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July 8, 2009
Ms. Tara L. Harkins
Mr. David Burton
Mail Stop 3030
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Via EDGAR
RE: Dynatronics Corporation SEC File No. 000-12697
Form 10-KSB for the fiscal year ended June 30, 2008 ("2008
Annual Report")
Amendment 1 to Form 10-KSB for the fiscal year ended June 30,
2007 ("Amended 2007 Annual Report") Form 10-Q for the
quarterly period ended March 31, 2009 ("March 2009 Quarterly
Report")
Dear Ms. Harkins and Mr. Burton:
This letter responds to the letter of the staff of the Commission (the "Staff")
dated June 25, 2009 (the "Comment Letter"), with regard to the above-referenced
periodic reports filed by Dynatronics Corporation (the "Company" or
"Dynatronics"), SEC File No. 000-12697, and contains the Company's responses to
the Staff's comments. For your convenience, the comments of the Staff from the
Comment Letter have been restated and are followed by our responses. This letter
is filed by EDGAR.
Form 10-KSB for the fiscal year ended June 30, 2008
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Item 8A. Controls and Procedures, page 22
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1. We note your disclosure on page 23 related to management's report
on internal control over financial reporting as of June 30, 2008.
However, we do not see where you have made a clear and definite
statement as to whether your internal control over financial
reporting was effective or not effective as of June 30, 2008.
Please amend your filing to provide management's conclusion as to
the effectiveness of your internal control over financial
reporting as of June 30, 2008. Refer to Item 308(a)(3) of
Regulation S-K.
Response
We will amend the 2008 Annual Report to clarify that management
concluded that internal control over financial reporting was
effective as of June 30, 2008.
2. Further to the above, please revise this report in future filings
to also include the disclosure required by Item 308(a)(4) of
Regulation S-K
U.S. Securities and Exchange Commission
July 8, 2009
Page 2
Response
As appropriate, the Company will include in future filings on Form
10-K the statement required by Item 308(a)(4) "that the registered
public accounting firm that audited the financial statements
included in the annual report containing the disclosure required
by this Item has issued an attestation report on the registrant's
internal control over financial reporting."
The Company understands that this requirement will first apply to
smaller reporting companies such as Dynatronics for annual reports
filed for fiscal years ending on or after December 15, 2009. For
the Company this would require that the attestation be included in
its annual report for the fiscal year ending June 30, 2010.
In a telephone conference with the Staff on July 6, 2009, the
Staff indicated that this comment should have properly referenced
temporary Item 308T. In the amended Form 10-KSB for the fiscal
year ended June 30, 2008 and in future filings, the Company will
include a statement to the effect that "This annual report does
not include an attestation report of the Company's independent
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to
attestation by the Company's independent registered public
accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only
management's report in this annual report."
Consolidated Financial Statements, page F-1
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Note (1) Basis of Presentation and Summary of Significant Accounting Policies,
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page F-6
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3. We note your disclosures on page 18 that you have "taken measures
designed to reduce expenses by more than $2 million annually" and
"the cost savings include a reduction of approximately 20 percent
of the Company's workforce and the elimination of duplicative
overhead expense." We note similar disclosures on page 10 of your
March 31, 2009 Form 10-Q. Based on these disclosures, it appears
that you may have implemented various restructuring plans. To the
extent that these represent restructuring plans, please revise
your notes and MD&A in future filings to provide the disclosures
required by paragraph 20 of SFAS 146 and SAB Topic 5P:4.
Response
In future filings we will provide disclosures required by
paragraph 20 of SFAS No. 146 and SAB Topic 5P:4. To date, the
cost-saving measures taken by the Company have not resulted in any
significant liability or "up-front" costs to the Company. For
example, no significant termination benefits were extended in
connection with the reduction in force. Therefore, to date, the
disclosures required by SFAS No. 146 and SAB Topic 5P:4 have not
U.S. Securities and Exchange Commission
July 8, 2009
Page 3
been applicable. Additionally, the Company has not sold or
terminated a line of business nor has the Company closed business
activities in a certain location. In conjunction with certain
acquisitions in 2007 the Company did consolidate warehouse
operations as part of the strategic plan for the acquisitions.
None of these warehouses had been operated by the Company prior to
the acquisitions. The Company has closed certain warehouse
facilities and moved the warehousing activities of such locations
to other existing warehouses. Costs incurred in connection with
the closure of these warehouses were not significant. The Company
has not made significant changes in management structure and has
not implemented a reorganization that affects the nature and focus
of operations. In addition to the consolidation of warehouse
facilities, steps taken to reduce costs and improve profitability
include a company-wide reduction in force, a reduction in pay for
top management, a reduction in personnel benefits, the elimination
of certain unprofitable tradeshows and other marketing expenses, a
reduction in commissions paid on small orders, and a reduction in
fees paid to certain service providers.
