10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

or

☐    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 incorporation or organization)	(I.R.S. Employer Identification No.)

7030 Park Centre Drive, Cottonwood Heights, 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  ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☑ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	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

The number of shares outstanding of the registrant's common stock, no par value, as of February 12, 2016 is 2,742,355.

DYNATRONICS CORPORATION

FORM 10-Q

QUARTER ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

	Page Number
PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements	1
Condensed Consolidated Balance Sheets (Unaudited) As of December 31, 2015 and June 30, 2015	1
Condensed Consolidated Statements of Operations (Unaudited) Three and Six Months Ended December 31, 2015 and 2014	2
Condensed Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended December 31, 2015 and 2014	3
Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.  Controls and Procedures	14
PART II. OTHER INFORMATION
Item 6.  Exhibits	15

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets	December 31,  2015			June 30, 2015
Current assets:
Cash and cash equivalents	$	2,134,140		$	3,925,967
Trade accounts receivable, less allowance for doubtful accounts of  $446,867 as of December 31, 2015 and $417,444 as of June 30, 2015		3,016,545			3,346,770
Other receivables		8,088			6,748
Inventories, net		5,470,960			5,421,787
Prepaid expenses and other		331,125			273,629
Prepaid income taxes		340,908			338,108
Total current assets		11,301,766			13,313,009
Property and equipment, net		4,808,736			5,025,076
Intangible assets, net		175,463			190,803
Other assets		580,222			623,342
Total assets	$	16,866,187		$	19,152,230
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	125,458		$	121,884
Current portion of capital lease		178,260			173,357
Current portion of deferred gain		150,448			150,448
Line of credit		733,316			1,909,919
Warranty reserve		154,015			153,185
Accounts payable		1,844,032			2,520,327
Accrued expenses		273,385			279,547
Accrued payroll and benefits expense		330,134			263,092
Total current liabilities		3,789,048			5,571,759
Long-term debt, net of current portion		587,413			651,118
Capital lease, net of current portion		3,374,476			3,464,850
Deferred gain, net of current portion		1,905,673			1,980,897
Deferred rent		63,688			41,150
Deferred income tax liabilities		136,128			136,128
Total liabilities		9,856,426			11,845,902
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value: Authorized 5,000,000 shares; 1,610,000 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively		3,067,608			3,087,554
Common stock, no par value: Authorized 50,000,000 shares; 2,672,652 shares and 2,642,389 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively		7,639,866			7,610,244
Accumulated deficit		(3,697,713	)		(3,391,470	)
Total stockholders' equity		7,009,761			7,306,328
Total liabilities and stockholders' equity	$	16,866,187		$	19,152,230

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
	2015			2014			2015			2014
Net sales	$	7,474,921		$	7,303,189		$	14,872,118		$	14,519,513
Cost of sales		4,797,939			4,839,578			9,684,307			9,488,330
Gross profit		2,676,982			2,463,611			5,187,811			5,031,183
Selling, general, and administrative expenses		2,469,131			2,379,720			4,824,785			4,631,349
Research and development expenses		253,868			234,674			519,229			451,500
Operating loss		(46,017	)		(150,783	)		(156,203	)		(51,666	)
Other income (expense):
Interest income		1,869			1,280			2,482			3,601
Interest expense		(77,274	)		(79,736	)		(157,517	)		(128,029	)
Other income, net		2,391			3,113			4,995			6,455
Net other expense		(73,014	)		(75,343	)		(150,040	)		(117,973	)
Loss before income taxes		(119,031	)		(226,126	)		(306,243	)		(169,639	)
Income tax (provision) benefit		(5,650	)		92,583			-			77,020
Net loss		(124,681	)		(133,543	)		(306,243	)		(92,619	)
8% Convertible preferred stock dividend		(80,500	)		-			(161,000	)		-
Net loss attributable to common stockholders	$	(205,181	)	$	(133,543	)	$	(467,243	)	$	(92,619	)
Basic and diluted net loss per common share	$	(0.08	)	$	(0.05	)	$	(0.18	)	$	(0.04	)
Weighted-average common shares outstanding:
Basic		2,670,124			2,520,389			2,656,711			2,520,389
Diluted		2,670,124			2,520,389			2,656,711			2,520,389

See accompanying notes to condensed consolidated financial statements.

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DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Six Months Ended
	December 31
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	(306,243	)	$	(92,619	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		110,912			175,318
Amortization of intangible assets		15,340			22,318
Amortization of other assets		25,686			25,686
Amortization of building lease		125,966			104,972
Stock-based compensation expense		29,622			33,911
Change in deferred income taxes		-			(985,190	)
Change in provision for doubtful accounts receivable		29,423			48,000
Change in provision for inventory obsolescence		3,856			60,000
Deferred gain on sale/leaseback		(75,224	)		(62,686	)
Change in operating assets and liabilities:
Receivables, net		299,462			165,522
Inventories, net		(53,029	)		117,189
Prepaid expenses and other assets		(57,496	)		(632,399	)
Other assets		17,434			(327,320	)
Income tax payable		-			545,496
Prepaid income taxes		(2,800	)		-
Accounts payable and accrued expenses		(611,993	)		(318,708	)
Net cash used in operating activities		(449,084	)		(1,120,510	)
Cash flows from investing activities:
Purchase of property and equipment		(20,538	)		(19,652	)
Proceeds from sale of property and equipment		-			3,800,000
Net cash provided by (used in) investing activities		(20,538	)		3,780,348
Cash flows from financing activities:
Principal payments on long-term debt		(60,131	)		(715,852	)
Principal payments on long-term capital lease		(85,471	)		(78,675	)
Net change in line of credit		(1,176,603	)		(1,998,518	)
Net cash used in financing activities		(1,322,205	)		(2,793,045	)
Net change in cash and cash equivalents		(1,791,827	)		(133,207	)
Cash and cash equivalents at beginning of the period		3,925,967			332,800
Cash and cash equivalents at end of the period	$	2,134,140		$	199,593
Supplemental disclosure of cash flow information:
Cash paid for interest	$	139,334		$	85,469
Cash paid for income taxes		-			356,151
Supplemental disclosure of non-cash investing and financing activity:
Capital lease - building	$	-		$	3,800,000
Preferred stock dividend payable in common stock		161,000			-

See accompanying notes to condensed consolidated financial statements.

3

DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

December 31, 2015

NOTE 1.  PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated balance sheets as of December 31, 2015 and June 30, 2015, and the condensed consolidated statements of operations and cash flows for the three and six months ended December 31, 2015 and 2014 were prepared by Dynatronics Corporation (the "Company") 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 U.S. generally accepted accounting principles (U.S. GAAP) 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 Company's financial position, results of operations and cash flows.  The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results of operations for the fiscal year ending June 30, 2016.  The Company previously filed with the SEC an annual report on Form 10-K, as amended, which included audited financial statements for each of the two years ended June 30, 2015 and 2014.  It is suggested that the financial statements contained in this Form 10-Q be read in conjunction with the financial statements and notes thereto contained in the Company's most recent Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate to inventory, allowance for doubtful accounts, stock-based compensation and valuation allowance for deferred income taxes.

Significant Accounting Policies

There have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

NOTE 2.  NET LOSS PER COMMON SHARE

Net loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive common stock equivalents outstanding during the period.  Stock options, convertible preferred stock and warrants are considered to be common stock equivalents.  The computation of diluted net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Basic net loss per common share is the amount of net loss for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net loss per common share is the amount of net 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.

The reconciliations between the basic and diluted weighted-average number of common shares outstanding for the three and six months ended December 31, 2015 and 2014 are as follows:

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	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2015		2014		2015		2014
Basic weighted-average number of common shares outstanding during the period		2,670,124		2,520,389		2,656,711		2,520,389
Weighted-average number of dilutive common stock equivalents outstanding during the period		-		-		-		-
Diluted weighted-average number of common and common equivalent shares outstanding during the period		2,670,124		2,520,389		2,656,711		2,520,389

Outstanding options for common shares not included in the computation of diluted net loss per common share, because they were anti-dilutive, for the three months ended December 31, 2015 and 2014 totaled 4,081,267 and 139,610, respectively, and for the six months ended December 31, 2015 and 2014 totaled 4,085,911 and 139,610, respectively.

NOTE 3. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the employee's requisite service period. The Company recognized $14,611 and $16,457 in stock-based compensation expense during the three months ended December 31, 2015 and 2014, respectively, and recognized $29,622 and $33,911 in stock-based compensation expense during the six months ended December 31, 2015 and 2014, respectively.  These expenses were recorded as selling, general and administrative expenses in the condensed consolidated statements of operations.

