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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2008.
[ ] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Check whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange 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
---- ----
The issuer's revenues for the fiscal year ended June 30, 2008 were $32,592,507.
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the issuer was approximately $6.6 million as of September 18,
2008, based on the average bid and asked price on that date.
As of September 18, 2008, 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
---- ----
i
The purpose of this filing is to correctly identify the form on which this
report is filed as Form 10-KSB. Due to a clerical error, the original filing was
made on Form 10-KSB/A. No changes have been made to this report other than the
reference to the form on which it is filed.
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 and 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...........................................22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................22
Item 8A. Controls and Procedures........................................22
Item 8B. Other Information..............................................23
PART III
Item 9. Directors, Executive Officers, Promoters, Control
Persons and Corporate Governance; Compliance with
Section 16(a) of the Exchange Act..............................23
Item 10. Executive Compensation.........................................23
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................23
Item 12. Certain Relationships and Related Transactions, and
Director Independence..........................................23
Item 13. Exhibits.......................................................24
Item 14. Principal Accountant Fees and Services.........................25
Signatures ...............................................................26
Certifications .............................................................
Unless the context otherwise requires, all references in this report to "we,"
"us," "our," "Dynatronics" or the "Company" include Dynatronics Corporation, a
Utah corporation.
ii
PART I
Item 1. Description of 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 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). 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.
Recent Developments
Significant consolidation within the physical medicine market 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
("Rajala"). On July 2, 2007, we acquired five additional independent
distributors: Responsive Providers, Inc. of Houston, Texas ("RPI"); Therapy and
Health Care Products, Inc. of Girard, Ohio ("THCP"); Cyman Therapy, Inc. of
Detroit, Michigan ("Cyman"); Al Rice and Associates, Inc. of Jeffersonville,
Indiana ("Al Rice"); and Theratech, Inc. of Minneapolis, Minnesota
("Theratech"). The vertical integration of these distributors is a key strategic
step toward strengthening and preserving our distribution channels. We believe
that when fully integrated, these acquisitions will provide Dynatronics with
more effective direct distribution of our products
Subsequent to these acquisitions, we added new direct sales
representatives in Southern California, Louisiana, Kansas, Oklahoma, Wisconsin,
Missouri, North Carolina, South Carolina, Virginia, West Virginia, and Maryland.
We now cover 29 states with 36 direct sales representatives. This network of
direct sales representatives significantly strengthens and complements the
existing distribution of the Company through independent distributors and
catalog companies.
During fiscal year 2008, Dynatronics introduced four new products to
the market. At the beginning of the fiscal year, the Company began shipping the
new T3 treatment table. We believe this three-section table is unique due to its
features and the tremendous value it provides for practitioners. The metal
frames of the T3 tables are manufactured in Asia for optimal cost savings.
In April 2008, Dynatronics announced the introduction of the DynaPro
Spinal Health System, a non-surgical treatment for back and neck pain. This
system combines the benefits of decompression and light therapy with
core-stabilization exercises and nutrition, to form an effective tool for
reducing back and neck pain.
Another new product introduced in April 2008 was the Dynatron X5
"Turbo" soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times
more powerful than the original X5 device and we believe it is a highly
effective treatment for acute and chronic pain.
In April 2008, we also began shipments of the new "Synergie Elite" line
of aesthetic treatment devices. This new line is comprised of cellulite
treatment devices, microdermabrasion units and bio-stimulation light therapy
equipment. These new products represent the first time in 10 years that the
Synergie line of products has been updated. Initial response to the new Synergie
Elite equipment at trade shows has been promising. We believe the new updated
design and additional features make the Synergie Elite products both more
visually attractive and functionally enhanced to enable us to better compete in
the aesthetic markets.
1
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
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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 provides 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 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 reducing minor muscle
aches and pains.
Iontophoresis - Iontophoresis uses electrical current to deliver drugs
such as lidocaine for localized treatment of inflammation transdermally (through
the skin) 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.
2
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
Product Name Description
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Dynatron(R) 125 Ultrasound
Dynatron(R) 525 Electrotherapy
Dynatron(R) 150 Plus** Ultrasound
Dynatron(R) 550 Plus** Multi-modality Electrotherapy
Dynatron(R) 650 Plus** Multi-modality Electrotherapy
Dynatron(R) 850 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) 950 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) STS Electrotherapy for Chronic Pain
Dynatron(R) STS Rx Electrotherapy for Chronic Pain
Dynatron(R) STSi Multi-modality Electrotherapy for
Chronic Pain
Dynatron Solaris(R) 701 Ultrasound with Infrared Light Therapy
Dynatron(R) 702 Infrared Light Therapy
Dynatron Solaris(R) 705 Electrotherapy with Infrared Light
Therapy
Dynatron Solaris(R) 706 Electrotherapy with Infrared Light
Therapy
Dynatron Solaris(R) 708 Combination Electrotherapy/Ultrasound
with Infrared Light Therapy
Dynatron Solaris(R) 709 Combination Electrotherapy/Ultrasound
with Infrared Light Therapy
Dynatron Solaris(R) 880 Accessory Infrared Light Probe
Dynatron Solaris(R) 890 Accessory Infrared Laser Light Probe
Dynatron(R) X3 Infrared Light Therapy
DX2 and DynaPro Spinal
Health System Combination Traction with Infrared
Light Therapy
Dynatron(R) X5 Turbo Oscillation Therapy
Dynatron(R) iBox Iontophoresis
Dynatron(R) TX900 Traction Therapy
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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, hand therapy products, pilates and yoga
equipment, nutritional supplements, emergency care products and portable
electrotherapy products. A new, 450 page full-line catalog was introduced to the
market in September 2008, containing over 12,000 rehab products. This new
catalog is a major step in presenting our Company's new image to the market
following the assimilation of these dealers. It represents a more consolidated
approach to selling not only our high-quality manufactured products, but the
hundreds of lines of distributed products we now represent as a result of the
dealer acquisitions.
Dynatronics markets its products through direct sales representatives,
independent dealers and through the new 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.
3
Aesthetic Products
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Dynatronics manufactures and markets a line of aesthetic products under
the brand name of Synergie. The new Synergie Elite Aesthetic Massage System
(AMS) applies therapeutic vacuum massage to skin and subcutaneous tissues to
achieve a temporary reduction in the appearance of cellulite 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 Elite
microdermabrasion device (MDA) as a companion to the AMS device. The MDA device
gently exfoliates the upper layers of skin, exposing softer, smoother skin. In
conjunction with the microdermabrasion devices, the Company offers a unique line
of skin care products under the trade name: Calisse(TM) which is designed to
enhance the effects of the MDA treatments.
As part of the aesthetics line of products, the Company markets the
Synergie Elite 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 Elite LT for light therapy has
provided aestheticians with the ability to provide an enhanced "ultimate facial"
available only with the use of Synergie devices.
Allocation of Sales Among Key Products
No product accounted for more than 10% of the Company's revenues during
fiscal years 2008 and 2007.
Patents and Trademarks
Dynatronics holds 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. We hold a patent on our
light therapy technology that will remain in effect until August 2025. 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.
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 2008 and
2007.
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 or
institutions 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 36 direct sales representatives selling our products in 29 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 2008 or 2007.
Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) totaled $772,500 in
fiscal year 2008 compared to $711,500 in fiscal year 2007. 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 holds one patent on its light therapy
technology and has applied for two additional 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
direct sales representatives provide Dynatronics with direct distribution of
products into 29 states. This vertical integration allows us 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 DJO 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 Dynatronics 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: DJO (Chattanooga Group division), Naimco (Rich-Mar division)
and Mettler Electronics.
Light Therapy. Competitors that manufacture and market light therapy
devices include: DJO, 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, DJO, that offers a combination light therapy device that
includes electrotherapy and ultrasound capabilities.
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 DJO and Fabrication Enterprises, most competitors are
primarily distributors such as North Coast Medical, Sammons Preston (a division
of Patterson Medical), and Meyer Distributing. Dynatronics enjoys cost
advantages on the products it manufactures and directly distributes compared to
companies that only distribute similar products.
5
Iontophoresis. Competition in the iontophoresis market includes DJO
(EMPI and Iomed divisions), Birch Point Medical, Vyteris and Naimco. DJO 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 DJO and Birch Point. Our Dynatron iBox iontophoresis device is helping expand
our presence in this market.
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, DJO, Armedica, and
Clinton Industries. We believe we compete based on our industry experience and
product quality. In addition, certain components of the treatment tables are
manufactured overseas, which we believe allows for pricing advantages over
competitors.
Aesthetic Products. 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 Eleme
Medical, Syneron, and Durmafirm. The Synergie Elite 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 and medical practitioners. 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 Elite AMS
device, the Synergie Elite 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 Elite LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.
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 2008, Dynatronics continued its aggressive R&D campaign,
developing four new products during the year including the Dynatron X5 Turbo
Oscillation Therapy device, the DynaPro Spinal Health System, the T3 treatment
table and the Synergie Elite AMS/MDA/light therapy system. Total R&D
expenditures for 2008 were $1,354,743, compared to $1,492,774 in 2007. R&D
expenses represented approximately 4.2% and 8.4% of the revenues of the Company
in 2008 and 2007, respectively
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 submits new
products for clearance primarily under section 510(k) of the Medical Device
Amendment of the FDC Act. The fee per 510(k) submission in fiscal year 2008 was
$3,066. Beginning October 1, 2008, FDA modified their fee structure pursuant to
MDUFMA II which was a reauthorization of user fees to impose annual registration
fees of approximately $1,851 per manufacturing site, with submission fees for
510(k) applications of approximately $1,847.
