================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2008.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0398434
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------
(Address of principal executive offices, Zip Code)
(801) 568-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
The number of shares outstanding of the registrant's common stock, no par value,
as of February 10, 2009 is 13,657,207.
i
Explanatory Note
----------------
This Amendment No. 1 is filed for the sole purpose of including currently dated
and signed certifications of the Company's Principal Executive Officer and
Principal Accounting and Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (Exhibit 32). The certifications filed with the
original quarterly report for the period ended December 31, 2008 inadvertently
omitted the date the certifications were signed by the responsible officers.
This amendment also includes updated and currently signed certifications in
Exhibits 31.1 and 31.2. No other changes were made to the report as originally
filed.
ii
DYNATRONICS CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).....................................1
Condensed Consolidated Balance Sheets
December 31, 2008 and June 30, 2008 ..........................................1
Condensed Consolidated Statements of Operations
Three and Six Months Ended December 31, 2008 and 2007.........................2
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 2008 and 2007...................................3
Notes to Condensed Consolidated Financial Statements..........................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................................16
Item 4. Controls and Procedures.............................................17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................18
Item 6. Exhibits............................................................18
iii
DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
Assets 2008 2008
------------ -------------
Current assets:
Cash $ 239,708 $ 288,481
Trade accounts receivable, less allowance
for doubtful accounts of $422,402 at
December 31, 2008 and $411,057 at June 30,
2008 5,343,962 5,151,235
Other receivables 41,091 63,487
Inventories, net 7,039,074 6,283,068
Prepaid expenses 751,735 619,471
Prepaid income taxes 4,562 98,644
Deferred income tax assets - current portion 500,266 477,300
------------ -------------
Total current assets 13,920,398 12,981,686
Property and equipment, net 3,447,298 3,527,153
Intangible assets, net 586,525 631,181
Other assets 435,492 359,748
Deferred income tax assets, net of current portion 943,395 928,051
------------ -------------
Total assets $ 19,333,108 $ 18,427,819
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 274,471 $ 297,413
Line of credit 6,208,338 5,818,320
Warranty reserve 209,168 209,168
Accounts payable 2,357,150 1,423,839
Accrued expenses 457,188 500,145
Accrued payroll and benefits 223,925 411,918
------------ -------------
Total current liabilities 9,730,240 8,660,803
Long-term debt, net of current installments 2,926,344 3,046,000
Deferred compensation 474,277 455,377
------------ -------------
Total liabilities 13,130,861 12,162,180
------------ -------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 13,657,207 shares
at December 31, 2008 and 13,670,807
shares at June 30, 2008 7,886,874 7,865,913
Accumulated deficit (1,684,627) (1,600,274)
------------ -------------
Total stockholders' equity 6,202,247 6,265,639
------------ -------------
Total liabilities and stockholders' equity $ 19,333,108 $ 18,427,819
============ =============
See accompanying notes to condensed consolidated financial statements.
1
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2008 2007 2008 2007
------------ ------------ ------------ -------------
Net sales $ 8,718,893 $ 8,861,633 $ 16,715,042 $ 16,753,063
Cost of sales 5,405,338 5,522,417 10,205,845 10,481,535
------------ ------------ ------------ -------------
Gross profit 3,313,555 3,339,216 6,509,197 6,271,528
Selling, general, and
administrative
expenses 2,827,427 3,339,548 5,804,074 6,915,044
Research and
development expenses 265,718 363,106 527,747 701,999
------------ ------------ ------------ -------------
Operating income
(loss) 220,410 (363,438) 177,376 (1,345,515)
------------ ------------ ------------ -------------
Other income (expense):
Interest income 1,390 470 1,797 5,386
Interest expense (139,556) (162,356) (290,628) (297,602)
Other income, net 7,673 3,668 10,543 6,832
------------ ------------ ------------ -------------
Net other income
(expense) (130,493) (158,218) (278,288) (285,384)
------------ ------------ ------------ -------------
Income (loss)
before income
tax provision
(benefit) 89,917 (521,656) (100,912) (1,630,899)
Income tax provision
(benefit) 35,319 (182,864) (16,559) (579,904)
------------ ------------ ------------ -------------
Net income (loss) $ 54,598 $ (338,792) $ (84,353) $ (1,050,995)
============ ============ ============ =============
Basic and diluted net
income (loss) per
common share $ 0.00 $ (0.02) $ (0.01) $ (0.08)
============ ============ ============ =============
Weighted-average basic
and diluted common
shares outstanding
(note 2)
Basic 13,657,207 13,661,316 13,657,752 13,634,491
Diluted 13,657,207 13,661,316 13,657,752 13,634,491
See accompanying notes to condensed consolidated financial statements.
