Washington, D.C. 20549
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The following table disaggregates revenue by major product category for the three and six months ended December 31, 2017.
The final transition impacts of the Tax Act may vary from the current estimate, possibly materially, due to, among other things, further clarification and changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, and the completion of the Company’s consolidated financial statements as of and for the year ending June 30, 2018. In accordance with SAB 118, any necessary measurement adjustments will be recorded and disclosed within one year from the enactment date within the period the adjustments are determined.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended. Among other items, the Act permanently reduces the federal corporate tax rate to 21% effective January 1, 2018.
Additionally, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the Act’s impact under ASC Topic 740, Income Taxes (“ASC 740”). The guidance in SAB 118 addresses certain fact patterns where the accounting for changes in tax laws or tax rates under ASC 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Act is enacted. Under the staff guidance in SAB 118, in the financial reporting period in which the Act is enacted, the income tax effects of the Act (i.e., only for those tax effects in which the accounting under ASC 740 is incomplete) would be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period” until the accounting under ASC 740 is complete. The measurement period is limited to no more than one year beyond the enactment date under the staff's guidance. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner. For discussion of the impacts of the Tax Act, refer to Note 9.
In November 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-14,31: Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to the Staff Accounting Bulletin (“SAB”) No. 116 and SEC Release No. 33-10403
. This ASU amended, superseded and added certain SEC paragraphs in Topic 220, Topic 605 and Topic 606 to reflect the August 2017 issuance of SAB 116 and SEC Release No. 33-10403. The SEC staff issued SAB 116 to align its revenue guidance with Accounting Standards Codification (“ASC”) 606. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of the adoption of this update on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11 – Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Stakeholders asserted that accounting for freestanding and embedded instruments with down round features as liabilities subject to fair value measurement on an ongoing basis creates a significant reporting burden and unnecessary income statement volatility associated with changes in value of an entity’s own share price. That is, current accounting guidance requires changes in fair value of an instrument with a down round feature to be recognized in earnings for both increases and decreases in share price, even though an increase in share price will not cause a down round feature to be triggered and a decrease will cause an adjustment to the strike price only if and when an entity engages in a subsequent equity offering.
Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of the extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests.
The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round features no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 48 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statements and disclosures. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendment in this update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. An entity should apply the amendments in this update on a prospective basis. This amendment will be effective for the Company in its fiscal year beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted this standard as of July 1, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The Board issued this update to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under Topic 805, there are three elements of a business—inputs, processes, and outputs (collectively referred to as a “set”) although outputs are not required as an element of a business set. The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, reducing the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update:
1.
require that a business set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and
2.
remove the evaluation of whether a market participant could replace missing elements.
The amendments provide a framework for evaluating whether both an input and a substantive process are present. Lastly, the amendments in this update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. This amendment will be effective for the Company in its fiscal year (including interim periods) beginning July 1, 2018. The Company is currently evaluating the impact the adoption of ASU 2017-01 will have on its consolidated financial statements and disclosures.
| | Three Months Ended December 31 | Six Months Ended December 31 |
| | | | | |
| Orthopedic Soft Bracing Products | $ 5,833,972
| $5,799,711
| $12,112,998
| $11,671,879
|
| Physical Therapy and Rehabilitation Products | 9,283,017
| 9,558,772
| 19,320,737
| 20,603,613
|
| Other | 80,002
| 81,483
| 152,805
| 230,309
|
| | $15,196,991
| $15,439,966
| $31,586,540
| $32,505,801
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842,) a new guidance on leases. This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. Accordingly, the standard is effective for the Company on July 1, 2019. The Company is currently evaluating the impact that this guidance will have on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments, a guidance related to financial instruments - overall recognition and measurement of financial assets and financial liabilities. The guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for public companies for interim and annual periods beginning after December 15, 2017. Accordingly, the standard is effective for the Company on July 1, 2018. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customer (Topic 606). This authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt this guidance on July 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is evaluating which transition approach to use and its impact, if any, on its consolidated financial statements.
NOTENote 11. SUBSEQUENT EVENTSSubsequent Events
In January 2018,2020, the Company paid approximately $201,000$202,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that were accrued during the three months ended December 31, 2017. The Company paid the dividends2019, by issuing 69,574243,652 shares of common stock.
ICtemAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including the disclosures contained in Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
Information contained in this Form 10-Q, particularly in the following Discussion and Analysis of Financial Condition and Results of Operations, includes statements considered to beOperation, contains “forward-looking statements” within the safe harbors provided bymeaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”(the “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-lookingforward-looking statements include, but are not limited to,to: any projections of net sales, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding product development, market acceptance,future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements can be identified by their use of such words as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate” and similar references to future periods.
We have based our forward-looking statements on management’s current expectations and assumptions about future events and trends affecting our business and industry that are subject to risks and uncertainties. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, results of operations or 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 anticipatedour historical results or those expressed or implied in any forward-looking statement contained in this report. Some of the risks and uncertainties that may cause actual results to differ from those expressed or implied in the forward-looking statements are described in the section “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the SEC, as well as in our other expectations expressedpublic filings with the SEC. Actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.
You should read this report in such forward-looking statements.its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference into this report, with the understanding that our future results may be materially different from what we currently expect. 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 after the date hereof to revise or conform such statements to actual results or to changes in our opinions or expectations. If we do update the reasons why actual results could differ from those projected in suchor correct any forward-looking statements, except as requiredinvestors should not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by law.these cautionary statements.
The terms “we,” “us,” “Dynatronics,” or the “Company” refer collectively to Dynatronics Corporation and its wholly-owned subsidiaries, unless otherwise stated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Dynatronics CorporationManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“Company,” “Dynatronics,” “we”MD&A”) designs, manufacturesis designed to provide a reader of our Unaudited Condensed Consolidated Financial Statements and distributes advanced-technology therapeutic medical devices, therapeuticNotes thereto that are contained in this quarterly report, with a narrative from the perspective of management. You should also consider this information with the information included in our Annual Report on Form 10-K for the year ended June 30, 2019, and medical treatment tables, rehabilitation equipment, custom athletic training treatment tablesour other filings with the SEC, including our quarterly and equipment, institutional cabinetry, orthopedic soft goods,current reports that we have filed since June 30, 2019 through the date of this report. In the following MD&A, we have rounded many numbers to the nearest one thousand dollars. These numbers should be read as well as other rehabilitation and therapy products and supplies. Through our various distribution channels, we market and sell our products to physical therapists, chiropractors, athletic trainers, sports medicine practitioners, orthopedists, and other medical professionals, hospitals, and institutions. We operate on aapproximate. All inter-company transactions have been eliminated. Our fiscal year endingends on June 30. For example, reference to fiscal year 20182020 refers to the year ending June 30, 2018.
Recent Events
On November 29, 2017, we held our annual meeting of shareholders who approved2020. This report covers the automatic conversion of the Series C Preferredthree and the Series D Preferred to common stock, subject, in the case of the Series C Preferred, to the right of the holder to elect to continue to hold the Series C Preferred and defer conversion subject to beneficial ownership limitation provisions. These unconverted shares of Series C Preferred are non-voting and are no longer entitled to certain preferences of the Series C Preferred Stock such as the accrual or receipt of dividends, liquidation preferences and redemption rights, and are treated as common shares for such purposes.
Business Outlook
Our strategic objective is to accelerate growth both organically and by acquisition. We acquired the assets of Hausmann Industries, Inc. (“Hausmann”) in April 2017 and we acquired the assets of Bird & Cronin, Inc. (“Bird & Cronin”) in October 2017. These acquisitions have enhanced our market position and improved our operating results, positioning us for positive cash flow.
The debt and equity financings completed in connection with these acquisitions strengthened our financial position and provided operating capital. We believe our relationships with Prettybrook Partners LLC and Bank of the West provide us with strategic and financial resources that will facilitate the execution of our strategic objectives.
In the past three years we have invested in executive talent and infrastructure to organize and prepare for additional significant growth. We have added executive talent across the organization including sales, operations, finance, and information technology. The management additions have bolstered our capacity to successfully acquire and integrate additional acquisition targets and to drive improvement in operating results in our current operations.
Our acquisition strategy is focused on acquiring complementary businesses that meet our investment criteria and broaden our product offerings. We continue to evaluate a variety of acquisition opportunities. Our target is to execute on at least one acquisition in calendar 2018.
Organic growth is also an essential element of our growth plan. Each operational division has established strategic plans to stimulate growth through expansion of distribution channels, product innovation or specific initiatives with existing customer base.