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
7
labeling and promotion. The FDA Quality Systems Regulations are 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 the Congress of the
United States or in State Legislatures that could significantly change the
statutory provisions governing the approval, manufacturing, and marketing of
medical devices and products like those 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,
domestically or internationally, would have on our business in the future. They
could include, however, requirements for the reformulation of certain products
to meet new standards, the recall or discontinuance of certain products,
additional record keeping, expanded documentation of the properties of certain
products, expanded or different labeling, and additional scientific
substantiation. Any or all such requirements could have a material adverse
effect on 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, 2008, we had a total of 165 full-time employees and 18
part-time employees, compared to 144 full-time employees and 7 part-time
employees at June 30, 2007.
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. 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 payments totaling 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 office and/or
warehouse space for its newly acquired dealers in Pleasanton, California;
Houston, Texas; Detroit, Michigan; and Girard, Ohio.
8
We believe the manufacturing facilities described above are adequate
and able to accommodate presently expected growth and needs of the Company for
its operations. 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 2008.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Small
------------------------------------------------------------------
Business Issuer Purchases of Equity Securities
----------------------------------------------
Market Information. As of September 17, 2008, 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,
2008 2007
---- ----
High Low High Low
-------------------------------------
1st Quarter (July-September) $2.00 $ .95 $1.36 $1.13
2nd Quarter (October-December) $1.55 $1.01 $1.45 $1.11
3rd Quarter (January-March) $1.20 $ .97 $1.27 $1.02
4th Quarter (April-June) $1.07 $ .60 $1.22 $ .97
Holders. As of September 17, 2008, the approximate number of common
stock shareholders of record was 454. 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.
NASDAQ Deficiency Notice. On June 25, 2008, Dynatronics received a
Deficiency Letter from the NASDAQ Stock Market, indicating that the Company had
failed to comply with the minimum bid requirement for continued inclusion under
Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D),
the Company is provided 180 days, or until December 22, 2008, to regain
compliance with the bid price deficiency rule.
The management of Dynatronics intend to use their best efforts to
regain compliance with NASDAQ's minimum bid requirement. However, there can be
no assurance that compliance with the minimum bid requirement will be achieved
given recent historical performance of the Company and the overall current
condition of financial and stock markets in the United States. If compliance is
not achieved, the Company's stock will likely be delisted from NASDAQ and begin
trading on the OTC bulletin board.
9
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information related to our equity
compensation plans as of June 30, 2008:
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))
(a) (b) (c)
--------------------------------------------------------------- ---------------- ---------------- -----------------
Equity compensation plans approved by security holders 1,101,603 $1.41 908,180
Equity compensation plans not approved by security holders 40,000 $3.50 0
Total 1,141,603 908,180
Recent sales of unregistered securities; use of proceeds.
---------------------------------------------------------
On June 30, 2007, the Company entered into a merger agreement with
Rajala. On July 2, 2007, the Company entered into separately negotiated merger
agreements with RPI, THCP, Cyman, Al Rice, and 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 an independent vendor or distributor of
the Company's products.
In each of these transactions the securities were issued without
registration under 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 2008, Dynatronics granted 648,370 options
to employees and officers pursuant to stock option plans. The total number of
shares of common stock issuable under such options is 648,370 shares with an
average exercise price of $1.07 per share. In fiscal year 2007, Dynatronics
granted 40,959 stock options for shares of common stock at an average exercise
price of $1.22 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. In December 2008, the Board of Directors
authorized an additional $250,000 to purchase the Company's common stock on the
open market. During fiscal year 2008, the Company purchased 258,569 shares for
$280,440, leaving $76,429 of 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
2008:
10
Small Business Issuer Purchases of Equity Securities
---------------------------- ------------- ----------- ------------ ----------
Period (a) (b) (c) (d)
Total Average Total Maximum
number price number number
of paid per of (or
shares share shares approximate
(or units) (or unit) (or units) dollar
purchased purchased value) of
as part shares (or
of units) that
publicly may yet be
announced purchased
plans under the
or plans
programs or
programs
---------------------------- ------------- ----------- ------------ ----------
April 1 to April 30, 2008 38,555 $.99 38,555 106,572
---------------------------- ------------- ----------- ------------ ----------
May 1 to May 31, 2008 13,300 $1.02 13,300 93,026
---------------------------- ------------- ----------- ------------ ----------
June 1 to June 30, 2008 22,074 $.75 22,074 76,429
---------------------------- ------------- ----------- ------------ ----------
Total 73,929 73,929
---------------------------- ------------- ----------- ------------ ----------
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Overview
--------
Our principal business is the design, manufacture, marketing,
distribution and sales 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 5,000 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
Sales of manufactured physical medicine products in fiscal years 2008
and 2007 represented approximately 49% and 76% of the Company's physical
medicine product sales, respectively, with the balance each year sold by the
Company as a distributor of non-manufactured products. As a result of the
acquisition of six of our distributors who represented not only Dynatronics'
products, but many other lines of products, there was a shift in the mix of
sales that began to be more heavily weighted toward distributed products.
Sales of manufactured aesthetic products in fiscal years 2008 and 2007
represented approximately 87% of the Company's aesthetic product sales each
year, with the balance sold by the Company as a distributor of non-manufactured
products.
Sales of all physical medicine products represented 89.1% and 87.2% of
total revenues in fiscal years 2008 and 2007, respectively; while sales of
aesthetic products accounted for 4.2% and 6.5% of total revenues in 2008 and
2007, respectively. Chargeable repairs, billable freight revenue and other
miscellaneous revenue accounted for approximately 6.7% and 6.3% of total
revenues in 2008 and 2007, respectively.
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
domestic or international 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 six fiscal years. The
audited financial statements for the fiscal years ended June 30, 2008 and 2007
are included with this report.
Selected Financial Data
Fiscal Year Ended June 30
2008 2007 2006 2005 2004 2003
----------------------------------------------------------------------------------
Net Sales $ 32,592,507 $ 17,837,104 $ 19,513,136 $ 20,404,368 $ 20,587,273 $ 16,896,992
Net Income (loss) $ (8,443,771) $ (85,042) $ 194,031 $ 728,816 $ 883,300 $ 24,799
Net Income (loss)
per share (diluted) $ (.62) $ (.01) $ .02 $ .08 $ .10 $ .00
Working Capital $ 4,320,883 $ 8,116,391 $ 7,390,147 $ 7,043,854 $ 6,300,582 $ 5,516,720
Total Assets $ 18,427,819 $ 18,567,616 $ 14,523,655 $ 13,459,723 $ 14,272,579 $ 12,713,029
Long-term Obligations $ 3,501,377 $ 3,961,436 $ 2,637,263 $ 1,914,490 $ 2,034,854 $ 2,203,779
Fiscal Year 2008 Compared to Fiscal Year 2007
---------------------------------------------
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, 2008 increased 83% to
$32,592,507, compared to $17,837,104 during fiscal year 2007. The increase in
sales is the result of the addition of revenues from the Company's acquisition
of six of its distributors of physical medicine products completed on June 30,
2007 and July 2, 2007. The vertical integration of these distributors is a key
strategic step toward strengthening our distribution channels. We believe that
these acquisitions provide Dynatronics with more effective direct distribution
of our products and generate better margins on each product sold at the retail
level compared to the wholesale level. Subsequent to these acquisitions, we
added twelve new direct sales persons in other territories including Southern
California, Louisiana, Kansas, Oklahoma, and Missouri, North Carolina, South
Carolina, Virginia, West Virginia and Maryland expanding our direct sales force
to 36 sales representatives covering 29 states.
The acquired distributors sell products from many manufacturers,
including Dynatronics. As a result of the transactions described above, the mix
between Company sales of manufactured and distributed rehab products during 2008
shifted toward distributed products with 51% of sales attributed to sales of
distributed products and the remaining 49% being manufactured products. By
comparison, during 2007, the mix between distributed and manufactured products
was 24% and 76%, respectively. We anticipate the mix between manufactured and
distributed products in future periods will be similar to the mix experienced
during fiscal year 2008.
Gross Profit
During fiscal year 2008, gross profit increased $5,230,149 or 75.7% to
$12,141,937 or 37.3% of net sales compared to 6,911,788 or 38.7% of net sales in
2007. The increase in gross profit was primarily a result of the sales added by
the recent acquisitions. For the year ended June 30, 2008, gross profit as a
percent of sales decreased 1.4 percentage points to 37.3%, compared to the prior
year. Most of this decrease (approximately 1.2 percentage points) was related to
$417,000 of inventories of Dynatronics manufactured products acquired from the
six independent dealers which had a higher cost basis because they were held in
the dealer inventory at wholesale cost instead of manufactured cost. Until that
inventory was depleted, the Company recognized higher Cost of Goods Sold than it
would have based on manufactured cost. Additionally, many distributed items
carry lower margins than manufactured items. The shift toward more sales of
distributed items would create downward pressure on overall gross margin
percentages.