2
DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2008 2007
------------ -------------
Cash flows from operating activities:
Net loss $ (84,353) $ (1,050,995)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of property
and equipment 178,154 179,552
Amortization of intangible assets 44,656 47,355
Stock-based compensation expense 31,099 274,329
Increase in deferred income tax assets, net (38,310) (603,117)
Provision for doubtful accounts 24,000 160,000
Provision for inventory obsolescence 72,000 84,000
Provision for warranty reserve 144,106 127,174
Provision for deferred compensation 18,900 16,110
Change in operating assets and liabilities:
Receivables (194,331) (1,483,771)
Inventories (828,006) (94,911)
Prepaid expenses and other assets (208,008) (167,380)
Accounts payable and accrued expenses 558,255 (652,381)
Prepaid income taxes - 9,859
Income tax payable 94,082 -
------------ -------------
Net cash used in operating activities (187,756) (3,154,176)
------------ -------------
Cash flows from investing activities:
Capital expenditures (98,299) (215,699)
Business acquisitions - (1,847,250)
------------ -------------
Net cash used in investing activities (98,299) (2,062,949)
------------ -------------
Cash flows from financing activities:
Principal payments on long-term debt (142,598) (102,784)
Net change in borrowings under line of credit 390,018 4,348,351
Proceeds from issuance of common stock - 49,225
Redemption of common stock (10,138) (114,796)
------------ -------------
Net cash provided by financing
activities 237,282 4,179,996
------------ -------------
Net decrease in cash (48,773) (1,037,129)
Cash at beginning of period 288,481 1,301,105
------------ -------------
Cash at end of period $ 239,708 $ 263,976
============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 295,754 $ 268,621
Cash paid for income taxes 20,886 7,000
Supplemental disclosure of non-cash investing and
financing activities:
Capital expenditures financed by long-term debt - 90,134
Acquisition cash obligation financed by line
of credit - 1,000,000
Stock based compensation - see note 3 for details
Business acquisitions disclosure - see note 8
for details
See accompanying notes to condensed consolidated financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION
The condensed consolidated balance sheets as of December 31, 2008 and June 30,
2008, the condensed consolidated statements of operations for the three and six
months ended December 31, 2008 and 2007, and the condensed consolidated
statements of cash flows for the six months ended December 31, 2008 and 2007
were prepared by Dynatronics Corporation without audit pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all necessary adjustments, which
consist only of normal recurring adjustments, to the financial statements have
been made to present fairly the financial position, results of operations and
cash flows. The results of operations for the three and six months ended
December 31, 2008 are not necessarily indicative of the results for the fiscal
year ending June 30, 2009. The Company has previously filed with the SEC an
annual report on Form 10-KSB which included audited financial statements for
each of the two years ended June 30, 2008 and 2007. It is suggested that the
financial statements contained in this filing be read in conjunction with the
statements and notes thereto contained in the Company's most recent Form 10-KSB
filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents. The computation of diluted earnings per share does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each weighted-average share of common stock outstanding
during the reporting period. Diluted net income (loss) per common share is the
amount of net income (loss) for the period available to each weighted-average
share of common stock outstanding during the reporting period and to each common
stock equivalent outstanding during the period, unless inclusion of common stock
equivalents would have an anti-dilutive effect.
In calculating net income (loss) per common share, the weighted-average shares
outstanding were the same for both the basic and diluted calculation for the
three and six months ended December 31, 2008 and 2007. A reconciliation between
the basic and diluted weighted-average number of common shares for the three and
six months ended December 31, 2008 and 2007 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2008 2007 2008 2007
------------ ------------ ------------ -------------
Basic weighted-average
number of common shares
outstanding during the
period 13,657,207 13,661,316 13,657,752 13,634,491
Weighted-average number
of dilutive common stock
options outstanding
during the period - - - -
------------ ------------ ------------ -------------
Diluted weighted-average
number of common and
common equivalent shares
outstanding during the
period 13,657,207 13,661,316 13,657,752 13,634,491
============ ============ ============ =============
There were no options in the money for the three and six month periods ended
December 31, 2008. Outstanding options not included in the computation of
diluted net income (loss) per common share for the three and six month periods
ended December 31, 2007 were 56,050 and 127,438 respectively, because to do so
would have been anti-dilutive.
4
NOTE 3. 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 $15,675 and $17,337 in stock-based compensation during the
three months ended December 31, 2008 and 2007, respectively, and recognized
$31,099 and $274,329 in stock-based compensation during the six months ended
December 31, 2008 and 2007, respectively, as selling, general, and
administrative expenses in the condensed consolidated statements of operations.
On July 1, 2007, the Company granted 220,000 shares of common stock to employees
with an estimated fair value of $1.08 per share, which vested over a ninety-day
period. The Company recognized $238,950 in stock-based compensation during the
three months ended September 30, 2007 from these shares. On July 1, 2007, the
Company also granted 80,000 shares of common stock with an estimated fair value
of $1.08 per share, which vests over a four-year period in annual installments
of 20,000 shares per year. The Company recognized $5,850 and $11,250 in
stock-based compensation expense during the three months ended December 31, 2008
and 2007, respectively, and $11,700 and $44,100 in stock-based compensation
expense during the six months ended December 31, 2008 and 2007, respectively,
from these shares. As of December 31, 2008, $29,700 in unrecognized stock-based
compensation from the unvested shares is expected to be recognized over the
remainder of the four-year period.
