UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
(Exact name of registrant as specified in its charter)
| Utah | 87-0398434 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
7030 Park Centre Drive, Cottonwood Heights, UT 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 class | Trading symbol | Name of each exchange on which registered |
Common Stock, no par value per share
| DYNT | The 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 November 5, 2020, there were 14,719,711 shares of the issuer’s common stock outstanding.
DYNATRONICS CORPORATION
QUARTERFOR THE QUARTERLY PERIOD ENDED December 31, 2017SEPTEMBER 30, 2020
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets |
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| | | |
| Assets | | |
| | | |
| 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 |
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| 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 |
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| See accompanying notes to condensed consolidated financial statements. | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets |
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| Assets | | |
| Current assets: | | |
| Cash and cash equivalents | $2,189,954 | $2,215,665 |
| Restricted cash | 100,636 | 100,636 |
| Trade accounts receivable, less allowance for doubtful accounts of $218,279 and $184,713 as of September 30, 2020 and June 30, 2020, respectively | 5,609,481 | 4,893,861 |
| Other receivables | 1,008,436 | 2,080 |
| Inventories, net | 6,168,574 | 8,371,842 |
Prepaid expenses
| 816,285 | 490,624 |
| | | |
| Total current assets | 15,893,366 | 16,074,708 |
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| Property and equipment, net | 4,695,602 | 4,941,517 |
| Operating lease assets | 3,126,778 | 3,347,378 |
| Intangible assets, net | 5,501,895 | 5,682,991 |
| Goodwill | 7,116,614 | 7,116,614 |
| Other assets | 419,553 | 433,109 |
| | | |
| Total assets | $36,753,808 | $37,596,317 |
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| Liabilities and Stockholders' Equity | | |
| Current liabilities: | | |
| Accounts payable | $3,257,805 | $3,013,949 |
| Accrued payroll and benefits expense | 1,565,038 | 1,204,964 |
| Accrued expenses | 1,037,340 | 768,117 |
| Warranty reserve | 221,854 | 221,854 |
| Line of credit | - | 1,012,934 |
| Current portion of long-term debt | 501,265 | 108,713 |
| Current portion of finance lease liability | 320,676 | 316,103 |
| Current portion of deferred gain | 150,448 | 150,448 |
| Current portion of operating lease liability | 858,146 | 852,419 |
| Income tax payable | 30,945 | 29,196 |
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| Total current liabilities | 7,943,517 | 7,678,697 |
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| Long-term debt, net of current portion | 3,060,706 | 3,496,222 |
| Finance lease liability, net of current portion | 2,515,374 | 2,597,525 |
| Deferred gain, net of current portion | 1,191,046 | 1,228,658 |
| Operating lease liability, net of current portion | 2,280,069 | 2,505,232 |
| Other liabilities | 197,449 | 194,102 |
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| Total liabilities | 17,188,161 | 17,700,436 |
| Commitments and contingencies | | |
| | | |
| Stockholders' equity: | | |
| Preferred stock, no par value: Authorized 50,000,000 shares; 3,681,000 shares and 3,681,000 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively | 8,770,798 | 8,770,798 |
| Common stock, no par value: Authorized 100,000,000 shares; 14,096,252 shares and 13,803,855 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively | 27,716,107 | 27,474,411 |
| Accumulated deficit | (16,921,258) | (16,349,328) |
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| Total stockholders' equity | 19,565,647 | 19,895,881 |
| | | |
| Total liabilities and stockholders' equity | $36,753,808 | $37,596,317 |
| | | |
See accompanying notes to condensed consolidated financial statements. | |
|
Condensed Consolidated Statements of Operations |
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| Net sales | $18,081,333 | $8,713,355 | $30,879,304 | $16,876,089 |
| 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) |
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| Other income (expense): | | | | |
| Interest expense, net | (103,706) | (63,408) | (180,514) | (122,728) |
| 11,371 | 55,494 | 21,985 | 77,735 |
| Net other expense | (92,335) | (7,914) | (158,529) | (44,993) |
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| Income (loss) before income taxes | 14,348 | (95,319) | 212,995 | (380,952) |
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| Income tax (provision) benefit | -
| -
| -
| -
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| Net income (loss) | 14,348 | (95,319) | 212,995 | (380,952) |
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| 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) |
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| Net loss attributable to common stockholders | $(1,314,916) | $(559,969) | $(1,303,330) | $(934,587) |
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| Basic and diluted net loss per common share | $(0.23) | $(0.19) | $(0.25) | $(0.33) |
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| Weighted-average common shares outstanding: | | | | |