(g) Goodwill and Long-lived Assets, Page F-7
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4. We note here and on page 23 that you used an independent appraiser
to determine your goodwill impairment. While in future filings,
management may elect to take responsibility for valuing your
goodwill, please note that if you continue to refer to the work of
the third party in a Form 10-K or Form 10-KSB that is incorporated
by reference into a registration statement, you may be required to
obtain and include a consent from the third party. Refer to
Compliance and Disclosure Interpretation 141.02, available at out
website
<http://www.sec.gov/divisions/corpfin/guidance/sasinterp.htm>.
Response
We note the Staff's comment and will comply as appropriate in
future filings.
Note 9. Income Taxes, page F-13
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5. We note here and from page F-2 of your March 31, 2009 Form10-Q
that you present a deferred income tax asset of $1.4 million as of
June 30, 2008 and March 31, 2009. You state that you believe it is
more likely than not that all of the deferred tax assets will be
realized due to historical taxable income, projections of future
taxable income, and tax planning strategies. Giving specific
consideration to negative evidence such as cumulative losses in
recent years, tell us and revise your note here and your critical
accounting policies in MD&A in future filings to discuss in more
detail why you believe that it is more likely than not that all of
the deferred tax assets will be realized. Refer to the guidance
provided in paragraphs 17(e) and 20-25 of SFAS 109.
U.S. Securities and Exchange Commission
July 8, 2009
Page 4
Response
In future filings, we will provide additional disclosure regarding
our analysis of the recoverability of the deferred income tax
assets.
Management performed an in-depth analysis of the deferred income
tax assets and their recoverability based on the criteria of SFAS
No. 109. The following points summarize management's assessment.
Evaluation of Negative Evidence (Paragraph 23 of SFAS No. 109)
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o A history of operating loss or tax credit carryforwards
expiring unused.
The Company does not have a history of net operating
losses. Over the last 19 years, the Company has only
experienced a pre-tax loss in 3 of those years. One of
those annual losses was due to non-operating expenses. All
prior deferred income tax assets were realized before their
expiration.
o Losses expected in early future years (by a presently
unprofitable entity)
The loss in fiscal 2008 was largely due to the write-off of
goodwill and other expenses related to the businesses
acquired in June and July 2007. Basic operations generated
profits, which we believe is a better indicator of future
results.
o Unsettled circumstances that, if unfavorably resolved,
would adversely affect the future operations and profit
levels on a continuing basis in future years.
We are not aware of any unsettled circumstances that might
have an adverse affect on future operations.
o A carryback, carrforward period that is so brief that it
would limit the realization of tax benefits if (1) a
significant deductible temporary difference is expected to
reverse in a single year or (2) the enterprise operates in
a traditionally cyclical business.
The carryforward period for realizing the net operating
losses is 19 years. Dynatronics does not operate in a
cyclical business.
U.S. Securities and Exchange Commission
July 8, 2009
Page 5
Evaluation of Positive Evidence (Paragraph 24 of SFAS No. 109)
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o Existing contracts or firm sales backlog that will produce
more than enough taxable income to realize the deferred tax
asset based on existing sales prices and cost structures.
Dynatronics experienced an 83% increase in sales in fiscal
2008 primarily as a result of the acquisitions made in June
and July 2007. While there is no existing contract or firm
sales backlog that would alone produce enough taxable
income to realize 100% of the deferred income tax assets in
a single year, our projections reflect that an increase of
6% in sales accompanied by a 4% increase in expenses would
achieve sufficient pre-tax profits over the next 6 years to
utilize the net operating loss carryforwards. We believe
these results are achievable based on recent activities.
o An excess of appreciated asset value over the tax basis of
the entity's net assets in an amount sufficient to realize
the deferred tax asset.
Dynatronics owns its manufacturing and operating facilities
in Utah and Tennessee. The difference in the depreciated
tax basis and the market value of these two facilities
totals approximately $2.5 million. The Company has
considered the sale of these facilities in order to reduce
future interest expense; however, no specific plan is
currently in place for the sale of the facilities.
o A strong earnings history exclusive of the loss that
created the future deductible amount (tax loss carryforward
or deductible temporary difference) coupled with evidence
indicating that the loss (for example, an unusual,
infrequent or extraordinary item) is an aberration rather
than a continuing condition.
Dynatronics has a strong earnings history and in 16 of the
last 19 years the Company has experienced a pre-tax profit
averaging over $500,000 per year. The principal causes of
the loss in fiscal 2008 (goodwill impairment and expenses
resulting from six acquisitions) are considered to be
unusual and are not expected to recur in the near future.