Stock Options. 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. At
December 31, 2008, 947,944 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 following table summarizes the Company's stock option activity during the
six month period ended December 31, 2008. There were no options granted during
the three month period ended December 31, 2008:
Weighted-
Average
Number of Exercise
options Price
------------ -------------
Outstanding at beginning of period 1,141,603 $ 1.40
Granted 39,502 .60
Exercised - -
Cancelled (79,266) 1.64
------------
Outstanding at end of period 1,101,839 1.46
============
Exercisable at end of period 711,879 1.69
============
The Black-Scholes option pricing model is used to estimate the fair value of
options under the Company's stock option plan. The weighted-average value of
stock options granted under the plan, as well as the assumptions used in
calculating these values for the six months ended December 31, 2008 and 2007
were based on estimates at the date of grant as follows:
Six Months Ended
---------------------------
December 31, December 31,
2008 2007
------------ -------------
Expected dividend yield 0% 0%
Expected stock price volatility 57 - 59% 56%
Risk-free interest rate 3.85 - 4.14% 4.8%
Expected life of options 10 years 7 years
Expected option lives and volatilities are based on historical data of the
Company. The risk-free interest rate is based on the US Treasury bill rate on
the grant date for constant maturities that correspond with the option life.
Historically, the Company has not declared dividends and there are no future
plans to do so.
5
No options were exercised during the six months ended December 31, 2008. As of
December 31, 2008, there was approximately $124,312 of total unrecognized
stock-based compensation cost related to grants under the stock option plan that
will be expensed over a weighted-average period of 5 years.
Stock-based compensation expense under Statement of Financial Accounting
Standards (SFAS) No 123(R), Share-Based Payment, for the three months ended
December 31, 2008 and 2007 was $7,825 and $2,029, respectively, and for the six
months ended December 31, 2008 and 2007 was $15,399 and $2,523, respectively,
and is included in the amount shown above.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
For the three and six months ended December 31, 2008 and 2007, comprehensive
income (loss) was equal to the net income (loss) as presented in the
accompanying condensed consolidated statements of operations.
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2008 2008
------------ -------------
Raw materials $ 2,822,146 $ 2,984,189
Finished goods 4,656,394 $ 3,636,597
Inventory reserve (439,466) (337,718)
------------ -------------
$ 7,039,074 $ 6,283,068
============ =============
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, June 30,
2008 2008
------------ -------------
Land $ 354,743 $ 354,743
Buildings 3,691,364 3,682,504
Machinery and equipment 1,681,629 1,661,962
Office equipment 1,326,801 1,283,821
Vehicles 214,940 188,148
------------ -------------
7,269,477 7,171,178
Less accumulated depreciation
and amortization (3,822,179) (3,644,025)
------------ -------------
$ 3,447,298 $ 3,527,153
============ =============
NOTE 7. PRODUCT WARRANTY RESERVE
The Company accrues the estimated costs to be incurred in connection with its
manufactured product warranty programs as products are sold based on historical
warranty claims. A reconciliation of the changes in the warranty reserve is as
follows:
Three months Three months
ended ended
December 31, December 31,
2008 2007
------------ -------------
Beginning product warranty reserve $ 209,168 208,000
Warranty repairs (81,798) (66,294)
Warranty reserve additions 65,596 134,200
Changes in estimated warranty costs 16,202 (67,906)
------------ -------------
Ending product warranty reserve $ 209,168 208,000
============ =============
6
Six months Six months
ended ended
December 31, December 31,
2008 2007
------------ -------------
Beginning product warranty reserve $ 209,168 $ 208,000
Warranty repairs (144,106) (127,174)
Warranty reserve additions 126,838 253,707
Changes in estimated warranty costs 17,268 (126,533)
------------ -------------
Ending product warranty reserve $ 209,168 $ 208,000
============ =============
NOTE 8. ACQUISITION AND NON-CASH DISCLOSURE
On July 2, 2007, the Company completed the acquisition of a 100% interest in
five of its key independent distributors; namely, 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 $5,700,000, comprised of approximately $2,300,000 in cash and
3,061,591 shares of the Company's common stock.