12
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the year
ended June 30, 2008 increased $7,931,330 to $13,473,190, or 41.3% of net sales,
compared to $5,541,860, or 31.1% of net sales in the prior year. Substantially
all of the increase in SG&A expenses for the year ended June 30, 2008 is related
to the recent acquisitions and includes the following:
o $4,247,000 in higher selling expenses primarily related to the new
direct sales force
o $2,230,000 in higher labor and operating costs to support the
higher sales volume
o $1,454,000 in higher general and administrative expenses
associated with the acquired companies
With the assimilation of the six acquisitions now substantially
completed, management implemented measures in March 2008 and July 2008 designed
to reduce annual operating expenses by more than $2.1 million. These cost
savings include a reduction of approximately 20 percent of the Company's
workforce and the elimination of duplicative overhead expense. In addition, we
consolidated operations from eight distribution points to three. Many of these
reductions had been contemplated as part of the planning for the acquisition and
assimilation of the distributors in 2007. We believe these reductions in
expenses will not negatively impact the Company's sales or operations as they
represent primarily the elimination of unnecessary duplicate costs associated
with the acquisitions.
Research and Development
Research and Development ("R&D") expense during fiscal year 2008 was
$1,354,743, compared to $1,492,774 in 2007. During fiscal 2008, we developed and
introduced the DynaPro Spinal Health System, the Dynatron X5 Turbo Oscillation
Therapy device, the new Synergie Elite AMS/MDA/Light Therapy line of products
and the T3 treatment table. R&D expense represented approximately 4.2% and 8.4%
of the net sales of the Company in 2008 and 2007, respectively. R&D expenditures
as a percentage of sales were lower due to the additional sales coming from the
acquisitions, compared to the prior year which predated the acquisitions. R&D
costs are expensed as incurred. Dynatronics intends to continue its commitment
to developing innovative products for the physical medicine market in fiscal
year 2009 and beyond in order to position the Company for growth.
Goodwill Impairment
At the end of fiscal year 2008, the Company performed an evaluation of
goodwill in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 142. As a result of a decrease in the market value of the Company as
reflected in the Company's lower stock price, an impairment of goodwill was
indicated and the goodwill stated on the books was written off. This resulted in
a $6.6 million write off of goodwill during the fourth quarter of fiscal year
2008. Most of that goodwill was associated with the acquisition of dealers at
the first of the year, as well as the 1996 acquisition of our Tennessee
operations. This write-off exhausts all goodwill assets on the books of the
Company.
Pre-tax Loss
Pre-tax loss for fiscal year 2008 was $9,915,555 compared to a pre-tax
loss of $271,243 in 2007. The pre-tax loss in 2008 was comprised of
approximately $6.6 million of goodwill impairment, $2 million in
acquisition-related expenses, including exhausting acquired dealer inventories
at higher costs than Dynatronics' cost of manufacturing, reducing personnel and
the associated severance costs, stock option expense, and duplicate SG&A
overhead costs, and approximately $768,000 in increased reserves for bad debts
and inventory during the year. The increase in reserves was associated with
increased receivables and inventories associated with higher sales.
Income Tax Benefit
Income tax benefit for fiscal year 2008 was $1,471,784 compared to
income tax benefit of $186,201 in 2007. The effective tax rate for 2008 was
14.8% compared to 68.6% in 2007. The lower effective tax rate for 2008 reflects
the non-deductibility of significant portions of the goodwill impairment charges
for tax purposes. The higher tax accrual rate in 2007 is a result of research
and development tax credits and certain other items.
13
Net Loss
Net loss for year ended June 30, 2008 was $8,443,771 ($.62 per share),
compared to net loss of $85,042 ($.01 per share) in 2007. Major components
contributing to the increased net loss in 2008 were the $6.6 million goodwill
impairment, $2 million of acquisition related expenses and increases in reserves
for bad debts and inventory.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through available cash reserves
and borrowings under its line of credit. The Company had working capital of
$4,320,883 at June 30, 2008, inclusive of the current portion of long-term
obligations and credit facilities, compared to working capital of $8,116,391 at
June 30, 2007. The $3.8 million decrease in working capital is a direct result
of a $5,568,320 increase in the line of credit that was required in part to
finance a $2.4 million increase in accounts receivable and inventory, to finance
a portion of the $3.2 million in cash expended in the acquisitions in June and
July 2007 and to finance operating losses incurred during the fiscal year. Other
factors affecting working capital included increased accounts payable and
accrued expenses as well as lower cash balances and other receivables.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
increased $1,393,751 to $5,151,235 at June 30, 2008, compared to $3,757,484 at
June 30, 2007. The increase in receivables is roughly equivalent to 30 days
worth of new sales through the direct sales reps. Many of the new retail
customers acquired through the dealers are not extended credit terms but instead
pay COD or by credit card. Conversely, some of the larger retail institutions
will sometimes require extended terms to collect. On average the new retail
sales attributable to our direct sales force are averaging 30 - 45 days to
collect.
Trade accounts receivable represent amounts due from the Company's
dealer network, 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. During the reporting period the reserve
for accounts receivable was increased by $480,000 with an ending reserve balance
of $411,000 compared to an ending reserve balance on June 30, 2007 of $330,857.
Accounts receivable are generally collected within 30 days of the agreed terms.
However, as a result of the recent acquisitions, the character of the accounts
receivable and collection patterns have changed and will be carefully monitored
over the coming year to ensure the allowance estimates are adequate. Allowances
for the retail accounts assumed in the acquisitions are currently calculated
based on the historical experience of the acquired companies.
Inventories
Inventories, net of reserves, at June 30, 2008 increased $969,084 to
$6,283,068 compared to $5,313,984 at June 30, 2007. This increase is primarily a
result of required adjustments in inventory levels to accommodate higher sales
and the expansion of the number of stocked items. Inventories are expected to
reduce modestly now that we have consolidated eight distribution points to three
central distribution facilities. Inventory reserves were increased during the
year by $288,000 to make allowance for increased inventory levels and unexpected
losses associated with the increased volume of distributed goods.
Goodwill
In compliance with SFAS No. 142, the Company was required to conduct an
assessment of the Company's goodwill as of June 30, 2008. The SFAS No. 142
goodwill impairment model is a two-step process. First, it requires a comparison
of the book value of net assets to the fair value of the Company. As of June 30,
2008, the book value of the Company exceeded the fair value of the Company as
determined by the market capitalization of the Company indicating an impairment
of goodwill was likely.
Because the fair value is determined to be less than book value, a
second step was performed to compute the amount of the impairment. To ascertain
this impairment, the Company retained an independent appraiser to determine the
extent of the impairment. The determination of the appraiser was the Company's
goodwill was 100% impaired. This resulted in a $6.6 million write-off of
goodwill during the fourth quarter of fiscal year 2008. Most of that goodwill
was associated with the acquisition of dealers at the first of the year, as well
as the 1996 acquisition of our Tennessee operations.
14
Accounts Payable
Accounts payable increased $182,809 to $1,423,839 at June 30, 2008,
compared to $1,241,030 at June 30, 2007, primarily as a result of the recent
acquisitions and the increased level of sales associated with those
acquisitions. Accounts payable are generally within term. We strive to take
advantage of available early payment discounts when offered.
Accrued Expenses and Acquisition Cash Obligation
Accrued expenses increased $212,372 to $500,145 at June 30, 2008,
compared to $287,773 at June 30, 2007, primarily as a result of increased sales
at the retail level which generate higher sales tax liabilities in the 30 states
where we now sell on a direct basis.
Acquisition cash obligations decreased to $0 at June 30, 2008, compared
to $1,000,000 at June 30, 2007. This obligation at June 30 reflected the cash
amount that was placed into escrow in conjunction with the acquisition made on
June 30, 2007, which was paid subsequently.
Accrued Payroll and Benefit Expenses
Accrued payroll & benefit expenses increased $135,164 to $411,918 at
June 30, 2008, compared to $276,754 at June 30, 2007. The increase in accrued
payroll and benefit expenses is related to timing differences as well as the
increased number of employees resulting in higher accrued payroll at June 30,
2008 compared to June 30, 2007.
Cash
The Company's cash position at June 30, 2008 decreased to $288,481,
compared to $1,301,105 at June 30, 2007, as a result of payments related to the
acquisitions made on June 30, 2007 and July 2, 2007. The Company had deposited
the financing proceeds in anticipation of the acquisitions, which temporarily
increased cash balances at June 30, 2007. The Company believes that improved
cash flow from operations through improving management of accounts receivable,
maintaining current inventory levels and the reductions in expenses implemented
during the year will further minimize operating losses and expedite a return to
profitability. This improved cash flow combined with balances under available
lines of credit is expected to be sufficient to cover 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
During fiscal year 2008, the Company increased its revolving line of
credit with a commercial bank from $6,500,000 to $8,000,000. At June 30, 2008,
the Company owed $5,818,320 compared to $250,000 at June 30, 2007. The increase
in the line of credit was the result of the following factors:
o The Company used approximately $3.2 million under the line of
credit to finance the acquisitions after June 30, 2007.
o Receivables and inventory increased $2,400,000, while payables
increased approximately $182,800. This imbalance of higher
receivables while maintaining payables more current required
additional financing demands on the line of credit.
o Operating losses and capital expenditures, mostly associated with
the acquisitions, required additional financing provided by the
line of credit.