As delivery of healthcare in the U.S. progresses under legislative reform, we believe there will be increasing demand for rehabilitation and physical therapy products and services. There is increasing pressure to find alternatives to the surgical suite. We believe this will lead to more demand for physical therapy services as a method for avoiding, preventing or delaying the need for surgical interventions. There are orthopedic clinics now embedding physical therapy and rehabilitation within their offering of services in order to better address patient needs in a pre-surgical as well as post-surgical environment. Third-party payers are also demanding better outcomes and structuring reimbursement conventions to reward practitioners who show identifiably improved outcomes. Physical therapy and rehabilitation has always figured prominently in the post-surgical environment to achieve the best outcomes following orthopedic surgical procedures. With the new reimbursement paradigms, the importance of physical therapy will only increase. The concept of “pre-habilitation” to avoid, prevent or delay surgical interventions, combined with traditional rehabilitation to achieve the best post-surgical outcomes provides a positive environment for growth of physical therapy and rehabilitation services and products in the future.
We also service the athletic training market. The growth of college athletics – particularly in the “Power Five” conferences – is creating a demand for the best and most impressive training facilities. We are working to tap into that demand by offering our custom designed furniture and proprietary products. The acquisition of Hausmann will particularly boost this effort as it has historically had success with its ProTeam™ line of products that address this same market.
In summary, based on our defined strategic initiatives we are focusing our resources in the following areas:
●
Joining resources of the acquired entities to maximize cross-selling opportunities without disrupting each entity’s current channels of distribution;
●
Exploring operating synergies with acquired companies while respecting established operating paradigms at each operation;
●
Seeking to improve distribution of our products through expansion of sales channels;
●
Improving gross profit margins by, among other initiatives, increasing market share of manufactured products with emphasis on our high margin therapeutic modalities including state-of-the-art Dynatron® ThermoStim probe, Dynatron Solaris® Plus and 25 Series™ products as well as new products from other manufacturers such as Zimmer;
●
Maintaining our position as a technological leader and innovator in our markets through the promotion of new products introduced over the last year and seeking opportunities to introduce other new products during the current fiscal year;
●
Exploring strategic business acquisitions. This will leverage and complement our competitive strengths, increase market reach and allow us to ultimately broaden our footprint in the physical medicine markets; and
●
Attending appropriate investor conferences to better publicize our strategic plans, attract new capital to support the business development strategy and identify other acquisition targets.
six months ended December 31, 2019. 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, 2017, 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, 2017, which includes audited financial statements for the year then ended. We have rounded many numbers to the nearest thousand dollars in this analysis. These numbers should be read as approximate. Results of operations for the second fiscal quarter and six months ended December 31, 2017,2019 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2018. This quarterly report includes the financial results of the newly acquired Bird and Cronin division. In connection with that acquisition, we filed a Current Report on Form 8-K on October 6, 2017.2020.
Overview
Dynatronics designs, manufactures, and sells a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through our distribution channels, we market and sell to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.
Results of Operations
Net Sales
Net sales increased $9,368,000,decreased $243,000, or 107.5%1.6%, to $18,081,000$15,197,000 for the quarter ended December 31 2017,, 2019, compared to net sales of $8,713,000$15,440,000 for the quarter ended December 31, 2016.2018. The year-over-year increasedecrease in net sales for the quarter ended December 31, 2017 was driven by our acquisitionsa reduction in sales of Hausmann in April 2017physical therapy and Bird & Cronin in October 2017, that contributed $4,368,000 and $5,698,000, respectively, in net sales in the quarter ended December 31, 2017. These increases were partially offset by a decrease of approximately $699,000, or 8.0%, in net sales from Dynatronics’ legacy operations. Included in the quarter ended December 31, 2016 was a $517,000 non-recurring order that accounts for the majority of the $699,000 sales differential between the two comparative quarters.rehabilitation products.
ForNet sales decreased $919,000, or 2.8%, to $31,587,000 for the six months ended December 31 2017, net sales increased $14,003,000, or 83.0%, to $30,879,000,2019, compared to net sales of $16,876,000$32,506,000 for the corresponding periodsix months ended December 31, 2016.2018. The year-over-year increasedecrease in net sales was attributable primarily to the acquisitions of Hausmann and Bird & Cronin. Hausmann contributed netdriven by a reduction in sales of $9,040,000 in the six months ended December 31, 2017physical therapy and Bird & Cronin contributed net sales of $5,698,000 in the three months ended December 31, 2017. These increases were partially offset by a decrease of approximately $731,000, or 4.3%, in net sales from Dynatronics’ legacy operations, primarily due to the $517,000 order in the second quarter of fiscal 2017 that did not repeat in the second quarter of fiscal 2018.rehabilitation products.
