subsequent to 2010 are as follows: 2011, $381,841; 2012, $368,765; 2013,
$387,622; 2014, $338,552: 2015, $290,882 and thereafter $1,218,951.
(8) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Lease expense for the years ended June 30, 2010 and 2009, was
$15,898 and $22,970, respectively. Future minimum lease payments required
under noncancelable operating leases that have initial or remaining lease
terms in excess of one year as of 2010 are as follows: 2011, $15,231;
2012, $7,809 and 2013, $6,507.
The Company rents office, warehouse, storage space and office equipment
under agreements which run one year or less in duration. The rent expense
for the years ended June 30, 2010 and 2009 was $269,741 and $263,917,
respectively. Future minimum rental payments required under operating
leases that have one year or less as of 2010 are as follows: 2011,
$270,300.
The office and warehouse spaces in Girard, Ohio; Detroit, Michigan;
Pleasanton, California; and Hopkins, Minnesota are leased on an annual
basis from employees/stockholders; or entities controlled by stockholders,
who were previously principals of the dealers acquired in June and July,
2007. The leases are related-party transactions with four
employee/stockholders, however the lease agreements have been conducted on
an arms-length basis and the terms are similar to those that would be
available to other third parties.
(9) Income Taxes
Income tax provision (benefit) for the years ended June 30 consists of:
Current Deferred Total
------------- ------------- -------------
2010:
U.S. federal $ 54,131 189,511 243,642
State and local 19,471 12,955 32,426
------------- ------------- -------------
$ 73,602 202,466 276,068
============= ============= =============
2009:
U.S. federal $ (33,167) 89,508 56,341
State and local (35,524) 15,119 (20,405)
------------- ------------- -------------
$ (68,691) 104,627 35,936
============= ============= =============
Actual income tax provision (benefit) differs from the "expected" tax
provision (benefit) computed by applying the U.S. federal corporate income
tax rate of 34% to income before income taxes, as follows:
2010 2009
------------- -------------
Expected tax provision (benefit) $ 235,975 62,988
State taxes, net of federal tax benefit 19,621 17,427
Officers' life insurance - 34,678
Other, net 20,472 (79,157)
------------- -------------
$ 276,068 35,936
============= =============
F-12
Deferred income tax assets and liabilities related to the tax effects of
temporary differences are as follow as of June 30:
2010 2009
------------- -------------
Net deferred income tax asset - current:
Inventory capitalization for income
tax purposes $ 69,530 84,117
Inventory reserve 129,118 132,127
Warranty reserve 72,548 74,508
Accrued product liability 19,995 20,572
Allowance for doubtful accounts 99,319 155,459
------------- -------------
Total deferred income tax asset -
current $ 390,510 466,783
============= =============
Net deferred income tax asset
(liability) - non-current:
Property and equipment, principally
due to differences in depreciation $ (249,212) (222,550)
Research and development credit
carryover 185,320 89,538
Other intangibles (176,023) (207,998)
Other 36,452 64,499
Operating loss carry forwards 355,360 1,110,452
------------- -------------
Total deferred income tax asset -
non-current $ 151,897 833,941
============= =============
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred income tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods which the deferred income tax assets are deductible,
management believes it is more likely than not that the Company will
realize the benefits of these deductible differences.
The change in the net deferred income tax asset for net operating loss
carry forwards was the result of the amendment to the carry back rules as
permitted by the Worker, Homeownership, and Business Assistance Act, PL
111-92 which allowed the Company to utilize the NOL against taxable income
in fiscal years 2004 and 2005 resulting in a refund of over $500,000 and
the utilization of approximately $465,000 of NOL for the fiscal year ended
June 30, 2010.
(10) Major Customers and Sales by Geographic Location
During the fiscal years ended June 30, 2010 and 2009, sales to any single
customer did not exceed 10% of total net sales.
The Company exports products to approximately 30 different countries.
Sales outside North America totaled approximately $533,000, or 1.6% of net
sales, for the fiscal year ended June 30, 2010 compared to approximately
$765,000, or 2.3% of net sales, for the fiscal year ended June 30, 2009.
(11) Common Stock and Common Stock Equivalents
On July 15, 2003, the Company approved an open-market share repurchase
program for up to $500,000 of the Company's common stock. On November 27,
2007, the board approved an additional $250,000 for the open-market share
repurchase program after the original $500,000 was exhausted. During the
year ended June 30, 2010, the Company acquired and retired 91,504 shares
of common stock for $97,378. During the year ended June 30, 2009, the
Company acquired and retired 13,600 shares of common stock for $10,138.
F-13
During the years ended June 30, 2010 and 2009, the Company granted 5,553
and 18,180 shares of restricted common stock to directors in connection
with compensation arrangements, respectively.
The Company maintains a 2005 equity incentive plan for the benefit of
employees. Incentive and nonqualified stock options, restricted common
stock, stock appreciation rights, and other share-based awards may be
granted under the plan. Awards granted under the plan may be
performance-based. Effective November 27, 2007, the plan was amended, as
approved by the stockholders, to increase the number of shares available
by 1,000,000 shares. As of June 30, 2010, 1,038,411 shares of common stock
were authorized and reserved for issuance, but were not granted under the
terms of the 2005 equity incentive plan as amended.
The Company granted options to acquire common stock under its 2005 equity
incentive plan for fiscal 2010 and 2009. 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 of directors, and exercise dates
may range from 6 months to 10 years from the date of grant.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2010 2009
------------- -------------
Expected dividend yield 0% 0%
Expected stock price volatility 58-61% 56-60%
Risk-free interest rate 3.31 - 3.72% 2.59 - 4.14%
Expected life of options 10 years 10 years
The weighted average fair value of options granted during 2010 and 2009
was $.57 and $.39, respectively.
