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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 2)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2007.
[ ] 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
(Name of small business issuer in its charter)
Utah 87-0398434
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7030 Park Centre Drive
Salt Lake City, Utah 84121-6618
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(Address of principal executive offices, Zip Code)
Issuer's telephone number (801) 568-7000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X
-----
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ x ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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The issuer's revenues for the fiscal year ended June 30, 2007 were $17,837,104.
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the issuer was approximately $17.6 million as of September 17,
2007, based on the average bid and asked price on that date.
As of September 17, 2007, there were 13.7 million shares of the issuer's common
stock outstanding.
Documents Incorporated by Reference
The issuer hereby incorporates information required by Part III (Items 9, 10, 11
and 14) of this report by reference to the issuer's definitive proxy statement
to be filed pursuant to Regulation 14A and provided to shareholders subsequent
to the filing of this report.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ------
Explanatory Note
----------------
This amendment is filed for the following reasons: (1) The report of
the independent registered public accounting firm was inadvertently omitted in
the original annual report on Form 10-KSB. Amendment No. 1, which was filed by
the Company to include the report of the independent registered public
accounting firm, did not include those exhibits and items that had been filed
with the original annual report on Form 10-KSB. This Amendment No. 2 includes a
complete set of financial statements along with the accompanying report of
independent registered public accounting firm as provided in Rule 2-02 of
Regulation S-X and Item 310 of Regulation S-B. (2) This Amendment No. 2 also
includes currently dated and signed certifications of the Company's Principal
Executive Officer and Principal Accounting and Financial Officer under Section
906 of the Sarbanes-Oxley Act of 2002 (Exhibit 32.1). The certifications filed
with the original report for the year ended June 30, 2007 inadvertently omitted
the date the certifications were signed by the responsible officers. This
amendment also includes updated and currently signed certifications in Exhibits
31.1 and 31.2. No other changes were made to the amended report on Form
10-KSB/A.
ii
TABLE OF CONTENTS
PART I
Item 1. Description of Business.........................................1
Item 2. Description of Property.........................................8
Item 3. Legal Proceedings...............................................9
Item 4. Submission of Matters to a Vote of Security Holders.............9
PART II
Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities........9
Item 6. Management's Discussion and Analysis or Plan of Operation......11
Item 7. Financial Statements..........................................F-1
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................20
Item 8A. Controls and Procedures........................................20
Item 8B. Other Information..............................................20
PART III
Item 9. Directors and Executive Officers of the Registrant.............20
Item 10. Executive Compensation.........................................20
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.....................20
Item 12. Certain Relationships and Related Transactions.................20
Item 13. Exhibits.......................................................20
Item 14. Principal Accountant Fees and Services.........................22
Signatures ...............................................................23
Certifications .............................................................24
Unless the context otherwise requires, all references in this report to "we,"
"us," "our," "Dynatronics" or the "Company" include Dynatronics Corporation, a
Utah corporation.
iii
PART I
Item 1. Description of the Business
---------------------------
When used in this report, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements within the statutory safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
All references to the financials statements herein refer to the
consolidated financial statements of Dynatronics Corporation, its affiliates and
subsidiaries.
Dynatronics was organized as a Utah corporation on April 29, 1983. The
principal business of the Company is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products.
Dynatronics currently sells approximately 4,000 physical medicine and
aesthetic products. We manufacture approximately 17% of the physical medicine
products and 15% of the aesthetic products in our product line. The remainder of
the product line is manufactured by third parties for whom Dynatronics acts as a
distributor. Physical medicine products accounted for approximately 87% of total
sales revenues in each of the last two fiscal years.
Sales of Company manufactured physical medicine products in both fiscal
years 2007 and 2006 represented approximately 76% of the Company's physical
medicine product sales with the balance each year sold by the Company as a
distributor. Sales of Company manufactured aesthetic products in fiscal years
2007 and 2006 represented approximately 96% of the Company's aesthetic product
sales each year with the balance sold by the Company as a distributor.
Recent Developments
For the past 20 years, we have distributed our products in three
primary ways: 1) through a network of independent dealers nationwide and
internationally, 2) through direct relationships with certain national accounts,
and 3) through a full-line catalog. Some of our aesthetic products are sold
through manufacturer representatives or directly to the practitioner by Company
representatives. Recently there has been significant consolidation within the
physical medicine market that is changing the dynamics of our industry. In order
to compete more effectively within the changing marketplace, we moved
aggressively to create a direct channel of distribution. On June 30, 2007, we
acquired our largest independent distributor, Rajala Therapy Sales Associates of
Pleasanton, California. Subsequent to the year ended June 30, 2007, on July 2,
2007, Dynatronics acquired five additional independent distributors: Responsive
Providers, Inc. of Houston, Texas; Therapy and Health Care Products, Inc. of
Girard, Ohio; Cyman Therapy, Inc. of Detroit, Michigan; Al Rice and Associates,
Inc. of Jeffersonville, Indiana; and Theratech, Inc. of Minneapolis, Minnesota.
The vertical integration of these distributors is a key strategic step toward
strengthening and preserving our distribution channels. We believe that these
acquisitions, as they are integrated into our business operations, will provide
Dynatronics with more effective direct distribution of our products in 20
states.
Subsequent to these acquisitions, we have added new direct sales
persons in Southern California, Louisiana, Kansas, and Oklahoma expanding our
direct sales channels to 22 states.
In August 2006, the Company began shipping the Dynatron X3, a
stand-alone infrared light therapy unit. Infrared light therapy has been used
for decades in Europe and Asia for treating pain as well as a wide variety of
soft tissue conditions. The Dynatron X3 is capable of operating two Xp infrared
light pads for treating larger areas of the body, or one infrared light therapy
probe and one Xp light pad simultaneously. The X3 device incorporates touch
screen technology for easy interface with the practitioner.
In August 2006, we also introduced the Elite LT device to the aesthetic
market. This innovative infrared light therapy unit is comparable to the
Dynatron X3 device, but is tailored specifically for the aesthetician market. It
provides on screen tutorials and specific protocols for aesthetic applications
using its interactive touch screen display.
In September 2006, the Company introduced the DX2 Decompression/Light
therapy device. Combining the pain relieving characteristics of infrared light
therapy, as offered through our new Xp Light Pad, with the traditional benefits
of decompression therapy through traction, makes our DX2 device one of the most
1
unique devices of its kind on the market. It is designed to provide
practitioners a more efficacious way to relieve pain using combination therapy.
During fiscal year 2007, the Company also introduced a new traction therapy
table, the Dynatron T4, which is used in conjunction with the DX2 Decompression
device.
In September 2006, the Company introduced a line of proprietary
iontophoresis electrodes with the brand name of "Dynatron Ion" electrodes. These
electrodes replace the line of electrodes the Company previously distributed for
other manufacturers and enjoys improved margins over the previous distributed
products.
In June 2007, the Company introduced the Dynatron X5 Oscillation
Therapy device. This unique modality combines the effectiveness of
electrotherapy with the beneficial effects of therapeutic massage for treating
pain and increasing local blood circulation. The X5 unit's gross profit margin
as a percent of sales is one of the highest of any of the therapy devices
produced by Dynatronics.
In July 2007, the new T3 treatment table was introduced to the market.
This three-section table is becoming quite popular due to its unique features
and the tremendous value it provides for practitioners. The metal frames of the
T3 tables are manufactured in Asia for optimal cost savings.
Description of Products Manufactured and/or Distributed by Dynatronics
Dynatronics manufactures and distributes a broad line of medical
equipment including therapy devices, medical supplies and soft goods, treatment
tables and rehabilitation equipment. In addition, we manufacture and distribute
a line of aesthetic equipment including aesthetic massage and microdermabrasion
devices, as well as skin care products. Our products are used primarily by
physical therapists, chiropractors, sports medicine practitioners, podiatrists,
plastic surgeons, dermatologists, aestheticians 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 four decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies for patient comfort and for success in the treatment
of pain and related physical ailments. Medium frequency alternating currents,
which are used primarily in the Company's 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 is a process of providing
therapeutic deep heat to soft tissues through the introduction of sound waves
into the body. It is one of the most common modalities used in physical therapy
today for treating pain, muscle spasms and joint contractures.
Dynatronics markets 15 devices that include electrotherapy, ultrasound
or a combination of both modalities in a single device. The Dynatron 125
ultrasound device and the Dynatron 525 electrotherapy device 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" below.) Dynatronics intends to continue
development of its electrotherapy and ultrasound technology and remain a leader
in the design, manufacture and sale of therapy devices.
Infrared Light Therapy - The Company's five Dynatron Solaris units, as
well as the Dynatron 702 and the new Dynatron X3 and DX2 devices, 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. In fiscal year 2006, the Company introduced the Dynatron
Xp light pad for treating larger areas of the body via unattended infrared light
therapy. This light pad can be powered by several of the Company's devices
including the Dynatron 702, Dynatron X3 and Dynatron DX2. The benefits of light
therapy have been documented by thousands of research studies published over the
past four decades.
Oscillation Therapy - Soft tissue oscillation therapy has been used in
Europe for over 15 years, yet 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 pain. Not only does it
reduce pain, but it decreases muscle soreness and muscle spasm while also
improving circulation.
2
Iontophoresis - Iontophoresis uses electrical current to transdermally
deliver drugs such as lidocaine for localized treatment of inflammation without
the use of needles. In fiscal year 2006, the Company developed its own
proprietary iontophoresis device - the Dynatron iBox - which is capable of
delivering two treatments simultaneously. In addition, the Company began
distribution in September 2006 of a line of proprietary iontophoresis electrodes
with the brand name of Dynatron Ion electrodes. These electrodes replace the
line of electrodes the Company previously distributed for Life-Tech and Naimco.
The following chart lists the therapy device products manufactured
and/or distributed by the Company.
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(TM) 701 Ultrasound with Infrared Light Therapy
Dynatron 702 Infrared Light Therapy
Dynatron Solaris(TM) 705 Electrotherapy with Infrared Light Therapy
Dynatron Solaris(TM) 706 Electrotherapy with Infrared Light Therapy
Dynatron Solaris(TM) 708 Combination Electrotherapy/Ultrasound with
Infrared Light Therapy
Dynatron Solaris(TM) 709 Combination Electrotherapy/Ultrasound with
Infrared Light Therapy
Dynatron Solaris(TM) 880 Accessory Infrared Light Probe
Dynatron Solaris(TM) 890 Accessory Infrared Laser Light Probe
Dynatron X3 Infrared Light Therapy
DX2 Combination Traction with Infrared Light
Therapy
Dynatron X5 Oscillation Therapy
Dynatron iBox Iontophoresis
Dynatron TX900 Traction Therapy
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Dynatron(R) is a registered trademark (#1280629) owned by Dynatronics ** "50
Series Plus" Product Line
Medical Supplies and Soft Goods - We currently manufacture over 700
medical supply and soft good products including: hot packs, cold packs, 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, exercise balls,
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,
Transcutaneous Electrical Nerve Stimulation or "TENS" devices, and traction
equipment. As a result of the acquisition of six independent distributors in
June and July, 2007, the Company significantly expanded the number of products
it now distributes to include more capital exercise equipment, massage therapy
products, chiropractic tables, and portable electrotherapy products.