Interest on the line of credit is based on the bank's prime rate plus
1%, which at June 30, 2008, equaled 6%. The line of credit is collateralized
by accounts receivable and inventories of the Company as well as a security
interest in the Company's headquarters facility in Salt Lake City, Utah.
Borrowing limitations are based on approximately 45% of eligible inventory and
up to 80% of eligible accounts receivable. 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, 2008, the Company was in compliance with its loan covenants or
had received waivers for any noncompliance.
The current ratio was 1.5 to 1 at June 30, 2008 compared to 3.3 to 1 at
June 30, 2007. Current assets represented 70% of total assets at June 30, 2008,
compared to 63% at June 30, 2007.
15
Debt
Long-term debt excluding current installments totaled $3,046,000 at
June 30, 2008, compared to $3,251,631 at June 30, 2007. In June 2007, a $1.5
million long-term mortgage loan was obtained to partially finance our
acquisitions in June and July 2007. The funding of this loan temporarily
increased our cash balances at the end of June 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
$3.3 million with monthly principal and interest payments of $40,708. For a more
complete explanation of the long term debt, please see Note 6 in the audited
financial statements.
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 an understanding of our results of operations. The impact and
risks related to these policies on our business operations are discussed where
such policies affect our reported and expected financial results. 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.
o Character of the inventory as either a distributed item, finished
manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statements of income during the
period in which such modifications are determined necessary by management. At
June 30, 2008 and June 30, 2007, our inventory valuation reserve balance, which
established a new cost basis, was $337,718 and $293,810, respectively, and our
inventory balance was $6,283,068 and $5,313,984 net of reserves, respectively.
Revenue Recognition
Historically, the majority of our product sales were to customers who
were independent distributors. In fiscal 2008, as a result of acquiring six of
our top distributors, a significant portion of our sales were generated through
our new direct sales force. Our sales force and distributors sell our products
to end users, including physical therapists, professional trainers, athletic
16
trainers, chiropractors, medical doctors and aestheticians. With the acquisition
of the key distributors, we effectively reduced our dependence on sales by
independent distributors. Sales revenues are recorded when products are shipped
FOB shipping point under an agreement with a customer, risk of loss and title
have passed to the customer, and collection of any resulting receivable is
reasonably assured. Amounts billed for shipping and handling of products are
recorded as sales revenue. Costs for shipping and handling of products to
customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In
doing so, we analyze historical bad debt trends, customer credit worthiness,
current economic trends and changes in customer payment patterns when evaluating
the adequacy of the allowance for doubtful accounts. Our accounts receivable
balance was $5,151,235 and $3,757,484, net of allowance for doubtful accounts of
$411,057 and $330,857, at June 30, 2008 and June 30, 2007, respectively. The
expansion of our customer base associated with more direct sales will spread bad
debt risk over a broader base of customers and reduce the concentration of large
dealer balances. At the same time, the management of more customer accounts
presents a higher risk. These risks will be evaluated over the coming year to
determine if current estimate policies are still applicable. In the meantime,
allowance for doubtful accounts associated with these acquired customers is
being based on the historical experience of the dealers acquired as well as the
one year of experience since the acquisition of these dealers.
Business Plan and Outlook
During fiscal year 2009, we will focus on a strategy to improve overall
operations and sales that include the following elements: (1) strengthening
distribution channels; (2) developing new, state-of-the-art products for future
growth; (3) refining operations associated with the acquired companies and
reducing overhead costs; and (4) enhancing product profit margins through
improved manufacturing processes. Our goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth.
Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. The main challenge presented by this
consolidation was the loss of independent dealers and the narrowing of
distribution channels. In order to compete more favorably and effectively, we
moved aggressively to strengthen our channels of distribution by acquiring key
distributors. We identified six key distributors with operations in 20 states.
On June 30, 2007, we acquired our largest independent distributor headquartered
in California. On July 2, 2007, we acquired five additional key independent
distributors headquartered in Texas, Ohio, Michigan, Indiana and Minnesota. We
also began hiring direct sales representatives in key locations around the
country resulting in direct sales representatives now in 29 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 believe will improve gross profit margins and
enhance the Company's control over the distribution process.
The September 2008 introduction of our first consolidated catalog and
pricing schedule provides a powerful sales tool that will help strengthen sales
efforts by direct sales reps. It will also be an effective tool for many
independent dealers who use either a private labeled version or the proprietary
version of the catalog. This tool will further enhance efforts to strengthen
distribution channels. Specific efforts will be focused on recruiting additional
independent dealers and seasoned direct sales reps in geographical areas where
distribution has been lost or diminished due to consolidation efforts within the
industry. With the broad line of products the company now offers, efforts will
be undertaken to develop relationships with Group Purchasing Organizations
(GPO's) and large chains of hospitals and clinics that purchase only on
contract. This is a segment of business the Company has not heretofore pursued
but represents a large segment of business from which it has previously been
foreclosed due to lack certification as an approved vendor with the various
GPO's and national or regional chains of care facilities.
The Company's Synergie brand line of aesthetic products received a
boost this past year with the introduction of the Elite Synergie line, the first
redesign of the popular aesthetic products since their original introduction
almost 10 years ago. This new line of products remains the best value on the
market. With the new product line in place, the Company intends to leverage its
stable of direct sales representatives to further promote the sale of Synergie
brand products. With no mature distribution channels in the aesthetics market,
the availability of these direct sales reps provides an advantage for enhancing
the distribution of these products. To assist in that effort, a unique catalog
is contemplated to include many products that are already offered in the
Company's proprietary rehab products catalog. In addition, the Company will seek
strategic partnerships, both domestic and international, to help maintain the
sales momentum that is being initiated by the introduction of this revised
product line. The broadening of the aesthetics distribution channel could
provide an exciting boost to the Company's line of high margin aesthetic
products.
17
We have long believed that international sales present an untapped
potential for growth and expansion, particularly given the current exchange
rates which favor foreign currencies over the dollar. Adding new distributors in
several countries will be the key to this expansion effort. Our past efforts to
improve international marketing have yielded only marginal improvements. We
remain committed, however, to finding the most cost effective ways to expand our
markets internationally. Our Salt Lake City facilities, where all
electrotherapy, ultrasound, traction, light therapy and Synergie products are
manufactured, are 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.
Strengthening our distribution channels domestically and
internationally for both the rehab and aesthetic lines is our top priority for
this new fiscal year. A second priority not far behind strengthening
distribution channels is the focus on introducing new products.
During fiscal year 2007 and 2008, significant investments were made in
research and development to bring important new products to market. In April
2008, Dynatronics introduced the DynaPro Spinal Health System, a non-surgical
treatment for back and neck pain. This innovative system combines the benefits
of decompression and light therapy with core-stabilization exercises and
nutrition forming a very effective tool for reducing pain. Decompression therapy
has been shown effective in relieving pain associated with a host of back
problems including herniated discs, degenerative disc disease, sciatica and
pinched nerves. In addition to offering the most comprehensive approach to the
effective treatment of many of the most common causes of back and neck pain, the
DynaPro Spinal Health System features the Company's Dynatron DX2, T4 treatment
table and other packaged accessories incorporating a state-of-the-art marketing
and patient-awareness program to help practitioners promote this proven,
non-surgical pain relief treatment.
Another new product introduced in April 2008 was the new Dynatron X5
"Turbo" soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times
more powerful than the original X5 device and is a highly effective treatment
for various orthopedic and sports injuries, and is gaining popularity in sports
medicine.
Also introduced in April 2008 was the new "Synergie Elite" product
line. The new "Synergie Elite" line of aesthetic treatment devices is comprised
of cellulite treatment devices, microdermabrasion units and bio-stimulation
light therapy equipment. These new products represent the first major redesign
of the Synergie AMS cellulite reduction device and MDA microdermabrasion device
since their introduction almost a decade ago. The market's response to the new
Synergie Elite equipment has been promising. The new updated design and
additional features make the Synergie Elite products not only visually
attractive, but functionally enhanced positioning us to better compete in the
aesthetic markets.
During fiscal year 2008, the Company began shipping the new T3
treatment table to customers. We believe this three-section table is unique due
to its features and the tremendous value it provides for practitioners. The
metal frames of the T3 tables are manufactured in Asia for optimal cost savings.
This commitment to product innovation will continue through the coming
fiscal year. Many new products are under design some of which are scheduled for
introduction in the latter half of the current fiscal year with others scheduled
for introduction in the first half of the following fiscal year. The commitment
to innovation of high quality products has been a hallmark of Dynatronics and
will continue to be throughout the coming year.
Since the acquisitions were completed in July 2007, Dynatronics has
consolidated operations from eight distribution points to three facilities
including our existing facilities in Tennessee and Utah as well as a new
facility established in California that was formerly associated with Rajala, one
of the acquired companies. The ability to timely service west coast customers
was deemed a critical point of service and warranted the continuance of the
Rajala operations. We believe that other areas of the country can be adequately
served from these three warehouse operations.
With the assimilation of the six acquisitions now substantially
completed, management has taken measures designed to reduce expenses by more
than $2 million annually. The cost savings include a reduction of approximately
20 percent of the Company's workforce and the elimination of duplicative
overhead expense. Many of these reductions had been contemplated as part of the
assimilation of the acquired distributors; however, implementation of the
planned reductions took longer to realize than expected. The implementation of
these cost reductions and further refinements that should be achieved over the
coming months is expected to contribute significantly to our profitability
objectives in the coming quarters.