Stock Options.  The Company maintained a 2005 equity incentive plan ("2005 Plan") for the benefit of employees. On June 29, 2015 the shareholders approved a new 2015 equity incentive plan ("2015 Plan") setting aside 500,000 shares. No additional shares or awards will be granted under the 2005 Plan. The 2015 Plan was filed with the SEC on September 3, 2015.   Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other stock-based awards may be granted under the 2015 Plan.  Awards granted under the 2015 Plan may be performance-based.  As of December 31, 2015, there were 418,806 shares of common stock authorized and reserved for issuance, but not granted under the terms of the 2015 Plan.

The Company granted 1,194 shares under its 2015 Plan during the six months ended December 31, 2015.  There was no equity awards granted under its 2005 Plan during that period.

The following table summarizes the Company's stock option activity for the 2005 and 2015 Plans during the six-month period ended December 31, 2015.

	Number of Options			Weighted- Average  Exercise Price
Outstanding at beginning of period		91,152		$	5.07
Granted		80,000			3.34
Exercised		-			-
Cancelled		(23,395	)		7.10
Outstanding at end of period		147,757			3.81
Exercisable at end of period		63,793			4.76

The Black-Scholes option-pricing model is used to estimate the fair value of options granted under the Company's stock option plan.

Expected option lives and volatilities are based on historical data of the Company. The risk-free interest rate is based on the U.S. Treasury Bills rate on the grant date for constant maturities that correspond with the option life. Historically, the Company has not declared dividends on common stock and there are no future plans to do so.

As of December 31, 2015, there was $298,861 of unrecognized stock-based compensation cost related to grants under the 2005/2015 Plans that is expected to be expensed over a weighted-average period of four to ten years. There was $2,278 of intrinsic value for options outstanding as of December 31, 2015.

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NOTE 4.CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS

On June 30, 2015, the Company completed a private placement with affiliates of Prettybrook Partners, LLC ("Prettybrook") and certain other purchasers (collectively with Prettybrook, the "Preferred Investors") for the offer and sale of shares of the Company's Series A 8% Convertible Preferred Stock (the "Series A Preferred") in the aggregate amount of approximately $4 million. Offering costs incurred in conjunction with the private placement were recorded net of proceeds. The Series A Preferred is convertible to common stock on a 1:1 basis.  A Forced Conversion can be initiated based on a formula related to share price and trading volumes as outlined in the terms of the private placement.  The dividend is fixed at 8% and is payable in either cash or common stock.  This dividend is payable quarterly and equates to an annual payment of $322,000 or equivalent value in common stock.  Certain redemption rights are attached to the Series A Preferred, but none of the redemption rights for cash are deemed outside the control of the Company. The redemption rights deemed outside the control of the Company require common stock payments or an increase in the dividend rate.  The Series A Preferred includes a liquidation preference under which Preferred Investors would receive cash equal to the stated value of their stock plus unpaid dividends.  In accordance with the terms of the sale of the Series A Preferred, the Company was required to register the underlying common shares associated with the Series A Preferred and the warrants.  That registration statement filed on form S-3 went effective on August 13, 2015.

The Series A Preferred votes on an as-converted basis, one vote for each share of common stock issuable upon conversion of the Series A Preferred, provided, however, that no holder of Series A Preferred shall be entitled to cast votes for the number of shares of common stock issuable upon conversion of such Series A Preferred held by such holder that exceeds the quotient of (x) the aggregate purchase price paid by such holder of Series A Preferred for its Series A Preferred, divided by (y) the greater of (i) $2.50 and (ii) the market price of the common stock on the trading day immediately prior to the date of issuance of such holder's Preferred Stock. The market price of the common stock on the trading day immediately prior to the date of issuance was $3.19 per share. Based on a $4,025,000 investment and a $3.19 per share price the number of common stock equivalents eligible for voting by preferred shareholders is 1,261,755.

The Preferred Investors purchased a total of 1,610,000 shares of Series A Preferred Stock, and received in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of common stock, and (ii) B-Warrants, exercisable by "cashless exercise", to purchase 1,207,500 shares of common stock.  The warrants are exercisable for 72 months from the date of issuance and carry a Black-Scholes put feature in the event of a change in control.  The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.

The Company's Board of Directors has the authority to cause the Company to issue, without any further vote or action by the shareholders, up to 3,390,000 additional shares of preferred stock, no par value per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.

The Series A Preferred includes a conversion right at a price that creates an embedded beneficial conversion feature.  A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The conversion price is 'in the money' and the holder realizes a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred issued by the Company do not have a stated life and, therefore, all of the beneficial conversion feature amount of $2,858,887 was amortized to dividends on the same date the preferred shares were issued.  The $2,858,887 dividend is added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the year ended June 30, 2015. 

6

NOTE 5.  COMPREHENSIVE LOSS

For the three and six months ended December 31, 2015 and 2014, comprehensive loss was equal to the net loss as presented in the accompanying condensed consolidated statements of operations.

NOTE 6.  INVENTORIES

Inventories consisted of the following:

	December 31, 2015			June 30, 2015
Raw materials	$	2,153,932			2,086,411
Finished goods		3,679,429			3,693,921
Inventory obsolescence reserve		(362,401	)		(358,545	)
	$	5,470,960			5,421,787

NOTE 7.  RELATED-PARTY TRANSACTIONS

The Company currently leases office and warehouse space in Detroit, Michigan and Hopkins, Minnesota from two shareholders and former independent distributors on an annual basis under operating lease arrangements. Management believes the lease agreements are on an arms-length basis and the terms are equal to or more favorable than would be available to the Company from third parties. The expense associated with these related-party transactions totaled $17,700 for the three months ended December 31, 2015 and 2014, and $35,400 for the six months ended December 31, 2015 and 2014.

NOTE 8.  LINE OF CREDIT

In March 2015, the Company moved its working capital line of credit to a new lender. Interest on the new line of credit is prime rate plus 5%. The $3 million line of credit is collateralized by accounts receivable and inventories.  Borrowing limitations are based on 85% of eligible accounts receivable and $0.7 million of eligible inventory.  The current borrowing base on the new line of credit is approximately $2.8 million.  Interest payments on the line are due monthly.  All borrowings under the line of credit are presented as current liabilities in the accompanying condensed consolidated balance sheet.

The line of credit matures on March 5, 2016. The Company plans to pay off the line of credit when it matures using cash reserves. The effective interest rate on borrowed money is approximately 10% including interest and origination fees. The new line of credit requires that a minimum borrowing of approximately $0.7 million be maintained during the term of the loan.

NOTE 9.  RECENT ACCOUNTING PRONOUNCEMENTS

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update make the following eight improvements to GAAP:

1) Equity investments (except those accounted for under the equity method or that result in consolidation of the investee) are to be measured at fair value with changes in fair value included in net income. However, an entity may choose to measure equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.  

2) A qualitative assessment is required for investments without readily determinable fair values in order to identify impairment. If impairment is identified, the investment is to be measured at fair value.  

3) The requirement to disclose the fair value of financial instruments measured at amortized cost is eliminated for non-public business entities.  

4) The requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost is eliminated for public business entities.  

5) Public entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.  

6) An entity is required to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  

7) Separate presentation of financial assets and liabilities by measurement category and form of financial asset is required on the balance sheet or accompanying notes.  

8) An entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

7

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. . The Company notes this new guidance will apply to its reporting requirements and will implement the new guidance accordingly and is currently evaluating the impact this new guidance will have on its financials.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Furthermore, the acquirer should record in the same period's financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly, if the Company acquires any new businesses.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This update was issued to make some fairly minor wording adjustments to ASC 835-30. The new wording, presented as paragraph 835-30-S45-1, recognizes that ASU 2015-13 does not address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-13 requires companies to recognize debt issuance costs as a reduction of the carrying amount of the associated debt liability. ASU 2015-15 states that debt issuance costs related to line-of-credit arrangements may be recognized as an asset and amortized over the term of the line-of-credit arrangement, even if the line-of-credit does not carry a balance. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update was issued in response to feedback from preparers, practitioners, and users of financial statements to see the effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance back for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along with any interim reporting periods in that same period. All other entities will be required to implement the new guidance to reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): simplifying the Measurement of Inventory. The objective of this update is to simplify Topic 330, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update will be effective for fiscal years beginning after December 15, 2017. The Company currently applies a lower of cost or market and is currently assessing the magnitude of the difference between using market value versus net realizable value; however, it is not anticipated to have a material effect on the Company's financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. This pronouncement is part of the FASB's perpetual project started in November 2010 to address feedback received from stakeholders regarding the codification standards. Like other such pronouncements issued from time to time, the purpose of this pronouncement is not to issue new guidance, but rather to clarify, correct unintended application of the standards, and make various minor improvements as deemed necessary. The updates made are effective immediately. These changes are not expected to have a significant impact on the financial statements of guidance users. While some of the changes made in this pronouncement impact standards applicable to the Company, no material impact was noted.

