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 DecemberMarch 31, 20172020
 
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)
 
Utah87-0398434
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
7030 Park Centre Drive, Cottonwood Heights, UT 841211200 Trapp Road, Eagan, Minnesota 55121
(Address of principal executive offices, Zip Code)
 
(801) 568-7000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, no par value per share
DYNTThe NASDAQ Capital Market
 
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, 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)
 
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☑
 Emerging growth company ☐
 
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 ☑
 
TheIndicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, no par value, as of February 2, 2018 was 7,934,262.the latest practicable date:
As of May 6, 2020, there were 13,803,855 shares of the issuer’s common stock outstanding.
 

 
 
 
DYNATRONICS CORPORATION
FORM 10-Q
QUARTERFOR THE QUARTERLY PERIOD ENDED DecemberMARCH 31, 20172020
TABLE OF CONTENTS
 
 
 
 
Page Number
 
1
 
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14

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  15

18
15
 
19
16
 
 
 
 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Balance Sheets
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 Assets
 
December 31, 2017
 
 
June 30, 2017
 
 
 
 
 
 
 
 
     Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $3,652,342 
 $254,705 
Trade accounts receivable, less allowance for doubtful accounts of $383,356 as of December 31, 2017 and $382,333 as of June 30, 2017
  7,385,608 
  5,281,348 
Other receivables
  139,366 
  33,388 
Inventories, net
  11,605,299 
  7,397,682 
Prepaid expenses
  893,933 
  503,800 
 
    
    
          Total current assets
  23,676,548 
  13,470,923 
 
    
    
Property and equipment, net
  5,970,836 
  4,973,477 
Intangible assets, net
  7,516,028 
  2,754,118 
Goodwill
  7,872,863 
  4,302,486 
Other assets
  532,611 
  562,873 
 
    
    
          Total assets
 $45,568,886 
 $26,063,877 
 
    
    
Liabilities and Stockholders' Equity
    
    
 
    
    
     Current liabilities:
    
    
Accounts payable
 $4,451,050
 $2,334,563 
Accrued payroll and benefits expense
  1,358,754 
  1,472,773 
Accrued expenses
  878,300 
  656,839 
Income tax payable
  9,654 
  8,438 
Warranty reserve
  205,850 
  202,000 
Line of credit
  6,742,979 
  2,171,935 
Current portion of long-term debt
  158,954 
  151,808 
Current portion of capital lease
  199,300 
  193,818 
Current portion of deferred gain
  150,448 
  150,448 
Current portion of acquisition holdback
  430,624 
  294,744 
 
    
    
          Total current liabilities
  14,585,913
  7,637,366 
 
    
    
Long-term debt, net of current portion
  386,632 
  461,806 
Capital lease, net of current portion
  2,986,689 
  3,087,729 
Deferred gain, net of current portion
  1,604,777 
  1,680,001 
Acquisition holdback and earn out liability, net of current portion
  2,716,667 
  750,000 
Deferred rent
  138,513 
  122,585 
 
    
    
          Total liabilities
  22,419,191
  13,739,487 
Commitments and contingencies
    
    
 
    
    
     Stockholders' equity:
    
    
Preferred stock, no par value: Authorized 50,000,000 shares; 4,889,000 shares and 3,559,000 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
  11,641,816 
  8,501,295 
Common stock, no par value: Authorized 100,000,000 shares; 7,864,715 shares and 4,653,165 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
  19,802,351 
  11,838,022 
Accumulated deficit
  (8,294,472)
  (8,014,927)
 
    
    
          Total stockholders' equity
  23,149,695 
  12,324,390 
 
    
    
          Total liabilities and stockholders' equity
 $45,568,886
 $26,063,877 
 
    
    
See accompanying notes to condensed consolidated financial statements.
    
    
  
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Balance Sheets
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 Assets
 
March 31, 2020
 
 
June 30, 2019
 
     Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $1,428,957 
 $155,520 
Restricted cash
  100,636 
  100,510 
Trade accounts receivable, less allowance for doubtful accounts of $103,462 and $89,500 as of March 31, 2020 and June 30, 2019, respectively
  6,635,441 
  7,495,309 
Inventories, net
  11,322,887 
  11,527,521 
Prepaid expenses and other receivables
  764,256 
  634,837 
 
    
    
          Total current assets
  20,252,177 
  19,913,697 
 
    
    
Property and equipment, net
  5,157,470 
  5,677,419 
Operating lease assets
  3,045,883 
  - 
Intangible assets, net
  5,864,087 
  6,407,374 
Goodwill
  7,116,614 
  7,116,614 
Other assets
  607,315 
  516,841 
 
    
    
          Total assets
 $42,043,546 
 $39,631,945 
 
    
    
Liabilities and Stockholders' Equity
    
    
     Current liabilities:
    
    
Accounts payable
 $5,539,558 
 $3,989,546 
Accrued payroll and benefits expense
  1,479,462 
  1,373,481 
Accrued expenses
  767,633 
  1,038,726 
Warranty reserve
  207,988 
  207,988 
Line of credit
  6,368,559 
  6,540,639 
Current portion of long-term debt
  148,922 
  173,921 
Current portion of finance lease liability
  311,073 
  283,781 
Current portion of deferred gain
  150,448 
  150,448 
Current portion of operating lease liability
  902,476 
  - 
Acquisition earn-out liability
  - 
  500,000 
Income tax payable
  7,351 
  16,751 
 
    
    
          Total current liabilities
  15,883,470 
  14,275,281 
 
    
    
Long-term debt, net of current portion
  22,073 
  129,428 
Finance lease liability, net of current portion
  2,679,110 
  2,915,241 
Deferred gain, net of current portion
  1,266,270 
  1,379,105 
Operating lease liability, net of current portion
  2,143,407 
  - 
Other liabilities
  190,160 
  177,181 
 
    
    
          Total liabilities
  22,184,490 
  18,876,236 
Commitments and contingencies
    
    
 
    
    
     Stockholders' equity:
    
    
Preferred stock, no par value: Authorized 50,000,000 shares; 3,681,000 shares and 4,899,000 shares issued and outstanding as of March 31, 2020 and June 30, 2019, respectively
  8,770,798 
  11,641,816 
Common stock, no par value: Authorized 100,000,000 shares; 10,407,775 shares and 8,417,793 shares issued and outstanding as of March 31, 2020 and June 30, 2019, respectively
  24,962,007 
  21,320,106 
Accumulated deficit
  (13,873,749)
  (12,206,213)
 
    
    
          Total stockholders' equity
  19,859,056 
  20,755,709 
 
    
    
          Total liabilities and stockholders' equity
 $42,043,546 
 $39,631,945 
 
    
    
See accompanying notes to condensed consolidated financial statements.
    
    


 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Operations
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
March 31,
 
 
March 31,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $13,706,319 
 $14,551,519 
 $45,292,860 
 $47,057,320 
Cost of sales
  9,761,864 
  10,146,361 
  31,608,541 
  32,425,066 
Gross profit
  3,944,455 
  4,405,158 
  13,684,319 
  14,632,254 
 
    
    
    
    
Selling, general, and administrative expenses
  4,907,363 
  4,818,093 
  14,450,155 
  15,087,393 
Operating loss
  (962,908)
  (412,935)
  (765,836)
  (455,139)
 
    
    
    
    
Other (expense) income:
    
    
    
    
   Interest expense, net
  (110,101)
  (124,477)
  (351,382)
  (387,107)
   Other (expense) income, net
  (18,193)
  6,905 
  (12,809)
  390,459 
Net other (expense) income
  (128,294)
  (117,572)
  (364,191)
  3,352 
 
    
    
    
    
Loss before income taxes
  (1,091,202)
  (530,507)
  (1,130,027)
  (451,787)
 
    
    
    
    
Income tax (provision) benefit
  - 
  (32,880)
  - 
  (236,829)
 
    
    
    
    
Net loss
  (1,091,202)
  (563,387)
  (1,130,027)
  (688,616)
 
    
    
    
    
Deemed dividend on convertible preferred stock and accretion of discount
  (65,219)
  - 
  (173,758)
  - 
Preferred stock dividend, in common stock, issued or to be issued
  (168,356)
  (196,240)
  (537,509)
  (586,145)
 
    
    
    
    
Net loss attributable to common stockholders
 $(1,324,777)
 $(759,627)
 $(1,841,294)
 $(1,274,761)
 
    
    
    
    
Net loss per common share
    
    
    
    
Basic and diluted
 $(0.13)
 $(0.09)
 $(0.20)
 $(0.16)
 
    
    
    
    
Weighted-average common shares outstanding:
    
    
    
    
Basic and diluted
  10,168,596 
  8,307,117 
  9,216,027 
  8,189,890 
 
    
    
    
    
 
See accompanying notes to condensed consolidated financial statements.
 