The acquisition value of the five 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 estimated fair values
at the purchase date. The following table reflects the estimated fair values of
the assets acquired and the liabilities assumed as of the acquisition date:
Cash $ 651,828
Trade accounts receivable 1,160,976
Inventories 1,192,639
Prepaid expenses 4,782
Property and equipment 112,764
Cash surrender value of life insurance 207,563
Intangible assets 366,400
Goodwill 3,512,779
-------------
Total assets acquired 7,209,731
Accounts payable and accrued expenses (1,496,800)
-------------
Net assets acquired $ 5,712,931
=============
NOTE 9. INTANGIBLE ASSETS OTHER THAN GOODWILL
Identifiable intangible assets consist of the following:
December 31, June 30,
Asset and Useful Life 2008 2008
------------ -------------
Trade name - 15 years $ 339,400 $ 339,400
Domain name - 15 years 5,400 5,400
Non-compete agreement - 4 years 149,400 149,400
Customer relationships - 7-15 years 120,000 120,000
Trademark licensing agreement - 20 years 45,000 45,000
Backlog of orders - 3 months 2,700 2,700
Customer database - 7 years 38,100 38,100
License agreement - 10 years 73,240 73,240
------------ -------------
Total identifiable intangible assets 773,240 773,240
Less accumulated amortization (186,715) (142,059)
------------ -------------
Net carrying amount $ 586,525 $ 631,181
============ =============
7
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements ("SFAS 157"). 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 in
accounting principles generally accepted in the United States of America. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 for financial assets and November 15, 2008 for
non-financial assets, and interim periods within those fiscal years. The Company
adopted SFAS 157 on July 1, 2008 for its financial assets and liabilities with
no material impact on its consolidated financial statements. The Company will
adopt SFAS 157 on July 1, 2009 for non-financial assets, and does not expect
that it will have a material impact on its consolidated financial statements.
In December 2007, SFAS No. 141R, Business Combinations , was issued which
replaces SFAS No. 141. SFAS No. 141R retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for the Company beginning July 1,
2009 and will apply prospectively to business combinations completed on or after
that date.
In December 2007, SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements - an amendment of ARB No. 51, was issued which changes the
accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent's equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in net income and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value,
with any gain or loss recognized in net income. SFAS No. 160 is effective for
the Company beginning July 1, 2009 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply retrospectively. The
Company believes the adoption of SFAS No. 160 will not have a material impact on
its financial statements.
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 operations, cash flows and
financial position.
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 accounting principles generally accepted in the
United States of America. 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.
8
NOTE 11. SUBSEQUENT EVENT
On January 21, 2009, the Company renewed its Revolving Line of Credit Agreement
with Zions First National Bank. The renewal extended the due date to October 31,
2009, modified certain loan covenants that existed in the previous agreement,
and added a new covenant requiring the Company to maintain minimum working
capital of not less than $3.9 million for the fiscal quarters ended December 31,
2008, March 31, 2009, and June 30, 2009; and not less than $4.1 million for each
fiscal quarter thereafter.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
--------
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements (unaudited) and notes thereto appearing in Part I, Item 1
of this report on Form 10-Q.
The operating results of the Company include the operations of entities acquired
by the Company in June and July 2007. On June 30, 2007, we acquired our largest
independent distributor, Rajala Therapy Sales Associates of Pleasanton,
California. On July 2, 2007, we acquired five additional independent
distributors: Responsive Providers, Inc. of Houston, Texas; Therapy and Health
Care Products, Inc. of Girard, Ohio; Cyman Therapy, Inc. of Detroit, Michigan;
Al Rice and Associates, Inc. of Jeffersonville, Indiana; and Theratech, Inc. of
Minneapolis, Minnesota. The effect of these acquisitions was to expand our
distribution capabilities from purely wholesale distribution to include direct
retail distribution. Subsequent to these acquisitions, we have brought on
additional direct sales representatives, bringing the total number of direct
sales representatives to 38 covering 26 states. We continue to support and
expand our network of wholesale distributors and dealers that provide coverage
in other states.
On December 17, 2008, we entered into an agreement with Vici Capital Partners to
begin an intensive effort to review and improve all aspects of our operations.
Through this process, we have developed a number of important ideas to
significantly improve operational efficiencies, lower manufacturing and other
costs, and create a leaner, more profitable organization. When implemented, we
expect these improvements to generate over $1 million in sustainable earnings
improvements annually, although we believe it will take several months to
implement all of the improvements identified through this process.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the three and
six month periods ended December 31, 2008, for our fiscal year ending June 30,
2009. Results of the period covered by this report are not necessarily
indicative of the results that may be realized for the fiscal year ending June
30, 2009.
Net Sales
For the quarter ended December 31, 2008, the Company's sales were $8,718,893,
compared to $8,861,633 for the quarter ended December 31, 2007. Sales for the
six months ended December 31, 2008, were $16,715,042, compared to $16,753,063
for the six months ended December 31, 2007. Sales remained even in the current
period when compared with the prior year period, notwithstanding significant
turmoil in the credit and financial markets and the economic environment in the
United States during the three months ended December 31, 2008. These conditions
continued to deteriorate after December 31, 2008. We believe that one of the
reasons for the success in holding sales within two percent of the same period
in the prior year is the September 2008 introduction of our new product catalog
containing over 500 pages of products - more than double the size of the
Company's previous catalog. The expansion of our product offering is a direct
result of the acquisitions of six distributors completed in July 2007. The new
catalog is a major step in presenting the Company's new image to the market
after a year of assimilation and change. In conjunction with the new catalog, we
also implemented pricing incentives to reward customers for placing larger
orders.