In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting. This Accounting Standards Update amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No.115. The Company notes the update is effective immediately and will apply to the Company if the Company acquires a business.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements.

NOTE 10.  SUBSEQUENT EVENTS

On January 7, 2016, the Company issued 31,301 shares of common stock as payment for the accrued "Preferred Stock Dividend."  On January 20, 2016, the Company issued 34,980 shares of common stock to the independent directors as compensation for calendar year 2016.  On January 26, 2016 the Company issued 3,422 shares of common stock pursuant to an employment agreement.

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Dynatronics Corporation ("Company," "Dynatronics," "we") designs, manufactures, distributes, markets and sells physical medicine products.  We offer a broad line of medical equipment including therapy devices, medical supplies and soft goods, treatment tables and rehabilitation equipment.  We market and sell our products primarily to physical therapists, chiropractors, sports medicine practitioners and podiatrists.  We operate on a fiscal year ending June 30.  For example, reference to fiscal year 2016 refers to the year ending June 30, 2016.

Recent Events

In December 2015, the Protecting Americans from Tax Hikes Act (the PATH Act) enacted as part of the Consolidated Appropriations Act, 2016 was passed and signed into law in the United States.  Among other things, this new law suspends the Medical Device Tax which had been imposed in January 2012 by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act.  The suspension of this tax is expected to result in a savings to the company of approximately $160,000 per year.  The PATH Act also makes permanent certain tax benefits such as the R&D tax credit which has benefitted the company in past years.

Business Outlook

The strategic direction of the Company, including the completion of a $4.0 million equity financing through the sale of preferred stock to affiliates of the strategic private investor Prettybrook Partners in June 2015, is designed to accelerate growth in the coming years.  The financing significantly strengthened our balance sheet and provides resources to increase our market and geographic footprint while maintaining our status as the innovative leader in rehabilitation and physical therapy products.

Combining the solid corporate infrastructure we have built over the last three decades with the business acumen and access to capital and deal flow provided by Prettybrook should allow Dynatronics not only to strengthen our legacy business, but also position the Company for growth through strategic acquisitions.

Our M&A strategy is focused on acquiring businesses that simultaneously fit our criteria and enhance our product offering.  We are currently evaluating acquisition opportunities and anticipate executing on one of these in calendar year 2016.  We believe these actions will cause Dynatronics to grow faster than our market segment.

We are also focused on growing organically, both in the US and internationally.  In the last three years, we have released more new and innovative products than during any other similar period in our history.  The introduction of the SolarisPlus family of combination electrotherapy/ultrasound/ phototherapy units, the 25 Series combination electrotherapy/ultrasound units, the line of Ultra treatment tables, and the ThermoStim probe (an accessory to the Solaris Plus family of products) make up most of these innovative new products.  The introduction of these products has been a major strategic component of attracting new sales representatives and dealers in order to expand our distribution across North America and into international territories.  Adding these new sales reps and dealers along with expanding into new markets such as podiatry, home health, hospitals and post-acute care is part of our strategic plan  to become a stronger provider of therapeutic products globally.

In July 2015, we received the Conformité Européen Mark (CE Mark), applicable to our SolarisPlus and "25 Series" therapeutic modality products.  The CE Mark is an indication that these products meet the requirements of  European Community directives for quality manufacturing.   The CE Mark approval of our SolarisPlus and "25 Series" therapeutic modality products facilitates the sale of these products in Europe and many other countries around the world.  Over the past several years, we have increased our emphasis on international sales.  In addition, during the past year, we also received clearance for these same products in Japan, Singapore and Peru.  Efforts are currently underway to obtain clearance in Mexico, China and other Southeast Asian countries.  With the CE Mark, we can further expand sales throughout Europe and into areas of the world that recognize and require this distinguished mark of quality.

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Based on our defined strategic initiatives, we are focusing our resources in the following areas:

· Exploring strategic business acquisitions to accelerate growth and enhance market strength.   We believe that this strategy will leverage and complement our competitive strengths, increase market reach and allow us to potentially expand into broader medical markets.  The criteria for these acquisitions will, in large part, be to facilitate the other initiatives described in this section.

· Improving gross profit margins by, among other initiatives, increasing market share of manufactured capital products by promoting sales of our state-of-the-art Dynatron ThermoStim probe, SolarisPlus and 25 Series products.

· Seeking to improve distribution of our products through recruitment of additional qualified sales representatives and dealers attracted by the many new products being offered and expanding the availability of proprietary combination therapy devices.

· Increasing international sales by (1) leveraging the CE Mark approval in Europe and other countries through appropriate distributors for the approved products, (2) finalizing regulatory approvals in Mexico and China and other countries in Southeast Asia, and (3) further developing relationships with existing international distributors in order to increase sales in countries where our products are approved.

· Continuing to seek ways of increasing business with regional and national accounts and the U.S. Government.

· Strengthening pricing management and procurement methodologies.

· Updating and improving our selling and marketing efforts including electronic commerce options, as well as developing better tools for our sales force to improve their efficiency.

Results of Operations

The following discussion and analysis of our financial condition and results of operations for the three and six months ended December 31, 2015, should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report, and our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, as amended, which includes audited financial statements for the year then ended.  Results of operations for the second fiscal quarter and six months ended December 31, 2015, are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2016.

Net Sales

Net sales increased 2.4%  rising $0.2 million to approximately $7.5 million for the quarter ended December 31, 2015, compared to net sales of approximately $7.3 million for the quarter ended December 31, 2014.  Net sales increased $0.4 million or 2.4% to approximately $14.9 million for the six months ended December 31, 2015, compared to net sales of approximately $14.5 million for the corresponding period ended December 31, 2014.  Higher sales of SolarisPlus devices as well as metal and wood treatment tables accounted for the majority of the increase in total sales for the quarter and six months ended December 31, 2015.  The upward trend in sales reflects improving overall market conditions and new initiatives incentivizing sales of our core modalities.  Those initiatives encouraged sales representatives to expand efforts into new accounts and markets.  In addition, the incentives promoted renewed contact with dormant former customers.

Gross Profit

For the quarter ended December 31, 2015, gross profit increased $0.2 million or about 8.7% to approximately $2.7 million, or 35.8% of net sales.  By comparison, gross profit for the quarter ended December 31, 2014 was approximately $2.5 million, or 33.7% of net sales.  For the six months ended December 31, 2015, gross profit increased $0.2 million or about 3.1% to approximately $5.2 million, or 34.9% of net sales, compared to gross profit for the six months ended December 31, 2014 of approximately $5.0 million, or 34.7% of net sales.  Higher gross profit margins are mainly attributable to increased sales of the Company's proprietary SolarisPlus family of devices for the quarter and six month periods.

Management's plans for increasing gross profits include focusing sales on the Company's proprietary therapeutic devices which are primarily sold by our sales representatives and which carry higher gross margins in general are making a positive impact.  These plans focus on improving penetration into our primary markets as well as exploring distribution into medical markets we have not previously addressed.  Increasing sales of therapeutic devices is one of the keys to improving gross profit margins going forward.

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Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased approximately $0.1 million to approximately $2.5 million, or 33.0% of net sales, for the quarter ended December 31, 2015, from approximately $2.4 million, or 32.6% of net sales, for the quarter ended December 31, 2014.  The following factors impacted SG&A expenses for the three months ended December 31, 2015:

· $103,925 of higher labor and overhead expenses;

· $46,335 of higher selling expenses; and

· $60,849 of lower general expenses.

SG&A expenses increased approximately $0.2 million to approximately $4.8 million, or 32.4% of net sales, for the six months ended December 31, 2015, compared to approximately $4.6 million, or 31.9% of net sales, for the six months ended December 31, 2014.  Specific factors that impacted SG&A expenses for the six months ended December 31, 2015, included the following:

· $180,671 of higher labor and overhead expenses;

· $41,332 of higher selling expenses; and

· $28,567 of lower general expenses

Approximately $69,000 and $118,000 of the increase in expenses for the quarter and six months ended December 31, 2016 is related to implementation of our strategic plans to transform the Company into a platform for growth, both organically and through carefully-planned acquisitions.