3
Dynatronics markets its products through direct sales representatives,
independent dealers and through a product catalog. We continually seek to update
our line of manufactured and distributed medical supplies and soft goods.
Treatment Tables and Rehabilitation Equipment - Dynatronics
manufactures and distributes motorized and manually operated physical therapy
treatment tables, rehabilitation parallel bars, and other specialty
rehabilitation products.
Aesthetic Products
------------------
Dynatronics manufactures and markets a line of aesthetic products under
the brand name of Synergie. The Synergie Aesthetic Massage System (AMS) applies
therapeutic vacuum massage to skin and subcutaneous tissues to achieve a
temporary reduction in the appearance of cellulite as well as reducing the
circumferential body measurements of the treated areas.
The results of a Company-sponsored research study 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.
The Company also manufactures and markets the Synergie
microdermabrasion device (MDA) as a companion to the Synergie AMS device. The
Synergie MDA device gently exfoliates the upper layers of skin, exposing softer,
smoother skin. In conjunction with the Synergie MDA device, the Company offers a
unique line of skin care products under the trade name: Calisse,(TM) which are
designed to enhance the effects of the Synergie MDA treatments.
In January 2004, we introduced the Synergie LT device which provides
light therapy for aesthetic applications. Light therapy is becoming popular in
spas and health clubs for improving skin tone and appearance. Combining elements
of the AMS vacuum massage techniques with microdermabrasion and Synergie 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 the Company's revenues during
fiscal years 2007 and 2006.
Patents and Trademarks
Dynatronics holds a patent on the "Target" feature of its
electrotherapy products that will remain in effect until April 4, 2008, a patent
on the multi-frequency ultrasound technology that will remain in effect until
June 2013, and a patent on the microdermabrasion device that will remain in
effect until February 2020. In addition, we hold a patent on the STS technology
for treating chronic pain that will remain in effect until July 17, 2021 and a
patent on the combination of our aesthetic massage and microdermabrasion
technologies that will remain in effect until May 11, 2019. We also hold two
design patents on the microdermabrasion device that will remain in effect until
November 2015. Two additional patent applications pertaining to the Company's
infrared light therapy technology and combination traction/light therapy
technology have been filed with the U.S. Patent and Trademark Office and are
currently pending. One of these patents received a notice of allowance in August
2007 and will be issued during fiscal year 2008. Dynatronics owns the exclusive,
worldwide rights (under a license agreement) to a second existing patent on the
STS technology for the treatment of chronic pain.
The trademark "Dynatron" has been registered with the United States
Patent and Trademark Office. In addition, U.S. trademark registrations have been
obtained for the trademarks: "Synergie," "Synergie Peel," "Sympathetic Therapy,"
and "Dynatron Solaris," and trademark registration has been obtained or is now
pending for various other product trademarks. Company materials are also
protected under copyright laws, both in the United States and internationally.
Warranty Service
The Company warrants all products it manufactures for time periods
ranging in length from 90 days to five years from the date of sale. Warranty
service is provided from the Company's Salt Lake City, Utah and Chattanooga,
Tennessee facilities according to the service required. These warranty policies
are comparable to warranties generally available in the industry. Warranty
claims as a percentage of gross sales were not material in fiscal years 2007 and
2006.
Products distributed by Dynatronics 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 Dynatronics.
4
Customers and Markets
Dynatronics' products are sold primarily to licensed practitioners such
as physical therapists, chiropractors, podiatrists, sports medicine specialists,
medical doctors, hospitals, plastic surgeons, dermatologists and aestheticians.
As a result of the acquisition of six dealers and the appointment or hiring of
other sales representatives, Dynatronics now has 37 direct sales representatives
selling our products in 22 states. Additionally, Dynatronics works through a
network of over 275 independent dealers throughout the United States and
internationally. The dealers purchase and take title to the products, which they
then sell to the licensed practitioners mentioned above.
The Company has entered into direct sales relationships with a few
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 2007 or 2006.
Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) totaled $711,490 in
fiscal year 2007 compared to $1,040,930 in fiscal year 2006. This 32% decline in
international sales was due primarily to reduced sales of aesthetic products
internationally. The Company is working to establish effective distribution for
its products in international markets. Our Salt Lake City facility is certified
to the ISO 13485 quality standard for medical device manufacturing. Many of the
Company's 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. The Company has
no foreign manufacturing operations. However, we do purchase certain products
and components from foreign manufacturers.
Competition
Despite significant competition, Dynatronics has distinguished key
products by using the latest technology, many of which are protected by patents.
We believe that the integration of advanced technology in the design of each
product, has distinguished Dynatronics' products in a competitive market.
Dynatronics was the first company to integrate infrared light therapy as part of
a combination therapy device. The Company has applied for two patents on its
light therapy technology. In addition, by manufacturing many of the medical
supplies, soft goods and tables it sells, the Company can focus on quality
manufacturing at competitive prices. We believe these factors give Dynatronics
an edge over many competitors who are solely distributors of such products.
Furthermore, the acquisition of six key distributors in June and July 2007 and
the addition of four other sales representatives provides Dynatronics with
direct distribution of products into 22 states. We expect that this vertical
integration will improve efficiencies, while at the same time allow the Company
to exercise better control over the sale and distribution of our products.
A discussion of the competition by category follows. However, it should
be noted that by virtue of the acquisition of the six dealers in June and July,
2007, Dynatronics now is a distributor of many of these competitive products
such as Mettler, MedX, and some ReAble products as well as many manufacturers of
treatment tables, medical supplies and soft goods.
Electrotherapy/Ultrasound Competition. Competition in the clinical
market for electrotherapy and ultrasound devices comes from 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 the Company. 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 Dynatronics holds a patent. The Company's primary domestic
competitors in the sale of electrotherapy and ultrasound products include:
Reable Therapeutics (Chattanooga Group division), Rich-Mar Corporation and
Mettler Electronics.
Light Therapy. Competitors that manufacture and market light therapy
devices include: Reable Therapeutics, Erchonia, Anodyne and MedX, among others.
These competitors offer units that are not as powerful as our units. We are
aware of only one competitor, Reable Therapeutics, that offers a combination
light therapy device that includes electrotherapy and ultrasound capabilities.
5
Medical Supplies & Soft Goods. The Company competes against various
manufacturers and distributors of medical supplies and soft goods, some of which
are larger, more established and have greater resources than Dynatronics.
Excellent customer service along with providing value to customers is of key
importance in this market. While there are many specialized manufacturers in
this area such as Reable Therapeutics and Fabrication Enterprises, most
competitors are primarily distributors such as North Coast Medical, Sammons
Preston (a division of Patterson Dental), and Meyer Distributing. Dynatronics
enjoys cost advantages on the products it manufactures and distributes compared
to companies that only distribute similar products.
Iontophoresis. Competition in the iontophoresis market includes Reable
Therapeutics (EMPI and Iomed divisions), Birch Point Medical, Vyteris and
Naimco. Reable Therapeutics enjoys the largest market share. We 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 Reable Therapeutics and Birch Point. Our new
Dynatron iBox iontophoresis device is helping us expand our presence in this
market, while, at the same time, increasing profit margins on these products.
Treatment Tables. The primary competition in the treatment table market
is from domestic manufacturers including Hill Laboratories Company, Hausmann
Industries, Sammons Preston, Bailey Manufacturing, Tri-W-G, Reable Therapeutics,
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 allows for pricing advantages over
competitors.
Aesthetic Products. The Company's two primary competitors in the
therapeutic massage industry are LPG Systems, and Silhouette Tone. Other
competitors include Cynosure, Inc., Diamond Systems, Palomar Medical and
Durmafirm. The Synergie AMS device utilizes proprietary technology that has been
proven effective in a research study. In addition, we provide a comprehensive
training and certification program for aestheticians. Dynatronics' aesthetic
massage equipment is priced lower than competitor's units, providing a
significant advantage in the marketplace. Dynatronics is developing 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 MDA
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 AMS device,
the Synergie MDA is one of the most powerful 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 LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.
Information necessary to determine or reasonably estimate the market
share of Dynatronics or any competitor in any of these markets is not readily
available.
Manufacturing and Quality Assurance
Dynatronics manufactures therapy devices, soft goods and other medical
products at its facilities in Salt Lake City, Utah and Chattanooga, Tennessee.
The Company purchases some components for its manufactured products from
third-party suppliers. All parts and components purchased from these suppliers
meet specifications set by Dynatronics. 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 ("FDA") and other regulatory agencies and authorities in the
United States and abroad. In compliance with the FDA's Good Manufacturing
Practices ("GMP"), we have developed a comprehensive program for processing
customer feedback and analyzing product performance trends. By insuring prompt
processing of timely information, we are better able to respond to customer
needs and insure proper operation of the products.
The Company established the Quality First Program, a concept for total
quality management designed to involve each employee in the quality assurance
process. Under this program, employees are not only expected to inspect for
quality, but they are empowered to stop any process and make any changes
necessary to insure that quality is not compromised. An incentive program is
established to insure the continual flow of ideas and to reward those who show
extraordinary commitment to the Quality First concept. Quality First has not
only become the Company motto, but it is the standard by which all decisions are
made. We believe the Quality First Program reinforces employee pride, increases
customer satisfaction, and improves overall operations of Dynatronics.
6
Our Salt Lake facility is certified to ISO 13485 standards for medical
products. ISO 13485 is an internationally recognized standard for quality
systems and manufacturing processes adopted by over 90 countries. In addition,
the Company has qualified for the CE Mark Certification on its electrotherapy,
ultrasound, light therapy and Synergie 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.
Research and Development (R&D)
In fiscal year 2007, Dynatronics continued its aggressive R&D campaign,
developing four new products during the year including the Dynatron X3 stand
alone light therapy device, the DX2 Decompression and Light Therapy device, the
T4 treatment table and the Dynatron X5 Oscillation Therapy device. Total R&D
expenditures for 2007 were $1,492,774, compared to $1,756,281 in 2006. R&D
expenses represented approximately 8.4% and 9.0% of the revenues of the Company
in 2007 and 2006, respectively. Substantially all of the research and
development expenditures during both years were for the development of new
products, or the upgrading of existing products.
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 ("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 ("FTC") under the Federal Trade Commission Act ("FTC 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 ("510(k)" 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 the Company's 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 the Company's
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.