Gross Profit
Gross profit for the quarter ended December 31, 2017 increased $2,697,000,2019 decreased $94,000, or about 87.7%2.0%, to $5,770,000,$4,586,000, or 31.9%30.2% of net sales.sales. By comparison, gross profit for the quarter ended December 31, 20162018 was was$4,680,000 $3,073,000,, or 35.3%30.3% of net sales.sales. The year-over-year increasedecrease in gross profit was attributable to the acquisitions of Hausmann and Bird & Cronin that contributed $1,066,000 and $2,082,000, respectively, in gross profit in the quarter ended December 31, 2017. These increases were partially offset by a decrease of approximately $451,000 in Dynatronics’ legacy operations gross profit. That decrease was primarily attributable to lower sales of physical therapy and rehabilitation products, which accounted for approximately $236,000$74,000 in lower gross profit, and by reduced gross margin percentage resultingpercent which accounted for approximately $20,000 in $215,000 lower gross profit. The year-over-year decrease in gross margin percentage to 31.9%30.2% from 35.3%30.3% was due primarily to inclusionlower sales of Hausmann sales, which had a lower gross margin percentage in the quarter, as well as reduced gross margin in Dynatronics’ legacy operations, primarily attributable to reduced margins on freight charged to customers.our physical therapy and rehabilitation equipment.
Gross profit for the six months ended December 31, 2017 increased $4,241,000,2019 decreased $487,000, or about 72.3%4.8%, to $10,109,000,$9,740,000, or 32.7%,30.8% of net sales. By comparison, gross profit for the six months ended December 31, 2018 was $10,227,000, or 31.5% of net sales. The year-over-year decrease in gross profit was attributable to lower sales of physical therapy and rehabilitation products, which accounted for approximately $289,000 in lower gross profit, and by reduced gross margin percent which accounted for approximately $198,000 in lower gross profit. The year-over-year decrease in gross margin percentage to 30.8% from 31.5% was due primarily to lower sales of our physical therapy and rehabilitation equipment.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased $155,000, or 3.2%, to $4,618,000 for the quarter ended December 31, 2019, compared to $4,773,000 for the quarter ended December 31, 2018. The decrease in SG&A is primarily related to a $197,000 decrease in selling expensesdue primarily to lower commission expense on lower sales and lower sales management salaries during the quarter.
SG&A expenses decreased $727,000, or 7.1%, to $9,543,000 for the six months ended December 31, 2019, compared to $10,269,000 for the six months ended December 31, 2018. Selling expenses represented $500,000 of the decrease in SG&A expensesdue primarily to lower commission expense on lower sales and lower sales management salaries during the six month period. General and administrative (“G&A”) expenses represented $227,000 of the decrease in SG&A expenses.The decrease in G&A is primarily related to a reduction in salaries and wages.
Net (Loss) Income Before Income Tax
Pre-tax loss for the quarter ended December 31, 2019 was $138,000 compared to $237,000 for the quarter ended December 31, 2018. The $99,000 improvement in pre-tax loss was attributable to the impact of $94,000 decrease in gross profit, offset by (1) $38,000 decrease in other expense primarily due to the $31,000 decrease in interest expense as a result of a decrease in the average balance of our line of credit and related interest rate and (2)$155,000 decrease in SG&A expenses.
Pre-tax loss for the six months ended December 31, 2019 was $39,000 compared to pre-tax income of $79,000 for the six months ended December 31, 2016 of $5,868,000, or 34.8%2018. The $118,000 decline in pre-tax income was attributable to the impact of net sales. The year-over-year increase(1) $358,000 decrease in other income primarily due to a $375,000 change in the fair value of the earn-out liability related to the Bird and Cronin acquisition and (2) $487,000 decrease in gross profit partially offset by a $727,000 decrease inSG&A expenses.
Income Tax Provision
Income tax provision was driven by$0 for the acquisitions of Hausmannthree and Bird & Cronin that contributed $2,685,000 and $2,082,000, respectively, in gross profit in the six months ended December 31, 2017. These increases were partially offset by a decrease of approximately $525,000 gross profit in Dynatronics’ legacy operations, primarily attributable2019, respectively, compared to lower sales which accounted$204,000 for approximately $171,000 lower gross profitthe three and reduced gross margin percentage resulting in $354,000 lower gross profit. The year-over-year decrease in gross margin percentage to 32.7% from 34.8% was due primarily to the inclusion of Hausmann lower gross margin percentage as well as reduced gross margin in Dynatronics’ legacy operations, primarily attributable to reduced margins on freight charged to customers.six months ended December 31, 2018, respectively. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information.