    
    
    


 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Stockholders' Equity
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total
 
 
 
 Common stock
 
 
 Preferred stock
 
 
 Accumulated
 
 
 stockholders'
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 deficit
 
 
 equity
 
Balance at June 30, 2018
  8,089,398 
 $20,225,107 
  4,899,000 
 $11,641,816 
 $(10,490,141)
 $21,376,782 
 
    
    
    
    
    
    
Stock-based compensation
  5,000 
  43,658 
  - 
  - 
  - 
  43,658 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  66,631 
  186,637 
  - 
  - 
  (186,637)
  - 
 
    
    
    
    
    
    
Net income
  - 
  - 
  - 
  - 
  315,601 
  315,601 
 
    
    
    
    
    
    
Balance at September 30, 2018
  8,161,029 
  20,455,402 
  4,899,000 
  11,641,816 
  (10,361,177)
  21,736,041 
 
    
    
    
    
    
    
Stock-based compensation
  - 
  56,082 
  - 
  - 
  - 
  56,082 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  65,494 
  203,268 
  - 
  - 
  (203,268)
  - 
 
    
    
    
    
    
    
Reduction in equity retained for acquisition holdback
  (37,708)
  - 
  - 
  - 
  - 
  - 
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (440,830)
  (440,830)
 
    
    
    
    
    
    
Balance at December 31, 2018
  8,188,815 
  20,714,752 
  4,899,000 
  11,641,816 
  (11,005,275)
  21,351,293 
 
    
    
    
    
    
    
Stock-based compensation
  58,998 
  85,566 
  - 
  - 
  - 
  85,566 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  74,731 
  196,240 
  - 
  - 
  (196,240)
  - 
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (563,387)
  (563,387)
 
    
    
    
    
    
    
Balance at March 31, 2019
  8,322,544 
  20,996,558 
  4,899,000 
  11,641,816 
  (11,764,902)
  20,873,472 
 
    
    
    
    
    
    
Stock-based compensation
  - 
  115,343 
  - 
  - 
  - 
  115,343 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  95,249 
  208,205 
  - 
  - 
  (208,205)
  - 
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (233,106)
  (233,106)
 
    
    
    
    
    
    
Balance at June 30, 2019
  8,417,793 
  21,320,106 
  4,899,000 
  11,641,816 
  (12,206,213)
  20,755,709 
 
    
    
    
    
    
    
Stock-based compensation
  135,244 
  129,793 
  - 
  - 
  - 
  129,793 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  126,194 
  166,904 
  - 
  - 
  (166,904)
  - 
 
    
    
    
    
    
    
Net income
  - 
  - 
  - 
  - 
  98,838 
  98,838 
 
    
    
    
    
    
    
Balance at September 30, 2019
  8,679,231 
  21,616,803 
  4,899,000 
  11,641,816 
  (12,274,279)
  20,984,340 
 
    
    
    
    
    
    
Stock-based compensation
  5,446 
  58,238 
  - 
  - 
  - 
  58,238 
 
    
    
    
    
    
    
Preferred stock converted to common stock
  760,000 
  1,791,320 
  (760,000)
  (1,791,320)
  - 
  - 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  165,251 
  202,249 
  - 
  - 
  (202,249)
  - 
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (137,663)
  (137,663)
 
    
    
    
    
    
    
Balance at December 31, 2019
  9,609,928 
  23,668,610 
  4,139,000 
  9,850,496 
  (12,614,191)
  20,904,915 
 
    
    
    
    
    
    
Stock-based compensation
  96,195 
  45,343 
  - 
  - 
  - 
  45,343 
 
    
    
    
    
    
    
Preferred stock converted to common stock
  458,000 
  1,079,698 
  (458,000)
  (1,079,698)
  - 
  - 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  243,652 
  168,356 
  - 
  - 
  (168,356)
  - 
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (1,091,202)
  (1,091,202)
 
    
    
    
    
    
    
Balance at March 31, 2020
  10,407,775 
 $24,962,007 
  3,681,000 
 $8,770,798 
 $(13,873,749)
 $19,859,056 
 
    
    
    
    
    
    
 
See accompanying notes to condensed consolidated financial statements.
 
    
    
    
    
    

 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Cash Flows
 
 
(Unaudited)
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
March 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:
 
 
 
 
 
 
       Net loss
 $(1,130,027)
 $(688,616)
       Adjustments to reconcile net loss to net cash provided by operating activities:
    
    
             Depreciation and amortization of property and equipment
  763,197 
  650,289 
             Amortization of intangible assets
  543,287 
  543,292 
             Amortization of other assets
  27,007 
  32,219 
             Loss on sale of property and equipment
  18,878 
  2,177 
             Stock-based compensation expense
  233,374 
  185,306 
             Change in allowance for doubtful accounts receivable
  13,962 
  (280,800)
             Change in allowance for inventory obsolescence
  (22,694)
  (58,268)
             Amortization deferred gain on sale/leaseback
  (112,835)
  (112,836)
             Deferred income taxes
  - 
  236,829 
             Change in fair value of earn-out liability
  - 
  (375,000)
             Change in operating assets and liabilities:
    
    
                  Trade accounts receivable and other receivables
  848,565 
  1,285,182 
                  Inventories
  227,328 
  (411,918)
                  Prepaid expenses
  (132,078)
  72,070 
                  Other assets
  (117,481)
  (15,692)
                  Income tax receivable
  (9,400)
  35,518 
                  Accounts payable and accrued expenses
  1,397,879 
  452,212 
 
    
    
                              Net cash provided by operating activities
  2,548,962 
  1,551,964 
 
    
    
Cash flows from investing activities:
    
    
       Purchase of property and equipment
  (249,617)
  (124,804)
 
    
    
                              Net cash used in investing activities
  (249,617)
  (124,804)
 
    
    
Cash flows from financing activities:
    
    
       Principal payments on long-term debt
  (132,354)
  (122,035)
       Principal payments on finance lease liability
  (221,348)
  (181,609)
       Payment of acquisition earn-out liability and holdbacks
  (500,000)
  (912,845)
       Net change in line of credit
  (172,080)
  (1,492,532)
 
    
    
                              Net cash used in financing activities
  (1,025,782)
  (2,709,021)
 
    
    
                              Net change in cash and cash equivalents and restricted cash
  1,273,563 
  (1,281,861)
 
    
    
Cash and cash equivalents and restricted cash at beginning of the period
  256,030 
  1,696,116 
 
    
    
Cash and cash equivalents and restricted cash at end of the period
 $1,529,593 
 $414,255 
 
    
    
Supplemental disclosure of cash flow information:
    
    
       Cash paid for interest
 $362,595 
 $392,039 
Supplemental disclosure of non-cash investing and financing activities:
    
    
       Deemed dividend on convertible preferred stock and accretion of discount
  173,758 
  - 
       Preferred stock dividend, in common stock, issued or to be issued
  537,509 
  586,145 
       Inventory reclassified to demonstration equipment
  - 
  239,106 
       Conversion of preferred stock to common stock
  2,871,018 
  - 
       Finance lease obligations incurred to obtain ROU assets
  12,509 
  252,493 
       Operating lease obligations incurred to obtain ROU assets
  3,749,809 
  - 
 
    
    
 
    
    
See accompanying notes to condensed consolidated financial statements.
    
    


 
 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Operations
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
December 31
 
 
December 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $18,081,333 
 $8,713,355 
 $30,879,304 
 $16,876,089 
Cost of sales
  12,311,354 
  5,640,048 
  20,769,933 
  11,008,094 
Gross profit
  5,769,979 
  3,073,307 
  10,109,371 
  5,867,995 
 
    
    
    
    
Selling, general, and administrative expenses
  5,109,809 
  2,851,236 
  8,932,511 
  5,615,594 
Research and development expenses
  553,487 
  309,476 
  805,336 
  588,360 
Operating profit (loss)
  106,683 
  (87,405)
  371,524 
  (335,959)
 
    
    
    
    
 
    
    
    
    
Other income (expense):
    
    
    
    
   Interest expense, net
  (103,706)
  (63,408)
  (180,514)
  (122,728)
   Other income, net
  11,371 
  55,494 
  21,985 
  77,735 
Net other expense
  (92,335)
  (7,914)
  (158,529)
  (44,993)
 
    
    
    
    
Income (loss) before income taxes
  14,348 
  (95,319)
  212,995 
  (380,952)
 
    
    
    
    
Income tax (provision) benefit
  -
 
  -
 
  -
 
  -
 
 
    
    
    
    
Net income (loss)
  14,348 
  (95,319)
  212,995 
  (380,952)
 
    
    
    
    
Deemed dividend on convertible preferred stock and accretion of discount
  (1,023,786)
  (375,858)
  (1,023,786)
  (375,858)
Preferred stock dividend, cash
  (104,884)
     -
  (104,884)
  -
 
Convertible preferred stock dividend, in common stock
  (200,594)
  (88,792)
  (387,655)
  (177,777)
 
    
    
    
    
Net loss attributable to common stockholders
 $(1,314,916)
 $(559,969)
 $(1,303,330)
 $(934,587)
 
    
    
    
    
Basic and diluted net loss per common share
 $(0.23)
 $(0.19)
 $(0.25)
 $(0.33)
 
    
    
    
    
Weighted-average common shares outstanding:
    
    
    
    
 
    
    
    
    
Basic and diluted
  5,735,159 
  2,881,111 
  5,241,604 
  2,861,299 
 
    
    
    
    
 
See accompanying notes to condensed consolidated financial statements.
 