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. Dynatronics primarily
submits new products for clearance under section 510(k) of the Medical Device
Amendment of the FDC Act. The fee per 510(k) submission in fiscal year 2007 was
$3,066. It is anticipated that MDUFMA will be reauthorized in September 2007.
This reauthorization is expected to impose annual registration fees of
approximately $1,700 per manufacturing site, but will lower the submission fees
for 510(k) applications to approximately $1,700.
7
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 the Company's ability to successfully market
its products. Our Salt Lake City facility is inspected periodically by both the
FDA and state agencies 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 is now based in
large part on 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, the Company is 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 Congress that could
significantly change the statutory provisions governing the approval,
manufacturing, and marketing of medical devices and products like those
manufactured by Dynatronics. 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 the Company's
business and the results of its 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, 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 the Company.
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 are not material to our business. Dynatronics
does 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.
Employees
On June 30, 2007, we had a total of 144 full-time employees and 7
part-time employees, which includes 24 full time and 2 part time employees from
the Rajala acquisition, compared to 141 full-time employees and 10 part-time
employees at June 30, 2006.
Item 2. Description of Property
-----------------------
The Company's headquarters and principal place of business are located
at 7030 Park Centre Drive, Salt Lake City, Utah, 84121. The headquarters consist
of a single facility housing administrative offices and manufacturing space
totaling approximately 36,000 square feet. The Company owns the land and
building, subject to mortgages requiring a monthly payment of approximately
$27,429. The mortgages mature in 2008, 2013 and 2017. The Company also owns a
53,200 sq. ft. manufacturing facility in Ooltewah, Tennessee, and accompanying
undeveloped acreage for future expansion subject to a mortgage requiring monthly
payments of $13,278 and maturing in 2021. The Company rents or will rent office
and/or warehouse space for its newly acquired dealers in Pleasanton, California;
Houston, Texas; Detroit, Michigan; Girard, Ohio; Jeffersonville, Indiana and
Minneapolis, Minnesota. Current leases for each location are on a short-term
basis with negotiations presently underway to locate appropriate facilities in
each location.
8
We believe the manufacturing facilities described above to be adequate
and able to accommodate presently expected growth and needs of the Company for
its operations. Distribution facilities currently used by acquired targets are
being consolidated into more regional facilities to reduce overhead and
operational complexity. Those negotiations are currently underway and are
expected to be finalized during the second quarter of Fiscal Year 2008. As
Dynatronics continues to grow, additional facilities or the expansion of
existing facilities will likely be required.
The Company owns equipment used in the manufacture and assembly of its
products. The nature of this equipment is not specialized and replacements may
be readily obtained from any of a number of suppliers. The Company also owns
computer equipment and engineering and design equipment used in its research and
development programs.
Item 3. Legal Proceedings.
-----------------
There are no pending legal proceedings of a material nature to which
Dynatronics is a party or of which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report. The Company's annual meeting of shareholders will
be held in November 2007.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
------------------------------------------------------------------------
Issuer Purchases of Equity Securities.
--------------------------------------
Market Information. As of September 17, 2007, there were 13.7 million
shares of common stock of Dynatronics issued and outstanding. The common stock
of the Company 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.
Year Ended June 30,
2006 2007
---- ----
High Low High Low
---------------------------------------------
1st Quarter (July-September) $2.02 $1.55 $1.36 $1.13
2nd Quarter (October-December) $1.70 $1.32 $1.45 $1.11
3rd Quarter (January-March) $1.76 $1.36 $1.27 $1.02
4th Quarter (April-June) $1.75 $1.12 $1.22 $.97
Holders. As of September 17, 2007, the approximate number of common
stock shareholders of record was 479. 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 shareholders exceeds 2,000.
Dividends. The Company has never paid cash dividends on its 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.
Securities Authorized for Issuance Under Equity Compensation Plans
The table shows information related to our equity compensation plans as
of June 30, 2007:
9
-------------------------------- --------------- ---------------- --------------
Plan Category Number of Weighted-average Number of
securities to exercise price securities
be issued of remaining
upon outstanding available for
exercise of options, future issuance
outstanding warrants under equity
options, and rights compensation
warrants plans
and rights (excluding
securities
reflected in
column (a))
(b)
(a) (c)
-------------------------------- --------------- ---------------- --------------
Equity compensation plans
approved by security holders 1,048,192 $1.40 520,854
-------------------------------- --------------- ---------------- --------------
Equity compensation plans not
approved by security holders 60,000 $3.00 0
-------------------------------- --------------- ---------------- --------------
Total 1,108,192 520,854
-------------------------------- --------------- ---------------- --------------
Recent sales of unregistered securities; use of proceeds from
registered securities.
On June 30, 2007, the Company entered into a merger agreement with
Rajala Therapy Sales Associates, a California corporation ("Rajala"). On July 2,
2007, the Company entered into separately negotiated merger agreements with
Responsive Providers, Inc., a Texas corporation ("RPI"), Therapy and Health Care
Products, Inc., an Ohio corporation ("THCP"), Cyman Therapy Products, Inc., a
Michigan corporation ("Cyman"), Al Rice & Associates, Inc., a Indiana
corporation ("Al Rice"), and Theratech, Inc., a Minnesota corporation
("Theratech"). Pursuant to these several agreements, each of these entities was
merged with and into a wholly-owned subsidiary of the Company, Dynatronics
Distribution Company. In connection with these mergers, the Company paid cash
and issued shares of common stock to the shareholders of Rajala, RPI, THCP,
Cyman, Al Rice, and Theratech in exchange for all of the issued and outstanding
stock of the target companies. The total number of shares of common stock issued
in these transactions was 4,561,593 restricted shares of Dynatronics Corporation
common stock at an exchange price of $1.13 per share. Prior to the merger
transactions, none of Rajala, RPI, THCP, Cyman, Al Rice or Theratech was
affiliated with or related to the Company or any of its subsidiaries or
affiliates. Prior to the merger transactions, each of these entities was a
vendor or distributor of the Company's products.
In each of these transactions the securities were issued without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon exemptions from registration applicable to limited or
non-public offers and sales of securities afforded by Section 4(2) and Rule 506
of Regulation D under the Securities Act. The Company filed a Form D reporting
each such transaction with the Securities and Exchange Commission and with state
securities regulators.
Stock Options. In fiscal year 2007, Dynatronics granted 40,959 options
to employees and officers pursuant to stock option plans. The total number of
shares of common stock issuable under such options is 40,959 shares with an
average exercise price of $1.22 per share. In fiscal year 2006, Dynatronics
granted 236,374 stock options for shares of common stock at an average exercise
price of $1.49 per share.
Stock Repurchase. On September 3, 2003, the Company announced a stock
repurchase program. The Board of Directors authorized the expenditure of up to
$500,000 to purchase the Company's common stock on the open market pursuant to
regulatory restrictions governing such repurchases. During fiscal year 2004, the
Company purchased 77,400 shares for approximately $89,000. No shares were
repurchased during fiscal year 2005. During fiscal year 2006, the Company
purchased 46,393 shares for $59,449. During fiscal year 2007, the Company
purchased 208,793 shares for $244,682, leaving $106,869 of original authorized
funds for future stock repurchases. The stock repurchase program is conducted
pursuant to safe harbor regulations under Rule 10b-18 of the Exchange Act for
the repurchase by an issuer of its own shares. The following table summarizes
purchases of equity securities by the Company under the repurchase program
during the last quarter of fiscal year 2007:
10
Small Business Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total number Average Total number of Maximum number
of shares price paid shares (or (or approximate
(or units) per share units) purchased dollar value) of
purchased (or unit) as part of shares (or
publicly units) that may
announced plans yet be purchased
or programs under the plans
or programs
--------------------------------------------------------------------------------
April 1 to
April 30, 2007 5,400 $1.15 5,400 152,870
--------------------------------------------------------------------------------
May 1 to
May 31, 2007 17,329 $1.12 17,329 133,400
--------------------------------------------------------------------------------
June 1 to
June 30, 2007 24,853 $1.07 24,853 106,869
--------------------------------------------------------------------------------
Total 47,582 47,582
--------------------------------------------------------------------------------
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Overview
--------
Our principal business is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products. With the
acquisition of six key distributors in June and July 2007, we expanded the
number of products we sell from approximately 2,000 to over 4,000 physical
medicine and aesthetic products through a combination of direct sales
representatives, a network of national and international independent dealers,
direct relationships with certain national accounts, and a full-line catalog. We
manufacture approximately 17% of the physical medicine products and 15% of the
aesthetic products in our product line. The remainder of the products are
manufactured by third parties and distributed by Dynatronics.
Sales of manufactured physical medicine products in both fiscal years
2007 and 2006 represented approximately 76% of the Company's physical medicine
product sales with the balance each year sold by the Company as a distributor.
Sales of manufactured aesthetic products in fiscal years 2007 and 2006
represented approximately 96% of the Company's aesthetic product sales each year
with the balance sold by the Company as a distributor. The majority of the
Company's revenues during fiscal years 2007 and 2006 were generated from the
sale of its manufactured products because demand for these products is much
greater and because the average selling price of our manufactured products is
significantly higher than distributed products. While sales of manufactured
products is expected to grow in future years because of the acquisition of
distributors and the addition of more direct sales representatives focusing more
on our products, these distributors also represented many other lines of
products that will likely cause the source of revenues to shift more heavily
toward distributed products in the coming fiscal years.
Sales of all physical medicine products represented 87% of total
revenues in both fiscal year 2007 and fiscal year 2006; sales of aesthetic
products accounted for 7% of total revenues both years. Chargeable repairs,
billable freight revenue and other miscellaneous revenue accounted for 6% of
total revenues in both 2007 and 2006.
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are regulated by both national and local
governmental agencies in the United States and other countries, including the
FDA. In addition, the FTC regulates our advertising and other forms of product
promotion and marketing. Failure to comply with applicable FDA, FTC or other
regulatory requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, criminal prosecutions, limits on
advertising, consumer redress, divestiture of assets, and rescission of
contracts.
Selected Financial Data
-----------------------
All references to the financials statements herein refer to the
consolidated financial statements of Dynatronics Corporation, its affiliates and
subsidiaries.
11
The table below summarizes selected financial data contained in the
Company's audited financial statements for the past five fiscal years. The
audited financial statements for the fiscal years ended June 30, 2007 and 2006
are included with this report.
Selected Financial Data
Fiscal Year Ended June 30
2007 2006 2005 2004 2003
-----------------------------------------------------------------
Net Sales $ 17,837,104 $ 19,513,136 $ 20,404,368 $ 20,587,273 $ 16,896,992
Net Income
(loss) $ (85,042) $ 194,031 $ 728,816 $ 883,300 $ 24,799
Net Income
(loss) per
share
(diluted) $ (.01) $ .02 $ .08 $ .10 $ .00
Working
Capital $ 8,116,391 $ 7,390,147 $ 7,043,854 $ 6,300,582 $ 5,516,720
Total Assets $ 18,567,616 $ 14,523,655 $ 13,459,723 $ 14,272,579 $ 12,713,029
Long-term
Obligations $ 3,961,436 $ 2,637,263 $ 1,914,490 $ 2,034,854 $ 2,203,779
Fiscal Year 2007 Compared to Fiscal Year 2006
---------------------------------------------
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Audited Financial
Statements and Notes thereto appearing elsewhere in this report.