Gross Profit
For the quarter ended December 31, 2008, gross profit was $3,313,555, or 38.0%
of net sales, compared to $3,339,216, or 37.7% of net sales, for the quarter
ended December 31, 2007. Gross profit for the six months ended December 31, 2008
was $6,509,197, or 38.9% of net sales, compared to $6,271,528, or 37.4% of net
sales, for the six months ended December 31, 2007. Margins for the comparative
period in the prior fiscal year were negatively impacted (approximately 2.1
percentage points) because of a higher cost basis in inventory sold during the
period. This higher cost basis was the carrying cost of the inventory held by
the acquired dealers at the time of acquisition. Although the introduction of
the expanded catalog has helped maintain sales at the prior year levels, the new
catalog also has boosted sales of lower margin supplies and distributed goods
which have the effect of lowering the overall gross profit percentage. This
trend is expected to continue as demand for capital goods has softened in the
current challenging national economic environment.
10
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the quarter ended
December 31, 2008 decreased $512,121 to $2,827,427, or 32.4% of net sales,
compared to $3,339,548, or 37.7% of net sales for the prior year period. The
decrease in SG&A expenses for the quarter ended December 31, 2008 was aided by
the following changes from the comparative period:
o $326,000 in lower labor and operating costs
o $110,000 in lower legal fees and general and administrative
expenses
o $76,000 in lower selling expenses
SG&A expenses for the six months ended December 31, 2008 decreased $1,110,970 to
$5,804,074, or 34.7% of net sales, compared to $6,915,044, or 41.3% of net sales
for the prior year period. The decrease in SG&A expenses for the six months
ended December 31, 2008 is related to the following:
o $594,000 in lower labor and operating costs
o $478,000 in lower stock option expense, acquisition costs, bad
debt expense and other general and administrative expenses
o $39,000 in lower selling expenses
The reduced SG&A expenses for the three and six months ended December 31, 2008
were primarily the result of cost-saving measures implemented by the Company as
part of the assimilation of the acquired entities during fiscal year 2008.
Specifically, with the assimilation process substantially completed, management
implemented measures in March and July 2008 designed to reduce annual operating
expenses by more than $2.1 million. These measures included 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 changes originally had been
contemplated as part of the planning for the acquisition and assimilation of the
distributors in 2007. Building on these measures, the streamlining efforts
currently underway with the assistance of Vici Capital Partners are expected to
further improve operational efficiencies and reduce costs.
Research and Development
Research and Development ("R&D") expense for the quarter ended December 31, 2008
was $265,718, compared to $363,106 for the similar quarter in 2007. R&D expense
for the six months ended December 31, 2008 was $527,747, compared to $701,999
for the similar period in 2007. R&D expense represented approximately 3.0% and
4.1% of net sales for the quarters ended December 31, 2008 and 2007,
respectively. R&D costs are expensed as incurred. Dynatronics intends to
continue its commitment to developing innovative products for the physical
medicine market through the balance of fiscal year 2009 and in future periods in
order to position the Company for growth.
Pre-tax Income/Loss
Pre-tax profit for the quarter ended December 31, 2008 was $89,917 compared to a
pre-tax loss of $521,656 for the quarter ended December 31, 2007. Pre-tax loss
for the six months ended December 31, 2008 was $100,912 compared to a pre-tax
loss of $1,630,899 for the six months ended December 31, 2007. These
improvements are directly related to the large reductions in SG&A expenses
discussed above, including the savings associated with assimilating the acquired
dealers, along with lower R&D expenses.
Income Tax Provision/Benefit
Income tax provision for the quarter ended December 31, 2008 was $35,319
compared to an income tax benefit of $182,864 for the quarter ended December 31,
2007. The effective tax rate for the 2008 quarter was 39.3% compared to 35.1% in
2007. The higher effective tax rate for the quarter ended December 31, 2008
reflects franchise taxes required in certain states. Income tax benefit for the
six months ended December 31, 2008 was $16,559 compared to $579,904 for the
similar period of the prior year.
Net Income/Loss Per Share
Net income for the quarter ended December 31, 2008 was $54,598 ($.00 per share),
compared to net loss of $338,792 ($.02 per share) for the quarter ended December
31, 2007. Net loss for the six months ended December 31, 2008 was $84,353 ($.01
per share), compared to a net loss of $1,050,995 ($.08 per share) for the six
months ended December 31, 2007. The primary components contributing to the
improvement and return to profitability in the current quarter were the sharp
reductions in SG&A expenses, together with lower R&D expenses, while maintaining
sales and gross profits at levels similar to the prior year's levels.