    
    
    

 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Cash Flows
 
 
(Unaudited)
 
 
 
Six Months Ended
 
 
 
December 31
 
 
 
2017
 
 
2016
 
Cash flows from operating activities:
 
 
 
 
 
 
       Net income (loss)
 $212,995 
 $(380,952)
       Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
    
    
             Depreciation and amortization of property and equipment
  184,010 
  106,098 
             Amortization of intangible assets
  254,090 
  15,340 
             Amortization of other assets
  40,681 
  60,069 
             Amortization of building capital lease
  125,967 
  125,967 
             Gain on sale of property and equipment
  (5,197)
  (19,252)
             Stock-based compensation expense
  117,073 
  102,989 
             Change in allowance for doubtful accounts receivable
  (6,978)
  48,073 
             Change in allowance for inventory obsolescence
  49,739 
  42,751 
             Deferred gain on sale/leaseback
  (75,224)
  (75,224)
             Change in operating assets and liabilities:
    
    
                  Receivables, net
  33,546 
  62,135 
                  Inventories, net
  (120,175)
  (630,132)
                  Prepaid expenses
  (297,144)
  (174,016)
                  Other assets
  (10,419)
  (18,799)
                  Income tax payable
  (1,236)
  1,066 
                  Accounts payable and accrued expenses
  1,175,114 
  684,319 
 
    
    
                              Net cash provided by (used in) operating activities
  1,676,842 
  (49,568)
 
    
    
Cash flows from investing activities:
    
    
       Purchase of property and equipment
  (84,494)
  (36,818)
       Net cash paid in acquisition, net of cash received - see Note 2
  (9,063,017)
  -
 
       Proceeds from sale of property and equipment
  10,355 
  32,000 
 
    
    
                              Net cash provided by (used in) investing activities
  (9,137,156)
  (4,818)
 
    
    
Cash flows from financing activities:
    
    
       Principal payments on long-term debt
  (68,028)
  (84,239)
       Principal payments on long-term capital lease
  (95,558)
  (90,373)
Payment of acquisition holdbacks
  (44,744)
  -
 
       Net change in line of credit
  4,571,044 
  -
 
       Proceeds from issuance of preferred stock, net
  6,600,121 
  928,554 
       Preferred stock dividends paid in cash
  (104,884)
  -
 
 
    
    
                              Net cash provided by (used in) financing activities
  10,857,951 
  753,942 
 
    
    
                              Net change in cash and cash equivalents
  3,397,637 
  699,556 
 
    
    
Cash and cash equivalents at beginning of the period
  254,705 
  966,183 
 
    
    
Cash and cash equivalents at end of the period
 $3,652,342 
 $1,665,739 
 
    
    
Supplemental disclosure of cash flow information:
    
    
       Cash paid for interest
 $172,893 
 $124,797 
Supplemental disclosure of non-cash investing and financing activity:
    
    
       Deemed dividend on convertible preferred stock and accretion of discount
 $1,023,786 
 $375,858 
       Preferred stock dividends paid or to be paid in common stock
  387,655 
  187,901 
       Preferred stock issued to acquire "Bird & Cronin"
  4,000,000 
  -
 
       Acquisition holdback
  2,147,291 
  -
 
       Conversion of preferred stock to common stock
  7,459,600 
  -
 
       Accrued compensation paid in common stock
  -
 
  26,388 
 
    
    
See accompanying notes to condensed consolidated financial statements.
    
    

DYNATRONICSDYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DecemberMarch 31, 20172020
 
 
NOTENote 1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPresentation and Summary of Significant Accounting Policies
Business

Dynatronics Corporation (“Company,” “Dynatronics”) is a leading medical device company committed to providing high-quality restorative products designed to accelerate optimal health. The Company designs, manufactures, and sells a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through its distribution channels, Dynatronics markets and sells to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated balance sheets as of December 31, 2017 and June 30, 2017, the condensed consolidatedfinancial statements of operations for the three and six months ended December 31, 2017 and 2016, and condensed consolidated statements of cash flows for the six months ended December 31, 2017 and 2016, were(the “Condensed Consolidated Financial Statements”) have been prepared by Dynatronics Corporationthe Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and its subsidiaries (collectively, the “Company”) without audit pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC(the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to suchthe rules and regulations.regulations of the SEC. As such, these Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “Annual Report”)filed with the SEC on September 25, 2019. The Condensed Consolidated Balance Sheet at June 30, 2019, has been derived from the Annual Report.
The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Basis of Presentation and Summary of Accounting Policies, of the Notes to Financial Statements included in the Company’s Annual Report. In the opinion of management, the Condensed Consolidated Financial Statements contain all necessary adjustments, which consistconsisting only of normal recurring adjustments, to the financial statements have been madenecessary to present fairly the Company’s financial position as of March 31, 2020 and its results of operations and its cash flows.flows for the periods presented. The results of operations for the three and sixfirst nine months ended December 31, 2017,of the fiscal year are not necessarily indicative of the results of operations that may be expected for the full year or any future periods.
The Company’s fiscal year begins on July 1 and ends on June 30 and references made to “fiscal year 2020” and “fiscal year 2019” refer to the Company’s fiscal year ending June 30, 2018. The Company previously filed with2020 and the SEC an Annual Report on Form 10-K (the “2017 Form 10-K”) which included audited financial statements for each of the yearsfiscal year ended June 30, 2017 and 2016. 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 2017 Form 10-K.2019, respectively.
 
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 revenuerevenues and expenses during the period.reporting periods presented.
The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially 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.assumptions.

Reclassification
 
Significant Accounting Policies
ThereCertain amounts in the prior year's Financial Statements have been no changesreclassified for comparative purposes to conform to the Company’s significant accounting policies as describedpresentation in the 2017 Form 10-K.
NOTE 2. ACQUISITIONScurrent year's Financial Statements.
 
On October 2, 2017, the Company acquired substantially all of the assets of Bird & Cronin, Inc. (“B&C”), a manufacturerRisks and distributor of orthopedic soft goods and specialty patient care products. The transaction is referred to as the “Acquisition”. The Acquisition will expand the Company’s sales in the orthopedic and patient care markets by leveraging the products and distribution network offered by B&C.Uncertainties
At the Closing of the Acquisition, the Company paid B&C cash of $9,063,017 and delivered 1,397,375 shares of its Series D Non Voting Convertible Preferred Stock (“Series D Preferred”) to B&C valued at approximately $3,533,333. The purchase price is subject to customary representations, warranties, indemnities, working capital adjustment and an earn-out payment ranging from $500,000 to $1,500,000, based on future sales. The balance of the earn-out liability at December 31, 2017 is $1,500,000. A holdback of cash totaling $647,291 and 184,560 shares of Series D Preferred valued at approximately $466,667 has been retained for purposes of satisfying adjustments to the purchase price.
In connection with the Acquisition, the Company completed a private placement of Series C Non Voting Convertible Preferred Stock (“Series C Preferred”) and common stock warrants to raise cash proceeds of $7,000,000 pursuant to the terms and conditions of a Securities Purchase Agreement entered into September 26, 2017 (the “Private Placement”). See Note 4 for details of the Private Placement.
Also in connection with the Acquisition, the Company entered into a lease with Trapp Road Limited Liability Company, a Minnesota limited liability company controlled by the former owners of B&C, to occupy the facility housing the B&C operations for a term of three years at annual rental payments of $600,000, payable in monthly installments of $50,000. The lease term will automatically be extended for two additional periods of two years each, without any increase in the lease payment, subject to the Company’s right to terminate the lease or to provide notice not to extend the lease prior to the end of the term. The Company also offered employees of B&C employment with Dynatronics at Closing including the Co-Presidents of B&C, Mike Cronin and Jason Anderson, who entered into employment agreements to serve as Co-Presidents of Bird & Cronin, LLC, the Company’s wholly-owned subsidiary that conducts the operations acquired in the Acquisition.