Net Sales
Total net sales for the year ended June 30, 2007 were $17,837,104,
compared to $19,513,136 during fiscal year 2006, a decrease of approximately
8.6%. Lower sales of the Company's products reflect a general softening in
demand for capital equipment and supplies broadly reported by our dealer network
together with the impact of increased competition. To combat these trends,
management is aggressively pursuing plans to position the Company to compete
more effectively within the physical medicine marketplace. One important element
of this plan is to strengthen the Company's direct distribution channel by
vertical integration of product distributors through strategic acquisitions. In
July 2007, the Company announced the acquisition of six of its key distributors,
with operations in 20 states. We believe that having a direct distribution
channel will provide improved efficiencies and better margins on each product
sold at the retail level compared to the wholesale level. The total
consideration paid for the six separately-negotiated acquisitions was
approximately $8.4 million comprised of approximately $3.3 million in cash and
4.6 million shares of common stock. The Company expects net sales in fiscal year
2008 will increase 80% over fiscal year 2007 levels as a result of the
integration of these acquisitions, based on actual historical sales of the
acquired entities, although there can be no assurance that the Company will have
that increase in sales.
In June 2007, the Company introduced an important new product, the
Dynatron X5 Oscillation Therapy device, which combines the benefits of
electrotherapy with the effectiveness of therapeutic massage. Practitioners are
finding this new product attractive from a reimbursement perspective while, at
the same time, providing excellent therapeutic benefit for their patients.
Strong sales of the Dynatron X5 gave a boost to net income for the fourth
quarter ended June 30, 2007, contributing to an increased net profit of $214,943
compared to $39,101 generated in the same quarter in the prior year.
Gross Profit
During fiscal year 2007, gross profit was $6,911,788 or 38.7% of net
sales compared to $7,291,761 or 37.4% of net sales in 2006. The decrease in
overall gross margin in 2007 reflects the reduction in overall sales. The
increase in gross margin as a percent of sales reflects sales of the new
high-margin Dynatron X5 Oscillation Therapy device, which is one of our highest
gross margin percentage products. In addition, the Company achieved higher
margins on certain manufactured rehabilitation supply products and treatment
tables, which helped improve margins as a percent of sales.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the year ended
June 30, 2007 were $5,541,860 or 31.1% of net sales compared to $5,239,462 or
26.9% of net sales in 2006, an increase of $302,398 or 5.8% compared to 2006.
The primary components of this increase in expense were:
12
o Approximately $248,000 in higher labor and labor-related costs
such as health insurance premiums; and
o Approximately $42,000 in higher selling expenses.
Research and Development
In fiscal year 2007, we continued to invest heavily in R&D in order to
develop new products. We spent $1,492,774 developing new, state-of-the-art
equipment during the year. This compares to $1,756,281 spent in fiscal year
2006. Among the new products developed during the year was the Dynatron X3 stand
alone light therapy device, the DX2 Decompression and Light Therapy device and
the Dynatron X5 Oscillation Therapy device. We also spent time and costs
developing the T4 and T3 motorized therapy tables which were introduced in March
and July 2007, respectively. Dynatronics intends to continue its commitment to
developing innovative products for the physical medicine market in fiscal year
2008 and beyond in order to position the Company for growth. R&D expenses
represented approximately 8.4% and 9.0% of the net sales of the Company in the
2007 and 2006, respectively. R&D costs are expensed as incurred. We anticipate
that R&D expenses in fiscal year 2008 will be approximately the same or lower
than fiscal year 2007.
Pre-tax profit
Pre-tax loss for the year ended June 30, 2007 was $271,243 compared to
pre-tax profit of $209,221 in 2006. Lower sales and gross profit generated
during fiscal year 2007, together with higher SG&A expenses decreased overall
profits during the year. These factors were partially offset by lower R&D
expenses.
Income Tax
Income tax benefit for the year ended June 30, 2007 was $186,201
compared to income tax expense of $15,190 in 2006. The income tax accrual rate
in fiscal years 2007 and 2006 was different from standard rates due to research
and development tax credits and certain other items.
Net Income (Loss)
Net loss for the year ended June 30, 2007 was $85,042 ($.01 per share),
compared to net income of $194,031 ($.02 per share) in fiscal 2006. As
previously stated, lower sales and gross profit generated during fiscal year
2007, together with higher SG&A expenses decreased overall profits during the
year. These factors were partially offset by lower R&D expenses.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves,
available borrowings under its line of credit, and from cash provided by
operations. The Company had working capital of $8,116,391 at June 30, 2007,
inclusive of the current portion of long-term obligations and credit facilities,
as compared to working capital of $7,390,147 at June 30, 2006. The increase in
working capital reflects the acquisition of Rajala Therapy Sales Associates
(Rajala) on June 30, 2007, which accounted for approximately $464,902 of the
total working capital.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
increased $734,493 to $3,757,484 at June 30, 2007 compared to $3,022,991 at June
30, 2006. The Company added $885,567 of trade accounts receivable in the
acquisition of Rajala on June 30, 2007. Management anticipates accounts
receivable will increase in future periods due to the acquisition of five other
key distributors on July 2, 2007 as their operations are integrated with the
Company's.
Trade accounts receivable represent amounts due from the Company's
dealer network and from medical practitioners and clinics. We estimate that 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.
Inventories
Inventories, net of reserves, at June 30, 2007 increased $330,994 to
$5,313,984 compared to $4,982,990 at June 30, 2006. The Company added $573,356
of inventories from the acquisition of Rajala. Excluding the inventories added
as a result of the Rajala acquisition, inventories at June 30, 2007 were reduced
by approximately $242,000 compared to the prior year period. Inventories will
increase in fiscal year 2008 with the acquisition of five other distributors on
July 2, 2007 as their operations are combined with the Company's.
13
Goodwill
Goodwill at June 30, 2007 increased to $2,758,572 compared to $789,422
at June 30, 2006, with approximately $1,969,150 added as a result of the
acquisition of Rajala.
Beginning July 1, 2002, the Company adopted the provisions of SFAS No.
142 Goodwill and other Intangible Assets. In compliance with SFAS 142,
management utilized standard principles of financial analysis and valuation
including: transaction value, market value and income value methods to arrive at
a reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002
and June 30, 2007, the fair value of the Company exceeded the book value of the
Company. Therefore, there was no indication of impairment upon adoption of SFAS
No. 142 or at June 30, 2007. Management is primarily responsible for the FAS 142
valuation determination and performed the annual impairment assessment during
the Company's fourth quarter.
Accounts Payable
Accounts payable increased $648,014 to $1,241,030 at June 30, 2007
compared to $593,016 at June 30, 2006. The Company added $578,265 of accounts
payable from the acquisition of Rajala. All accounts payable are within term. We
continue to take advantage of available early payment discounts when offered.
Accrued Expenses and Acquisition Cash Obligation
Accrued expenses decreased $40,358 to $287,773 at June 30, 2007
compared to $328,131 at June 30, 2006.
The Company recorded $1 million of acquisition cash obligation on June
30, 2007 in conjunction with the acquisition of Rajala. This amount was paid to
the previous shareholders of Rajala on July 2, 2007, subsequent to the end of
the fiscal year.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses remained relatively constant at
$276,754 at June 30, 2007 compared to $254,453 at June 30, 2006.
Cash
The Company's cash position increased $877,921 to $1,301,105 at June
30, 2007 compared to $423,184 at June 30, 2006 as a result of the deposit of
financing proceeds in anticipation of the acquisition of six independent
distributors made on June 30, 2007 and July 2, 2007, together with strong
collections on trade receivables. The Company believes that its current cash
balances, amounts available under its line of credit and cash provided by
operations will be sufficient to cover its operating needs in the ordinary
course of business for the next twelve months. If we experience an adverse
operating environment 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 favorable terms.
Line of Credit
In June 2007, the Company increased its revolving line of credit with a
commercial bank to $6,000,000 in anticipation of making acquisitions. At June
30, 2007, the Company owed $250,000 compared to $577,232 at June 30, 2006. The
entire $250,000 amount reflects a separate line of credit acquired in the Rajala
acquisition, which has been paid off and closed subsequent to June 30, 2007.
Interest on Dynatronics' line of credit is based on the bank's prime rate, which
at June 30, 2007, equaled 8.75%. Following the fiscal year end, the Company drew
approximately $3 million on its line of credit to complete the acquisitions. As
of September 17, 2007, $3.8 million was outstanding on its line of credit. The
line of credit is collateralized by accounts receivable and inventories.
Borrowing limitations are based on 35% of eligible inventory and up to 80% of
eligible accounts receivable. Interest payments on the line are due monthly. The
line of credit is renewable biennially on December 15th and includes covenants
requiring the Company to maintain certain financial ratios. As of June 30, 2007,
the Company was in compliance with all loan covenants.
14
The current ratio was 3.3 to 1 at June 30, 2007 compared to 4.3 to 1 at
June 30, 2006. Current assets represented 63% of total assets at June 30, 2007.
Debt
Long-term debt excluding current installments totaled $3,251,631 at
June 30, 2007 compared to $2,023,410 at June 30, 2006. The Company obtained $1.5
million of long-term mortgage debt financing to acquire six of its key
distributors in June and July 2007. 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 $3.5 million with
monthly principal and interest payments of $40,707.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have
not been unusually affected by inflation or price increases for raw materials
and parts from vendors.
The Company's business operations are not materially affected by
seasonality factors.
Critical Accounting Policies
----------------------------
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
risks related to these policies on our business operations are discussed in this
Management's Discussion and Analysis where such policies affect our reported and
expected financial results. For a detailed discussion of the application of
these and other accounting policies, see Notes to the Audited Financial
Statements contained in this annual report. In all material respects, management
believes that the accounting principles that are utilized conform to accounting
principles generally accepted in the United States of America.
The preparation of this annual report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our Audited Financial Statements. By their
nature, these judgments are subject to an inherent degree of uncertainty. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, and revenue recognition. We base our estimates on historical
experience and other facts and circumstances that are believed to be reasonable,
and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under
different assumptions or conditions.
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:
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.
Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statements of income during the
period in which such modifications are determined necessary by management. At
June 30, 2007 and 2006, our inventory valuation reserve balance, which
established a new cost basis, was $293,810 and $383,492, respectively, and our
inventory balance was $5,313,984 and $4,982,990 net of reserves, respectively.