Research and Development Expenses

Research and development, or R&D expenses for the quarter ended December 31, 2015 were approximately $0.3 million or 3.4% of sales compared to approximately $0.2 million or 3.2% of sales in the quarter ended December 31, 2014.  R&D expenses for the six months ended December 31, 2015 were approximately $0.5 million or 3.5% of sales compared to approximately $0.5 million or 3.1% of sales in the period ended December 31, 2014.  Over the past three years, we have introduced more new products than any previous three-year period in our history.  The new product introductions include the innovative SolarisPlus line of electrotherapy/ultrasound/ phototherapy units, the Ultra 2 and Ultra 3 motorized treatment tables, the 25 Series line of electrotherapy and ultrasound products, as well as the Dynatron ThermoStim Probe.  We believe that developing new products is a key element in our strategy and critical to moving purchasing momentum in a positive direction.  Increased R&D expenses in the current quarter are related to development of new products and product enhancements scheduled for release later this fiscal year.  R&D costs are expensed as incurred and are expected to remain at present levels in the current fiscal year.

Income (Loss) Before Income Tax

Pre-tax loss for the quarter ended December 31, 2015, was approximately $0.1 million, compared to $0.2 million for the quarter ended December 31, 2014.  Pre-tax loss for the six months ended December 31, 2015, was approximately $0.3 million, compared to $0.2 million for the six months ended December 31, 2014.  The decrease in pre-tax loss for the quarter was primarily attributable to approximately $0.2 million of higher gross profit generated during the period, partially offset by approximately $0.1 million in increased expenses related to implementation of strategic plans for organic growth and acquisitions. During the quarter and six months ended December 31, 2014, the Company recorded approximately $77,000 and $143,000, respectively related to due diligence and legal work on a terminated acquisition.

Income Tax Provision (Benefit)

Income tax provision was $5,650 for the quarter ended December 31, 2015, compared to income tax benefit of $92,583 for the quarter ended December 31, 2014.  Income tax benefit was $0 for the six months ended December 31, 2015, compared to income tax benefit of $77,020 for the for the six months ended December 31, 2014.  In accordance with accounting rules, we increased the valuation allowance on our net deferred tax assets by approximately $0.1 million and $0.3 million for the quarter and six months ended December 31, 2015, respectively.  The effective tax rate for the quarter ended December 31, 2015 was 4.7%, compared to an effective tax benefit rate of 40.9% for the same quarter of the prior year.  The effective tax benefit rate for the six months ended December 31, 2015 was 0%, compared to an effective tax benefit rate of 45.4% for the same period of the prior year.  See "Liquidity and Capital Resources – Deferred Income Tax Assets" below for more information regarding the valuation allowance and its anticipated impact on the effective tax rate for 2016.

Net Income (Loss)

Net loss was approximately $0.1 million for the quarter ended December 31, 2015, compared to $0.1 million for the quarter ended December 31, 2014.  Net loss was approximately $0.3 million for the six months ended December 31, 2015, compared to $0.1 million for the six month period ended December 31, 2014.  The decrease in net loss for the quarter was primarily attributable to higher gross profit generated during the period offset by increased expenses related to implementation of strategic plans to grow organically and through acquisitions, higher R&D expense and the lack of recording any tax benefits associated with reported losses as was done in the same quarter last year. The lack of any tax benefit being recorded for the quarter or the six month period is related to the valuation allowance mentioned above.

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Net Loss Applicable to Common Shareholders

Net loss applicable to common shareholders was approximately $0.2 million ($0.08 per share) for the quarter ended December 31, 2015, compared to $0.1 million ($0.05 per share) for the quarter ended December 31, 2014.  Net loss applicable to common shareholders was approximately $0.5 million ($0.18 per share) for the six months ended December 31, 2015, compared to $0.1 million ($0.04 per share) for the six months ended December 31, 2014.  The net loss applicable to common shareholders includes the impact of the accrued payment of $0.1 million of dividends to preferred shareholders for the quarter ended December 31, 2015 and $0.2 million of dividends paid for the six months ended December 31, 2015.  The dividends were paid by issuing shares of our common stock at 90% of the current market value at the time of issuance.

Liquidity and Capital Resources

We have historically financed operations through cash from operations, available cash reserves, and borrowings under a line of credit facility.  Working capital was $7.5 million as of December 31, 2015, inclusive of the current portion of long-term obligations and credit facilities, compared to working capital of $7.7 million as of June 30, 2015.  As of December 31, 2015, we had approximately $2.1 million of available credit under our credit facility.  The current ratio was 3.0 to 1 as of December 31, 2015 and 2.4 to 1 as of June 30, 2015.

Cash and Cash Equivalents

Our cash and cash equivalents position as of December 31, 2015, was $2.1 million, compared to cash and cash equivalents of $3.9 million as of June 30, 2015.  Uses of cash during the past six months have been approximately $0.7 million in reduction of accounts payable, $0.2 million in costs related to the offer and sale of our Series A Preferred stock, and $1.2 million used to reduce debt on the Company's line of credit.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, decreased approximately $0.3 million, or 9.9%, to $3.0 million as of December 31, 2015, compared to $3.3 million as of June 30, 2015.  Trade accounts receivable represent amounts due from our customers including medical practitioners, clinics, hospitals, colleges and universities and sports teams as well as dealers and distributors that purchase our products for redistribution.  We believe that our estimate of the allowance for doubtful accounts is adequate based on our historical knowledge and relationship with these customers.  Accounts receivable are generally collected within 30 days of the agreed terms.

Inventories

Inventories, net of reserves, increased $49,173, or 0.9%, to $5.5 million as of December 31, 2015, compared to $5.4 million as of June 30, 2015.  Inventory levels fluctuate based on the timing of large inventory purchases from domestic and overseas suppliers as well as increased parts related to new products being planned for introduction.  We believe that our estimate of the allowance for inventory reserves is adequate based on our historical knowledge and product sales trends.

Accounts Payable

Accounts payable decreased approximately $0.7 million, or 26.8%, to $1.8 million as of December 31, 2015, from approximately $2.5 million as of June 30, 2015.  Accounts payable are generally not aged beyond the terms of our suppliers.  We take advantage of available early payment discounts when offered by our vendors.

Line of Credit

The outstanding balance on our line of credit decreased $1.2 million to $0.7 million as of December 31, 2015, compared to $1.9 million as of June 30, 2015.  This reduction was made possible by the capital infusion from the sale of preferred stock on June 30, 2015 to affiliates of Prettybrook Partners.  Interest on the line of credit is based on the prime rate plus 5%.  The $3 million line of credit is collateralized by accounts receivable and inventories.  Borrowing limitations are based on 85% of eligible accounts receivable and $0.7 million of eligible inventory.  The current borrowing base on the new line of credit is approximately $2.8 million.  Minimum interest payments of $5,000 are due monthly.  All borrowings under the line of credit are presented as current liabilities in the accompanying consolidated balance sheet.

The line of credit matures on March 5, 2016.  The Company plans to pay off the line of credit when it matures using cash reserves.  The effective interest rate on borrowed money is approximately 10% including interest and origination fees.  We believe that cash balances, amounts available under the line of credit as well as cash generated from operating activities will continue to be sufficient to meet our annual operating requirements.

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Debt

Long-term debt, excluding current installments decreased $0.1 million to about $0.6 million as of December 31, 2015, compared to approximately $0.7 million as of June 30, 2015.  Our long-term debt is comprised primarily of the mortgage loan on our office and manufacturing facility in Tennessee.  The principal balance on the mortgage loan is approximately $0.7 million, of which approximately $0.6 million is classified as long-term debt, with monthly principal and interest payments of $13,278.  Our mortgage loan matures in 2021.

In conjunction with the sale and leaseback of our corporate headquarters in August 2014, we entered into a $3.8 million capital lease for a 15-year term with an investor group.  Amortization associated with that lease is recorded on a straight line basis over 15 years.  Lease payments of approximately $27,000 are payable monthly.  Total amortization expense related to the leased building is approximately $25,370 (net of amortized gain on sale) for the quarter ended December 31, 2015 and $50,740 for the six months ended December 31, 2015.  The deferred gain on sale is being amortized over the 15-year life of the lease.  Total imputed interest related to the leased building is approximately $50,700 and $100,700 for the quarter and six months ended December 31, 2015, respectively.