 
The Acquisitionpandemic caused by an outbreak of the Novel Coronavirus Disease 2019 (“COVID-19”) has been accountedresulted, and is likely to continue to result, in significant national and global economic disruption and has adversely affected and may continue to adversely affect the Company’s business. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, industry, and workforce. Certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer orders, and reduced operations.
Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases ("Topic 842"). This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of right-of-use ("ROU") assets and lease liabilities by lessees for under the purchase methodsubstantially all leases. The standard also requires additional quantitative and qualitative disclosures.The Company adopted Topic 842 as prescribed by applicable accounting standards.of July 1, 2019 using a modified retrospective method. Under this method, financial results reported in periods prior to July 1, 2019 are unchanged. The Company elected the ‘package of practical expedients’ which permits the Company has allocatedto carryforward the purchase price to the assets acquired and liabilities assumed at estimated fair values. The total consideration transferred or to be transferred, totaled $15,213,959. The following table summarizes the preliminary estimated fair valuehistorical lease classification. Adoption of the standard resulted in the recording of additional ROU assets acquired and lease liabilities assumedfor operating leases of $3,749,809 as of the date of acquisition:
Cash and cash equivalents
$4,104
Trade accounts receivable
2,232,703
Inventories
4,137,181
Prepaid expenses
92,990
Property and equipment
1,228,000
Intangible assets
5,016,000
Goodwill
3,570,376
Warranty reserve
(5,000)
Accounts payable
(607,084)
Accrued expenses
(265,732)
Accrued payroll and benefits
(189,579)
Purchase price
$15,213,959
The estimates of fair value of identifiable assets acquired and liabilities assumed are preliminary, pending finalization of a valuation, and are subject to revisions that may result in adjustments to the values presented above.
Intangible assets subject to amortization relate to customer relationships of $4,313,000 with a useful life of ten years and other intangible assets of $83,000 with a useful life of five years. Intangible assets not subject to amortization relate to trade names of $620,000. The goodwill recognized from the Acquisition is estimated to be attributable, but not limited to, the acquired workforce and expected synergies that do not qualify for separate recognition. The full amount of goodwill and intangible assets are expected to be deductible for tax purposes.
As of December 31, 2017, the Acquisition earn out liability and holdbacks of $2,147,291 come due, contingent upon the terms set forth in the purchase agreement, as follows:
October 2, 2018
$180,624
April 1, 2019
466,667
August 15, 2019
1,500,000
Acquisition holdback
$2,147,291
The amounts of B&C’s net sales and net income included in the Company's consolidated statement of operations for the period from October 2, 2017 to December 31, 2017, were $5,701,507 and $455,052 respectively. Pro forma net sales and net loss of the combined operations had the acquisition date been July 1, 2016 are:
 
 
Net Sales
 
 
Net Income (loss)
 
Unaudited supplemental pro forma July 1, 2017 to December 31, 2017
 $37,337,488 
 $259,644 
Unaudited supplemental pro forma July 1, 2016 to June 30, 2017
 $60,027,677 
 $(285,951)
2017 supplemental pro forma earnings were adjusted to exclude $70,0002019. The adoption of acquisition-related costs incurred in 2017.
this guidance did not have an impact on net loss.
 
NOTEIn December 2019, the FASB issued ASU 2019-12,Income Taxes(“Topic 740”):Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company is currently assessing the impact of this standard on its financial condition and results of operations.
 5

Note 2. Acquisitions
The earn-out liability was $0 as of March 31, 2020. Payments during the quarters ended December 31, 2019 and September 30, 2019 totaled $375,000and $125,000, respectively.
Note 3. NET INCOME (LOSS) PER COMMON SHARENet loss per Common Share
 
Net income (loss)loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive potential common stock outstanding during the period. Stock options, convertible preferred stock and warrants are considered to be potential common stock. The computation of diluted net income (loss)loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
 
Basic net income (loss)loss per common share is the amount of net income (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net income (loss)loss per common share is the amount of net income (loss)loss for the period available to each weighted-average share of common stock outstanding during the reporting period and to each share of potential common stock outstanding during the period, unless inclusion of potential common stock would have an anti-dilutive effect.
 
OutstandingAll outstanding options, warrants and convertible preferred stock for common shares are not included in the computation of diluted net loss per common share because they wereare anti-dilutive, which for the three months ended DecemberMarch 31, 2017,2020, and 2016,2019, totaled 13,838,85910,946,022 and 5,148,398,11,744,083, respectively, and for the sixnine months ended DecemberMarch 31, 2017,2020, and 2016,2019, totaled 12,114,13211,452,544 and 5,148,398,11,744,083, respectively.
 
NOTENote 4. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTSConvertible Preferred Stock and Common Stock Warrants
 
During quarter ended December 31, 2017, the Company issued 25,000 shares of common stock upon conversion of 25,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred”). As of DecemberMarch 31, 2017,2020, the Company had issued and outstanding a total of 3,459,0001,992,000 shares of Series A 8% Convertible Preferred Stock (the “(“Series A Preferred”) and 1,459,000 shares of Series B Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred”) and Series B Preferred outstanding.are convertible into a total of 3,451,000 shares of common stock. Dividends payable on these preferred shares accrue at the rate of 8% per year and are payable quarterly in stock or cash.cash at the option of the Company. The Company generally pays the dividends inon the preferred stock by issuing shares of our common stock. The formula for paying this dividendthese dividends using common stock in common stocklieu of cash can change the effective yield on the dividend to more or less than 8% depending on the market price of the common stock at the time of issuance.
In connection with the Acquisition As of B&C on October 2, 2017, the CompanyMarch 31, 2020, there were also issued 2,800,000and outstanding 230,000 shares of Series C Non-Voting Convertible Preferred with common stock warrantsStock (“Series C Warrants”Preferred”) and 1,581,935 shares of its Series D Preferred. The Series C Warrants have an exercise price of $2.75 per share of common stock and a term of six years. They may not be exercised unless and until shareholder approval has been obtained. Each share of Series C Preferred and Series D Preferred was convertible into one share of common stock of the Company automatically upon, but not before receipt of shareholder approval required under applicable Nasdaq Marketplace Rules. A holder of Series C Preferred was able elect to retain the Series C Preferred and not convert, subject to future beneficial ownership limitations and loss of preferential rights. At the Company’s 2017 Annual Meeting of Shareholders, held on November 29, 2017, the Company sought and obtained shareholder approval as described above. On November 29, 2017, the Company issued 1,360,000 shares of Common Stock in conversion of a portion of the Series C Preferred and 1,581,935 shares of Common Stock in conversion of all of the Series D Preferred. As of December 31, 2017, the Company had 1,440,000 shares of Series C Preferred outstanding.. The Series C Preferred shares are non-voting, do not receive dividends, and have no liquidation preferences or redemption rights.
The During the quarter ended December 31, 2019, the Company determined thatissued 760,000 shares of common stock upon conversion of 760,000 shares of Series C Preferred.During the quarter ended March 31, 2020, the Company issued 450,000 and 8,000 shares of common stock upon conversion of 450,000 and 8,000 shares of Series C Preferred contain a beneficial conversion feature resulting in a deemed dividendand Series A Preferred, respectively.
In April 2020, the Company paid approximately $202,000 of $829,559. Upon conversion of a portion ofpreferred stock dividends with respect to the Series CA Preferred and Series B Preferred that accrued during the three months ended DecemberMarch 31, 2017, accretion2020, by issuing 195,490 shares of $194,227 in discounts was recognized.common stock.
 
NOTE
Note 5. COMPREHENSIVE INCOME (LOSS)Common Stock
As of March 31, 2020, the Company had issued and outstanding a total of 10,407,775 shares of common stock. 
On March 12, 2020, the Company entered into an Equity Distribution Agreement with Canaccord Genuity LLC and Roth Capital Partners, LLC relating to the offer and sale of shares of its common stock in an at-the-market offering (“ATM”). In accordance with the terms of the equity distribution agreement, the Company may offer and sell common stock having an aggregate offering price of up to $10,000,000 from time to time through Canaccord Genuity LLC and Roth Capital Partners, LLC, acting as the Company’s sales agents. The shares of common stock will be distributed at the market prices prevailing on The Nasdaq Capital Market at the time of the sale of such shares. Canaccord Genuity LLC and Roth Capital Partners, LLC will be entitled to compensation at a fixed commission rate equal to 3.0% of the gross sale price per share of common stock sold. No shares were sold in the ATM during the three months ended March 31, 2020.
In April 2020, the Company sold 3,200,585 shares of common stock, no par value per share, in the ATM offering.  The Company incurred offering costs totaling $238,169, inclusive of commission fees at a fixed rate of 3.0%, legal, accounting, and filing fees. Net proceeds from the shares sold totaled $2,286,939. The proceeds will be used to strengthen the Company's working capital position.
Note 6. Comprehensive Income
 
For the three and sixnine months ended DecemberMarch 31, 20172020 and 2016,2019, comprehensive income (loss)loss was equal to the net income (loss)loss as presented in the accompanying condensed consolidated statementsCondensed Consolidated Statements of operations.