Selling, General and Administrative ExpensesNet Loss
Selling, general and administrative (“Net loss was SG&A$138,000”) expenses increased $2,259,000, or 79.2%, to $5,110,000 for the quarter ended December 31, 2017,2019, compared to $2,851,000$441,000 for the quarter ended December 31, 2016. Selling expenses in the current quarter represented $691,000 of the $2,259,000 increase in SG&A expenses. Increases in selling expenses included the addition of $858,000 of expenses associated with Hausmann and Bird & Cronin operations, partially offset by $167,000 lower selling costs in Dynatronics’ legacy operations comprised primarily of reduced commissions on lower sales. General and administrative (“2018. G&ANet loss was $38,000”) expenses represented $1,567,000 of the $2,259,000 increase in SG&A expenses for the quarter ended December 31, 2017. Increases in G&A expenses included the addition of $1,623,000 in G&A expenses from Hausmann’s and Bird & Cronin’s operations, partially offset by $56,000 in decreased G&A expenses in Dynatronics’ legacy operations. G&A expenses included approximately $100,000 in acquisition related expenses during the current quarter.
SG&A expenses for the six months ended December 31, 2017 increased $3,317,000, or 59.1%, to $8,933,000,2019, compared to $5,616,000$125,000 for the six months ended December 31, 2016. Selling expenses represented $968,000 of2018. The reasons for the $3,317,000 increasechanges in SG&A expenses. Includednet loss arethe same as explained above under the heading Net (Loss) Income Before Income Tax and Income Tax Provision.
Net Loss Attributable to Common Stockholders
Net loss attributable to common stockholders improved $196,000 to $448,000 for the quarter ended December 31, 2019, compared to $644,000 for the quarter ended December 31, 2018. The improvement in selling expenses were $1,169,000 of selling expenses associated with Hausmann and Bird & Cronin operations,net loss attributable to common stockholders for the quarter is due primarily to a $303,000 improvement in net loss partially offset by $202,000 lower selling costsa $109,000 increase in Dynatronics’ legacy operations comprised primarilydeemed dividend on convertible preferred stock and accretion of lower commissions on lower sales. G&A expenses represented $2,349,000discount as a result of the $3,317,000 increase in SG&A expensesconversion of preferred stock. On a per share basis, net loss attributable to common stockholders was $(0.05) per share for the quarter ended December 31, 2019, compared to $(0.08) per share for the quarter ended December 31, 2018.
Net loss attributable to common stockholders increased $2,000 to $517,000 for the six months ended December 31, 2017. Included in G&A expenses were $2,263,000 from Hausmann’s operations and Bird & Cronin’s operations, and $86,000 from Dynatronics’ legacy operations. G&A expenses included $314,000 in acquisition expenses in the six months ended December 31, 2017.
Research and Development Expenses
Research and development expenses for the quarter ended December 31, 2017 increased $244,000, or 78.8%,2019, compared to $553,000 from approximately $309,000 in the quarter ended December 31, 2016. Research and development expenses$515,000 for the six months ended December 31, 2017 increased $217,000, or 36.9%, to $805,000 from approximately $588,000 in the six months ended December 31, 2016.2018. The increases in both the quarter and six months ended December 31, 2017 were driven by $325,000 in costs incurred on a project which was abandoned during the quarter ended December 31, 2017, offset by a reduction in other R&D expenses of approximately $81,000 and $108,000 for the quarter and six months, respectively, ended December 31, 2017.
Net Income (Loss) Before Income Tax
Pre-tax income for the quarter ended December 31, 2017 was approximately $14,000, compared to a pre-tax loss of $95,000 for the quarter ended December 31, 2016. The $109,000 improvement in pre-tax income for the quarter was primarily attributable to $2,697,000 higher gross profit, offset by $2,259,000 increased SG&A expenses and $244,000 higher research and development expenses. Pre-tax income for the six months ended December 31, 2017 was approximately $213,000, compared to a pre-tax loss of $381,000 for the six months ended December 31, 2016. The $594,000 improvement in pre-tax income for the six months was primarily attributable to $4,241,000 higher gross profit, offset by $3,317,000 in increased SG&A expenses and $217,000 higher research and development expenses. These changes in both the quarter and six months ended December 31, 2017 were primarily attributable to components of Hausmann’s and Bird & Cronin’s results of operations offset by the $325,000 in costs related to the abandoned project in the second fiscal quarter and transaction related costs of $100,000 and $314,000 in the quarter and six months ended December 31, 2017, respectively.