15
Revenue Recognition
The majority of our product sales for the past two fiscal years were to
customers who are independent distributors. These distributors resell the
products, typically to end users, including physical therapists, professional
trainers, athletic trainers, chiropractors, medical doctors and aestheticians.
We also sell our products direct to end users through our field sales
representatives. With the recent acquisition of six of our independent
distributors we expect to reduce our dependence on distributor sales. 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 collectibility 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 $3,757,484 and $3,022,991, net of allowance for doubtful accounts of
$330,857 and $244,238, at June 30, 2007 and June 30, 2006, respectively.
Business Plan and Outlook
-------------------------
During fiscal year 2007, management began implementing a four-fold
strategy to improve overall operations. This strategy focused on (1)
strengthening distribution channels; (2) developing several new,
state-of-the-art products for future growth; (3) reducing manufacturing and R&D
labor expenses; and (4) enhancing product profit margins through improved
manufacturing processes. Management's goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth. We believe that this strategy began to positively
affect our operations during and immediately following the fourth quarter of
fiscal year 2007 as we completed the acquisition of six of our independent
distributors and as new products were released to the market. Net income in the
quarter ended June 30, 2007 was $214,943, compared to $39,101 in the same
quarter of the prior year.
Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. In order to compete more favorably and
effectively, our management believed that it needed to move aggressively to
strengthen the Company's channels of distribution by acquiring key distributors.
They identified six key distributors with operations in 20 states. On June 30,
2007, Dynatronics acquired its largest independent distributor headquartered in
California. On July 2, 2007, Dynatronics acquired five additional key
independent distributors headquartered in Texas, Ohio, Michigan, Indiana and
Minnesota. Dynatronics also began hiring direct sales representatives in key
locations around the country resulting in direct sales representatives now in 22
states. The creation of a direct distribution channel through these key
acquisitions and hiring direct sales representatives provides Dynatronics with
expanded ability to sell at the retail level, which we will improve gross profit
margins and enhance the Company's control over the distribution process. We
expect these changes will open new opportunities for improving future sales as
we continue to pursue our strategy of strengthening our distribution channels.
During fiscal year 2007, we introduced some important new products
including the Dynatron X3, a powerful light therapy device capable of powering a
light probe and two light pads simultaneously. This device incorporates touch
screen technology for easy interface with the practitioner. We also introduced
the DX2 combination traction and light therapy device. The DX2 is Dynatronics'
first proprietary traction device and incorporates not only touch screen
technology, but other unique and proprietary technology that will facilitate
traction and decompression therapy. We believe it is the only unit on the market
that offers traction and infrared light therapy from the same device. Market
reception of the X3 did not meet expectations of management mostly due to the
selling price of the unit. Efforts are being made to reduce costs of this unit
to make it more affordable. The DX2 has performed closer to expectations and
seems to have been well received as an innovative device for delivering traction
and decompression therapy.
The introduction of the new T4 motorized treatment table in March 2007
and the introduction of the new T3 treatment table in July 2007 round out the
full traction package concept originally conceived. These tables are designed
with a higher lift capacity and several unique features. The T4 therapy table is
specially designed for performing traction and decompression therapies with the
DX2 unit and has been very well received in the market.
In June 2007, we introduced an important new product to the market, the
Dynatron X-5 Oscillation Therapy device. The unique product effectively reduces
pain and swelling through the creation of an electrostatic field within the
patient by combining concepts of electrotherapy with therapeutic massage.
Initial sales of this product exceeded management's projections. The X5 unit's
gross profit margin as a percent of sales is one of the highest of any of the
therapy devices produced by Dynatronics.
16
During fiscal 2007, management identified a number of improvements that
could be implemented to lower manufacturing costs and increase profit margins,
not only for the new X-Series products but also for our other therapy equipment.
Those improvements included labor cost reductions through improved production
efficiencies, trimming production staffing, and reductions in R&D labor which
had been ramped up in fiscal years 2007 and 2006 to accelerate development of
the X-Series products. While these objectives were elusive in fiscal year 2007,
we continue to focus on our strategy to achieve them for the coming fiscal year.
International sales is viewed as having untapped potential for growth
and expansion. Adding new distributors in several countries will be the key to
this expansion effort. 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. The Company's
Salt Lake City operation, where all electrotherapy, ultrasound, STS devices,
light therapy and Synergie products are manufactured, is certified to ISO 13485,
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 foreign countries.
Marketing efforts are being increased to promote our aesthetic products
which include the Synergie AMS device for dermal massage, the Synergie MDA
device for microdermabrasion, and the Synergie LT device, an infrared light
therapy unit designed specifically for aesthetic applications. In addition, we
are redesigning our Synergie product line to give it a fresh appearance and
greater functionality. We also plan to develop and introduce additional products
for the aesthetic market. A new national sales manager was hired in the quarter
ended December 31, 2006 with experience in setting up dealer and distributor
networks. Also, Kelvyn Cullimore Sr., who managed the Synergie branded products
until departing two years ago on a humanitarian mission to Asia, has returned to
again manage the department. Under his leadership, sales momentum of Synergie
branded products has continued to mount with June 2007 representing one of the
highest sales months for Synergie products in our history. Numerous strategic
partnerships, both domestic and international, are currently under consideration
that would help maintain the sales momentum that is being built.
Based on our defined strategic initiatives, we are focusing our
resources in the following areas:
o Reinforcing our position in the physical medicine market by
securing channels of distribution through a strategy of acquiring
dealers, recruiting direct sales representatives and working
closely with the most successful dealers of capital equipment.
o Continuing development of new, state-of-the-art products, both
high tech and commodity, in fiscal year 2008, for both the
rehabilitation and aesthetic markets.
o Reducing manufacturing labor and certain other expenses through
improved production efficiencies, possible reductions in personnel
count where appropriate and decreasing R&D labor costs which had
been increased over the past two years to accelerate the
introduction of the X-Series products.
o Enhancing product profit margins through improved manufacturing
processes, particularly for the recently introduced X-Series
products.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more products into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Establishing strategic business alliances that will leverage and
complement the Company's competitive strengths.
Forward-Looking Statements
--------------------------
This Report on Form 10-KSB contains certain statements that are
"forward-looking" within the meaning of the statutory safe harbor provisions of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements and other information are
based on our beliefs as well as assumptions made by us using information
currently available.
17
The words "anticipate," "believe," "estimate," "expect,' "intend,"
"will," "should" and similar expressions, as they relate to us, are intended to
identify forward-looking statements. Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks and uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended or using other similar expressions.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events. Risks and circumstances that may cause actual results to vary from the
Company's expectations include, among others, the following:
Assimilation of Acquired Companies and Migration of our Business Model.
Through the end of fiscal year 2007, Dynatronics had operated primarily as a
manufacturer of medical products sold through a network of specialty and general
line distributors. Due to consolidation in our market place and the threat from
that consolidation to the channels of distribution available to Dynatronics, the
Company acquired six of its distributors and has continued to add direct sales
reps around the country. This represents a significant change in our business
model. Going forward, Dynatronics will be distributing many more products than
it manufactures. Additionally, Dynatronics will be much more vertically
integrated in the distribution chain working with a staff of direct sales
representatives instead of the traditional model of working through dealers.
There can be no assurance that Dynatronics will be successful in assimilating
these companies or migrating to the new business model without incurring
significant unanticipated costs or experiencing unexpected operational problems.
Some of the risks include:
o Many sales representatives not being contractually obligated to
stay with the Company
o Management of an expanded inventory base
o Controlling operations that are more geographically diverse
o Collecting accounts receivable from thousands of smaller customers
instead of hundreds of larger dealers
o Securing adequate working capital
o Ability to reduce overhead costs and streamline operations
o Conflicts distributing products from manufacturers who were
previously a competitor
o Availability of trained support personnel
Technological Obsolescence. The business of designing and manufacturing
medical and aesthetic products is characterized by rapid technological change.
Although Dynatronics has obtained patents on certain aspects of its technology,
there can be no assurance that our competitors will not develop or manufacture
products technologically superior to those of the Company.
Extensive Government Regulation. 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, which adds to the expense of doing business and, if
violated, could adversely affect the Company's financial condition and results
of operations.
Health Care Reform. Governments are continually reviewing and
considering expansive legislation that may lead to significant reforms in health
care delivery systems. The pressure for reform stems largely from the rising
cost of health care in recent years. We cannot predict whether or when new or
proposed legislation will be enacted and there can be no assurance that such
legislation, when enacted, will not impose additional restrictions on part or
all of the Company's business or its intended business, which might adversely
affect such business.
Product Liability. Manufacturers and distributors of products used in
the medical device, aesthetics and related industries are from time to time
subject to lawsuits alleging product liability, negligence or related theories
of recovery, which have become an increasingly frequent risk of doing business
in these industries. Although from time to time lawsuits may arise or claims
asserted based on product liability matters, all such actions have been insured
against. Although we maintain product liability insurance coverage which we deem
to be adequate based on historical experience, there can be no assurance that
such coverage will be available for such risks in the future or that, if
available, it would prove sufficient to cover potential claims or that the
present amount of insurance can be maintained in force at an acceptable cost.
Furthermore, the assertion of such claims, regardless of their merit or eventual
outcome, also may have a material adverse effect on the Company, its business
reputation and its operations.
18
Risks Associated with Manufacturing. The Company's results of
operations are dependent upon the continued operation of its manufacturing
facilities in Utah and Tennessee. The operation of a manufacturing facility
involves many risks, including power failures, the breakdown, failure or
substandard performance of equipment, failure to perform by key suppliers, the
improper installation or operation of equipment, natural or other disasters and
the need to comply with the requirements or directives of government agencies,
including the FDA. There can be no assurance that the occurrence of these or any
other operational problems at our facilities would not have a material adverse
effect on the Company's business, financial condition and results of operations.
Reliance on Information Technology. The Company's success is dependent
in large part on the accuracy, reliability and proper use of sophisticated and
dependable information processing systems and management information technology.
Our information technology systems are designed and selected in order to
facilitate order entry and customer billing, maintain records, accurately track
purchases, accounts receivable and accounts payable, manage accounting, finance
and manufacturing operations, generate reports and provide customer service and
technical support. Any interruption in these systems could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. Our industry is highly competitive. Numerous
manufacturers, distributors and retailers compete actively for consumers and
customers. The Company competes directly with other entities that manufacture,
market and distribute products in each of its product lines. The consolidation
that has occurred in the physical medicine market has resulted in two large
competitors, ReAble and Sammons Preston division of Patterson Companies, where
competitors of such magnitude had not existed before. Many of these competitors
are substantially larger than the Company and have greater financial resources
and broader brand name recognition. The market is highly sensitive to the
introduction of new products that may rapidly capture a significant share of the
market. There can be no assurance that the Company will be able to compete in
this intensely competitive environment.