Deferred Income Tax Assets

A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The ability to realize deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for eachtax jurisdiction.

We have determined that we do not meet the "more likely than not" threshold that deferred tax assets will be realized. Accordingly, a valuation allowance is required.  Any reversal of the valuation allowance in future periods will favorably impact the Company's results of operations in the period of reversal.

At December 31, 2015 and June 30, 2015, we recorded a full valuation allowance against our deferred tax assets and no valuation allowance at June 30, 2014.

Deferred tax assets and the related valuation allowance were increased by an estimated $0.1 million and $0.3 million for the quarter and six months ended December 31, 2015, respectively.  This resulted in no reported tax benefit associated with the operating losses reported during the three or six month periods being reported in this filing.

The Company's federal and state income tax returns for June 30, 2013, 2014 and 2015 are open tax years.

Inflation

Our revenues and net income have not been unusually affected by inflation or price increases for raw materials and parts from vendors.

Stock Repurchase Plans

We have a stock repurchase plan available to us at the discretion of the Board of Directors.  Approximately $0.5 million remained of this authorization as of December 31, 2015.  No purchases have been made under this plan since September 28, 2011.

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Critical Accounting Policies

The preparation of our financial statements requires that we make estimates and judgments.  We base these on historical experience and on other assumptions that we believe to be reasonable.  Our critical accounting policies are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended June 30, 2015, as amended.  There have been no material changes to the critical accounting policies previously disclosed in that report.

Cautionary Statement Concerning Forward-Looking Statements

The statements contained in this 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 safe harbors provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act").  These statements refer to our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future.  They may be identified by the use of words or phrases such as "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.  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, except as required by law.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to information from that presented for the year ended June 30, 2015.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods that are specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these 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.

As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act).  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6.Exhibits

(a)Exhibits

3.1	Articles of Incorporation of Dynatronics Laser Corporation, incorporated by reference to Registration Statement on Form S-1 (no. 2-85045) filed and effective November 2, 1984 November 2, 1984
3.2	Articles of Amendment to Articles of Incorporation dated November 18, 1993, incorporated by reference to Annual Report on Form 10-KSB, filed September 28, 1995
3.3	Articles of Amendment to Articles of Incorporation, incorporated by reference to Current Report on Form 8-K, filed December 18, 2012
3.4	Articles of Amendment to Articles of Incorporation, incorporated by reference to Current Report on Form 8-K, filed July 1, 2015
3.5	Amended and Restated Bylaws, adopted July 20, 2015, incorporated by reference to Current Report on Form 8-K, filed July 22, 2015
4.1	Form of certificate representing common stock, 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	Form of certificate representing Series A 8% Convertible Preferred Stock, incorporated by reference to Ex 4.2 to Form S-3 filed July 29, 2015
4.3	Form of certificate of designations for Series A 8% Convertible Preferred Stock, incorporated by reference to Current Report on Form 8-K filed on July 1, 2015
4.4	Form of A Warrant, incorporated by reference to Current Report on Form 8-K filed on July 1, 2015
4.5	Form of B Warrant, incorporated by reference to Current Report on Form 8-K filed on July 1, 2015
10.1	Securities Purchase Agreement, dated as of May 1, 2015, filed as Appendix C to the Registrant's Preliminary Proxy Statement as filed with the Commission on May 4, 2015 and incorporated herein by reference.
10.2	Form of Registration Rights Agreement, filed as Appendix F to the Registrant's Preliminary Proxy Statement as filed with the Commission on May 4, 2015 and incorporated herein by reference.
10.3	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, 2006)
10.4	Form of Option Agreement for the 2005 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)
10.5	Form of Option Agreement for the 2005 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)
10.6	Dynatronics Corporation 2015 Equity Incentive Award Plan and Forms of Statutory and Non-statutory Stock Option Awards (previously filed as exhibit to Registration Statement on Form S-8, effective September 3, 2015
10.7	Executive Employment Agreement (Cullimore) dated May 1, 2015 (previously filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10Q filed on November 13, 2015)
10.8	Executive Employment Agreement (Beardall) dated May 1, 2015 (previously filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10Q filed on November 13, 2015)

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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)
101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*

*The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DYNATRONICS CORPORATION
	Registrant
Date   February 16, 2016	/s/ Kelvyn H. Cullimore, Jr.
	Kelvyn H. Cullimore, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)
Date   February 16, 2016	/s/ Terry M. Atkinson, CPA
	Terry M. Atkinson, CPA
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kelvyn H. Cullimore, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dynatronics Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) 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:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 16, 2016

 /s/ Kelvyn H. Cullimore, Jr.

Kelvyn H. Cullimore, Jr.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Terry M. Atkinson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dynatronics Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) 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:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 16, 2016

  /s/ Terry M. Atkinson, CPA

Terry M. Atkinson, CPA

Chief Financial Officer

EX-32

 EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dynatronics Corporation (the "Company") on Form 10-Q for the period ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Kelvyn H. Cullimore, Jr., Chief Executive Officer, and Terry M. Atkinson, CPA, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  February 16, 2016	/s/ Kelvyn H. Cullimore, Jr.
	Kelvyn H. Cullimore, Jr.
	President, Chief Executive Officer
	(Principal Executive Officer)
	Dynatronics Corporation

Date:  February 16, 2016	/s/ Terry M. Atkinson, CPA
	Terry M. Atkinson, CPA
	Chief Financial Officer
	(Principal Accounting and Financial Officer)
	Dynatronics Corporation

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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Document and Entity Information - shares	6 Months Ended
	Dec. 31, 2015	Feb. 12, 2016
Document and Entity Information:
Entity Registrant Name	DYNATRONICS CORP
Document Type	10-Q
Document Period End Date	Dec. 31, 2015
Trading Symbol	dynt
Amendment Flag	false
Entity Central Index Key	0000720875
Current Fiscal Year End Date	--06-30
Entity Common Stock, Shares Outstanding		2,742,355
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2

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Consolidated Balance Sheets - USD ($)	Dec. 31, 2015	Jun. 30, 2015
Current assets:
Cash and cash equivalents	$ 2,134,140	$ 3,925,967
Trade accounts receivable, less allowance for doubtful accounts of $446,867 as of December 31, 2015 and $417,444 as of June 30, 2015	3,016,545	3,346,770
Other receivables	8,088	6,748
Inventories, net	5,470,960	5,421,787
Prepaid expenses and other	331,125	273,629
Prepaid income taxes	340,908	338,108
Total current assets	11,301,766	13,313,009
Property and equipment, net	4,808,736	5,025,076
Intangible assets, net	175,463	190,803
Other assets	580,222	623,342
Total assets	16,866,187	19,152,230
Current liabilities:
Current portion of long-term debt	125,458	121,884
Current portion of capital lease	178,260	173,357
Current portion of deferred gain	150,448	150,448
Line of credit	733,316	1,909,919
Warranty reserve	154,015	153,185
Accounts payable	1,844,032	2,520,327
Accrued expenses	273,385	279,547
Accrued payroll and benefits expense	330,134	263,092
Total current liabilities	3,789,048	5,571,759
Long-term debt, net of current portion	587,413	651,118
Capital lease, net of current portion	3,374,476	3,464,850
Deferred gain, net of current portion	1,905,673	1,980,897
Deferred rent	63,688	41,150
Deferred income tax liabilities	136,128	136,128
Total liabilities	$ 9,856,426	$ 11,845,902
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value: Authorized 5,000,000 shares; 1,610,000 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively	$ 3,067,608	$ 3,087,554
Common stock, no par value: Authorized 50,000,000 shares; 2,672,652 shares and 2,642,389 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively	7,639,866	7,610,244
Accumulated deficit	(3,697,713)	(3,391,470)
Total stockholders' equity	7,009,761	7,306,328
Total liabilities and stockholders' equity	$ 16,866,187	$ 19,152,230

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Consolidated Balance Sheets Parenthetical - USD ($)	Dec. 31, 2015	Jun. 30, 2015
Consolidated Balance Sheets Parenthetical
Allowance for doubtful accounts	$ 446,867	$ 417,444
Preferred stock par value
Preferred stock shares authorized	5,000,000	5,000,000
Preferred stock shares issued	1,610,000	1,610,000
Preferred stock shares outstanding	1,610,000	1,610,000
Common stock par value
Common stock shares authorized	50,000,000	50,000,000
Common stock shares issued	2,672,652	2,642,389
Common stock shares outstanding	2,672,652	2,642,389