18
Refining the best model for supporting sales reps and dealers will be a
high priority during fiscal year 2009. We will continue to evaluate the most
efficient ways to maintain the satellite sales offices and warehouses. The
ongoing refinement of this model is expected to yield further efficiencies that
will better achieve sales goals while at the same time reducing expenses.
While sales have shifted more to distributed products, the sale of the
Company's manufactured products remains the largest contributor to margin
generation. Therefore, renewed emphasis is being placed on improving
manufacturing operations including considering more offshore manufacturing of
components as well as streamlining manufacturing operations in Utah and
Tennessee.
Fiscal year 2008 was a year of transformation. Dynatronics changed its
business model from being primarily a manufacturer of products distributed
through a network of independent dealers to a manufacturer and distributor of
products through a direct sales force as well as through key independent
dealers. This change in our business model comes in response to the changes
occurring in our industry. Consolidation efforts have resulted in a more
competitive environment. These consolidation efforts are occurring in both
manufacturing and distribution. The consolidation in manufacturing is being led
by DJO, Inc. (formerly ReAble or Encore Medical). Over the past few years DJO,
Inc. has acquired such companies as Chattanooga Group, Saunders, Iomed, Empi,
and Rehabilicare. In addition it has acquired distributors, including
Performance Modalities and Endeavor Medical. The consolidation in distribution
is being led primarily by Patterson Medical. During the same period of time,
Patterson Medical has acquired distributors including Sammons-Preston,
Theraquip, Dale Surgical, W.S. Medical and Goldsmith Medical. These
consolidation efforts have created both challenges and opportunities for
Dynatronics.
In order to strategically protect distribution channels, Dynatronics
acquired the six independent distributors previously discussed. Since that time,
Dynatronics has continued to add direct sales personnel as well as strengthen
relationships with key independent distributors. We believe that through these
direct sales reps and independent distributor relationships, we have the premier
distribution network of seasoned and trained equipment sales personnel in the
industry. The consolidation efforts in manufacturing by DJO and in distribution
by Patterson are having a polarizing effect and compelling independent
distributors and sales reps to choose an affiliation. We believe many of the
best of these have become affiliated with Dynatronics because of our innovative
quality products and proven history of strong customer service and loyalty to
our distribution network. The quality of our products, the breadth of our
product line, and the strength of our distribution channel we believe enable us
to effectively compete in servicing our core market of private clinical
practitioners and professional, collegiate, and other athletic teams.
As a manufacturer of many of the products we sell, we also have the
ability to be competitive in our pricing schemes - particularly when compared to
large consolidated or independent distributors. The recent introduction of our
new catalog and revised pricing schedule has refreshed our margins for products
where we experienced increasing costs from vendors.
Dynatronics' management acknowledges that the transition in our
business model has taken longer than anticipated and the losses incurred have
been higher than expected. Nevertheless, the strategic decisions to change our
business model were mandated by our desire to be responsive to the
consolidations occurring within our industry. While it has been a more expensive
proposition than originally projected, we believe the strategy was appropriate
and provides a platform for the Company to now be competitive in a new market
environment. With the reduction in expenses already implemented, the new
products recently introduced, the new product catalog, and ongoing efforts to
further streamline operations, we believe our goal of returning to profitability
is achievable in the coming quarters.
Based on our defined strategic initiatives, we are focusing our
resources in the following areas:
o Reinforcing our position in the domestic physical medicine market
by securing channels of distribution through a strategy of
recruiting direct sales representatives and working closely with
the most successful dealers of capital equipment in areas where
distribution has been lost or significantly diminished through
consolidation. .
o Improving sales by focusing on development of new sales strategies
and promotional programs including the introduction of the most
comprehensive catalog in our history and leveraging that tool in
achieving the goals of strengthening our distribution channels.
o Expanding distribution of our redesigned Synergie product line
through leveraging our current direct sales force, seeking
additional independent distributors and creating new sales tools
such as a catalog of products targeted just for aesthetics.
19
o Renewing emphasis of international sales by identifying key
distributors who could represent the product line particularly in
Europe.
o Continuing development of new, state-of-the-art products, both
high-tech and commodity, in fiscal year 2009, for both the
rehabilitation and aesthetic markets.
o Examining ways to reduce costs of manufacturing including
exploring more overseas manufacturing of components.
o Further refining the operational model for supporting field sales
and satellite operations.
o Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase market
reach and supplement capital resources.
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 and Section 21E of the Exchange Act. These
forward-looking statements and other information are based on our beliefs as
well as assumptions made by us using information currently available.
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.
Prior to the acquisition of its dealers at 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 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
o Achieving sales expansion sufficient to return to profitability.
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.
20
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.
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, DJO, Inc. and Sammons Preston, Inc., a 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 20 years
from its filing date. 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.
21
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.
General Economic Conditions. The general economic conditions in the
United States including the current credit crises could lead to loss of consumer
confidence resulting in postponement of purchases of capital equipment, in
particular. The company relies on the sale of its capital equipment to maintain
sales and margins. A serious recession or worse could have a serious adverse
affect on the operations of the Company.
Reductions in Reimbursements. The Company sells to practitioners who
are dependent on reimbursements from insurance companies, including Medicare and
Medicaid. Reductions in reimbursement rates could lead to lower cash flow for
practitioners stemming the purchases of supplies and new capital equipment or
completing expansion plans that would require new equipment.
Effect of Common Stock being Delisted from NASDAQ. On June 25, 2008,
Dynatronics received a Deficiency Letter from the NASDAQ Stock Market indicating
that the Company failed to comply with the minimum bid requirement for continued
inclusion under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule
4310(c)(8)(D), the Company is provided 180 days, or until December 22, 2008, to
regain compliance with the bid price deficiency rule. The leaders of Dynatronics
intend to use their best efforts to regain compliance with NASDAQ's minimum bid
requirement. However, there can be no assurance that compliance with the minimum
bid requirement will be achieved given the current market environment. If
compliance is not achieved, the Company's stock will likely be delisted from
NASDAQ and begin trading on the OTC bulletin board. Such delisting could have a
negative effect on the price and liquidity of the Company's stock.
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.
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, management has
concluded that for the reason noted below our disclosure controls and procedures
are not 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 2008, 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 except as explained below.
22
Management's Report on Internal Control Over Financial Reporting.
-----------------------------------------------------------------
Management's Report on Internal Control Over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act, as amended. Our management assessed the effectiveness
of our internal control over financial reporting as of June 30, 2008. In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company's annual or interim financial statements will not be prevented or
detected on a timely basis.
As of June 30, 2008, management performed an analysis of goodwill and
determined based on that analysis that no impairment was required for goodwill.
Subsequently, at the request of our auditors, we employed an independent third
party appraiser to perform an assessment of any goodwill impairment. The report
of the appraiser resulted in management reconsidering their prior impairment
analysis and resulted in a material adjustment to our financial statements.
Based on that assessment we have concluded that a material weakness existed in
our procedure for evaluating goodwill impairment. As a result of this evaluation
we have modified our procedures and controls for properly assessing long lived
assets.
Item 8B. Other Information
-----------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and
-------------------------------------------------------------
Corporate Governance; 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 2008 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 2008 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 2008
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, and Related
-----------------------------------------------------------
Transactions
------------
The Company rents office and/or warehouse space for its newly acquired
dealers in Pleasanton, California; Detroit, Michigan; and Girard, Ohio. These
buildings are owned by the Rajala Family Trust, Tony Trolio and Steve Cyman who
are the former owners of three of the dealerships acquired on June 30 and July
2, 2007. As part of the purchase price for their distribution companies, The
Rajala Family Trust, Tony Trolio and Steve Cyman were paid with shares of
Dynatronics stock and are currently 5% or greater shareholders of the Company.
The rental payments for each facility are comparable to or below market rates
for similar properties.
23
During the two years ended June 30, 2008, there were no other parties
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:
1. Financial Statements (included in Part II, Item 7):
Report of Independent Registered Public Accounting Firm.......F-1
Consolidated Balance Sheets at June 30, 2008 and 2007.........F-2
Consolidate Statements of Operations for years ended
June 30, 2008 and 2007........................................F-3
Consolidated Statements of Stockholders'
Equity for years ended June 30, 2008
and 2007......................................................F-4
Consolidated Statements of Cash Flows for
years ended June 30, 2008 and 2007 ...........................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)
10.2 Employment contract with Kelvyn H. Cullimore, Jr.
(filed as Exhibit to June 30, 2007 Annual Report
on Form 10-KSB)
10.2 Employment contract with Larry K. Beardall (filed
as Exhibit to June 30, 2007 Annual Report on Form
10-KSB)
10.3 Loan Agreement with Zion Bank (filed as Exhibit to
June 30, 2007 Annual Report on Form 10-KSB)
10.4 Settlement Agreement dated March 29, 2000 with
Kelvyn Cullimore, Sr. (previously filed)
24
10.7 Dynatronics Corporation 2005 Equity Incentive
Award Plan (previously filed as Annex A to the
Company's Definitive Proxy Statement on Schedule
14A filed on October 27, 2005)
10.8 Form of Option Agreement for the 2005 Equity
Incentive Award Plan for incentive stock options
(filed as Exhibit to June 30, 2007 Annual Report
on Form 10-KSB)
10.9 Form of Option Agreement for the 2005 Equity
Incentive Award Plan for non-qualified options
(filed as Exhibit to June 30, 2007 Annual Report
on Form 10-KSB)
23.1 Consent of Tanner LC (filed herewith)
31 Certification under Rule 13a-14(a)/15d-14(a) of
principal executive officer and principal
financial officer (filed herewith)
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 2008 Annual
Meeting of Shareholders, to be sent to shareholders of the Company subsequent to
the filing of this report on Form 10-KSB.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNATRONICS CORPORATION
By /s/ Kelvyn H. Cullimore, Jr.