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Basic and diluted
| 5,735,159 | 2,881,111 | 5,241,604 | 2,861,299 |
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See accompanying notes to condensed consolidated financial statements. | | | |
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Condensed Consolidated Statements of Operations |
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| Net sales | $12,132,768 | $16,389,549 |
| Cost of sales | 8,230,815 | 11,235,542 |
| Gross profit | 3,901,953 | 5,154,007 |
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| Selling, general, and administrative expenses | 4,245,627 | 4,924,692 |
| Operating (loss) income | (343,674) | 229,315 |
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| Other expense: | | |
| Interest expense, net | (39,943) | (130,992) |
| Other income, net | 5,913 | 515 |
| Net other expense | (34,030) | (130,477) |
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| (Loss) income before income taxes | (377,704) | 98,838 |
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| Income tax (provision) benefit | - | - |
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Net (loss) income
| (377,704) | 98,838 |
| | | |
| Preferred stock dividend, in common stock, issued or to be issued | (194,226) | (166,904) |
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| Net loss attributable to common stockholders | $(571,930) | $(68,066) |
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| Net loss per common share | | |
| Basic and diluted | $(0.04) | $(0.01) |
| | | |
| Weighted-average common shares outstanding: | | |
| Basic and diluted | 14,080,361 | 8,576,961 |
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See accompanying notes to condensed consolidated financial statements. | |
|
Condensed Consolidated Statements of Cash Flows |
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| 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) | -
|
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| 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. | | |
|
Consolidated Statements of Stockholders' Equity |
|
| | | | | | | |
| | | | | | | |
| | | | | |
| | | | | | | |
| 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 dividend, in common stock, issued or to be issued | 165,251 | 202,249 | - | - | (202,249) | - |
| | | | | | | |
| Preferred stock converted to common stock | 760,000 | 1,791,320 | (760,000) | (1,791,320) | - | - |
| | | | | | | |
| Preferred stock beneficial conversion and accretion of discount | - | - | - | 108,539 | - | 108,539 |
| | | | | | | |
| Dividend of beneficial conversion and accretion of discount | - | - | - | (108,539) | - | (108,539) |
| | | | | | | |
| 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 dividend, in common stock, issued or to be issued | 243,652 | 168,356 | - | - | (168,356) | - |
| | | | | | | |
| Preferred stock converted to common stock | 458,000 | 1,079,698 | (458,000) | (1,079,698) | - | - |
| | | | | | | |
| Preferred stock beneficial conversion and accretion of discount | - | - | - | 65,219 | - | 65,219 |
| | | | | | | |
| Dividend of beneficial conversion and accretion of discount | - | - | - | (65,219) | - | (65,219) |
| | | | | | | |
| 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 |
| | | | | | | |
| Stock-based compensation | - | 45,342 | - | - | - | 45,342 |
| | | | | | | |
| Preferred stock dividend, in common stock, issued or to be issued | 195,495 | 180,123 | - | - | (180,123) | - |
| | | | | | | |
| Issuance of common stock, net of issuance costs of $238,168 | 3,200,585 | 2,286,939 | - | - | - | 2,286,939 |
| | | | | | | |
| Net loss | - | - | - | - | (2,295,456) | (2,295,456) |
| | | | | | | |
| Balance at June 30, 2020 | 13,803,855 | 27,474,411 | 3,681,000 | 8,770,798 | (16,349,328) | 19,895,881 |
| | | | | | | |
| Stock-based compensation | 84,661 | 47,470 | - | - | - | 47,470 |
| | | | | | | |
| Preferred stock dividend, in common stock, issued or to be issued | 207,736 | 194,226 | - | - | (194,226) | - |
| | | | | | | |
Net loss
| - | - | - | - | (377,704) | (377,704) |
| | | | | | | |
| Balance at September 30, 2020 | 14,096,252 | $27,716,107 | 3,681,000 | $8,770,798 | $(16,921,258) | $19,565,647 |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements. | | | | | | |
|
Condensed Consolidated Statements of Cash Flows |
|
| | |
| | |
| | |
| | | |
| Cash flows from operating activities: | | |
Net (loss) income
| $(377,704) | $98,838 |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Depreciation and amortization of property and equipment | 244,353 | 246,890 |
| Amortization of intangible assets | 181,096 | 181,095 |
| Amortization of other assets | 6,402 | 11,218 |
| Loss on sale of property and equipment | (6,240) | - |
Stock-based compensation
| 47,470 | 129,793 |
| Change in allowance for doubtful accounts receivable | 33,566 | - |
| Change in allowance for inventory obsolescence | (76,246) | (1,740) |
| Amortization deferred gain on sale/leaseback | (37,612) | (37,611) |
| Change in operating assets and liabilities: | | |
| Trade accounts receivable | (749,186) | 191,301 |
| Inventories | 1,299,498 | 399,279 |
| Prepaid expenses and other receivables | (327,001) | (10,900) |
| Other assets | 7,154 | (4,268) |