In summary, the only negative evidence presented to support a
valuation allowance against the deferred income tax assets is the
cumulative loss position as of June 30, 2008. Mitigating factors
to consider when forming a conclusion relative to the validity of
this negative evidence include:
o Substantially all of the cumulative losses are attributable
to a single year, fiscal 2008.
U.S. Securities and Exchange Commission
July 8, 2009
Page 6
o The losses in fiscal 2008 are of an infrequent and unusual
nature.
o The losses may not be as relevant given the significant,
recent changes associated with the six acquisitions.
o The stated concerns of the FASB over recording a valuation
allowance when business combinations are involved.
Dynatronics recently had six such acquisitions.
o No history of losses. Dynatronics has over the last 19-year
period shown an average pre-tax profit of $500,000 per year
with only three of the past 19 years experiencing an
operating loss.
The following positive evidence supports the conclusion that a
valuation allowance is not required:
o Dynatronics once before established a valuation allowance
and subsequently reversed that allowance three years later.
The full net operating loss was ultimately utilized.
Therefore, Dynatronics has shown a history of realizing net
operating losses.
o Over the last 19 years, Dynatronics generated approximately
$10,000,000 in pre-tax profits. The next 19 years would
have to generate only 40% of the performance of the last 19
years to utilize the 100% of the net operating loss
carryforward. Given historical performance, this appears
more likely than not.
o Current projections indicate that a sales increase of
approximately 6% per year would be required to fully
utilize the net operating loss carryforward in six years.
Over the last 19 years, Dynatronics has increased its sales
from $2,500,000 to $33,500,000. That is an annual increase
of approximately 15% per year. It seems more likely than
not that a 6% annual increase in sales will be achieved.
o Even in the current economically depressed environment, the
net realizable gain that would result from the sale of the
property owned by Dynatronics is estimated at $2,500,000.
As the assets are further depreciated and property values
increase in the future, that differential between the
depreciated basis and the net realizable value will
continue to increase.
Given the lack of conclusive negative evidence, the mitigating
factors associated with the only negative consideration in
evidence, the preponderance of positive evidence, the fact the
Company has 19 years to utilize the net operating loss
carryforwards in question, and the ability of the Company to
generate a substantial gain from the sale of certain real
property, Dynatronics' management concludes that it is more likely
than not that the Company will realize the deferred income tax
assets associated with the net operating losses generated in
fiscal 2008.
U.S. Securities and Exchange Commission
July 8, 2009
Page 7
Note 14. Acquisition and Non-Cash Disclosure, page F-16
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6. We note that you acquired Rajala Therapy Sales Associates, one of
your key distributors, for total consideration of $2.7 million on
June 30, 2007. We further note that you acquired five other
distributors for total consideration of $5.7 million on July 2,
2007. We note that you filed Item 2.01 Form 8-Ks on July 6, 2007
and July 9, 2007 announcing the closing of these acquisitions and
that these reports did not include audited financial statements
and pro forma financial information of the acquired entities.
Considering that total consideration for these acquisitions was
$8.4 million, please provide to us your significance tests as set
forth in Item 310(c) of regulation S-B along with the reason why
you believe financial statements for these acquisitions in your
previously filed Forms 8-K were not required.
Response
Because the acquisitions did not involve a group of related
businesses (as defined by Item 3-05 of Regulation S-X), the
provisions of 310(c) were not applicable to these acquisitions.
Furthermore, each business acquisition was separately negotiated
and was not dependent on the outcome of the other acquisitions.
The Rajala acquisition did not exceed 20 percent of any of the
conditions listed in Rule 1-02(w) of Regulation S-X.
Regarding the acquisitions made in July 2007, the following
significance tests were performed:
o The acquisition price was less than 50% of the total
consolidated assets of Dynatronics as of June 30, 2007.
o The total assets of the acquired entities as of the
acquisition date were less than 50% of the total
consolidated assets of Dynatronics as of June 30, 2007.
o The total pretax income of the acquired entities for the
most recent completed fiscal year was less than 50% of the
total consolidated pretax income of Dynatronics for the
year ended June 30, 2007.
U.S. Securities and Exchange Commission
July 8, 2009
Page 8
As a result of the foregoing facts, audited financial statements
and proforma financial information of the acquired entities were
not required.
Exhibits 31.1 and 31.2
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7. We note that you omitted the language "internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)" from the introduction of paragraph 4 of your
certifications and have also omitted paragraph 4(b) from your
certifications. The required certifications must be in the exact
form prescribed. Please revise your filings to include
certifications that conform to the exact wording required by Item
601(b)(31) of Regulation S-B and Item 601(b)(31) of Regulation
S-K, as applicable.
Response
The Company will amend the certifications filed with the Amended
2008 Annual Report to include the omitted language. We note that
the certifications filed with the March 2009 Quarterly Report do
include the following language in paragraph 4: "The registrant's
other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have . . . ."