11
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
$4,190,158 at December 31, 2008, inclusive of the current portion of long-term
obligations and credit facilities, compared to working capital of $4,320,883 at
June 30, 2008.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$192,727 to $5,343,962 at December 31, 2008, compared to $5,151,235 at June 30,
2008. Trade accounts receivable represent amounts due from the Company's dealer
network, medical practitioners and clinics. We estimate that the allowance for
doubtful accounts is adequate based on our historical experience as well as our
knowledge of and relationship with these customers. Accounts receivable are
generally collected within 30 days of the agreed terms. However, as a result of
increased distribution activity of the Company following the acquisitions in
2007, the character of the accounts receivable and collection patterns have
changed from prior years. We will continue to carefully monitor our collections
practices over the coming year to ensure the allowance estimates are adequate.
Allowances for the retail accounts assumed in the acquisitions include
consideration of the historical experience of the acquired companies.
Inventories
Inventories, net of reserves, at December 31, 2008 increased $756,006 to
$7,039,074 compared to $6,283,068 at June 30, 2008. This increase is partly a
result of required adjustments in inventory levels to accommodate the expansion
of the number of stocked items associated with the new catalog. Other factors
included timing of large inventory purchases from overseas suppliers.
Accounts Payable
Accounts payable increased $933,311 to $2,357,150 at December 31, 2008, compared
to $1,423,839 at June 30, 2008. The increase in accounts payable is a result of
the timing of our weekly payments to suppliers and the timing of purchases of
product components. Accounts payable are generally within the terms of our
suppliers. We strive to take advantage of available early payment discounts when
offered.
Accrued Payroll and Benefits
Accrued payroll and benefits decreased $187,993 to $223,925 at December 31,
2008, compared to $411,918 at June 30, 2008. The decrease in accrued payroll and
benefits is related to timing differences as well as the reduction in force
implemented in July 2008.
Cash
The Company's cash position at December 31, 2008 was $239,708, compared to
$288,481 at June 30, 2008. The Company believes that improved cash flows from
operating activities will be generated through higher sales, improved management
of accounts receivable, reduction of current inventory levels and reduction of
operating expenses. We expect that cash flows from operating activities,
together with amounts available through an existing line of credit facility,
will be sufficient to cover operating needs in the ordinary course of business
for the next twelve months. If we experience an adverse operating environment,
including a further worsening of the general economy in the United States, or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on terms favorable to the Company.
12
Line of Credit
The Company has an $8,000,000 revolving line of credit with a commercial bank.
At December 31, 2008, we owed $6,208,338 on this line compared to $5,818,320 at
June 30, 2008. At December 31, 2008, the borrowing base was approximately $6.9
million, resulting in approximately $700,000 of borrowings available to the
Company under the line of credit. Interest on the line of credit is based on the
bank's prime rate plus 1%, which at December 31, 2008 equaled 4.25% per annum.
The line of credit is collateralized by accounts receivable and inventories 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 on October 31, 2009
and includes covenants requiring the Company to maintain certain financial
ratios. As of December 31, 2008, the Company was in compliance with its loan
covenants.
The current ratio was 1.4 to 1 at December 31, 2008 and 1.5 to 1 at June 30,
2008. Current assets represented 72% of total assets at December 31, 2008,
compared to 70% at June 30, 2008.
Debt
Long-term debt, net of current portion, totaled $2,926,344 at December 31, 2008,
compared to $3,046,000 at June 30, 2008. 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
$3,200,000 with monthly principal and interest payments of $40,707.
Inflation and Seasonality
The Company's revenues and net income 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 quarterly report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in the condensed consolidated 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, deferred income tax assets, 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 Forecasted sales.
o Product obsolescence.
o Technological innovations.
o Character of the inventory as a distributed item, finished
manufactured item or raw material.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of sales within the statements of operations during the period in which
such modifications are determined necessary by management. At December 31, 2008
and June 30, 2008, our inventory valuation reserve, which established a new cost
basis, was $439,466 and $337,718, respectively, and our inventories totaled
$7,039,074 and $6,283,068 net of reserves, respectively.
13
Revenue Recognition
Prior to June 2007, the majority of our product sales were to independent
distributors. In fiscal 2008, through the acquisition of six of our top
distributors, we added a significant portion of sales through an in-house direct
sales force. This sales force and distributors sell our own manufactured
products to end users, including physical therapists, professional trainers,
athletic trainers, chiropractors, medical doctors and aestheticians. In
addition, with the acquisition of the distributors, we expanded our distribution
options to include direct distribution of products in some territories while
supporting independent dealer efforts in others.
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 $5,343,962 and $5,151,235, net of allowance for doubtful accounts of
$422,402 and $411,057, at December 31, 2008 and June 30, 2008, 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
based on the historical experience of the dealers acquired as well as our one
and one-half years of experience since the acquisition of these dealers.