Dependence on Patents and Proprietary Rights. The Company has seven
patents issued and two patents pending relating to its products. In addition, we
have obtained by license the worldwide rights to the STS patent. The Company's
trademarks have also been registered in the United States and in other
countries. There can be no assurance that patents owned by or licensed to us
will not be challenged or circumvented or will provide us with any competitive
advantages or that a patent will issue from any pending patent application. In
addition, each patent owned by the Company expires after approximately 17 years
from its date of issuance. We also rely upon copyright protection for our
proprietary software and other property. There can be no assurance that any
copyright obtained will not be circumvented or challenged. In addition, we rely
on trade secrets that we seek to protect, in part, through confidentiality
agreements with employees and other parties. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that our trade secrets will not otherwise become
known to or independently developed by competitors. The Company may become
involved from time to time in litigation to determine the enforceability, scope
and validity of proprietary rights. Any such litigation could result in
substantial cost to the Company and divert the efforts of its management and
technical personnel.
Foreign Duties and Import Restrictions. Some of the Company's products
are exported to the countries in which they ultimately are sold. The countries
in which we sell products may impose various legal restrictions on imports,
impose duties of varying amounts, or enact regulatory requirements, adverse to
the Company's products. There can be no assurance that changes in legal
restrictions, increased duties or taxes, or stricter health and safety
requirements would not have a material adverse effect in the Company's ability
to market its products in a given country.
Effect of Exchange Rate Fluctuations. Exchange rate fluctuations may
have a significant effect on the Company's sales and gross margins in a given
foreign country. If exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries. Differences in the exchange rates may also create a marketing
advantage for foreign competitors, making the purchase price of their products
lower than prices originally denominated in U.S. dollars. As the Company's
business expands outside the United States, an increasing share of its revenues
and expenses will be transacted in currencies other than the U.S. dollar.
Consequently, the reported earnings of the Company in future periods may be
significantly affected by fluctuations in currency exchange rates, with earnings
generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar.
Item 7. Financial Statements
--------------------
The consolidated financial statements and accompanying report of the
Company's auditors follow immediately and form a part of this report.
19
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 as of June 30, 2007 and 2006, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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. We were not 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dynatronics Corporation and subsidiary as of June 30, 2007 and 2006, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Tanner LC
Salt Lake City, Utah
September 28, 2007
DYNATRONICS CORPORATION
Consolidated Balance Sheets
June 30, 2007 and 2006
Assets 2007 2006
------------ ------------
Current assets:
Cash $ 1,301,105 423,184
Trade accounts receivable, less allowance
for doubtful accounts of $330,857 at
June 30, 2007 and $244,238 at
June 30, 2006 3,757,484 3,022,991
Other receivables 282,741 216,847
Inventories, net 5,313,984 4,982,990
Prepaid expenses 507,755 505,786
Prepaid income taxes 92,702 65,869
Deferred tax asset - current 396,156 387,830
------------ ------------
Total current assets 11,651,927 9,605,497
Property and equipment, net 3,453,495 3,671,216
Goodwill, net 2,758,572 789,422
Intangibles asset, net 356,792 30,516
Other assets 346,830 427,004
------------ ------------
$ 18,567,616 14,523,655
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 271,979 254,518
Line of credit 250,000 577,232
Warranty reserve 208,000 208,000
Accounts payable 1,241,030 593,016
Accrued expenses 287,773 328,131
Accrued payroll and benefit expenses 276,754 254,453
Acquisition cash obligation 1,000,000 -
------------ ------------
Total current liabilities 3,535,536 2,215,350
Long-term debt, excluding current installments 3,251,631 2,023,410
Deferred compensation 420,470 388,250
Deferred tax liability - noncurrent 289,335 225,603
------------ ------------
Total liabilities 7,496,972 4,852,613
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 10,308,522
shares at June 30, 2007 and
8,988,173 shares at June 30, 2006 4,227,147 2,742,503
Retained earnings 6,843,497 6,928,539
------------ ------------
Total stockholders' equity 11,070,644 9,671,042
------------ ------------
$ 18,567,616 14,523,655
============ ============
See accompanying notes to financial statements.
F-1
DYNATRONICS CORPORATION
Consolidated Statements of Operations
Years Ended June 30, 2007 and 2006
2007 2006
------------ ------------
Net sales $ 17,837,104 19,513,136
Cost of sales 10,925,316 12,221,375
------------ ------------
Gross profit 6,911,788 7,291,761
Selling, general, and administrative expenses 5,541,860 5,239,462
Research and development expenses 1,492,774 1,756,281
------------ ------------
Operating income (loss) (122,846) 296,018
------------ ------------
Other income (expense):
Interest income 28,330 10,714
Interest expense (209,292) (163,287)
Other income, net 32,565 65,776
------------ ------------
Total other income (expense) (148,397) (86,797)
------------ ------------
Income (loss) before income taxes (271,243) 209,221
Income tax expense (benefit) (186,201) 15,190
------------ ------------
Net income (loss) $ (85,042) 194,031
============ ============
Basic net income (loss) per
common share $ (0.01) 0.02
Diluted net income (loss) per
common share $ (0.01) 0.02
Weighted average basic and diluted common shares outstanding:
Basic 8,916,317 9,019,416
Diluted 8,916,317 9,170,270
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2007 and 2006
Total
Number Common Retained stockholders'
of shares stock earnings equity
---------- ------------ ---------- -------------
Balances at
June 30, 2005 9,015,128 $ 2,779,000 6,734,508 9,513,508
Issuance of common
stock upon exercise
of employee stock
options 14,238 15,797 - 15,797
Redemption of common
stock (46,393) (59,449) - (59,449)
Income tax benefit
disqualifying disposition
of employee stock options - 3,155 - 3,155
Issuance of restricted
stock to outside
directors 5,200 - - -
Deferred restricted
stock compensation - 4,000 - 4,000
Net income - 194,031 194,031
---------- ------------ ---------- -------------
Balances at
June 30, 2006 8,988,173 2,742,503 6,928,539 9,671,042
Issuance of common
stock upon exercise
of employee stock
options 1,664 1,697 - 1,697
Redemption of common
stock (208,793) (244,682) - (244,682)
Income tax benefit
disqualifying
disposition
of employee stock
options - 1,810 - 1,810
Issuance of restricted
stock to outside
directors 7,476 - - -
Deferred restricted
stock compensation - 8,000 - 8,000
Issuance of common
stock upon exercise
of non employee
stock options 20,000 21,600 - 21,600
Share based
compensation - 1,217 - 1,217
Issuance of common
stock in business
acquisition 1,500,002 1,695,002 - 1,695,002
Net loss - - (85,042) (85,042)
---------- ------------ ---------- -------------
Balances at
June 30, 2007 10,308,522 $ 4,227,147 6,843,497 11,070,644
========== ============ ========== =============
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Consolidated Statements of Cash Flows
Years Ended June 30, 2007 and 2006
2007 2006
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (85,042) 194,031
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization of property
and equipment 366,047 354,220
Amortization of intangible asset 7,324 7,324
Stock based compensation expense 9,217 4,000
Provision for doubtful accounts 141,401 48,000
Provision for inventory obsolescence 38,599 252,000
Provision for warranty reserve 270,124 280,085
Provision for deferred compensation 32,220 27,732
Change in operating assets and liabilities:
Receivables (41,466) (190,394)
Inventories 203,763 (522,467)
Prepaid expenses and other assets 120,833 (210,916)
Deferred tax asset, net (37,010) (1,797)
Accounts payable and accrued expenses (759,411) (442,381)
Prepaid income taxes (25,023) (41,013)
------------ ------------
Net cash provided by (used in)
operating activities 241,577 (241,576)
------------ ------------
Cash flows from investing activities:
Capital expenditures (128,560) (804,992)
Proceeds from business acquisition 67,839
Proceeds from sale of assets - 1,500
------------ ------------
Net cash used in investing
activities (60,721) (803,492)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,500,000 1,530,000
Principal payments on long-term debt (254,318) (803,466)
Net change in line of credit (327,232) 312,471
Proceeds from issuance of common stock 23,297 15,797
Redemption of common stock (244,682) (59,449)
------------ ------------
Net cash provided by financing
activities 697,065 995,353
------------ ------------
Net change in cash 877,921 (49,715)
Cash at beginning of year 423,184 472,899
------------ ------------
Cash at end of year $ 1,301,105 423,184
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 209,139 156,723
Cash paid for income taxes 13,049 58,000
Supplemental disclosure of non-cash investing and
financing activities:
Common stock issued for directors fees 8,000 8,000
Income tax benefit from non-employee exercise
of stock options 1,810 3,155
Business acquisition disclosure see note 14
for details
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007 and 2006
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures, markets, and
distributes 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. The products are distributed primarily through
dealers in the United States and Canada, with additional
distribution in foreign countries.
(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) Cash Equivalents
For purposes of the combined statements of cash flows, all highly
liquid investments with maturities of three months or less are
considered to be cash equivalents. There were no significant cash
equivalents as of June 30, 2007 and 2006.
(d) Inventories
Finished goods inventories are stated at the lower of standard
cost, which approximates actual cost (first-in, first-out), or
market. Raw materials are stated at the lower of cost (first-in,
first-out), or market.
(e) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest. 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 historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. 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. The Company does not have any off-balance-sheet
credit exposure related to its customers.
(f) 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.
F-5
(g) Goodwill and Long-Lived Assets
Goodwill represents the excess of costs over fair value of assets
of businesses acquired. Goodwill and intangible assets acquired in
business combinations and determined to have an indefinite useful
life are not amortized, but instead tested for impairment at least
annually. Management is primarily responsible for the valuation
determination. Management utilizes standard principles of
financial analysis and valuation including: transaction value,
market value, and income value methods to arrive at a reasonable
estimate of the fair value of the Company in comparison to its
book value. The Company has determined it has one reporting unit.
Management performed its annual impairment assessment during the
Company's fourth quarter of fiscal year 2007 and 2006 and has
determined there is not an indication of impairment.
Long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, 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 by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be 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.
(h) Intangible asset
Intangible assets are amortized over their useful life on a
straight line method. The estimated lives for the intangible asset
range from 3 months to 15 years.
(i) Revenue Recognition
Sales are generally 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.
(j) Research and Development Costs
Research and development costs are expensed as incurred.
(k) 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.
(l) Earnings per Common Share
Basic earnings per common share is the amount of earnings for the
period available to each 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 share of
common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding
during the period.
F-6
The reconciliation between the basic and diluted weighted average
number of common shares for 2007 and 2006 is summarized as
follows:
2007 2006
------------ ------------
Basic weighted average number of
common shares outstanding during
the year 8,916,317 9,019,416
Weighted average number of dilutive
common stock options outstanding
during the year -0- 150,854
------------ ------------
Diluted weighted average number of
common and common equivalent shares
outstanding during the year 8,916,317 9,170,270
============ ============
Outstanding options not included in the computation of diluted net
income per share based on the treasury stock method total 797,042
and 675,638 as of June 30, 2007 and 2006, respectively, because to
do so would have been antidilutive.