-----------------------------------
Kelvyn H. Cullimore, Jr.
Chief Executive Officer and President
Date: September 29, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Kelvyn H. Cullimore, Jr. Chairman, President, September 29, 2008
---------------------------- CEO (Principal Executive
Kelvyn H. Cullimore, Jr. Officer)
/s/ Terry M. Atkinson Chief Financial Officer September 29, 2008
---------------------------- (Principal Financial
Terry M. Atkinson, CPA Officer and Principal
Accounting Officer)
/s/ Larry K. Beardall Director, Executive September 29, 2008
---------------------------- Vice President
Larry K. Beardall
/s/ Kelvyn H. Cullimore Vice Chairman September 29, 2008
----------------------------
Kelvyn H. Cullimore
/s/ Howard L. Edwards Director September 29, 2008
----------------------------
Howard L. Edwards
/s/ Val J. Christensen Director September 29, 2008
----------------------------
Val J. Christensen
/s/ Joseph H. Barton Director September 29, 2008
----------------------------
Joseph H. Barton
/s/ Mark A. Crockett Director September 29, 2008
----------------------------
Mark A. Crockett
26
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, 2008 and 2007, 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, 2008 and 2007, 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 29, 2008
F-1
DYNATRONICS CORPORATION
Consolidated Balance Sheets
June 30, 2008 and 2007
Assets 2008 2007
-------------- ---------------
Current assets:
Cash $ 288,481 1,301,105
Trade accounts receivable, less allowance
for doubtful accounts of $411,057 at
June 30, 2008 and $330,857 at June 30,
2007 5,151,235 3,757,484
Other receivables 63,487 282,741
Inventories, net 6,283,068 5,313,984
Prepaid expenses 619,471 507,755
Prepaid income taxes 98,644 92,702
Deferred tax asset - current 477,300 396,156
-------------- ---------------
Total current assets 12,981,686 11,651,927
Property and equipment, net 3,527,153 3,453,495
Goodwill, net - 2,758,572
Intangible asset, net 631,181 356,792
Other assets 359,748 346,830
Deferred tax asset - noncurrent 928,051 -
-------------- ---------------
$ 18,427,819 18,567,616
============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 297,413 271,979
Line of credit 5,818,320 250,000
Warranty reserve 209,168 208,000
Accounts payable 1,423,839 1,241,030
Accrued expenses 500,145 287,773
Accrued payroll and benefit expenses 411,918 276,754
Acquisition cash obligation - 1,000,000
-------------- ---------------
Total current liabilities 8,660,803 3,535,536
Long-term debt, excluding current installments 3,046,000 3,251,631
Deferred compensation 455,377 420,470
Deferred tax liability - noncurrent - 289,335
-------------- ---------------
Total liabilities 12,162,180 7,496,972
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 13,670,807
shares at June 30, 2008 and 10,308,522
shares at June 30, 2007 7,865,913 4,227,147
Retained earnings deficit) (1,600,274) 6,843,497
-------------- ---------------
Total stockholders' equity 6,265,639 11,070,644
-------------- ---------------
$ 18,427,819 18,567,616
============== ===============
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Consolidated Statements of Operations
Years Ended June 30, 2008 and 2007
2008 2007
-------------- ---------------
Net sales $ 32,592,507 17,837,104
Cost of sales 20,450,570 10,925,316
-------------- ---------------
Gross profit 12,141,937 6,911,788
Selling, general, and administrative expenses 13,473,190 5,541,860
Research and development expenses 1,354,743 1,492,774
Goodwill impairment 6,636,466 -
-------------- ---------------
Operating loss (9,322,462) (122,846)
-------------- ---------------
Other income (expense):
Interest income 9,610 28,330
Interest expense (620,473) (209,292)
Other income, net 17,770 32,565
-------------- ---------------
Total other income (expense) (593,093) (148,397)
-------------- ---------------
Loss before income taxes (9,915,555) (271,243)
Income tax benefit (1,471,784) (186,201)
-------------- ---------------
Net loss $ (8,443,771) (85,042)
============== ===============
Basic net income (loss) per common
share $ (0.62) (0.01)
Diluted net income (loss) per common
share $ (0.62) (0.01)
Weighted average basic and diluted common
shares outstanding:
Basic 13,609,880 8,916,317
Diluted 13,609,880 8,916,317
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2008 and 2007
Total
Number Common Retained stockholders'
of shares stock earnings equity
------------- -------------- --------------- ---------------
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)
Issuance of common stock
upon exercise of non
employee stock options 20,000 21,600 - 21,600
Stock based compensation 7,476 11,027 - 11,027
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
Issuance of common stock
upon exercise of employee
stock options 251,499 208,345 - 208,345
Redemption of common stock (258,569) (280,440) - (280,440)
Stock based compensation 307,764 312,495 - 312,495
Issuance of common stock
in business acquisitions 3,061,591 3,398,366 - 3,398,366
Net loss - - (8,443,771) (8,443,771)
------------- -------------- --------------- ---------------
Balances at June 30, 2008 13,670,807 $ 7,865,913 (1,600,274) 6,265,639
============= ============== =============== ===============
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Consolidated Statements of Cash Flows
Years Ended June 30, 2008 and 2007
2008 2007
-------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (8,443,771) (85,042)
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization of
property and equipment 375,005 366,047
Amortization of intangible asset 92,011 7,324
Stock based compensation expense 308,300 9,217
Goodwill impairment 6,636,466 -
Deferred tax asset, net (1,473,718) (37,010)
Provision for doubtful accounts 480,000 141,401
Provision for inventory obsolescence 288,000 38,599
Provision for warranty reserve 270,124 270,124
Provision for deferred compensation 34,907 32,220
Change in operating assets and
liabilities:
Receivables (285,958) (41,466)
Inventories (64,445) 203,763
Prepaid expenses and other assets (119,852) 120,833
Accounts payable and accrued
expenses (1,235,410) (759,411)
Prepaid income taxes (1,748) (25,022)
-------------- ---------------
Net cash provided by (used in)
operating activities (3,140,089) 241,577
-------------- ---------------
Cash flows from investing activities:
Capital expenditures (335,899) (128,560)
Business acquisitions (2,852,664) 67,839
-------------- ---------------
Net cash used in investing
activities (3,188,563) (60,721)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 104,401 1,500,000
Principal payments on long-term debt (284,598) (254,318)
Net change in line of credit 5,568,320 (327,232)
Proceeds from issuance of common stock 208,345 23,297
Redemption of common stock (280,440) (244,682)
-------------- ---------------
Net cash provided by financing
activities 5,316,028 697,065
-------------- ---------------
Net change in cash (1,012,624) 877,921
Cash at beginning of year 1,301,105 423,184
-------------- ---------------
Cash at end of year $ 288,481 1,301,105
============== ===============
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 598,239 209,139
Cash paid for income taxes 16,461 13,049
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
Stock based compensation - see note 1(n)
for details
Business acquisitions disclosure see
note 14 for details
See accompanying notes to financial statements.
F-5
DYNATRONICS CORPORATION
Notes to Consolidated Financial Statements
June 30, 2008 and 2007
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures, markets,
distributes and sells a broad line of therapeutic, diagnostic, and
rehabilitation equipment, medical supplies and soft goods,
treatment tables and aesthetic medical devices to an expanding
market of physical therapists, podiatrists, orthopedists,
chiropractors, plastic surgeons, dermatologists, and other medical
professionals. The products are sold primarily in the United
States and Canada, with additional sales 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, 2008 and 2007.
(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 a combination of statistical analysis,
historical collections, a client's current creditworthiness, age
of the receivable balance both individually and in the aggregate
and general economic conditions that may affect a customer's
ability to pay. All account balances are reviewed on an individual
basis. Account balances are charged off against the allowance
after all means of collection have been exhausted and the
potential for recovery is considered remote. 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-6
(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 per SFAS No. 142 Goodwill and Other Intangibles.
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.
The Company performed the initial phase of its impairment
evaluation by comparing the fair market value of its single
reporting entity to its carrying value as of June 30, 2008. The
primary factor in arriving at a fair market value was the market
capitalization of the Company. As the carrying amount exceeded the
fair value, the Company performed the second phase of its
impairment evaluation to calculate impairment and as a result,
recorded a pre-tax goodwill impairment charge of approximately
$6.6 million. The primary reason for the impairment charge was the
sustained decline of the Company's stock price during the fourth
quarter of fiscal 2008. Management retained an independent
appraiser to assist in determining the goodwill impairment.