Business Plan and Outlook
During fiscal year 2009, we have undertaken a focused strategy to improve
overall operations and sales that includes the following elements: (1) refining
operations and continuing to reduce overhead costs as well as automating certain
processes; (2) enhancing product profit margins through improved manufacturing
processes and negotiating better pricing of components with vendors; (3)
developing and introducing new, state-of-the-art products for future growth; and
(4) strengthening distribution channels. 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 has been 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
certain of our key distributors in June and July 2007. We also began hiring
direct sales representatives in key locations around the country resulting in 38
direct sales representatives now in 26 states. The creation of a direct
distribution channel through these key acquisitions and hiring direct sales
representatives has expanded our ability to sell at the retail level, which we
believe improves gross profit margins and enhances the Company's control over
the distribution process.
The September 2008 introduction of our first consolidated catalog and pricing
schedule provided a powerful sales tool that is expected to help strengthen
sales efforts by direct sales reps. We believe that it will also be an effective
tool for independent dealers who use either a private labeled version or the
proprietary version of the catalog. This tool should 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 now offered by the
Company, we will undertake 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 because it was not an approved vendor with the various GPO's and
national or regional chains of care facilities.
14
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. We believe that 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, we believe that the availability of these direct sales representatives
provides us with an advantage for enhancing the distribution of these products.
To assist in that effort, we are contemplating the compilation of a unique
aesthetic products catalog that will include selected products already offered
in the Company's proprietary rehab products catalog which would have
applicability to the aesthetics market. In addition, the Company will seek
strategic partnerships, both domestic and international, to help maintain the
sales momentum from the introduction of this revised product line.
We have long believed that international markets present an untapped potential
for growth and expansion. Adding new distributors in several countries will be
the key to this expansion effort. Our past efforts to improve international
marketing have yielded only marginal improvements. We remain committed, however,
to finding the most cost effective ways to expand our markets internationally.
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.
During fiscal year 2008 and 2007, 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 relieving pain associated with a
host of back problems including herniated discs, degenerative disc disease,
sciatica and pinched nerves. The DynaPro Spinal Health System features our
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 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 various orthopedic and sports injuries, and is gaining popularity
in sports medicine.
Also as discussed above, in April 2008 we introduced 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. 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.
This commitment to product innovation will continue through the coming fiscal
year. Several new products are under development. The commitment to innovation
of high quality products has been a hallmark of Dynatronics and will continue to
be throughout the coming year.
Refining our business model for supporting sales reps and dealers also will be a
focal point of operations during fiscal year 2009. We will continue to evaluate
the most efficient ways to maintain our 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.
As mentioned previously in this document, we have retained Vici Capital Partners
to assist in the process of identifying ways to improve efficiencies and drive
greater profitability. This is particularly important given the soft market for
capital products associated with the weakening national economy.
While sales have shifted more to distributed products, the sale of the Company's
manufactured products remains the largest contributor to margin generation.
Therefore, we have placed renewed emphasis on improving manufacturing operations
including considering more offshore manufacturing of components as well as
streamlining manufacturing operations in Utah and Tennessee. With thousands of
new products now being distributed by the Company, refinements in the methods of
price management will be implemented throughout the coming year to ensure
margins are properly maintained.
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Significantly improving operational efficiencies, lowering
manufacturing and other costs, automating certain processes and
creating a leaner, more profitable organization. This effort is
supported by retaining Vici Capital Partners to guide the effort
company-wide.
o Further refining the operational model for supporting field sales
and improving product pricing.
15
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 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 is limited.
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.
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 Exploring strategic business alliances that will leverage and
complement the Company's competitive strengths, increase market
reach and supplement capital resources.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-Q, particularly the foregoing
discussion in Part I Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not purely historical, are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements regarding product development, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of existing assets to fund future operations and capital spending
needs. Actual results could differ materially from the anticipated results or
other expectations expressed in such forward-looking statements for the reasons
detailed under the headings "Risk Factors" in our Annual Report on Form 10-KSB
for the year ended June 30, 2008. The forward-looking statements contained in
this report are made as of the date of this report and we assume no obligation
to update them or to update the reasons why actual results could differ from
those projected in such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks. Market risk is the potential risk of
loss arising from adverse changes in market prices and rates. We do not enter
into derivative or other financial instruments for trading or speculative
purposes. There have been no material changes in our market risk during the
quarter ended December 31, 2008, although the weakening general economy is
expected to lead to greater discounting market-wide to stimulate sales in a
declining economic environment. We believe the worsening general economic
conditions could lead to significantly diminished demand for the Company's
higher margin manufactured capital products in coming quarters.
Our primary market risk exposure is interest rate risk. As of December 31, 2008,
approximately $6.2 million of our debt bore interest at variable rates.
Accordingly, our net income (loss) is affected by changes in interest rates. For
every one hundred basis point change in the average interest rate under our
existing debt, our annual interest expense would change by approximately
$62,000.
In the event of an adverse change in interest rates, we could take actions to
mitigate our exposure. However, due to the uncertainty of the actions that would
be taken and their possible effects, this analysis assumes no such actions.