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Consolidated Statements of Income - USD ($)	3 Months Ended		6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2015	Dec. 31, 2014
Consolidated Statements of Income
Net sales	$ 7,474,921	$ 7,303,189	$ 14,872,118	$ 14,519,513
Cost of sales	4,797,939	4,839,578	9,684,307	9,488,330
Gross profit	2,676,982	2,463,611	5,187,811	5,031,183
Selling, general, and administrative expenses	2,469,131	2,379,720	4,824,785	4,631,349
Research and development expenses	253,868	234,674	519,229	451,500
Operating loss	(46,017)	(150,783)	(156,203)	(51,666)
Other income (expense):
Interest income	1,869	1,280	2,482	3,601
Interest expense	(77,274)	(79,736)	(157,517)	(128,029)
Other income, net	2,391	3,113	4,995	6,455
Net other expense	(73,014)	(75,343)	(150,040)	(117,973)
Loss before income taxes	(119,031)	(226,126)	(306,243)	(169,639)
Income tax (provision) benefit	(5,650)	92,583		77,020
Net loss	(124,681)	(133,543)	(306,243)	(92,619)
8% Convertible preferred stock dividend	(80,500)		(161,000)
Net loss attributable to common stockholders	$ (205,181)	$ (133,543)	$ (467,243)	$ (92,619)
Basic and diluted net loss per common share	$ (0.08)	$ (0.05)	$ (0.18)	$ (0.04)
Weighted-average common shares outstanding:
Basic	2,670,124	2,520,389	2,656,711	2,520,389
Diluted	2,670,124	2,520,389	2,656,711	2,520,389

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Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014
Cash flows from operating activities:
Net income (loss)	$ (306,243)	$ (92,619)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	110,912	175,318
Amortization of intangible assets	15,340	22,318
Amortization of other assets	25,686	25,686
Amortization of building lease	125,966	104,972
Stock-based compensation expense	29,622	33,911
Change in deferred income taxes		(985,190)
Change in provision for doubtful accounts receivable	29,423	48,000
Change in provision for inventory obsolescence	3,856	60,000
Deferred gain on sale/leaseback	(75,224)	(62,686)
Change in operating assets and liabilities:
Change in Receivables, net	299,462	165,522
Change in Inventories, net	(53,029)	117,189
Change in Prepaid expenses and other assets	(57,496)	(632,399)
Change in Other assets	17,434	(327,320)
Change in Income tax payable		545,496
Change in Prepaid income taxes	(2,800)
Change in Accounts payable and accrued expenses	(611,993)	(318,708)
Net cash used in operating activities	(449,084)	(1,120,510)
Cash flows from investing activities:
Purchase of property and equipment	(20,538)	(19,652)
Proceeds from sale of property and equipment		3,800,000
Net cash provided by (used in) investing activities	(20,538)	3,780,348
Cash flows from financing activities:
Principal payments on long-term debt	(60,131)	(715,852)
Principal payments on long-term capital lease	(85,471)	(78,675)
Net change in line of credit	(1,176,603)	(1,998,518)
Net cash used in financing activities	(1,322,205)	(2,793,045)
Net change in cash and cash equivalents	(1,791,827)	(133,207)
Cash and cash equivalents at beginning of the period	3,925,967	332,800
Cash and cash equivalents at end of the period	2,134,140	199,593
Supplemental disclosure of cash flow information:
Cash paid for interest	$ 139,334	85,469
Cash paid for income taxes		356,151
Supplemental disclosure of non-cash investing and financing activity:
Capital lease - building		$ 3,800,000
Preferred stock dividend payable in common stock	$ 161,000

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Note 1. Presentation and Summary of Significant Accounting Policies

6 Months Ended

Dec. 31, 2015

Notes

Note 1. Presentation and Summary of Significant Accounting Policies

NOTE 1.  PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated balance sheets as of December 31, 2015 and June 30, 2015, and the condensed consolidated statements of operations and cash flows for the three and six months ended December 31, 2015 and 2014 were prepared by Dynatronics Corporation (the “Company”) 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 U.S. generally accepted accounting principles (U.S. GAAP) 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 Company’s financial position, results of operations and cash flows.  The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results of operations for the fiscal year ending June 30, 2016.  The Company previously filed with the SEC an annual report on Form 10-K, as amended, which included audited financial statements for each of the two years ended June 30, 2015 and 2014.  It is suggested that the financial statements contained in this Form 10-Q be read in conjunction with the financial statements and notes thereto contained in the Company’s most recent Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate to inventory, allowance for doubtful accounts, stock-based compensation and valuation allowance for deferred income taxes.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

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Note 2. Net Loss Per Common Share

6 Months Ended

Dec. 31, 2015

Notes

Note 2. Net Loss Per Common Share

NOTE 2.  NET LOSS PER COMMON SHARE

Net loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive common stock equivalents outstanding during the period.  Stock options, convertible preferred stock and warrants are considered to be common stock equivalents.  The computation of diluted net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Basic net loss per common share is the amount of net loss for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net loss per common share is the amount of net 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.

The reconciliations between the basic and diluted weighted-average number of common shares outstanding for the three and six months ended December 31, 2015 and 2014 are as follows:

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2015	2014	2015	2014
Basic weighted-average number of common shares outstanding during the period	2,670,124	2,520,389	2,656,711	2,520,389
Weighted-average number of dilutive common stock equivalents outstanding during the period	-	-	-	-
Diluted weighted-average number of common and common equivalent shares outstanding during the period	2,670,124	2,520,389	2,656,711	2,520,389

Outstanding options for common shares not included in the computation of diluted net loss per common share, because they were anti-dilutive, for the three months ended December 31, 2015 and 2014 totaled 4,081,267 and 139,610, respectively, and for the six months ended December 31, 2015 and 2014 totaled 4,085,911 and 139,610, respectively.

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Note 3. Stock-based Compensation

6 Months Ended

Dec. 31, 2015

Notes

Note 3. Stock-based Compensation

NOTE 3. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the employee’s requisite service period. The Company recognized $14,611 and $16,457 in stock-based compensation expense during the three months ended December 31, 2015 and 2014, respectively, and recognized $29,622 and $33,911 in stock-based compensation expense during the six months ended December 31, 2015 and 2014, respectively.  These expenses were recorded as selling, general and administrative expenses in the condensed consolidated statements of operations.

Stock Options.  The Company maintained a 2005 equity incentive plan (“2005 Plan”) for the benefit of employees. On June 29, 2015 the shareholders approved a new 2015 equity incentive plan (“2015 Plan”) setting aside 500,000 shares. No additional shares or awards will be granted under the 2005 Plan. The 2015 Plan was filed with the SEC on September 3, 2015.   Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other stock-based awards may be granted under the 2015 Plan.  Awards granted under the 2015 Plan may be performance-based.  As of December 31, 2015, there were 418,806 shares of common stock authorized and reserved for issuance, but not granted under the terms of the 2015 Plan.

The Company granted 1,194 shares under its 2015 Plan during the six months ended December 31, 2015.  There was no equity awards granted under its 2005 Plan during that period.

The following table summarizes the Company’s stock option activity for the 2005 and 2015 Plans during the six-month period ended December 31, 2015.

	Number of Options		Weighted-Average Exercise Price
Outstanding at beginning of period	91,152	$	5.07
Granted	80,000		3.34
Exercised	-		-
Cancelled	(23,395)		7.10
Outstanding at end of period	147,757		3.81
Exercisable at end of period	63,793		4.76

The Black-Scholes option-pricing model is used to estimate the fair value of options granted under the Company’s stock option plan.

Expected option lives and volatilities are based on historical data of the Company. The risk-free interest rate is based on the U.S. Treasury Bills rate on the grant date for constant maturities that correspond with the option life. Historically, the Company has not declared dividends on common stock and there are no future plans to do so.

As of December 31, 2015, there was $298,861 of unrecognized stock-based compensation cost related to grants under the 2005/2015 Plans that is expected to be expensed over a weighted-average period of four to ten years. There was $2,278 of intrinsic value for options outstanding as of December 31, 2015.