(m) Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred
tax assets and deferred tax liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(n) Share-Based Compensation
Restricted Stock
----------------
The Company recognizes as compensation expense the fair value of
restricted common stock granted as compensation to directors.
During the years ended June 30, 2007 and 2006, the Company
recognized $5,280 and $2,640 in director compensation expense,
respectively, net of related tax effects. As of June 30, 2007, the
Company has not recognized $2,640 in director compensation
expense, net of related tax effects. The Company expects to
recognize this compensation over a weighted-average period of six
months.
Stock Options
-------------
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123(R),
"Share-Based Payment", which amended SFAS No. 123, "Accounting for
Stock Based Compensation", which the Company adopted on July 1,
2006. This amendment requires the Company to recognize as
compensation expense the fair value of stock options granted for
compensation to employees (fair value method). Prior to this
amendment and in accordance with SFAS No. 123, the Company opted
to recognize as compensation expense the intrinsic value of stock
options granted as compensation to employees (intrinsic value
method), and to disclose as pro forma compensation the fair value
of those stock options. The Company recognizes as compensation
expense the fair value of stock options granted as compensation to
non-employees.
F-7
During the year ended June 30, 2007, the Company recognized $803 in
employee compensation expense, net of related tax effects, under
the fair value method as required by SFAS No. 123(R). Had the
Company not adopted SFAS No. 123(R), the Company would have
disclosed the pro forma impact of adopting the fair value method,
and would have recognized no employee compensation expense under
the intrinsic value method.
During the years ended June 30, 2006, the Company recognized no
employee compensation expense under the intrinsic method. Had the
Company opted to recognize employee compensation expense using the
fair value method, the Company's net income and income per share
would have been as follows:
Year ended
June 30,
2006
-------------
Net income as reported $ 194,031
Less: pro forma adjustment for stock
based compensation, net of income
tax (563,489)
-------------
Pro forma net income (loss) $ (369,458)
=============
Basic net income (loss) per share:
As reported $ 0.02
Effect of pro forma adjustment (0.06)
-------------
Pro forma (0.04)
=============
Diluted net income (loss) per share:
As reported 0.02
Effect of pro forma adjustment (0.06)
-------------
Pro forma $ (0.04)
=============
As of June 30, 2007, the Company has not recognized $5,663 in
employee compensation expense, net of related tax effects. The
Company expects to recognize this compensation over a
weighted-average period of 4.4 years.
On May 19, 2006 the Board of Directors accelerated the vesting of
certain unvested stock options awarded to employees and officers
under the Company's stock option plan. The Company took this
action to avoid an accounting charge (as compensation expense) for
these options starting in the quarter ending September 30, 2006,
as required by FAS 123(R). A portion of the increase in pro forma
compensation expense in fiscal 2006, as shown above, is a result
of the vesting acceleration.
(o) 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.
F-8
(p) 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 as defined by
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
The Company groups their sales into physical medicine products and
aesthetic products. Physical medicine products consisted of 87% of
net sales for both the years ended June 30, 2007 and 2006,
respectively. Aesthetics products consisted of 7% of net sales for
both years ended June 30, 2007 and 2006, respectively. Chargeable
repairs, billable freight and other miscellaneous revenue account
for the remaining 6% of total revenues in both years ended June
30, 2007 and 2006, respectively.
(q) 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 accounting principles generally accepted in the United States
of America. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant, and
equipment; valuation allowances for receivables, income taxes, and
inventories; accrued product warranty reserve; and estimated
recoverability of goodwill. Actual results could differ from those
estimates.
(r) Fair Value Disclosure
The carrying value of accounts receivable, accounts payable,
accrued expenses, and line of credit approximates their estimated
fair value due to the relative short maturity of these
instruments. The carrying value of long-term debt approximates its
estimated fair value due to recent issuance of the debt or the
existence of interest rate reset provisions.
(s) Advertising Cost
Advertising costs are expensed as incurred. Advertising expense
for the years ended June 30, 2007 and 2006 was approximately
$177,000 and $186,000, respectively.
(2) Inventories
Inventories consist of the following:
2007 2006
------------ ------------
Raw materials $ 2,961,653 3,034,919
Finished goods 2,646,141 2,331,563
Inventory reserve (293,810) (383,492)
------------ ------------
$ 5,313,984 4,982,990
============ ============
(3) Property and Equipment
Property and equipment consist of the following:
2007 2006
------------ ------------
Land $ 354,743 354,743
Buildings 3,603,380 3,590,088
Machinery and equipment 1,521,601 1,481,796
Office equipment 1,147,667 1,059,664
Vehicles 95,124 94,290
------------ ------------
6,722,515 6,580,581
Less accumulated depreciation
and amortization 3,269,020 2,909,365
------------ ------------
$ 3,453,495 3,671,216
============ ============
F-9
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve consists
of the following:
2007 2006
------------ ------------
Beginning product warranty reserve
balance $ 208,000 208,000
Warranty repairs (270,124) (280,085)
Warranties issued 256,027 138,975
Changes in estimated warranty costs 14,097 141,110
------------ ------------
Ending product warranty
reserve balance $ 208,000 208,000
============ ============
(5) Line of Credit
The Company has a revolving line of credit facility with a commercial bank
in the amount of $6 million. Borrowing limitations are based on 35% of
eligible inventory and up to 80% of eligible accounts receivable. At June
30, 2007 and 2006, the outstanding balance was approximately $-0- and
$577,000, respectively. The line of credit is collateralized by inventory
and accounts receivable and bears interest at the bank's "prime rate,"
(8.75% and 8.25% at June 30, 2007 and 2006, respectively). This line is
subject to bi-annual renewal and matures on December 15, 2008. 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,
2007, the Company was in compliance with all loan covenants.
The acquisition of Rajala Therapy Sales Associates, Inc on June 30, 2007,
included a line of credit with a balance due of $250,000 as of June 30,
2007. The Rajala line of credit was subsequently paid off and canceled in
July 2007.
(6) Long-Term Debt
Long-term debt consists of the following:
2007 2006
------------ ------------
9.11% promissory note secured by
building, maturing June 2017,
payable in monthly installments
beginning at $11,388 $ 1,500,000 -
6.44% promissory note secured by
trust deed on real property,
maturing January 2021, payable
in monthly installments of $13,278 1,440,070 1,504,394
6.21% promissory note secured by a
trust deed on real property, maturing
November 2013, payable in decreasing
installments currently at $7,373 442,803 498,159
5.84% promissory note secured by a
trust deed on real property, payable
in monthly installments of $8,669
through November 2008 140,737 233,422
8.87% promissory note secured by
fixed assets, payable in monthly
installments of $3,901 through
May 2007 - 41,435
Other notes payable - 518
------------ ------------
Total long-term debt 3,523,610 2,277,928
Less current installments 271,979 254,518
------------ ------------
Long-term debt, excluding
current installments $ 3,251,631 2,023,410
============ ============
F-10
The aggregate maturities of long-term debt for each of the years
subsequent to 2007 are as follow: 2008, $271,979; 2009, $278,174; 2010,
$255,109; 2011, $275,031; 2012, $291,050 and thereafter $2,152,267.
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Rent expense for the years ended June 30, 2007 and 2006 was
$28,736 and $29,765, respectively. Future minimum rental payments required
under noncancelable operating leases that have initial or remaining lease
terms in excess of one year as of 2007 are as follows: 2008, $27,883;
2009, $15,800; 2010, $8,098 and 2011, $7,423.
(8) Goodwill and Other Intangible Assets
Goodwill. The cost of acquired companies in excess of the fair value of
the net assets and purchased intangible assets at acquisition date is
recorded as goodwill. As of June 30, 2002, the Company had net goodwill of
$789,422 arising from the acquisition of Superior Orthopaedic Supplies,
Inc. on May 1, 1996 and the exchange of Dynatronics Laser Corporation
common stock for a minority interest in Dynatronics Marketing Corporation
on June 30, 1983. On June 30, 2007 the Company recorded additional
goodwill in the amount of $1,969,150 in conjunction with the acquisition
of Rajala Therapy Sales Associates, Inc.
Identifiable Intangibles. Identifiable intangibles assets, included in
other assets, consists of the following:
As of As of
June 30, June 30,
2007 2006
------------ ------------
Trade name - 15 years $ 118,000 -0-
Domain name - 15 years 1,200 -0-
Non-compete covenant - 4 years 114,000 -0-
Customer relationships - 7 years 89,000 -0-
Backlog of orders - 3 months 2,700 -0-
Customer database - 7 years 8,700 -0-
License agreement - 10 years 73,240 73,240
------------ ------------
Total identifiable intangibles 406,840 73,240
Accumulated amortization 50,048 42,724
------------ ------------
Net carrying amount $ 356,792 30,516
============ ============
F-11
Amortization expense associated with the license agreement was $7,324 for
2007 and 2006. Estimated amortization expense for the identifiable
intangibles is expected to be as follows: 2008, $60,428; 2009, $57,728;
2010, $57,728; 2011, $51,623; 2012, $21,904 and thereafter $107,381.
(9) Income Taxes
Income tax expense (benefit) for the years ended June 30 consists of:
Current Deferred Total
--------------------------- -------------
2007:
U.S. federal $ (134,760) (32,576) (167,336)
State and local (14,430) (4,434) (18,864)
--------------------------- -------------
$ (149,190) (37,010) (186,200)
=========================== =============
2006:
U.S. federal $ (3,724) (1,556) (5,280)
State and local 20,711 (241) 20,470
--------------------------- -------------
$ 16,987 (1,797) 15,190
=========================== =============
Actual income tax expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
income before income taxes) as follows:
2007 2006
------------ ------------
Expected tax expense $ (92,223) 71,135
State taxes, net of federal tax benefit (12,450) 11,206
Officers' life insurance (3,479) (3,278)
Extraterritorial income exclusion -0- (7,662)
Other, net (78,048) (56,211)
------------ ------------
$ (186,200) 15,190
============ ============
Deferred income tax assets and liabilities related to the tax effects of
temporary differences are as follows:
2007 2006
------------ ------------
Net deferred tax asset - current:
Inventory capitalization for income
tax purposes $ 62,447 63,523
Inventory reserve 117,348 143,043
Warranty reserve 77,584 77,584
Accrued product liability 12,521 12,580
Charitable contribution 2,846 -0-
Allowance for doubtful accounts 123,410 91,100
------------ ------------
Total deferred tax asset - current $ 396,156 387,830
============ ============
Net deferred tax asset (liability) -
non-current:
Deferred compensation $ 156,835 144,817
Property and equipment, principally
due to differences in
depreciation (488,896) (373,052)
R&D credit carryover 40,752 -0-
Non-compete and goodwill 1,974 2,632
------------ ------------
Total deferred tax liability - non-current $ (289,335) (225,603)
============ ============
F-12
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred 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 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 tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences.