Operations.
 
NOTE 6. INVENTORIESNote 7. Inventories
 
Inventories consisted of the following:
 
December 31, 2017
 
 
 June 30, 2017
 
 
March 31, 2020
 
 
June 30, 2019
 
Raw materials
 $6,332,413 
 $3,766,940 
 $5,765,534 
 $5,830,140 
Work in process
  421,861 
  470,721 
  553,470 
  706,128 
Finished goods
  5,303,501 
  3,562,758 
  5,160,985 
  5,129,806 
Inventory obsolescence reserve
  (452,476)
  (402,737)
  (157,102)
  (138,553)
 $11,605,299 
 $7,397,682 
 $11,322,887 
 $11,527,521  
 
NOTE 7. RELATED-PARTY TRANSACTIONS
 6
 
Note 8. Leases
Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Such assets are classified as ROU assets with a corresponding lease liability.

Finance and operating lease ROU assets and liabilities are recorded at commencement at the present value of future minimum lease payments over the expected lease term. As the implicit discount rate for the present value calculation is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate based on the information available at commencement of the lease. The expected lease terms include options to extend the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
The Company has operating and finance leases for various administrative, manufacturing, and distribution facilities and equipment.Most of the Company’s leases include one or more options to renew and extend the lease term two years to five years. The exercise of lease renewal options is typically at the Company's sole discretion, however, as a material economic incentive to exercise the option exists, the majority of renewals to extend the lease terms are included in the ROU assets and lease liabilities as they are reasonably certain of exercise. The Company’s lease agreements do not contain any material non-lease components, residual value guarantees, or material restrictive covenants.
Leases recorded on the balance sheet consist of the following:

Classification on the Balance Sheet
March 31, 2020
Lease Assets
Operating lease assetsOperating lease assets, net
$3,045,883
Finance lease assetsProperty and equipment, net
$2,630,542
Lease Liabilities
Current
OperatingCurrent portion of operating lease liability
$902,476
FinanceCurrent portion of finance lease liability
$311,073
Noncurrent
OperatingOperating lease liability, net of current portion
$2,143,407
FinanceFinance lease liability, net of current portion
$2,679,110
Other information related to lease term and discount rate is as follows:
March 31, 2020
Weighted Average Remaining Lease Term
Operating leases
3.3 years
Finance leases
8.8 years
Weighted Average Discount Rate
Operating leases
4.6%
Finance leases
5.7%
 7

The components of lease expense are as follows:
 Classification on the Statement of Operations
 
Three Months Ended
March 31, 2020
 
 
Nine Months Ended
March 31, 2020
 
Operating lease cost 
 
 
 
 
 
 
Operating lease costCost of sales
 $70,515 
 $211,545 
Operating lease costSelling, general, and administrative expenses
  188,256 
  564,188 
Short term lease costSelling, general, and administrative expenses
  15,750 
  47,250 
 
    
    
Finance lease cost 
    
    
Amortization of finance lease assetsCost of sales
 $35,670 
 $107,010 
Amortization of finance lease assetsSelling, general, and administrative expenses
  54,968 
  152,923 
Interest on finance lease liabilitiesInterest expense, net
  43,477 
  133,566 
Total lease cost 
 $408,636 
 $1,216,482 

Supplemental cash flow information related to leases is as follows:
 
 
Three Months Ended
March 31, 2020
 
 
Nine Months Ended
March 31, 2020
 
ROU assets obtained in exchange for lease liabilities:
 
 
 
 
 
 
Operating leases
  - 
  3,749,809 
Financing leases
  9,423 
  12,509 

Future minimum lease payments are summarized as follows:
 
 
Operating Leases
 
 
Finance Leases
 
Year ending June 30,
 
 
 
 
 
 
2020 (excluding the nine months ended March 31, 2020)
 $257,916 
 $114,028 
2021
  959,721 
  465,624 
2022
  150,000 
  472,874 
2023
  - 
  445,280 
2024
  - 
  384,754 
Thereafter
  - 
  2,113,348 
Total future minimum lease payments
 $1,367,637 
 $3,995,908 
 
    
    
Imputed interest
    
  815,566 
Deferred rent
    
  190,160 
The Company leases office, manufacturing and warehouse facilities in Detroit, Michigan, Hopkins, Minnesota, Northvale, New JerseyJersey; and Eagan, Minnesota from employees, shareholders, and entities controlled by shareholders, who were previously principals of businesses acquired by the Company.The combined expenses associated with these related-party transactions totaled approximately $257,400 $261,666and $17,700$261,792 for the three months ended DecemberMarch 31, 20172020 and 2016,2019, respectively, and $365,400 $784,999 and $35,400$785,353 for the sixnine months ended DecemberMarch 31, 20172020 and 2016,2019, respectively.

 8

Note 9. Line of Credit
 

Certain significant shareholders, officers and directors
The Company has a line of the Company participated as investors in the private placements of the Company’s Series A Preferred, Series B Preferred and Series C Preferred. The terms of these offerings were reviewed and approved by disinterested members of the Company’s Board of Directors who did not invest in the private placements and who do not own any shares of Series A Preferred, Series B Preferred or Series C Preferred. The affiliated investors participated in these offerings on terms that were no more favorable than the terms granted to unaffiliated investors.
Pursuant to the Company’s acquisition of Hausmann Industries, Inc. (“Hausmann”) in April 2017, the Company held back approximately$1,045,000 of the purchase price. As of December 31, 2017, and June 30, 2017, the holdback liability to Hausmann under the purchase agreement was $1,000,000 and $1,045,000, respectively. Certain principals of Hausmann are holders of the Company’s Series B Preferred and one of the principals, David Hausmann, is an employee of the Company.
In connection with the Acquisition of B&C in October 2017, the Company held back approximately $647,000 in cash plus an earn-out payment of a minimum of $500,000 up to $1,500,000. These obligations to B&C, totaling approximately $2,147,000, are liabilities on the Company’s balance sheet as of December 31, 2017. In addition, the Company withheld approximately 467,000 shares of common stock to be released to B&C pursuant to the holdback provisions in the Asset Purchase Agreement. These shares are included in common stock on the Company’s balance sheet at December 31, 2017. Certain principals of B&C are holders of the Company’s common stock and two of the principals, Michael Cronin and Jason Anderson, are employees of the Company.
NOTE 8. LINE OF CREDIT
On September 28, 2017, the Company modified its credit agreement with Bank of the West (“Line of Credit”) available pursuant to a loan and entered into an Amendedsecurity agreement, as amended (the “Loan and Security Agreement”), that matures on January 15, 2022. The Company’s obligations under the Line of Credit Facility (the “Amendedare secured by a first-priority security interest in substantially all of the Company’s assets. The Line of Credit Facility”)requires a lockbox arrangement and contains affirmative and negative covenants, including covenants that restrict the Company's ability to, provide asset-based financing toamong other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the Company to be used for fundingnature of its business, and engage in transactions with affiliates. The agreement also contains financial covenants including a minimum monthly consolidated fixed charge coverage ratio which only applies when the Acquisition (see Note 2)excess availability amount under the Line of Credit is less than the greater of $1,000,000 or 10% of the borrowing base. As amended, the Loan and for operating capital. The Amended Credit FacilitySecurity Agreement provides for revolving credit borrowings by the Companyin an amount up to the lesser of $11,000,000 or the calculated borrowing base. The borrowing base is computed monthly and is equal to the sum of stated percentages of eligible accounts receivable and inventory, less a reserve. Amounts outstanding bear interest at LIBOR plus 2.25% (approximately 3% as of March 31, 2020). The Company paid a commitment feeLine of .25% and the lineCredit is subject to an unused line fee of .25%. The maturity date

Borrowings on the Line of Credit were $6,368,559 and $ 6,540,639 as of March 31, 2020 and June 30, 2019, respectively. As of March 31, 2020, there was approximately $1,000,000 available to borrow.
Note 10. Long-term Debt
As of March 31, 2020 and June 30, 2019 long-term debt was $170,995 and $303,349, respectively. Long-term debt is September 30, 2019. The Company’s obligationsprimarily comprised of the mortgage loan on the Company's office and manufacturing facility in Tennessee maturing in 2021.
On April 29, 2020, the Company entered into a promissory note (the “Note”) with Bank of the West to evidence a loan to the Company in the amount of $3,477,412 under the Amended Credit Facility are securedPaycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (“SBA”).
In accordance with the requirements of the CARES Act, the Company expects to use the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, mortgage interest, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA. Interest will accrue on the outstanding balance of the Note at a first-priority securityrate of 1.00% per annum. The Company expects to apply for forgiveness of up to all amounts due under the Note, in an amount equal to the sum of qualified expenses under the PPP incurred during the eight weeks following initial disbursement. Notwithstanding the Company’s expected eligibility to apply for forgiveness, no assurance can be given that the Company will obtain forgiveness of all or any portion of amounts due under the Note.