At June 30, 2007 the Company performed its annual evaluation, it
was determined that the fair value of its reporting entity
exceeded the carrying amount resulting in no 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.
F-7
(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 represents 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.
The reconciliation between the basic and diluted weighted average
number of common shares for 2008 and 2007 is summarized as
follows:
2008 2007
-------------- ---------------
Basic weighted average number
of common shares outstanding
during the year 13,609,880 8,916,317
Weighted average number of
dilutive common stock options
outstanding during the year -0- -0-
-------------- ---------------
Diluted weighted average
number of common and common
equivalent shares outstanding
during the year 13,609,880 8,916,317
============== ===============
Outstanding options not included in the computation of diluted net
income per share total 719,698 and 797,042 as of June 30, 2008 and
2007, respectively, because to do so would have been antidilutive.
(m) Income Taxes
The Company accounts for income taxes using the asset and
liability method in accordance with SFAS No. 109, Accounting for
Income Taxes. 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.
During the quarter ended September 30, 2007, the Company adopted
FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB No. 109, which contains a
two-step approach to recognizing and measuring uncertain tax
positions taken or expected to be taken in a tax return. The
adoption of this standard had no material impact on the Company's
financial statements.
The Company performed an in-depth valuation analysis based on the
outcome of fiscal year 2008 to determine if a valuation allowance
was required under FAS 109. Using a"more likely than not"
criteria, management determined that no valuation allowance was
required for the fiscal year ended June 30, 2008.
F-8
(n) Stock Based Compensation
Stock-based compensation cost is measured at grant date, based on
the fair value of the award, and is recognized over the employee
requisite service period. The Company recognized $312,495 and
$11,027 in stock-based compensation during for the years ended
June 30, 2008 and 2007, respectively, as selling, general, and
administrative expenses in the consolidated statements of
operations. The stock-based compensation includes amounts for both
restricted stock and stock options under SFAS No. 123(R).
Restricted Stock
----------------
On July 1, 2007, the Company granted 220,000 shares of common
stock to employees with an estimated value of $1.08 per share.
This stock had a ninety day vesting period. On July 1, 2007, the
Company also granted 80,000 shares of common stock with an
estimated value of $1.08 per share, which vested over a four-year
period in annual installments of 20,000 shares per year. As of
June 30, 2008, $41,400 in unrecognized stock-based compensation
from the unvested shares is expected to be recognized over the
remainder of the four-year period.
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. The expense for SFAS No. 123(R) is included in the
restricted stock section of this note.
(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.
(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 89%
and 87% of net sales for the years ended June 30, 2008 and 2007,
respectively. Aesthetics products consisted of 4% and 7% of net
sales for the years ended June 30, 2008 and 2007, respectively.
Chargeable repairs, billable freight and other miscellaneous
revenue account for the remaining 7% and 6% of total revenues in
the years ended June 30, 2008 and 2007, respectively.
F-9
(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) Advertising Cost
Advertising costs are expensed as incurred. Advertising expense
for the years ended June 30, 2008 and 2007 was approximately
$286,700 and $177,000, respectively.
(2) Inventories
Inventories consist of the following:
2008 2007
-------------- ---------------
Raw materials $ 2,984,189 2,961,653
Finished goods 3,636,597 2,646,141
Inventory reserve (337,718) (293,810)
-------------- ---------------
$ 6,283,068 5,313,984
============== ===============
(3) Property and Equipment
Property and equipment consist of the following:
2008 2007
-------------- ---------------
Land $ 354,743 354,743
Buildings 3,682,504 3,603,380
Machinery and equipment 1,661,962 1,521,601
Office equipment 1,283,821 1,147,667
Vehicles 188,148 95,124
-------------- ---------------
7,171,178 6,722,515
Less accumulated depreciation
and amortization 3,644,025 3,269,020
-------------- ---------------
$ 3,527,153 3,453,495
============== ===============
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve consists
of the following:
2008 2007
-------------- ---------------
Beginning product warranty
reserve balance $ 208,000 208,000
Warranty repairs (280,746) (270,124)
Warranties issued 232,077 256,027
Changes in estimated
warranty costs 49,837 14,097
-------------- ---------------
Ending product warranty
reserve balance $ 209,168 208,000
============== ===============
F-10
(5) Line of Credit
The Company has a revolving line of credit facility with a commercial
bank in the amount of $8 million. Borrowing limitations are based on 45%
of eligible inventory and up to 80% of eligible accounts receivable. At
June 30, 2008 and 2007, the outstanding balance was approximately $5.8
million and $-0-, respectively. The line of credit is collateralized by
inventory and accounts receivable and bears interest at a rate based on
the bank's "prime rate." The interest rate was 6% and 8.75% at June 30,
2008 and 2007, 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, 2008, the Company was in compliance with its loan covenants or had
received waivers from the commercial lender.
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:
2008 2007
-------------- ---------------
9.11% promissory note secured
by building, maturing December
2017, payable in monthly
installments beginning at $11,388 $ 1,453,372 1,500,000
6.44% promissory note secured
by trust deed on real property,
maturing January 2021, payable
in monthly installments of $13,278 1,371,479 1,440,070
6.21% promissory note secured
by a trust deed on real property,
maturing November 2013, payable
in decreasing installments
currently at $7,373 383,911 442,803
12.17% promissory note secured
by fixed assets, payable in
monthly installments of $2,009
through September 2012 79,692 -
5.84% promissory note secured
by a trust deed on real
property, payable in monthly
installments of $8,669
through November 2008 42,425 140,737
16.35% promissory note secured
by fixed assets, payable in
monthly installments of $409
through October 2011 12,534 -
-------------- ---------------
Total long-term debt 3,343,413 3,523,610
Less current installments 297,413 271,979
-------------- ---------------
Long-term debt, excluding
current installments $ 3,046,000 3,251,631
============== ===============
The aggregate maturities of long-term debt for each of the years
subsequent to 2008 are as follow: 2009, $297,413; 2010, $275,933; 2011,
$298,708; 2012, $320,066; 2013, $325,759 and thereafter $1,825,534.
F-11
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Lease expense for the years ended June 30, 2008 and 2007 was
$30,489 and $28,736, respectively. Future minimum rental payments
required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year as of 2008 are as follows:
2009, $23,608; 2010, $15,906; 2011, $15,231; 2012, $7,809 and 2013,
$6,507.
The Company rents office, warehouse, storage space and office equipment
under agreements which run one year or less in duration. The rent expense
for the years ended June 30, 2008 and 2007 was $259,816 and $7,361,
respectively.
The office and warehouse spaces in Girard, Ohio, Detroit, Michigan and
Pleasanton, California are leased on an annual basis from
employees/shareholders, or entities controlled by shareholders, who were
previously principals of the dealers acquired in June and July, 2007. The
leases create a related party transaction with three
employee/shareholders, however the lease agreements have been conducted
on an arms-length basis and the terms are equal to or more favorable than
would be available to other third parties.
(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
goodwill in the amount of $1,969,150 in conjunction with the acquisition
of Rajala Therapy Sales Associates, Inc. and on July 2, 2007 the Company
recorded additional goodwill of $3,877,894 in conjunction with the
acquisitions of Responsive Providers, Inc., Therapy and Health Care
Products, Inc., Cyman Therapy, Inc., Al Rice and Associates, Inc. and
Theratech Inc.
As described in note 1(g), the Company determined that a goodwill
impairment charge of approximately $6.6 million was indicated for the
period ended June 30, 2008 effectively eliminating all booked goodwill as
of June 30, 2008.
Identifiable Intangibles. Identifiable intangibles assets, included in
other assets, consists of the following:
As of As of
June 30, 2008 June 30, 2007
-------------- ---------------
Trade name - 15 years $ 339,400 118,000
Domain name - 15 years 5,400 1,200
Non-compete covenant - 4 years 149,400 114,000
Customer relationships - 7 years 120,000 89,000
Trademark licensing agreement - 20 years 45,000 -0-
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 8,700
License agreement - 10 years 73,240 73,240
-------------- ---------------
Total identifiable intangibles 773,240 406,840
Less accumulated amortization 142,059 50,048
-------------- ---------------
Net carrying amount $ 631,181 356,792
============== ===============
F-12
Amortization expense associated with the license agreement was $92,011
and $7,324 for 2008 and 2007, respectively. Estimated amortization
expense for the identifiable intangibles is expected to be as follows:
2009, $89,311; 2010, $89,311; 2011, $83,207; 2012, $44,637; 2013, $44,637
and thereafter $280,078.