16
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by SEC Rule 13a-15(b), an evaluation was performed under the
supervision and with the participation of our management, including our
principal executive officer and our principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are effective.
There has been no change in our internal control over financial reporting during
the quarter ended December 31, 2008 that has materially affected, or that is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Shareholders on November 25, 2008, the following
actions were submitted and approved by vote of the shareholders:
(1) Election of seven directors; and
(2) Ratification of the Board's selection of Tanner LC as our independent
registered public accounting firm for the fiscal year ending June 30,
2009.
A total of 9,749,310 shares (approximately 71.4%) of the issued and outstanding
shares of Dynatronics Corporation were represented by proxy or in person at the
meeting. These shares were voted on the matters described above as follows:
1. For the directors as follows:
Number of
Number of Shares
Shares Abstaining/
Name For Withheld
----------------------- ------------ -------------
Kelvyn H. Cullimore, Jr. 9,080,499 588,229
Kelvyn H. Cullimore 9,078,681 588,229
Larry K. Beardall 9,082,581 588,229
Howard L. Edwards 9,090,581 588,229
Val J. Christensen 9,089,081 588,229
Joseph H. Barton 9,089,081 588,229
Mark A. Crockett 9,151,085 588,229
2. For the ratification of Tanner, LC as the Company's independent registered
public accounting firm, as follows:
Number of Shares Number of Shares Number of Shares
For Against Abstaining/Withheld
9,489,336 143,426 116,547
On December 17, 2008, the Company filed a Current Report on Form 8-K to report
the resignation from the Board of Directors of Mr. Kelvyn H. Cullimore, Sr. and
Mr. Mark A. Crockett. Mr. Crockett resigned in conjunction with the execution of
an agreement between the Company and Vici Capital Partners, an entity owned and
controlled by Mr. Crockett, pursuant to which Vici Capital Partners will assist
in identifying and developing strategies for reducing operating expenses and
streamlining operations of the Company with the goal of improving operating
results and profitability. Mr. Cullimore resigned to maintain a majority of
independent directors on the Board. The current Board includes five members: Mr.
Cullimore, Jr., Mr. Beardall, Mr. Edwards, Mr. Christensen and Mr. Barton. The
Board has determined that Messrs. Edwards, Christensen and Barton are
independent pursuant to the Marketplace Rules of the Nasdaq Stock Market and the
regulations of the Securities and Exchange Commission.
17
Item 5. Other Information
On June 25, 2008, we received a Deficiency Letter from the NASDAQ Stock Market,
notifying us that the Company fails to comply with the minimum bid requirement
for continued inclusion under Marketplace Rule 4310(c)(4). Under that rule, the
Company's common stock is required to maintain a minimum bid price of $1.00. In
accordance with Marketplace Rule 4310(c)(8)(D), we were provided 180 days, or
until December 22, 2008, to regain compliance with the bid price deficiency
rule. Subsequently, pursuant to the rules and regulations of the Securities and
Exchange Commission, NASDAQ submitted a notice of filing and immediate
effectiveness of a change to the rule governing the failure of listed companies
to meet the market value of listed securities requirement. The effect of this
new rule change is to extend the time for the Company to comply with the minimum
bid price rule until approximately June 28, 2009.
We intend to use our 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 capital 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.
Item 6. Exhibits
(a) Exhibits
--------
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 SEC 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)
10.1 Employment contract with Kelvyn H. Cullimore, Jr.
(previously filed)
10.2 Employment contract with Larry K. Beardall (previously
filed)
10.3 Loan Agreement with Zions Bank (previously filed)
10.5 Amended Loan Agreement with Zions Bank (previously filed)
10.6 1992 Amended and Restated Stock Option Plan (previously
filed)
10.7 Dynatronics Corporation 2006 Equity Incentive Award Plan
(previously filed as Annex A to the Company's Definitive
Proxy Statement on Schedule 14A filed on October 27, 2006)
10.8 Form of Option Agreement for the 2006 Equity Incentive Plan
for incentive stock options (previously filed as Exhibit
10.8 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2006)
10.9 Form of Option Agreement for the 2006 Equity Incentive Plan
for non-qualified options (previously filed as Exhibit 10.9
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2006)
11 Computation of Net Income per Share (included in Notes to
Consolidated Financial Statements)
31.1 Certification under Rule 13a-14(a)/15d-14(a) of principal
executive officer (filed herewith)
31.2 Certification under Rule 13a-14(a)/15d-14(a) of principal
financial officer (filed herewith)
32 Certifications under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. SECTION 1350) (filed herewith)
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
DYNATRONICS CORPORATION
Registrant
Date 8/26/09 /s/ Kelvyn H. Cullimore, Jr.
---------------------- -----------------------------------------
Kelvyn H. Cullimore, Jr.
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
Date 8/26/09 /s/ Terry M. Atkinson, CPA
---------------------- -----------------------------------------
Terry M. Atkinson, CPA
Chief Financial Officer
(Principal Accounting and Financial
Officer)
19
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