Subject to any forgiveness granted under the PPP, the Note is scheduled to mature, April 29, 2022, two years from the date of initial disbursement under the Note and is payable in 18 equal monthly payments of principal and interest in substantially allbeginning six months from the date of its assets, including those of its subsidiaries.initial disbursement. The Amended Credit Facility includes financial covenants, such as ratios for consolidated leverage and fixed charge coverage, andNote may be prepaid at any time prior to maturity without penalty. The Note contains customary affirmative and negative covenants for a credit facility of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. The Amended Credit Facility also contains penalties in connection with customaryprovisions related to events of default, including, among others, payment,failure to make payments, bankruptcy, representationbreaches of representations, significant changes in ownership, and warranty, covenant, change in control, judgment and events or conditions that have a Material Adverse Effect (as definedmaterial adverse effects. The occurrence of an event of default may result in the Amended Credit Facility). Ascollection of December 31, 2017, the Company had borrowed $6,742,979all amounts owing under the Amended Credit Facility compared to $2,171,935 as of June 30, 2017. There was $1,874,268 available to borrowNote, and/or filing suit and obtaining judgment against the Company. The Company’s obligations under the original loanNote are not secured by any collateral or personal guarantees.

Note 11. Accrued Payroll and security agreement as of December 31, 2017.
Benefits Expense
NOTE 9. INCOME TAXES
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%.

As a result of the reduction in the corporate income tax rate from 35% to 21% under the Act, the Company revalued its net deferred tax assets at December 31, 2017. As of December 31, 2017 and June 30, 2017, a full valuation allowance has been established against net deferred 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.

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,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, As of March 31, 2020 and June 30, 2019, the FASB issued ASU 2017-11 – Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivativesaccrued payroll 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 Entitiesbenefits expense balance included $294,662 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$310,903, becauserespectively, 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.accrued severance expense. The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statementsrecognized $311,701 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.$54,778 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.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842,)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.
NOTE 11. SUBSEQUENT EVENTS
In January 2018, the Company paid approximately $201,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that were accruedseverance expense during the three months ended DecemberMarch 31, 2017.2020 and 2019, respectively, and $464,787 and $185,831 in severance expense during the nine months ended March 31, 2020 and 2019, respectively. The Company paidseverance expense was incurred in connection with reductions of the dividends by issuing 69,574 sharesCompany's workforce to better align its resources with the needs of common stock.the business andcost-reduction initiatives. Severance expense is included in selling, general, and administrative expenses.
 
Note 12.  Revenue
As of March 31, 2020 and June 30, 2019, the rebate liability was $289,841 and $287,430, respectively. The rebate liability is included in accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
As of March 31, 2020 and June 30, 2019, the allowance for sales discounts was $14,500. The allowance for sales discounts is included in trade accounts receivable, less allowance for doubtful accounts in the accompanying Condensed Consolidated Balance Sheets.
The following table disaggregates revenue by major product category for the three and nine months ended March 31:
 
 
Three Months Ended
March 31
 
 
Nine Months Ended
March 31  
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
Orthopedic Soft Bracing Products
 $   5,303,246
 $5,510,461 
 $17,416,245 
 $17,182,340 
Physical Therapy and Rehabilitation Products
  8,342,162 
  8,973,207 
  27,662,899 
  29,576,820 
Other
  60,911 
  67,851 
  213,716 
  298,160 
 
 $13,706,319 
 $14,551,519 
 $45,292,860 
 $47,057,320 
 

 9
 
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. These risks and uncertainties include, but are not limited to, the uncertainty regarding the impact or duration of the Novel Coronavirus Disease 2019 ("COVID-19") virus pandemic that is rapidly spreading globally and adversely affecting communities and businesses, including ours, as well as those factors 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,” “weMD&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.
nine months ended March 31, 2020. Results of Operations
The following discussion and analysis of our financial condition and results of operations for the three and sixnine months ended DecemberMarch 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, 2017,2020 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2018. This quarterly report includes2020.
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.

Impact of COVID-19 on Our Business
The pandemic caused by an outbreak of COVID-19 has resulted, and is likely to continue to result, in significant national and global economic disruption. Various policies and initiatives have been implemented around the world to reduce the spread of COVID-19, including work-from-home requirements or requests, shelter-in-place requirements, social distancing requirements, travel restrictions or bans in and to certain countries, bans or limitations on medical procedures and elective surgeries, closure of retail centers, restaurants and other business establishments, and the cancellation of major sporting and entertainment events. The response to and economic impact of COVID-19 adversely affected our business during the quarter ended March 31, 2020 and may continue to have an adverse effect in the fourth quarter ending June 30, 2020 and into the first half of fiscal year 2021.
Uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. We are uncertain as to the effect the pandemic ultimately will have on our financial condition, liquidity, and results of operations. Management is actively monitoring this situation and the newly acquired Birdpossible effects on our financial condition, liquidity, operations, suppliers, industry, and Cronin division. In connectionworkforce. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity. Due to the COVID-19 pandemic we have been unable to: (i) conduct face-to-face meetings with customers and prospective customers, (ii) present in-person demonstrations of our products, (iii) attend trade shows and conferences which typically generate future sales opportunities, (iv) operate our manufacturing facilities at full capacity, or (v) meet with prospective strategic partners. The temporary suspension of elective medical procedures and other restrictions related to stay-at-home orders reduced demand for our products. We believe that acquisition, we filed a Current Reportthese and other effects caused by the COVID-19 pandemic will likely have an adverse impact on Form 8-K on October 6, 2017.our revenue over the next several quarters.

 10
 
Results of Operations

Net Sales
 
Net Sales
Net sales increased $9,368,000,decreased $845,000, or 107.5%5.8%, to $18,081,000$13,706,000 for the quarter ended DecemberMarch 31, 2017,2020, compared to net sales of $8,713,000$14,552,000 for the quarter ended DecemberMarch 31, 2016.2019. 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 $4,368,000rehabilitation products as well as a decline due to COVID-19 stay-at-home restrictions and $5,698,000, respectively, in netholds on elective procedures.
Net sales in the quarter ended December 31, 2017. These increases were partially offset by a decrease of approximately $699,000,decreased $1,764,000, or 8.0%3.7%, in net sales from Dynatronics’ legacy operations. Included in the quarter ended December 31, 2016 was a $517,000 non-recurring order that accountsto $45,293,000 for the majority of the $699,000 sales differential between the two comparative quarters.
For the sixnine months ended DecemberMarch 31, 2017, net sales increased $14,003,000, or 83.0%, to $30,879,000,2020, compared to net sales of $16,876,000$47,057,000 for the corresponding periodnine months ended DecemberMarch 31, 2016.2019. The year-over-year increasedecrease in net sales was attributable primarily to the acquisitions of Hausmann and Bird & Cronin. Hausmann contributed net sales of $9,040,000 in the six months ended December 31, 2017 and Bird & Cronin contributed net sales of $5,698,000 in the three months ended December 31, 2017. These increases were partially offsetdriven by a decreasereduction in sales of approximately $731,000, or 4.3%, in net sales from Dynatronics’ legacy operations, primarilyphysical therapy and rehabilitation productsas well as a decline due to the $517,000 order in the second quarter of fiscal 2017 that did not repeat in the second quarter of fiscal 2018.COVID-19 stay-at-home restrictions and holds on elective procedures.
 