(9) Income Taxes
Income tax expense (benefit) for the years ended June 30 consists of:
Current Deferred Total
------------- -------------- ---------------
2008:
U.S. federal $ (9,082) (1,201,989) (1,211,071)
State and local 11,016 (271,729) (260,713)
------------- -------------- ---------------
$ 1,934 (1,473,718) (1,471,784)
============= ============== ===============
2007:
U.S. federal $ (134,760) (32,576) (167,336)
State and local (14,430) (4,435) (18,865)
------------- -------------- ---------------
$ (149,190) (37,011) (186,201)
============= ============== ===============
Actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) (computed by applying the U.S. federal corporate income
tax rate of 34% to income before income taxes) as follows:
2008 2007
-------------- ---------------
Expected tax expense (benefit) $ (3,371,289) (92,223)
State taxes, net of federal tax
benefit (172,071) (12,450)
Officers' life insurance (3,916) (3,479)
Non-deductible portion of goodwill
impairment charge 2,035,542 -0-
Other, net 39,950 (78,049)
-------------- ---------------
$ (1,471,784) (186,201)
============== ===============
Deferred income tax assets and liabilities related to the tax effects of
temporary differences are as follows:
2008 2007
-------------- ---------------
Net deferred tax asset - current:
Inventory capitalization for
income tax purposes $ 84,285 62,447
Inventory reserve 139,820 117,348
Warranty reserve 81,576 77,584
Accrued product liability 7,126 12,521
Charitable contribution 4,181 2,846
Allowance for doubtful accounts 160,312 123,410
-------------- ---------------
Total deferred tax asset -
current $ 477,300 396,156
============== ===============
F-13
Net deferred tax asset (liability)
- non-current:
Deferred compensation $ 177,597 156,835
Property and equipment, principally
due to differences in
depreciation (246,853) (488,896)
R&D credit carryover 120,269 40,752
Restricted stock 6,004 -0-
Other intangibles (239,972) -0-
Non-compete and goodwill 1,375 1,974
Other (7,087) -0-
Operating loss carry forwards 1,116,718 -0-
-------------- ---------------
Total deferred tax asset
(liability) - non-current $ 928,051 (289,335)
============== ===============
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, 2008 and 2007, sales to any single
customer did not exceed 10% of total net sales.
Sales in the United States and other countries were approximately 98
percent and 2 percent for the fiscal year ended June 30, 2008 and
approximately 95 percent and 5 percent for the fiscal year ended June 30,
2007.
(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. On November 27,
2007 the board approved an additional $250,000 for the open-market share
repurchase program after the original $500,000 was exhausted. During the
year ended June 30, 2008, the Company acquired and retired $280,440 of
common stock. During the year ended June 30, 2007, the Company acquired
and retired $244,682 of common stock.
During the years ended June 30, 2008 and 2007, the Company granted 7,764
and 7,476 shares of restricted common stock to directors as compensation,
respectively.
The Company maintains a 2005 equity incentive plan for the benefit of
employees. Incentive and nonqualified stock options, restricted common
stock, stock appreciation rights, and other share-based awards may be
granted under the Plan. Awards granted under the Plan may be
performance-based. Effective November 27, 2007 the plan was amended to
increase the number of shares available by one million shares as approved
by the shareholders votes. At June 30, 2008, 908,180 shares of common
stock were authorized and reserved for issuance, but were not granted
under the terms of the 2005 equity incentive plan as amended.
The Company granted options to acquire common stock under its 2005 equity
incentive plan for fiscal 2008 and 2007. 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.
F-14
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:
2008 2007
-------------- ---------------
Expected dividend yield 0% 0%
Expected stock price volatility 55-57% 55-58%
Risk-free interest rate 3.51 - 4.03% 4.50 - 5.03%
Expected life of options 10 years 7 years
The weighted average fair value of options granted during 2008 and 2007
was $.74 and $.75, respectively.
The following table summarizes the Company's stock option activity during
the years ended June 30, 2008 and 2007:
2008 2007
------------------------------ ---------------------------------
Weighted Weighted
Number average Number average
of shares exercise price of shares exercise price
------------- -------------- --------------- ---------------
Options outstanding at
beginning of year 1,048,192 $ 1.40 1,129,858 $ 1.42
Options granted 648,370 1.07 40,959 1.22
Options exercised (251,499) .83 (1,664) 1.02
Options canceled or
expired (343,460) 1.14 (120,961) 1.54
------------- ---------------
Options outstanding at
end of year 1,101,603 1.41 1,048,192 1.40
============= ===============
Options exercisable at
end of year 679,523 1.62 1,041,816 1.39
============= ===============
Range of exercise
prices at end of year $ 0.73 - 3.00 $ 0.66 - 3.00
On August 16, 2000 the Company issued 80,000 options that were outside of
its stock option plan, as of June 30, 2008 and 2007 there are 40,000 and
60,000 options outstanding respectively. The exercise price of the
options ranges from $2.00 to $4.00. The options expire during fiscal 2009
through fiscal 2010.
The aggregate intrinsic value on the date of exercise of options
exercised during the years ended June 30, 2008 and 2007 was $16,757 and
$383, 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 2008 and 2007, 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 2008 and 2007 were $50,212
and $31,212, respectively. Company matching contributions for future
years are at the discretion of the board of directors.
F-15
(13) Salary Continuation Agreements
As of June 30, 2008 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 2008 and 2007, the Company has accrued $455,377 and $420,470,
respectively, of deferred compensation under the terms of the agreements.
(14) Acquisition and Non-Cash Disclosure
On July 2, 2007, the Company completed the acquisitions of a 100%
interest in five of its key independent distributors, Responsive
Providers, Inc. of Houston, Texas, Therapy and Health Care Products, Inc.
of Youngstown, Ohio, Cyman Therapy, 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 $2.4 million in cash and 3,061,591 shares of
common stock.
On June 30, 2007, the Company had completed the 100% interest acquisition
of its largest independent distributor, Rajala Therapy Sales Associates
of Pleasanton, California (Rajala). The Rajala purchase was $2,695,002,
paid through a $1 million cash obligation and the issuance of 1.5 million
shares of the Company's common stock.
The acquisition value of the dealers acquired 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 dates:
July 2, 2007 June 30, 2007
Acquisitions Acquisition
-------------- ---------------
Cash $ 651,828 67,839
Trade accounts receivable 1,160,976 900,322
Inventories 1,192,639 573,356
Prepaid expenses 4,782 42,629
Property and equipment 112,764 19,766
Intangible assets - weighted
average 9 years 366,400 333,600
Cash surrender value of life insurance 207,563 -0-
Goodwill 3,512,779 1,876,734
-------------- ---------------
Total assets acquired 7,209,731 3,814,246
Line of credit -0- (250,000)
Accounts payable and accrued expenses (1,496,800) (869,244)
-------------- ---------------
Net assets acquired 5,712,931 2,695,002
============== ===============
F-16
The July 2, 2007 acquisitions resulted in a $175,188 deferred income tax
liability and a corresponding increase to goodwill of $175,188 for the
fiscal year ended June 30, 2008. The June 30, 2007 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 in the fiscal year ended June 30, 2007.
Unaudited pro forma results of operations for the years ended June 30,
2008 and 2007, as though the six acquired dealers had been acquired as of
July 1, 2006, are as follows:
2008 2007
-------------- ---------------
Net sales $ 32,592,507 26,531,492
Net income (loss) (8,443,771) (85,402)
Basic and diluted net income (loss)
per common share (.62) (.01)
(15) Recent Accounting Pronouncements
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.
In December 2007, the FASB Statement 141R, "Business Combinations" ("SFAS
141R") was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the
acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest of
the acquired company at fair value. SFAS 141R also requires transaction
costs related to the business combination to be expensed as incurred.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The effective
date for the Company will be January 1, 2009. We have not yet determined
the impact of SFAS 141R related to future acquisitions, if any, on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51," which establishes accounting and reporting standards to improve the
relevance, comparability, and transparency of financial information in
its consolidated financial statements. This is accomplished by requiring
all entities, except not-for-profit organizations, that prepare
consolidated financial statements to (a) clearly identify, label, and
present ownership interests in subsidiaries held by parties other than
the parent in the consolidated statement of financial position within
equity, but separate from the parent's equity, (b) clearly identify and
present both the parent's and the non-controlling's interest attributable
consolidated net income on the face of the consolidated statement of
income, (c) consistently account for changes in parent's ownership
interest while the parent retains it controlling financial interest in
subsidiary and for all transactions that are economically similar to be
accounted for similarly, (d) measure of any gain, loss or retained
non-controlling equity at fair value after a subsidiary is
deconsolidated, and (e) provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the
interests of the non-controlling owners. This Statement also clarifies
that a non-controlling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 is effective for fiscal
years, and interim periods on or after December 15, 2008. The management
of the Company does not expect the adoption of this pronouncement to have
a material impact on its financial statements.
F-17
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 06-11, "Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards." EITF06-11 requires companies to recognize
the income tax benefit realized from dividends or dividend equivalents
that are charged to retained earnings and paid to employees for
non-vested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for
fiscal years beginning after September 15, 2007. The Company does not
expect EITF 06-11 will have a material impact on its financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133, ("SFAS No. 161"), which requires companies to provide additional
disclosures about its objectives and strategies for using derivative
instruments, how the derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities , and related interpretations, and how the
derivative instruments and related hedged items affect the Company's
financial statements. SFAS No. 161 also requires companies to disclose
information about credit risk-related contingent features in their hedged
positions. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. Although the Company will continue to
evaluate the application of SFAS No. 161, management does not currently
believe adoption will have a material impact on the Company's financial
condition or operating results.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the
Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible
asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
FSP FAS 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives. FSP FAS 142-3 is
effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years.
The Company is currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on its consolidated results of operation, cash flows
or financial condition.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles. The new standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with generally accepted
accounting principles for nongovernmental entities in the United States.
SFAS No. 162 is effective 60 days following SEC approval of the Public
Company Accounting Oversight Board Auditing amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles." The Company does not expect adoption of SFAS No.
162 will have a material impact on the Company's consolidated financial
statements.
F-18
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