The following table summarizes the Company's stock option activity during
the years ended June 30, 2010 and 2009:
2010 2009
----------------------------- -------------------------------
Weighted
Weighted average Weighted
Number average remaining Number average
of exercise contractual of exercise
shares price term shares price
------------- ------------- ------------- ------------- ---------------
Options outstanding at
beginning of year 960,104 $ 1.39 5.86 years 1,101,603 $ 1.41
Options granted 89,336 .80 79,455 .50
Options exercised (1,716) .78 - -0-
Options canceled or expired (114,919) 1.23 (220,954) 1.16
------------- -------------
Options outstanding at end
of year 932,805 1.35 4.84 years 960,104 1.39
============= =============
Options exercisable at end
of year 545,464 1.66 581,193 1.65
============= =============
Range of exercise prices at
end of year $ 0.35 - 3.00 $ 0.35 - 3.00
F-14
The aggregate intrinsic value on the date of exercise of options exercised
during the years ended June 30, 2010 and 2009 was $487 and $0,
respectively. The aggregate intrinsic value of the outstanding options as
of June 30, 2010 and 2009 was $5,413 and $6,071, respectively.
(12) Employee Benefit Plan
The Company has a deferred savings plan which qualifies under Internal
Revenue Code Section 401(k). The plan covers all employees of the Company
who have at least six months of service and who are age 20 or older. For
fiscal 2010 and fiscal 2009, the Company made matching contributions of
25% of the first $2,000 of each employee's contribution. The Company's
contributions to the plan for 2010 and 2009 were $33,511 and $29,456,
respectively. Company matching contributions for future years are at the
discretion of the board of directors.
(13) Salary Continuation Agreements
Effective March 5, 2009, Kelvyn H. Cullimore, Jr. and Larry Beardall
(officers of the Company) legally canceled their Company-funded retirement
programs which were funded through life insurance polices owned by the
Company. As a result, $367,917 in cash value from the life insurance
policies was paid to the Company and the contractual liability to pay the
retirement benefits was terminated. This termination reduced selling,
general and administrative expense during the fiscal ended June 30, 2009,
by $472,397.
(14) Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued Accounting Standards Update No. 2009-13
(FASB ASU 09-13), Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force).
FASB ASU 09-13 updates the existing multiple-element arrangement guidance
currently in FASB Topic 605-25 (Revenue Recognition - Multiple-Element
Arrangements). This new guidance eliminates the requirement that all
undelivered elements have objective evidence of fair value before a
company can recognize the portion of the overall arrangement fee that is
attributable to the items that have already been delivered. Further,
companies will be required to allocate revenue in arrangements involving
multiple deliverables based on the estimated selling price of each
deliverable, even though such deliverables are not sold separately by
either the Company itself or other vendors. This new guidance also
significantly expands the disclosures required for multiple-element
revenue arrangements. The revised guidance will be effective for the first
annual period beginning on or after June 15, 2010. The Company may elect
to adopt the provisions prospectively to new or materially modified
arrangements beginning on the effective date or retrospectively for all
periods presented. The Company does not expect FASB ASU 09-13 to have a
significant impact on its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14
(FASB ASU 09-14), Certain Revenue Arrangements That Include Software
Elements--a consensus of the FASB Emerging Issues Task Force, that reduces
the types of transactions that fall within the current scope of software
revenue recognition guidance. Existing software revenue recognition
guidance requires that its provisions be applied to an entire arrangement
when the sale of any products or services containing or utilizing software
when the software is considered more than incidental to the product or
service. As a result of the amendments included in FASB ASU No. 2009-14,
many tangible products and services that rely on software will be
accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance.
Under this new guidance, the following components would be excluded from
the scope of software revenue recognition guidance: the tangible element
of the product, software products bundled with tangible products where the
software components and non-software components function together to
deliver the product's essential functionality, and undelivered components
F-15
that relate to software that is essential to the tangible product's
functionality. FASB ASU 09-14 also provides guidance on how to allocate
transaction consideration when an arrangement contains both deliverables
within the scope of software revenue guidance (software deliverables) and
deliverables not within the scope of that guidance (non-software
deliverables). This guidance will be effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The Company may elect to adopt the provisions prospectively
to new or materially modified arrangements beginning on the effective date
or retrospectively for all periods presented. However, the Company must
elect the same transition method for this guidance as that chosen for FASB
ASU No. 2009-13. The Company does not expect FASB ASU 09-14 to have a
significant impact on its consolidated financial statements.
F-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNATRONICS CORPORATION
By /s/ Kelvyn H. Cullimore, Jr.
----------------------------
Kelvyn H. Cullimore, Jr.
Chief Executive Officer and President
Date: September 22, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Kelvyn H. Cullimore, Jr. Chairman, President, CEO September 22, 2010
---------------------------- (Principal Executive
Kelvyn H. Cullimore, Jr. Officer)
/s/ Terry M. Atkinson Chief Financial Officer September 22, 2010
--------------------- (Principal Accounting Officer
Terry M. Atkinson, CPA and Principal Financial
Officer)
/s/ Larry K. Beardall Director, Executive September 22, 2010
--------------------- Vice President
Larry K. Beardall
/s/ Howard L. Edwards Director September 22, 2010
---------------------
Howard L. Edwards
/s/ Joseph H. Barton Director September 22, 2010
--------------------
Joseph H. Barton
25
--------------------------------------------------------------------------------