| Income tax payable | 1,749 | (18,100) |
| Accounts payable, accrued expenses, and other current liabilities | 876,500 | 806,846 |
| | | |
| Net cash provided by operating activities | 1,123,799 | 1,992,641 |
| | | |
| Cash flows from investing activities: | | |
| Purchase of property and equipment | (16,034) | (65,969) |
| | | |
| Net cash used in investing activities | (16,034) | (65,969) |
| | | |
| Cash flows from financing activities: | | |
| Principal payments on long-term debt | (42,964) | (46,617) |
| Principal payments on finance lease liability | (77,578) | (72,198) |
| Payment of acquisition earn-out liability and holdbacks | - | (125,000) |
| Net change in line of credit | (1,012,934) | (1,463,733) |
| | | |
| Net cash used in financing activities | (1,133,476) | (1,707,548) |
| | | |
| Net change in cash and cash equivalents and restricted cash | (25,711) | 219,124 |
| | | |
| Cash and cash equivalents and restricted cash at beginning of the period | 2,316,301 | 256,030 |
| | | |
| Cash and cash equivalents and restricted cash at end of the period | $2,290,590 | $475,154 |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Cash paid for interest | $39,930 | $141,424 |
| Supplemental disclosure of non-cash investing and financing activities: | | |
| Preferred stock dividend, in common stock, issued or to be issued | 194,227 | 166,904 |
| Finance lease obligations incurred to obtain ROU assets | - | 3,086 |
| | | |
| See accompanying notes to condensed consolidated financial statements. | | |
DYNATRONICSDYNATRONICS CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2017September 30, 2020
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, 2020 (the “Annual Report”) filed with the SEC on September 24, 2020. The Condensed Consolidated Balance Sheet at June 30, 2020, 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 September 30, 2020 and its results of operations and its cash flows.flows for the periods presented. The results of operations for the first three and six 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 2021” and “fiscal year 2020” refer to the Company’s fiscal year ending June 30, 2018. The Company previously filed with2021 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.2020, 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.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies as described in the 2017 Form 10-K.
NOTE 2. ACQUISITIONSassumptions.
On October 2, 2017, the Company acquired substantially all of the assets of Bird & Cronin, Inc. (“Recent Accounting PronouncementsB&C”), a manufacturer 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.
AtIn December 2019, the ClosingFASB 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 Acquisition,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.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. The guidance is effective for the Company paid B&C cashin the first quarter of $9,063,017fiscal year 2025 and delivered 1,397,375 sharesearly adoption is permitted. The Company is evaluating the impact of adoption of this guidance will have on 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.consolidated financial statements.
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.2. Net Loss per Common Share
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 Acquisition has been accounted for under the purchase method as prescribed by applicable accounting standards. Under this method, the Company has allocated 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 value of the assets acquired and liabilities assumed 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:
| | | |
| 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 $70,000 of acquisition-related costs incurred in 2017.
NOTE 3. NET INCOME (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 December 31, 2017,September 30, 2020, and 2016,2019, totaled 13,838,85911,777,500 and 5,148,398, respectively, and for the six months ended December 31, 2017, and 2016, totaled 12,114,132 and 5,148,398,11,887,083, respectively.
NOTE 4. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTSNote 3. Convertible Preferred Stock
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 December 31, 2017,September 30, 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 its 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 CompanySeptember 30, 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.
TheIn November 2020, the Company determined that theissued 330,000 shares of common stock upon conversion of 230,000 shares of Series C Preferred contain a beneficial conversion feature resulting in a deemed dividendand 100,000 shares of $829,559. Upon conversionSeries B Preferred.
In October 2020, the Company paid approximately $194,000 of a portion ofpreferred stock dividends with respect to the Series CA Preferred and Series B Preferred that accrued during the three months ended December 31, 2017, accretionSeptember 30, 2020, by issuing 276,519 shares of $194,227 in discounts was recognized.common stock.
NOTE 5. COMPREHENSIVE INCOME (LOSS)Note 4. Comprehensive Income
For the three and six months ended December 31, 2017September 30, 2020 and 2016,2019, comprehensive income (loss) was equal to the net income (loss) as presented in the accompanying condensed consolidated statements of operations.