Income Tax Provision (Benefit)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended. Among other items, the Act permanently reduces the federal corporate tax rate to 21% effective January 1, 2018. As the Company’s fiscal year end falls on June 30, the statutory federal corporate tax rate for fiscal 2018 will be prorated to 27.5%, with the statutory rate for fiscal 2019 and beyond at 21%.
Income tax provision was $0 for both the quarter and six months ended December 31, 2017, respectively. This compares to income tax provision of $0 for the quarter and six months ended December 31, 2016, respectively. We decreased the valuation allowance on our net deferred income tax assets equal to the one-time revaluation of our net deferred tax assets at the lower tax rate.
Net Income (Loss)
Net income was $14,000 for the quarter ended December 31, 2017, compared to a net loss of $95,000 for the quarter ended December 31, 2016. Net income was $213,000 for the six months ended December 31, 2017, compared to a net loss of $381,000 for the six months ended December 31, 2016. The changes in net income (loss) are the same as explained above for Net Income (Loss) Before Income Tax.
Net Loss Attributable to Common Stockholders
Net loss attributable to common stockholders was $1,314,916 ($0.23 per share) for the quarter ended December 31, 2017, compared to $560,000 ($0.19 per share) for the quarter ended December 31, 2016. The $755,000 year-over-year increase in net loss attributable to common stockholders is due primarily to approximately $217,000 of additionala $109,000 increase in deemed dividend on convertible preferred stock dividends associated with 390,000 shares of Series A Preferred Stock issued in December 2016, 1,559,000 shares of Series B Preferred issued in April 2017, and 2,800,000 of Series C Preferred shares and 1,581,935 shares of Series D Preferred Shares issued in October 2017. The increase was also attributable to approximately $454,000 in additional deemed dividends and approximately $194,000 in accretion of discounts associated withdiscount as a result of the Series C Preferred shares and warrants issued in connection with the Bird & Cronin Acquisition in comparison to deemed dividends associated with Series A Preferred in December 2016. These increases were partiallyconversion of preferred stock partially offset by $109,000a $86,000 decrease in higher net incomeloss and $21,000 decrease in the quarter ended December 31, 2017, compared to the same quarter of the prior year.
Netconvertible preferred stock dividend. On a per share basis, net loss attributable to common stockholders increased $368,000 to $1,303,330 ($0.25was $(0.06) per share)share for the six months ended December 31, 2017, compared to $935,000 ($0.33 per share) for the six months ended December 31, 2016. The decrease in net loss is due to approximately $594,000 in higher net income in the six months ended December 31, 2017, compared to the same period of the prior year, partially offset by $315,000 of additional preferred stock dividends associated with issuance of the same preferred shares described in the previous paragraph as well as an increase of approximately $454,000 in additional deemed dividends2019 and approximately $194,000 in accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin Acquisition2018, respectively. in comparison to deemed dividends associated with Series A Preferred in December 2016.
The deemed dividends reflect the difference between the underlying common share value of the issued preferred shares as if converted, based on the closing price of the Company’s common stock on the date of the issuance, less an amount of the purchase price assigned to the preferred shares in an allocation of the purchase price between the preferred shares and the common stock warrants that were issued with the preferred shares.
Liquidity and Capital Resources
We have historically financed operations through cash from operating activities, available cash reserves, borrowings under a line of credit facility (see, Line of Credit, below) and salesproceeds from the sale of our equity securities. During the quarter ended December 31, 2019, we had positive cash flows from operating activities. We expectbelieve that our cash generated from operations, current capital resources, and available credit provide sufficient liquidity to obtain capitalfund operations for future acquisitions using borrowings and proceeds from debt and equity offerings. the next 12 months.
Working capital was $9,091,000$5,251,000 as of December 31, 2017,2019, compared to working capital of $5,834,000$5,638,000 as of June 30, 2017.2019. The current ratio was 1.61.4 to 1 as of December 31, 20172019 and 1.8 to1.4 to 1 as of June 30, 2017.2019.