Gross Profit
 
Gross profit for the quarter ended DecemberMarch 31, 2017 increased $2,697,000,2020 decreased $461,000, or about 87.7%10.5%, to $5,770,000,$3,944,000, or 31.9%28.8% of net sales.sales. By comparison, gross profit for the quarter ended DecemberMarch 31, 20162019 was was$4,405,000 $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$256,000 in lower gross profit, and to reduced gross margin percentage resultingpercent which accounted for approximately $205,000 in $215,000 lower gross profit. The year-over-year decrease in gross margin percentage to 31.9%28.8% 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 sixnine months ended DecemberMarch 31, 2017 increased $4,241,000,2020 decreased $948,000, or about 72.3%6.5%, to $10,109,000,$13,684,000, or 32.7%,30.2% of net sales, compared tosales. By comparison, gross profit for the sixnine months ended DecemberMarch 31, 20162019 was of$14,632,000 $5,868,000,, or 34.8%31.1% of net sales.sales. The year-over-year increasedecrease in gross profit was driven by the acquisitionsattributable to lower sales of Hausmannphysical therapy 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 attributable to lower salesrehabilitation products, which accounted for approximately $171,000$549,000 in lower gross profit, and to reduced gross margin percentage resultingpercent which accounted for approximately $399,000 in $354,000 lower gross profit. The year-over-year decrease in gross margin percentage to 32.7%30.2% from 34.8%31.1% was due primarily to the inclusionlower sales 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.our physical therapy and rehabilitation equipment.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (“SG&A&A”) expenses increased $2,259,000,$89,000, or 79.2%1.9%, to $5,110,000$4,907,000 for the quarter ended DecemberMarch 31, 2017,2020, compared to $2,851,000$4,818,000 for the quarter ended DecemberMarch 31, 2016. Selling expenses in the current quarter represented $691,000 of the $2,259,0002019. The increase in SG&A expenses. Increasesis primarily related to a $257,000 increase in selling expenses included the additionseverance expense related to consolidation of $858,000 of expenses associated with Hausmannmanagement and Bird & Cronincertain operations, and cost-reduction initiatives in response to COVID-19. This increase was partially offset by $167,000a $219,000 reduction in selling expense due primarily to lower selling costs in Dynatronics’ legacy operations comprised primarily of reduced commissionscommission expense on lower sales.sales and decreased sales management salaries during the quarter.

SG&A expenses decreased $637,000, or 4.2%, to $14,450,000 for the nine months ended March 31, 2020, compared to $15,087,000 for the nine months ended March 31, 2019. The decrease in SG&A is primarily related to a $718,000 decrease in selling expensedue to lower commission expense on lower sales and decreased sales management salaries during the nine month period. General and administrative (“G&A&A”) expenses represented $1,567,000increased $81,000 primarily related to a $279,000 increase in severance expense due to consolidation of management and certain operations, and cost-reduction initiatives in response to COVID-19. This increase in G&A was partially offset byother G&A decreases primarily related to reductions in salaries and wages.
Net Loss Before Income Tax
Pre-tax loss for the $2,259,000quarter ended March 31, 2020 was $1,091,000 compared to $531,000 for the quarter ended March 31, 2019. The $560,000 increase in pre-tax loss was primarily attributable to the impact of $461,000 decrease in gross profit and $89,000 increase in SG&A expenses.
Pre-tax loss for the nine months ended March 31, 2020 was $1,130,000 compared to $452,000 for the quarternine months ended DecemberMarch 31, 2017. Increases2019. The $678,000 increase in G&A expenses includedpre-tax loss was attributable to the additionimpact of $1,623,000(1) $368,000 decrease in G&A expenses from Hausmann’sother income primarily due to a $375,000 change in the fair value of the earn-out liability related to the Bird and Bird & Cronin’s operations,Cronin acquisition during the nine months ended March 31, 2019, and (2) $948,000 decrease in gross profit partially offset by $56,000a $637,000 decrease 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, compared to $5,616,000 for the six months ended December 31, 2016. Selling expenses represented $968,000 of the $3,317,000 increase in SG&A expenses. Included in selling expenses were $1,169,000 of selling expenses associated with Hausmann and Bird & Cronin operations, partially offset by $202,000 lower selling costs in Dynatronics’ legacy operations comprised primarily of lower commissions on lower sales. G&A expenses represented $2,349,000 of the $3,317,000 increase in SG&A expenses 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%, to $553,000 from approximately $309,000 in the quarter ended December 31, 2016. Research and development expenses 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. 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)(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 quarterthree and sixnine months ended DecemberMarch 31, 2017, respectively. This compares2020, respectively, compared to income tax provision of $0$33,000 and $237,000 for the quarterthree and sixnine months ended DecemberMarch 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.2019, respectively. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information. 
Net Loss
 
Net Income (Loss)
Net incomeloss was $14,000$1,091,000 for the quarter ended DecemberMarch 31, 2017,2020, compared to a net loss of $95,000$563,000 for the quarter ended DecemberMarch 31, 2016. 2019. Net incomeloss was $213,000$1,130,000 for the sixnine months ended DecemberMarch 31, 2017,2020, compared to a$689,000 for the nine months ended March 31, 2019. The reasons for the increase in net loss of $381,000 for the six months ended December 31, 2016. The changes in net income (loss) arethe same as explained above forunder the heading Net Income (Loss)Loss Before Income Tax and Income Tax (Provision) Benefit.
 
Net Loss Attributable to Common Stockholders
 
Net loss attributable to common stockholders was $1,314,916 ($0.23 per share)increased $565,000 to $1,325,000 for the quarter ended DecemberMarch 31, 2017,2020, compared to $560,000 ($0.19 per share)$760,000 for the quarter ended DecemberMarch 31, 2016.2019. The $755,000 year-over-yearincrease in net loss attributable to common stockholders for the quarter is due primarily to a $528,000 increase in net loss and a $65,000 increase in deemed dividend on convertible preferred stock and accretion of discount as a result of the conversion of preferred stock. On a per share basis, net loss attributable to common stockholders was $(0.13) per share for the quarter ended March 31, 2020, compared to $(0.09) per share for the quarter ended March 31, 2019.
Net loss attributable to common stockholders increased $566,000 to $1,841,000 for the nine months ended March 31, 2020, compared to $1,275,000 for the nine months ended March 31, 2019. The increase in net loss attributable to common stockholders is due primarily to approximately $217,000 of additionala $441,000 increase in net loss and a $174,000 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 with 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 partially offset by $109,000 in higher net income in the quarter ended December 31, 2017, compared to the same quarterdiscount as a result of the prior year.

Netconversion of preferred stock. On a per share basis, net loss attributable to common stockholders increased $368,000 to $1,303,330 ($0.25was $(0.20) per share)share and $(0.16) per share for the sixnine months ended DecemberMarch 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 dividends2020 and approximately $194,000 in accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin Acquisition2019, respectively. 
in comparison to deemed dividends associated with Series A Preferred in December 2016
.
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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. We expect to obtain capitalWhile we had positive cash flows from operating activities for future acquisitions using borrowings and proceedsthe nine months ended March 31, 2020, during the quarter ended March 31, 2020, we had negative cash flows from debt and equity offerings. operating activities.
Working capital was $9,091,000$4,369,000 as of DecemberMarch 31, 2017,2020, compared to working capital of $5,834,000$5,638,000 as of June 30, 2017.2019. The current ratio was 1.61.3 to 1 as of DecemberMarch 31, 20172020 and 1.81.4 to 1 as of June 30, 2017.2019.
We believe that our cash generated from operations, current capital resources including recent loan and equity proceeds, and available credit provide sufficient liquidity to fund operations for the next 12 months. However, the continuing effects of the COVID-19 pandemic could have an adverse effect on our liquidity and cash and we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.
In March 2020, we entered into an equity distribution agreement with Canaccord Genuity LLC and Roth Capital Partners LLC, pursuant to which we arranged to offer and sell shares of our common stock in an at-the-market offering (“ATM”) under a registration statement previously filed by us on Form S-3 with the Securities and Exchange Commission. On March 13, 2020, we filed a Prospectus Supplement amending the registration statement and commenced the ATM. Under the terms of the equity distribution agreement, we may sell shares of our common stock in an aggregate amount of up to $10,000,000, with Canaccord Genuity LLC and Roth Capital Partners LLC acting as our sales agents at the market prices prevailing on The Nasdaq Capital Market at the time of the sale of such shares. We will pay Canaccord Genuity LLC and Roth Capital Partners, LLC a fixed commission rate equal to 3.0% of the gross sale price per share of common stock sold.
Subsequent to the end of the quarter, during April 2020, we sold an aggregate of 3,200,585 shares of common stock under the equity distribution agreement in the ATM. We incurred offering costs totaling $238,169, inclusive of commissions paid to the sales agents at a fixed rate of 3.0%, together with legal, accounting and filing fees. Net proceeds from the sale of the shares totaled $2,286,939 and we will use the proceeds to strengthen our liquidity and working capital position.
On April 29, 2020, we entered into a promissory note (the “Note”) with Bank of the West to evidence a loan to the Company in the amount of $3,477,412 under the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (“SBA”).
 
In accordance with the requirements of the CARES Act, we expect to use the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, mortgage interest, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA. Interest will accrue on the outstanding balance of the Note at a rate of 1.00% per annum. We intend to apply for forgiveness of up to all amounts due under the Note, in an amount equal to the sum of qualified expenses under the PPP incurred during the eight weeks following initial disbursement. Notwithstanding our expected eligibility to apply for forgiveness, no assurance can be given that the we will obtain forgiveness of all or any portion of amounts due under the Note.