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Note 4. Convertible Preferred Stock and Common Stock Warrants

6 Months Ended

Dec. 31, 2015

Notes

Note 4. Convertible Preferred Stock and Common Stock Warrants

NOTE 4.  CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS

On June 30, 2015, the Company completed a private placement with affiliates of Prettybrook Partners, LLC (“Prettybrook”) and certain other purchasers (collectively with Prettybrook, the “Preferred Investors”) for the offer and sale of shares of the Company’s Series A 8% Convertible Preferred Stock (the “Series A Preferred”) in the aggregate amount of approximately $4 million. Offering costs incurred in conjunction with the private placement were recorded net of proceeds. The Series A Preferred is convertible to common stock on a 1:1 basis.  A Forced Conversion can be initiated based on a formula related to share price and trading volumes as outlined in the terms of the private placement.  The dividend is fixed at 8% and is payable in either cash or common stock.  This dividend is payable quarterly and equates to an annual payment of $322,000 or equivalent value in common stock.  Certain redemption rights are attached to the Series A Preferred, but none of the redemption rights for cash are deemed outside the control of the Company. The redemption rights deemed outside the control of the Company require common stock payments or an increase in the dividend rate.  The Series A Preferred includes a liquidation preference under which Preferred Investors would receive cash equal to the stated value of their stock plus unpaid dividends.  In accordance with the terms of the sale of the Series A Preferred, the Company was required to register the underlying common shares associated with the Series A Preferred and the warrants.  That registration statement filed on form S-3 went effective on August 13, 2015. 

The Series A Preferred votes on an as-converted basis, one vote for each share of common stock issuable upon conversion of the Series A Preferred, provided, however, that no holder of Series A Preferred shall be entitled to cast votes for the number of shares of common stock issuable upon conversion of such Series A Preferred held by such holder that exceeds the quotient of (x) the aggregate purchase price paid by such holder of Series A Preferred for its Series A Preferred, divided by (y) the greater of (i) $2.50 and (ii) the market price of the common stock on the trading day immediately prior to the date of issuance of such holder’s Preferred Stock. The market price of the common stock on the trading day immediately prior to the date of issuance was $3.19 per share. Based on a $4,025,000 investment and a $3.19 per share price the number of common stock equivalents eligible for voting by preferred shareholders is 1,261,755.

The Preferred Investors purchased a total of 1,610,000 shares of Series A Preferred Stock, and received in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of common stock, and (ii) B-Warrants, exercisable by “cashless exercise”, to purchase 1,207,500 shares of common stock.  The warrants are exercisable for 72 months from the date of issuance and carry a Black-Scholes put feature in the event of a change in control.  The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.

The Company’s Board of Directors has the authority to cause the Company to issue, without any further vote or action by the shareholders, up to 3,390,000 additional shares of preferred stock, no par value per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.

The Series A Preferred includes a conversion right at a price that creates an embedded beneficial conversion feature.  A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The conversion price is ‘in the money’ and the holder realizes a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred issued by the Company do not have a stated life and, therefore, all of the beneficial conversion feature amount of $2,858,887 was amortized to dividends on the same date the preferred shares were issued.  The $2,858,887 dividend is added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the year ended June 30, 2015. 

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Note 5. Comprehensive Income (loss)

6 Months Ended

Dec. 31, 2015

Notes

Note 5. Comprehensive Income (loss)

NOTE 5.  COMPREHENSIVE LOSS

For the three and six months ended December 31, 2015 and 2014, comprehensive loss was equal to the net loss as presented in the accompanying condensed consolidated statements of operations.

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Note 6. Inventories

6 Months Ended

Dec. 31, 2015

Notes

Note 6. Inventories

NOTE 6.  INVENTORIES

Inventories consisted of the following:          

		December 31, 2015	June 30, 2015
Raw materials	$	2,153,932	2,086,411
Finished goods		3,679,429	3,693,921
Inventory obsolescence reserve		(362,401)	(358,545)
	$	5,470,960	5,421,787

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Note 7. Related-party Transactions

6 Months Ended

Dec. 31, 2015

Notes

Note 7. Related-party Transactions

NOTE 7.  RELATED-PARTY TRANSACTIONS

The Company currently leases office and warehouse space in Detroit, Michigan and Hopkins, Minnesota from two shareholders and former independent distributors on an annual basis under operating lease arrangements. Management believes the lease agreements are on an arms-length basis and the terms are equal to or more favorable than would be available to the Company from third parties. The expense associated with these related-party transactions totaled $17,700 for the three months ended December 31, 2015 and 2014, and $35,400 for the six months ended December 31, 2015 and 2014.

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Note 8. Line of Credit

6 Months Ended

Dec. 31, 2015

Notes

Note 8. Line of Credit

NOTE 8.  LINE OF CREDIT

In March 2015, the Company moved its working capital line of credit to a new lender. Interest on the new line of credit is prime rate plus 5%. The $3 million line of credit is collateralized by accounts receivable and inventories.  Borrowing limitations are based on 85% of eligible accounts receivable and $0.7 million of eligible inventory.  The current borrowing base on the new line of credit is approximately $2.8 million.  Interest payments on the line are due monthly.  All borrowings under the line of credit are presented as current liabilities in the accompanying condensed consolidated balance sheet.

The line of credit matures on March 5, 2016. The Company plans to pay off the line of credit when it matures using cash reserves. The effective interest rate on borrowed money is approximately 10% including interest and origination fees. The new line of credit requires that a minimum borrowing of approximately $0.7 million be maintained during the term of the loan.

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Note 9. Recent Accounting Pronouncements

6 Months Ended

Dec. 31, 2015

Notes

Note 9. Recent Accounting Pronouncements

NOTE 9.  RECENT ACCOUNTING PRONOUNCEMENTS

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update make the following eight improvements to GAAP:

1)       Equity investments (except those accounted for under the equity method or that result in consolidation of the investee) are to be measured at fair value with changes in fair value included in net income. However, an entity may choose to measure equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

2)       A qualitative assessment is required for investments without readily determinable fair values in order to identify impairment. If impairment is identified, the investment is to be measured at fair value.

3)       The requirement to disclose the fair value of financial instruments measured at amortized cost is eliminated for non-public business entities.

4)       The requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost is eliminated for public business entities.

5)       Public entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

6)       An entity is required to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

7)       Separate presentation of financial assets and liabilities by measurement category and form of financial asset is required on the balance sheet or accompanying notes.

8)       An entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. . The Company notes this new guidance will apply to its reporting requirements and will implement the new guidance accordingly and is currently evaluating the impact this new guidance will have on its financials.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB’s larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is part of the FASB’s larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Furthermore, the acquirer should record in the same period’s financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly, if the Company acquires any new businesses.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This update was issued to make some fairly minor wording adjustments to ASC 835-30. The new wording, presented as paragraph 835-30-S45-1, recognizes that ASU 2015-13 does not address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-13 requires companies to recognize debt issuance costs as a reduction of the carrying amount of the associated debt liability. ASU 2015-15 states that debt issuance costs related to line-of-credit arrangements may be recognized as an asset and amortized over the term of the line-of-credit arrangement, even if the line-of-credit does not carry a balance. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update was issued in response to feedback from preparers, practitioners, and users of financial statements to see the effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance back for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along with any interim reporting periods in that same period. All other entities will be required to implement the new guidance to reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): simplifying the Measurement of Inventory. The objective of this update is to simplify Topic 330, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update will be effective for fiscal years beginning after December 15, 2017. The Company currently applies a lower of cost or market and is currently assessing the magnitude of the difference between using market value versus net realizable value; however, it is not anticipated to have a material effect on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. This pronouncement is part of the FASB’s perpetual project started in November 2010 to address feedback received from stakeholders regarding the codification standards. Like other such pronouncements issued from time to time, the purpose of this pronouncement is not to issue new guidance, but rather to clarify, correct unintended application of the standards, and make various minor improvements as deemed necessary. The updates made are effective immediately. These changes are not expected to have a significant impact on the financial statements of guidance users. While some of the changes made in this pronouncement impact standards applicable to the Company, no material impact was noted.

In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting. This Accounting Standards Update amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No.115. The Company notes the update is effective immediately and will apply to the Company if the Company acquires a business.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements.

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Note 10. Subsequent Events

6 Months Ended

Dec. 31, 2015

Notes

Note 10. Subsequent Events

NOTE 10.  SUBSEQUENT EVENTS

On January 7, 2016, the Company issued 31,301 shares of common stock as payment for the accrued “Preferred Stock Dividend.”  On January 20, 2016, the Company issued 34,980 shares of common stock to the independent directors as compensation for calendar year 2016.  On January 26, 2016 the Company issued 3,422 shares of common stock pursuant to an employment agreement.