Cash and Cash Equivalents
Our cash and cash equivalents and restricted cash position increased $3,397,000$276,000 to $3,652,000 as$532,000 as of December 31, 2017,2019, compared to $255,000$256,000 as of June 30, 2017.2019. The primary source of cash in the six months ended December 31, 2017,2019, was approximately $1,677,000$2,916,000 of net cash provided by operating activities, net borrowings of $4,571,000 under our line of credit and net proceeds of approximately $6,600,000 from sale of our Series C Preferred and warrants in connection with the Acquisition of Bird & Cronin.activities.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increaseddecreased approximately $2,104,000,$555,000, or 39.8%7.4%, to $7,385,000$6,940,000 as of December 31, 2017,2019, from $5,281,000$7,495,000 as of June 30, 2017.2019. The increasedecrease was driven primarily dueby a decrease in sales and the time to the addition of the Bird & Cronin that added $1,819,000 incollect receivables. Trade accounts receivable as of December 31, 2017.represents amounts due from our customers including dealers and distributors that purchase our products for redistribution, medical practitioners, clinics, hospitals, colleges, universities and sports teams. We believe that our estimate of the allowance for doubtful accounts is adequate based on our historical experience and relationships with our customers. Accounts receivable are generally collected within approximately 3040 days of invoicing.
Inventories
Inventories, net of reserves, increased $4,207,000decreased $144,000 or 56.9%1.2%, to $11,605,000$11,384,000 as of December 31, 2017,2019, compared to $7,398,000$11,528,000 as of June 30, 2017. The increase was driven by the addition of the Bird & Cronin subsidiary that had $4,707,000 of net inventory as of December 31, 2017.2019. Inventory levels fluctuate based on timing of large inventory purchases from domestic and overseas suppliers as well as variations in sales and production activities. We believe that our allowance for inventory obsolescence is adequate based on our analysis of inventory, sales trends, and historical experience.
Accounts Payable
Accounts payable increased approximately $2,116,000$1,981,000 or 90.6%49.6%, to $4,451,000$5,970,000 as of December 31, 20172019, from $2,335,000$3,990,000 as of June 30, 2017.2019. The increase was driven primarily by the additiontiming of the Bird & Cronin subsidiary that had $1,346,000 of accounts payable at December 31, 2017. The increase was also attributable tointernational purchases, improved payment terms with primary suppliers, and an increase in days payable from approximately 27the average time to 34.
pay suppliers.
Line of Credit
Our line of credit balance increased $4,571,000decreased $1,722,000 to $6,743,000$4,819,000 as of December 31, 2017,2019, compared to $2,172,000$6,541,000 as of June 30, 2017. We drew $5,000,000 on September 29, 2017 in anticipation2019. The decrease was driven primarily by positive cash flows from operating activities used to pay down the line of closing the Acquisitioncredit. As of Bird & Cronin on October 2, 2017.December 31, 2019, there was approximately $2,350,000 available to borrow.
Debt
Long-term debt excluding current installments, decreased $75,000approximately $89,000 to $387,000approximately $214,000 as of December 31, 2017,2019, compared to $462,000approximately $303,000 as of June 30, 2017.2019. Our long-term debt is primarily comprised of the mortgage loan on our office and manufacturing facility in Tennessee maturing in 2021, and also includes loans related to equipment and a vehicle. The principal balance on the mortgage loan wasis approximately $445,000$166,000, of which $310,000$52,000 is classified as long-term debt, with monthly principal and interest payments of $13,278 through January 2021.$13,000.
Finance Lease Liability
Finance lease liability as of December 31, 2019 and June 30, 2019 totaled approximately $3,056,000 and $3,199,000, respectively. Our finance lease liability consists primarily of our Utah building lease. In conjunction with the sale and leaseback of our corporate headquartersUtah building in August 2014, we entered into a 15-year building lease, that we treatedclassified as a capitalfinance lease, originally valued at $3,800,000. We are amortizing the capitalThe building lease asset is amortized on a straight linestraight-line basis over 15 years at approximately $21,000$252,000 per month, or $63,000 per quarter. Accumulatedyear. Total accumulated amortization ofrelated to the capital lease asset wasleased building is approximately $861,000$1,365,000 at December 31, 2017.2019. The building sale resulted ingenerated a profit of $2,300,000, thatwhich is treated as a deferred gain that is amortized as an offset to amortization expensebeing recognized straight-line over the life of the lease at $12,500approximately $150,000 per month, or approximately $37,500 per quarter.year as an offset to amortization expense. The balance of the deferred gain atas of December 31, 2017 was approximately $1,755,000.2019 is $1,454,000. Lease payments, currently approximately $29,000,$27,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. The balance of the capital lease liability was approximately $3,186,000 at December 31, 2017. Imputed interest for the quarterthree and six months ended December 31, 2017,2019 was approximately $45,000.$40,000 and $79,000, respectively. In addition to the Utah building, we have certain equipment leases that we have determined are finance leases.