Paragraph 4(b) is also included in the certifications filed with
the March 2009 Quarterly Report.
Exhibit 32
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8. We note that your certifications here and within your September
30, 2008, December 31, 2008 and March 31, 2009 Forms 10-Q
furnished pursuant to Rule 13a-14(b) of the Exchange Act are not
dated. Please amend your June 30, 2008 Form 10-KSB and your
September 30, 2008, December 31, 2008 and March 31, 2009 Forms
10-Q to include currently signed and dated certifications. The
amendments should include the entire filing with the revised
certifications.
Response
The certifications filed as Exhibit 32 with the 2008 Annual Report
and the subsequently filed quarterly reports on Form 10-Q were
executed on the same dates as the certificates filed as Exhibit 31
filed with the corresponding reports. This omission of the date
from the certifications filed as Exhibit 32 was inadvertent. We
will amend the annual report on Form 10-KSB for the fiscal year
ended June 30, 2008 and the quarterly reports on Form 10-Q for the
quarters ended September 30 and December 31, 2008 and March 31,
2009 to include currently signed and dated certifications and
include the entire filing with the revised certifications.
U.S. Securities and Exchange Commission
July 8, 2009
Page 9
Amendment 1 to June 30, 2007 Form 10-KSB
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9. We note the June 30, 2007 Form 10-KSB was amended to include the
audit report for your financial statements as of and for the years
ended June 30, 2007 and 2006 since you inadvertently omitted this
from your original filing. Please further amend your June 30, 2007
Form 10-KSB to include a complete set of financial statements
along with the accompanying audit report. Refer to Rule 2-02 of
regulation S-X and Item 310 of Regulation S-B.
Response
Because the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2008 includes a signed report of the
independent registered public accounting firm that covers the
fiscal years ended June 30, 2008 and 2007, we believe that it is
unnecessary to file an amendment of the Amended 2007 Annual Report
to include a complete set of financial statements along with the
accompanying audit report.
Form 10-Q for the Quarter Ended March 31, 2009
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Notes to Condensed Consolidated Financial Statements, page 4.
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10. We note from page 9 that you implemented pricing incentives to
reward customers for placing larger orders. Please revise your
notes in future filings to explain the nature of these incentives
and how you are accounting for these incentives. Refer to the
guidance in EITF 01-09.
Response
We will revise our notes in future filings to explain the nature
of these incentives and how we are accounting for these
incentives.
11. We note from page 10 that you reversed $472,000 of an accrued
liability related to the cancellation of retirement benefits for
two of your executive officers during the nine months ended March
31, 2009. Please tell us and revise your future filings to explain
in more detail why you reversed these obligations. Within your
discussion, please explain if these contracts have been legally
cancelled.
U.S. Securities and Exchange Commission
July 8, 2009
Page 10
Response
The reversal of the liability was required because of the
termination of the agreements between the Company and the two
executives which provided for the cancelled benefits. The Company
entered into agreements with these two executives in June 2009,
with an expiration date of December 31, 2009, as recently reported
on a Current Report on Form 8-K filed by the Company on June 16,
2009. The new agreements do not include benefits like those that
were terminated with the earlier agreements. Copies of the new
agreements were included as exhibits filed with the Current
Report. Future filings will include disclosure that clarifies that
the original agreements were legally cancelled.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations, page 9.
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12. We note your discussion on page 9 relating to your gross margin
"adjusting for higher basis inventory." In future filings, when
presenting similar non-GAAP measures, please provide all the
disclosures required by Item 10(e) of regulation S-K and comply
fully with the guidance provided in Division of Corporation
Finance Frequently Asked Questions Regarding the Use of Non-GAAP
Financial Measures. Otherwise, revise future filings to only
present your gross margin on a GAAP basis.
Response
In future filings, when presenting similar non-GAAP measures, we
will provide all the disclosures required by Item 10(e) of
regulation S-K and comply with the guidance provided by the
Commission regarding the use of Non-GAAP Financial Measures or
only present our gross margin on a GAAP basis.
The Company acknowledges in connection with the Company's response herein and to
the filings made as part of such response that:
o The Company is responsible for the adequacy and accuracy of
the disclosure in its filings;
o Staff comments or changes to disclosure in response to
staff comments do not foreclose the Commission from taking
any action with respect to the filings; and
o The Company may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
U.S. Securities and Exchange Commission
July 8, 2009
Page 11
Please contact the undersigned at (801) 568-7000 if you have any further
questions or need further clarification.
Thank you.
Sincerely,
DYNATRONICS CORPORATION
/s/ Kelvyn H. Cullimore, Jr.
Kelvyn H. Cullimore, Jr.
Chairman, President and CEO
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