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Note 1. Presentation and Summary of Significant Accounting Policies: Basis of Presentation (Policies)

6 Months Ended

Dec. 31, 2015

Policies

Basis of Presentation

Basis of Presentation

The condensed consolidated balance sheets as of December 31, 2015 and June 30, 2015, and the condensed consolidated statements of operations and cash flows for the three and six months ended December 31, 2015 and 2014 were prepared by Dynatronics Corporation (the “Company”) 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 U.S. generally accepted accounting principles (U.S. GAAP) 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 Company’s financial position, results of operations and cash flows.  The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results of operations for the fiscal year ending June 30, 2016.  The Company previously filed with the SEC an annual report on Form 10-K, as amended, which included audited financial statements for each of the two years ended June 30, 2015 and 2014.  It is suggested that the financial statements contained in this Form 10-Q be read in conjunction with the financial statements and notes thereto contained in the Company’s most recent Form 10-K.

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Note 1. Presentation and Summary of Significant Accounting Policies: Use of Estimates (Policies)

6 Months Ended

Dec. 31, 2015

Policies

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate to inventory, allowance for doubtful accounts, stock-based compensation and valuation allowance for deferred income taxes.

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Note 1. Presentation and Summary of Significant Accounting Policies: Significant Accounting Policies (Policies)

6 Months Ended

Dec. 31, 2015

Policies

Significant Accounting Policies

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

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Note 9. Recent Accounting Pronouncements: New Accounting Pronouncements, Policy (Policies)

6 Months Ended

Dec. 31, 2015

Policies

New Accounting Pronouncements, Policy

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update make the following eight improvements to GAAP:

1)       Equity investments (except those accounted for under the equity method or that result in consolidation of the investee) are to be measured at fair value with changes in fair value included in net income. However, an entity may choose to measure equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

2)       A qualitative assessment is required for investments without readily determinable fair values in order to identify impairment. If impairment is identified, the investment is to be measured at fair value.

3)       The requirement to disclose the fair value of financial instruments measured at amortized cost is eliminated for non-public business entities.

4)       The requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost is eliminated for public business entities.

5)       Public entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

6)       An entity is required to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

7)       Separate presentation of financial assets and liabilities by measurement category and form of financial asset is required on the balance sheet or accompanying notes.

8)       An entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. . The Company notes this new guidance will apply to its reporting requirements and will implement the new guidance accordingly and is currently evaluating the impact this new guidance will have on its financials.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB’s larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is part of the FASB’s larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Furthermore, the acquirer should record in the same period’s financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly, if the Company acquires any new businesses.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This update was issued to make some fairly minor wording adjustments to ASC 835-30. The new wording, presented as paragraph 835-30-S45-1, recognizes that ASU 2015-13 does not address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-13 requires companies to recognize debt issuance costs as a reduction of the carrying amount of the associated debt liability. ASU 2015-15 states that debt issuance costs related to line-of-credit arrangements may be recognized as an asset and amortized over the term of the line-of-credit arrangement, even if the line-of-credit does not carry a balance. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update was issued in response to feedback from preparers, practitioners, and users of financial statements to see the effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance back for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along with any interim reporting periods in that same period. All other entities will be required to implement the new guidance to reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): simplifying the Measurement of Inventory. The objective of this update is to simplify Topic 330, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update will be effective for fiscal years beginning after December 15, 2017. The Company currently applies a lower of cost or market and is currently assessing the magnitude of the difference between using market value versus net realizable value; however, it is not anticipated to have a material effect on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. This pronouncement is part of the FASB’s perpetual project started in November 2010 to address feedback received from stakeholders regarding the codification standards. Like other such pronouncements issued from time to time, the purpose of this pronouncement is not to issue new guidance, but rather to clarify, correct unintended application of the standards, and make various minor improvements as deemed necessary. The updates made are effective immediately. These changes are not expected to have a significant impact on the financial statements of guidance users. While some of the changes made in this pronouncement impact standards applicable to the Company, no material impact was noted.

In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting. This Accounting Standards Update amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No.115. The Company notes the update is effective immediately and will apply to the Company if the Company acquires a business.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements.

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Note 2. Net Loss Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Tables)

6 Months Ended

Dec. 31, 2015

Tables/Schedules

Schedule of Earnings Per Share, Basic and Diluted

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2015	2014	2015	2014
Basic weighted-average number of common shares outstanding during the period	2,670,124	2,520,389	2,656,711	2,520,389
Weighted-average number of dilutive common stock equivalents outstanding during the period	-	-	-	-
Diluted weighted-average number of common and common equivalent shares outstanding during the period	2,670,124	2,520,389	2,656,711	2,520,389

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Note 3. Stock-based Compensation: Summary of Stock Option Activity (Tables)

6 Months Ended

Dec. 31, 2015

Tables/Schedules

Summary of Stock Option Activity

	Number of Options		Weighted-Average Exercise Price
Outstanding at beginning of period	91,152	$	5.07
Granted	80,000		3.34
Exercised	-		-
Cancelled	(23,395)		7.10
Outstanding at end of period	147,757		3.81
Exercisable at end of period	63,793		4.76

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Note 6. Inventories: Schedule of Inventory, Current (Tables)

6 Months Ended

Dec. 31, 2015

Tables/Schedules

Schedule of Inventory, Current

		December 31, 2015	June 30, 2015
Raw materials	$	2,153,932	2,086,411
Finished goods		3,679,429	3,693,921
Inventory obsolescence reserve		(362,401)	(358,545)
	$	5,470,960	5,421,787

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Note 2. Net Loss Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Details) - shares	3 Months Ended		6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2015	Dec. 31, 2014
Details
Basic weighted-average number of common shares outstanding during the year	2,670,124	2,520,389	2,656,711	2,520,389
Diluted weighted-average number of common and common equivalent shares outstanding during the year	2,670,124	2,520,389	2,656,711	2,520,389

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Note 2. Net Loss Per Common Share (Details) - shares	3 Months Ended		6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2015	Dec. 31, 2014
Details
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	4,081,267	139,610	4,085,911	139,610

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Note 3. Stock-based Compensation (Details) - USD ($)	3 Months Ended		6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2015	Dec. 31, 2014
Details
Allocated Share-based Compensation Expense	$ 14,611	$ 16,457	$ 29,622	$ 33,911
Common Stock, Capital Shares Reserved for Future Issuance	418,806		418,806
Stock Granted, Value, Share-based Compensation, Net of Forfeitures			$ 1,194
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 298,861		298,861
Employee Service Share Based Compensation Unrecognized Compensation Costs On Nonvested Awards Weighted Average Period Of Recognition	four to ten years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Intrinsic Value	$ 2,278		$ 2,278

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Note 3. Stock-based Compensation: Summary of Stock Option Activity (Details)	3 Months Ended
	Dec. 31, 2015 $ / shares shares
Details
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance | shares	91,152
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 5.07
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | shares	80,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares	$ 3.34
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period | shares	(23,395)
Share-based Compensation Arrangements by Share-based Payment Award, Options, Expirations in Period, Weighted Average Exercise Price | $ / shares	$ 7.10
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance | shares	147,757
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance | $ / shares	$ 3.81
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Number of Exercisable Options | shares	63,793
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price | $ / shares	$ 4.76

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Note 6. Inventories: Schedule of Inventory, Current (Details) - USD ($)	Dec. 31, 2015	Jun. 30, 2015
Details
Inventory, Raw Materials, Gross	$ 2,153,932	$ 2,086,411
Inventory, Finished Goods, Gross	3,679,429	3,693,921
Inventory Valuation Reserves	(362,401)	(358,545)
Inventories, net	$ 5,470,960	$ 5,421,787

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Note 7. Related-party Transactions (Details) - USD ($)	3 Months Ended		6 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2015	Dec. 31, 2014
Details
Related Party Transaction, Expenses from Transactions with Related Party	$ 17,700	$ 17,700	$ 35,400	$ 35,400

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Note 8. Line of Credit (Details)	3 Months Ended
	Dec. 31, 2015 USD ($)
Details
Line of Credit Facility, Interest Rate Description	Interest on the new line of credit is prime rate plus 5%
Line of Credit Facility, Maximum Borrowing Capacity	$ 3,000,000
Line of Credit Facility, Collateral	Borrowing limitations are based on 85% of eligible accounts receivable and $0.7 million of eligible inventory
Revolving Line of Credit	$ 2,800,000
Interest Rate	10.00%