(10) Major Customers and Sales by Geographic Location
During the fiscal years ended June 30, 2007 and 2006, sales to any single
customer did not exceed 10% of total net sales.
Sales in the United States and other countries were approximately 95
percent and 5 percent for both fiscal years ended June 30, 2007 and 2006,
respectively.
(11) Common Stock and 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. During the year
ended June 30, 2007, the Company acquired and retired $244,682 of common
stock. During the year ended June 30, 2006, the Company acquired and
retired $59,449 of common stock.
During the years ended June 30, 2007 and 2006, the Company granted 7,476
and 5,200 shares of restricted common stock to directors as compensation,
respectively, 7,476 shares of which had not vested as of June 30, 2007.
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. At June 30, 2007, 520,854 shares of common stock were
authorized and reserved for issuance, but were not granted under the terms
of the 2005 equity incentive plan.
The Company granted options to acquire common stock under its 2005 equity
incentive plan for fiscal 2007 and 2006. 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 six months to ten years from the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2007 2006
------------ ------------
Expected dividend yield 0% 0%
Expected stock price volatility 55-58% 70-88%
Risk-free interest rate 4.50 - 5.03% 4.14 - 4.98%
Expected life of options 7 years 5 - 10 years
F-13
The weighted average fair value of options granted during 2007 and 2006
was $.75 and $1.22, respectively.
The following table summarizes the Company's stock option activity during
the years ended June 30, 2007 and 2006:
2007 2006
-------------------------------------------------
Weighted Weighted
average average
Number exercise Number exercise
of shares price of shares price
----------- ------------------------ -----------
Options outstanding at
beginning of year 1,129,858 $ 1.42 1,155,839 $ 1.41
Options granted 40,959 1.22 236,374 1.49
Options exercised (1,664) 1.02 (14,238) 1.11
Options canceled or
expired (120,961) 1.54 (248,117) 1.42
----------- ----------
Options outstanding
at end of year 1,048,192 1.40 1,129,858 1.42
=========== ==========
Options exercisable
at end of year 1,041,816 1.39 1,129,858 1.42
=========== ==========
Range of exercise
prices at end
of year $0.66 - 3.00 $0.66 - 3.00
At June 30, 2007 and 2006 the Company had 60,000 and 80,000 options
respectively, outstanding that were not issued under the Company's stock
option plan. The exercise price of the options ranges from $1.08 to $4.00.
The options expire during fiscal 2008 through fiscal 2010.
The aggregate intrinsic value on the date of exercise of options exercised
during the years ended June 30, 2007 and 2006 was $383 and $7,478,
respectively.
(12) Employee Benefit Plan
During 1991, the Company established 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 2007 and 2006, 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 2007 and 2006 were $31,212 and
$34,120, respectively. Company matching contributions for future years are
at the discretion of the board of directors.
(13) Salary Continuation Agreements
As of June 30, 2007 the Company had salary continuation agreements with
two key employees. The agreements provide a pre-retirement salary
continuation income to the employee's designated beneficiary in the event
that the employee dies before reaching age 65. This death benefit amount
is the lesser of $75,000 per year or 50% of the employee's salary at the
time of death, and continues until the employee would have reached age 65.
The agreements also provide the employee with a 15-year supplemental
retirement benefit if the employee remains in the employment of the
Company until age 65. Estimated amounts to be paid under the agreements
are being accrued over the period of the employees' active employment. As
of 2007 and 2006, the Company has accrued $420,470 and $388,250,
respectively, of deferred compensation under the terms of the agreements.
F-14
(14) Acquisition and Non-Cash Disclosure
On June 30, 2007, the Company completed the acquisition of a 100% interest
in its largest independent distributor, Rajala Therapy Sales Associates of
Pleasanton, California (Rajala). Over the past few years there has been
significant consolidation within the physical medicine market which is
changing the dynamics of the industry. In order to compete more
effectively within the changing marketplace, the Company has implemented a
strategy to create a direct channel of distribution through the
acquisition of its independent distributors, the recruitment of direct
sales representatives and the retention of strong independent dealers. The
Rajala purchase was $2,695,002, paid through an acquisition cash
obligation $1 million of cash and the issuance of 1.5 million shares of
the Company's common stock.
The acquisition value of Rajala Therapy Sales Associates was accounted for
using the purchase method of accounting. Accordingly, the purchase price
was assigned to the assets acquired and the liabilities assumed based on
fair market values at the purchase date. The following table reflects the
estimated fair values of the assets acquired and the liabilities assumed
as of the acquisition date:
Cash $ 67,839
Trade accounts receivable 900,322
Inventories 573,356
Prepaid expenses 42,629
Property and equipment 19,766
Intangible assets - weighted average 9 years 333,600
Goodwill 1,876,734
-------------
Total assets acquired 3,814,246
Line of credit (250,000)
Accounts payable and accrued expenses (869,244)
-------------
Net assets acquired 2,695,002
=============
The acquisition resulted in a $7,757 current income tax benefit and a
$100,173 deferred income tax liability, the net amount of which was
recognized as a $92,416 increase to goodwill. The results of operations
for 2007 and 2006 for Rajala are not included in the Company's Statement
of Operations because the acquisition was made on June 30, 2007, the last
day of the Company's fiscal year 2007.
Unaudited pro forma results of operations for the years ended June 30,
2007 and 2006, as though Rajala had been acquired as of July 1, 2005, are
as follows:
2007 2006
------------ ------------
Net sales $ 24,036,702 24,844,582
Net income (loss) (55,006) 211,839
Basic and diluted net income (loss) per
common share (.01) .02
(15) Subsequent Events
On July 2, 2007 the Company acquired five additional key independent
distributors including Responsive Providers, Inc. of Houston, Texas,
Therapy and Health Care Products, Inc. of Youngstown, Ohio, Cyman Therapy,
F-15
Inc. of Detroit, Michigan, Al Rice and Associates, Inc. of Jeffersonville,
Indiana and Theratech Inc. of Minneapolis, Minnesota. The total
consideration paid for the five separately-negotiated acquisitions was
approximately $5.7 million comprised of approximately $2.3 million in cash
and 3.1 million shares of common stock. As a result of these acquisitions
there will be an increase in intangible assets, goodwill and deferred tax
assets and liabilities, the dollar amounts of which are undeterminable as
of this report. The Company has also begun hiring direct sales
representatives in key locations.
(16) Recent Accounting Pronouncements
On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB No. 109, was
issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The provisions of FIN 48
are effective for fiscal years beginning after December 15, 2006.
Accordingly, the Company will implement the revised standard in the first
quarter of fiscal year 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosure requirements regarding fair value
measurement. Where applicable, this statement simplifies and codifies fair
value related guidance previously issued within United States of America
generally accepted accounting principles. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is
currently reviewing SFAS 157 and has not yet determined the impact that
the adoption of SFAS 157 will have on its results of operations or
financial condition.
F-16
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
---------------------
None.
Item 8A. Controls and Procedures
-----------------------
Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934), as of the end of the
period covered by this Report. Based upon that evaluation, our management have
concluded that our disclosure controls and procedures are effective to
reasonably ensure that information we are required to disclose in reports filed
by the Company under the Exchange Act (i) is recorded, processed, summarized and
reported within the time periods specified in SEC 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 disclosures. There have been no significant changes in
internal controls over financial reporting during the fourth quarter or fiscal
year 2007, or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Item 8B. Other Information
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
------------------------------------------------------------------------
With Section 16(a) of the Exchange Act
---------------------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the headings
"Executive Officers and Directors," "Compliance with Section 16(a) of the
Securities Exchange Act of 1934," "Committees and Meetings of the Board of
Directors," "Audit Committee Financial Expert" and "Code of Ethics" contained in
the Company's definitive proxy statement for its 2007 Annual Meeting of
Shareholders, to be sent to shareholders of the Company subsequent to the filing
of this report on Form 10-KSB.
Item 10. Executive Compensation
----------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading
"Executive Compensation and other Matters" and "Director Compensation" contained
in the Company's definitive proxy statement for its 2007 Annual Meeting of
Shareholders, to be sent to shareholders of the Company subsequent to the filing
of this report on Form 10-KSB.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Voting
Securities and Principal Shareholders" and "Equity Compensation Plan
Information" contained in the Company's definitive proxy statement for its 2007
Annual Meeting of Shareholders, to be sent to shareholders of the Company
subsequent to the filing of this report on Form 10-KSB.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
During the two years ended June 30, 2007, the Company was not a party
to any transaction in which any director, executive officer or shareholder
holding more than 5% of the Company's issued and outstanding common stock had a
direct or indirect material interest.
Item 13. Exhibits
--------
(a) Exhibits and documents required by Item 601 of Regulation S-B:
20
1. Financial Statements (included in Part II, Item 7):
Report of Independent Registered Public Accounting Firm........F-1
Consolidated Balance Sheets at June 30, 2007 and 2006..........F-2
Consolidated Statements of Operations for years ended
June 30, 2007 and 2006.........................................F-3
Consolidated Statements of Stockholders'
Equity for years ended June 30, 2007
and 2006.......................................................F-4
Consolidated Statements of Cash Flows for
years ended June 30, 2007 and 2006 ............................F-5
Notes to Consolidated Financial Statements.....................F-6
Exhibits:
--------
Reg. S-B
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)
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.
4.2 Amended and Restated 1992 Stock Option Plan, effective
November 28, 1996 (previously filed)
10.1 Employment Agreement with Kelvyn H. Cullimore, Jr.
(previously filed)
10.2 Employment Agreement with Larry K. Beardall (previously
filed)
10.3 Loan Agreements with Zion Bank (previously filed)
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, 2006 Annual Report on Form 10-KSB)
10.9 Form of Option Agreement for the 2005 Equity Incentive
Award Plan for non-qualified options (filed as Exhibit to
June 30, 2006 Annual Report on Form 10-KSB)
23.1 Consent of Independent Registered Public Accounting Firm
dated August 26, 2009 (filed herewith)
31 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer and principal accounting and financial
officer (filed herewith)
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32 Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. SECTION 1350) (filed herewith)
Item 14. Principal Accountant Fees and Services
--------------------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Auditor
Fees" contained in the Company's definitive proxy statement for its 2007 Annual
Meeting of Shareholders, to be sent to shareholders of the Company subsequent to
the filing of this report on Form 10-KSB.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this amended 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: August 26, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended 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, August 26, 2009
---------------------------- CEO (Principal
Kelvyn H. Cullimore, Jr. Executive Officer)
/s/ Terry M. Atkinson Chief Financial August 26, 2009
---------------------------- Officer (Principal
Terry M. Atkinson, CPA Financial Officer
and Principal
Accounting Officer)
23
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