Operating Lease Liability
Operating lease liability as of December 31, 2019 and June 30, 2019 totaled approximately $3,311,000 and $0, respectively. The operating lease liability was recorded upon the adoption of ASU No. 2016-02, Leases. Our operating lease liability consists primarily of building leases for office, manufacturing, warehouse and storage space.
Acquisition Earn-Out Liability
Acquisition earn-out liability decreased $500,000 or 100.0%, to $0 as of December 31, 2019, from $500,000 as of June 30, 2019. The decrease is due to payment in full of the obligations during the six months ended December 31, 2019.
Deferred Income Tax Assets
A valuation allowance is required when there is significant uncertainty as to the realizability of deferred income tax assets. The ability to realize deferred income tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have determined that we do not meet the “more likely than not” threshold that deferred income tax assets will be realized. Accordingly, a valuation allowance is required. Any reversal of the valuation allowance in future periods will favorably impact our results of operations in the period of reversal. As of December 31, 20172019 and June 30, 2017,2019, we recorded a full valuation allowance against our net deferred income tax assets. This resulted in no reported income tax expense associated with the operating profit reported during the three and six months ended December 31, 2017.2019.As a result of a temporary book to tax difference associated with the amortization of goodwill for tax purposes, income tax expense was $204,000 for the three and six months ended December 31, 2018.
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 $449,000 remained of this authorization as of December 31, 2017.2019. No purchases have been made under this plan since September 28, 2011.
Off-Balance Sheet Arrangements
As of December 31, 2017,2019, we had no off-balance sheet arrangements.
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, 2017.2019. There have been no material changes to the critical accounting policies previously disclosed in that report.
Itemtem 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
There have been no material changes tofrom the information from that presented in our Annual Report on Form 10-K for the year ended June 30, 2017.2019.
Item 4.4. Controls and Procedures
Evaluation of 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 (“SEC”)SEC’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.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2017.2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.2019.
Changes in Internal Control over Financial Reporting
On October 2, 2017 we acquired the assets of Bird & Cronin. We have established oversight, procedures, and controls over financial reporting to accurately consolidate the financial statements of Bird & Cronin and to properly reflect acquisition-related accounting and disclosures. We are continuing to evaluate the design of internal controls over financial reporting for the Bird & Cronin subsidiary.
Except as described above, thereThere were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 20172019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings
None.
Item 1A.
The risk factors described in our Annual Report on Form 10-K for the year ended June 30, 2019 have not materially changed, except as noted below.
PART II. OTHER INFORMATIONWe face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our supply chain and impact our operating results. Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of novel coronavirus causing respiratory illness emerged in the city of Wuhan in the Hubei province of China. The Chinese government has taken certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holidays, implementation of travel bans and closure of factories and businesses. Some of our materials and products are sourced from suppliers located in China. While the full impact of this outbreak is unknown at this time, we are closely monitoring the developments in China and continually assessing the potential impact on our business. Any prolonged disruption to our suppliers could negatively impact our sales and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
(a) Exhibits
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11 | Computation of Net Income per Share (included in Notes to Consolidated Financial Statements) |
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| 101.INS | XBRL Instance Document |
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| 101.CAL | XBRL Taxonomy Extension Schema Document |
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| 101.SCH | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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 | |
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Date: February 13, 2018
11, 2020 | By: | /s/ Kelvyn H. Cullimore, Jr.Brian D. Baker | |
| | | Kelvyn H. Cullimore, Jr.Brian D. Baker | |
| | | President and Chief Executive Officer (Principal (Principal Executive Officer)
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Date: February 13, 2018
11, 2020 | By: | /s/ David A. Wirthlin | |
| | | David A. Wirthlin | |
| | | Chief Financial Officer
(Principal (Principal Financial and Accounting Officer) | |