Subject to any forgiveness granted under the PPP, the Note is scheduled to mature two years from the date of initial disbursement under the Note and is payable in 18 equal monthly payments of principal and interest beginning six months from the date of initial disbursement. The Note may be prepaid at any time prior to maturity without penalty. The Note contains customary provisions related to events of default, including, among others, failure to make payments, bankruptcy, breaches of representations, significant changes in ownership, and material adverse effects. The occurrence of an event of default may result in the collection of all amounts owing under the Note, and/or filing suit and obtaining judgment against us. Our obligations under the Note are not secured by any collateral or personal guarantees.
Cash and Cash Equivalents
 
Our cash and cash equivalents and restricted cash position increased $3,397,000$1,274,000 to $3,652,000 as$1,530,000 as of DecemberMarch 31, 2017,2020, compared to $255,000$256,000 as of June 30, 2017.2019. The primary source of cash in the sixnine months ended DecemberMarch 31, 2017,2020, was approximately $1,677,000$2,549,000 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,$860,000, or 39.8%11.5%, to $7,385,000$6,635,000 as of DecemberMarch 31, 2017,2020, 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 $205,000 or 56.9%1.8%, to $11,605,000$11,323,000 as of DecemberMarch 31, 2017,2020, 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$1,550,000 or 90.6%38.9%, to $4,451,000$5,540,000 as of DecemberMarch 31, 20172020, from $2,335,000$3,990,000 as of June 30, 2017.2019. The increase was driven primarily by improved payment terms with our primary suppliers and changes in the addition of the Bird & Cronin subsidiary that had $1,346,000 of accounts payable at December 31, 2017. The increase was also attributableaverage time to an increasepay suppliers which we increased to manage working capital in days payable from approximately 27response to 34.COVID-19.
  

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Line of Credit
 
Our line of credit balance increased $4,571,000decreased $172,000 to $6,743,000$6,369,000 as of DecemberMarch 31, 2017,2020, 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.March 31, 2020, there was approximately $1,000,000 available to borrow.

Debt
 
Long-term debt excluding current installments, decreased $75,000approximately $132,000 to $387,000approximately $171,000 as of DecemberMarch 31, 2017,2020, 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 of which $310,000 is classified as long-term debt,$129,000, with monthly principal and interest payments of $13,278 through January 2021.$13,000.
 
Finance Lease Liability
Finance lease liability as of March 31, 2020 and June 30, 2019 totaled approximately $2,990,000 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$1,428,000 at DecemberMarch 31, 2017.2020. 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 at Decemberas of March 31, 2017 was approximately $1,755,000.2020 is $1,417,000. Lease payments, currently approximately $29,000,$30,000, 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 nine months ended DecemberMarch 31, 2017,2020 was approximately $45,000.$40,000 and $118,000, 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 March 31, 2020 and June 30, 2019 totaled approximately $3,045,000 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 March 31, 2020, from $500,000 as of June 30, 2019. The decrease is due to payment in full of the obligations during the nine months ended March 31, 2020.
 
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 DecemberMarch 31, 20172020 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 sixnine months ended December March 31, 2017.2020.As a result of a temporary book to tax difference associated with the amortization of goodwill for tax purposes, income tax expense was $33,000 and $237,000 for the three and nine months ended March 31, 2019, respectively.
 
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 DecemberMarch 31, 2017.2020. No purchases have been made under this plan since September 28, 2011.

 
Off-Balance Sheet Arrangements
 
As of DecemberMarch 31, 2017,2020, 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.
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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 DecemberMarch 31, 2017.2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of DecemberMarch 31, 2017.2020.
 
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 DecemberMarch 31, 20172020, 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. Risk Factors
Our business, results of operations, and financial condition are subject to various risks. We have described and discussed these risks elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC, including our Annual Report. The following additional risk factors relating to the Novel Coronavirus 2019 (“COVID-19”) pandemic should be read in conjunction with the risk factors previously disclosed in our Annual Report and in our other filings made with the SEC as well as the information contained in this Quarterly Report on Form 10-Q. 
 
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 novel strain of coronavirus causing respiratory illness emerged in the China and has continued to spread to other countries including the United States and has been deemed a pandemic. Global governments, including local, state and federal government of the United States, has taken certain emergency measures to combat the spread of the virus, including implementation of stay-at-home orders, social distancing, travel bans and closure of factories and businesses. We have implemented guidelines and redundancies to promote employee health and wellness in order to meet our obligations as a manufacturer and infrastructure provider. Although we are considered an essential manufacturer, some of our materials and products are sourced from suppliers located in affected areas. Likewise, many of our customers have had to temporarily close or limit their operations. While the full impact of this outbreak is unknown at this time, we are closely monitoring the developments and continually assessing the potential impact on our business. Any prolonged disruption to our suppliers or our customers could negatively impact our sales, operating results, collection of receivables, and valuation of inventory; however, the situation continues to develop and the extent or duration is still uncertain.

               Any current or future outbreak of a health epidemic or other adverse public health developments, such as the current outbreak of COVID-19, could disrupt our manufacturing and supply chain, and adversely affect our business and operating results. Our business could be adversely affected by the effects of health epidemics. For example, our materials suppliers could be disrupted by conditions related to COVID-19, or other epidemics, possibly resulting in disruption to our supply chain. If our suppliers are unable or fail to fulfill their obligations to us for any reason, we may not be able to manufacture our products and satisfy customer demand or our obligations under sales agreements in a timely manner, and our business could be harmed as a result. At this point in time, there is uncertainty relating to the potential effect of COVID-19 on our business. Infections may become more widespread and should that limit our ability to timely sell and distribute our products or cause supply disruptions it would have a negative impact on our business, financial condition and operating results. In addition, a significant health epidemic could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products, which could have a material adverse effect on our business, operating results and financial condition.
Although certain of our products are used by healthcare professionals in settings where patients are treated, we do not make claims that our products are effective in the treatment, prevention or cure of disease, including COVID-19. If sales representatives, retailers or online resellers make unauthorized representations concerning the use of our products in the prevention, treatment or mitigation of COVID-19, the response to such statements may adversely affect our business and results of operations and the market price of our common stock. The manufacture, marketing and sale of our products are regulated by the governmental agencies, including the U.S. Food and Drug Administration or FDA, or FDA, and the Federal Trade Commission, or FTC. Recently the FDA and the FTC issued warning letters to several companies for selling fraudulent COVID-19 products, as part of these agencies’ response in protecting Americans during the global COVID-19 outbreak. Companies that sell products that fraudulently claim to prevent, treat or cure COVID-19 may be subject to legal action, including but not limited to seizure or injunction. The extent to which the COVID-19 outbreak continues to impact our financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new government actions or restrictions, new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the impact of COVID-19 on economic activity.
The recent COVID-19 global pandemic has increased capital markets volatility. The global stock markets have experienced, and may continue to experience, significant volatility as a result of the COVID-19 pandemic, and the price of our common stock has been volatile in recent months. The COVID-19 pandemic and the significant uncertainties it has caused for the global economy, business activity, and business confidence have had, and is likely to continue to have, a significant effect on the market price of securities generally, including our securities. For example, in the 12 months ended April 30, 2020, the sales price on The Nasdaq Capital Market for our common stock ranged from a low of $0.63 to a high of $3.70 per share. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others, the current and future public response and investor reaction to rumors or factual reports of global events, terrorism, outbreaks of disease and other natural disasters, such as the recent COVID-19 or coronavirus pandemic and the other factors discussed in this report and in our other reports and documents filed with the SEC.
   14

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.
 
Item 6. Exhibits
 
(a) Exhibits
 
Exhibits marked with an asterisk (*) are filed herewith.
3.1(a)10.1 
3.1(b)
3.1(c)
3.1(d)
10.1

               10.2 

10.3

               10.4 
                 
10.2               10.5March 13, 2020)
  
10.3
10.4
10.5
10.6
11Computation of Net Income per Share (included in Notes to Consolidated Financial Statements)

31.1
  
31.2
  
32.1
               32.2
  
101.INSXBRL Instance DocumentDocument*
  
101.CALXBRL Taxonomy Extension Schema DocumentDocument*
  
101.SCHXBRL Taxonomy Extension Calculation Linkbase DocumentDocument*
  
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentDocument*
  
101.LABXBRL Taxonomy Extension Label Linkbase DocumentDocument*
  
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentDocument*
 
 15

 
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
 
    
Date: February 13, 2018  
May 14, 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)
 
 
   
    
Date: February 13, 2018  
May 14, 2020
By:
/s/ DavidJohn A. Wirthlin
Krier
 
  DavidJohn A. WirthlinKrier 
  Chief Financial Officer
(Principal (Principal Financial and Accounting Officer)
 
 
 
1916