NOTE 6. INVENTORIESNote 5. Inventories
Inventories consisted of the following:
| | | | | |
| Raw materials | $6,332,413 | $3,766,940 | $3,042,377 | $4,798,489 |
| Work in process | 421,861 | 470,721 | 508,466 | 427,744 |
| Finished goods | 5,303,501 | 3,562,758 | 3,109,568 | 3,713,692 |
| Inventory obsolescence reserve | (452,476) | (402,737) | (491,837) | (568,083) |
| | $11,605,299 | $7,397,682 | $6,168,574 | $8,371,842 |
NOTE 7. RELATED-PARTY TRANSACTIONS
Note 6. Related-Party Transactions
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$264,703 and $17,700$261,666 for the three months ended December 31, 2017September 30, 2020 and 2016, respectively,2019, respectively.
Note 7. Line of Credit
Borrowings on the Line of Credit were $0 and $365,400 and $35,400 for the six months ended December 31, 2017 and 2016, respectively.
Certain significant shareholders, officers and directors$1,012,934 as 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,September 30, 2020 and June 30, 2017, the holdback liability to Hausmann under the purchase agreement was $1,000,000 and $1,045,000,2020, respectively. Certain principalsAs 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 and entered into an Amended Credit Facility (the “Amended Credit Facility”) to provide asset-based financing to the Company to be used for funding the Acquisition (see Note 2) and for operating capital. The Amended Credit Facility provides for revolving credit borrowings by the Company 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%. The Company paid a commitment fee of .25% and the line is subject to an unused line fee of .25%. The maturity date is September 30, 2019. The Company’s obligations under the Amended Credit Facility are secured by a first-priority security interest in substantially all of its assets, including those of its subsidiaries. The Amended Credit Facility includes financial covenants, such as ratios for consolidated leverage and fixed charge coverage, and 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 customary events of default, including, among others, payment, bankruptcy, representation and warranty, covenant, change in control, judgment and events or conditions that have a Material Adverse Effect (as defined in the Amended Credit Facility). As of December 31, 2017, the Company had borrowed $6,742,979 under the Amended Credit Facility compared to $2,171,935 as of June 30, 2017. There2020, there was $1,874,268approximately $5,750,000 available to borrow under the original loan and security agreement as of December 31, 2017.borrow.
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.
Note 8. Revenue
In July 2017,As of September 30, 2020 and June 30, 2020, the FASB issued ASU 2017-11 – Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivativesrebate liability was $284,187 and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception.$247,388 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, respectively. The rebate liability is included 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.
accrued expenses Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of the extensive pending content in the FASB Accounting Standards Codification. This pending contentaccompanying condensed consolidated balance sheets.As of September 30, 2020 and June 30, 2020, the allowance for sales discounts was $14,500 and $8,000, respectively. The allowance for sales discounts 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 amendmentsincluded 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 trade accounts receivable, less allowance for doubtful accounts in the Codification, to a scope exception. Those amendments do not have an accounting effect. The Company is currently evaluating the impact the adoption of this update will have on itsaccompanying condensed consolidated financial statements and disclosures. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendment in this update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. An entity should apply the amendments in this update on a prospective basis. This amendment will be effective for the Company in its fiscal year beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted this standard as of July 1, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Businessbalance sheets. 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 frameworkfollowing table disaggregates revenue by major product category 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,) a new guidance on leases. This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. Accordingly, the standard is effective for the Company on July 1, 2019. The Company is currently evaluating the impact that this guidance will have on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments, a guidance related to financial instruments - overall recognition and measurement of financial assets and financial liabilities. The guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for public companies for interim and annual periods beginning after December 15, 2017. Accordingly, the standard is effective for the Company on July 1, 2018. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customer (Topic 606). This authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt this guidance on July 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is evaluating which transition approach to use and its impact, if any, on its consolidated financial statements.
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 accrued during the three months ended December 31, 2017. The Company paid the dividends by issuing 69,574 shares of common stock.September 30:
| | | |
| Orthopedic Soft Bracing Products | $5,559,918 | $6,279,026 |
| Physical Therapy and Rehabilitation Products | 6,497,230 | 10,037,720 |
| Other | 75,620 | 72,803 |
| | $12,132,768 | $16,389,549 |
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 adversely affecting communities and businesses globally, 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, 2020, filed with the SEC, as well as in our other expectations expressedpublic filings with the SEC. Actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business.
You should read this report in such forward-looking statements.its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference into this report, with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them after the date hereof to revise or conform such statements to actual results or to changes in our opinions or expectations. If we do update the reasons why actual results could differ from those projected in suchor correct any forward-looking statements, except as requiredinvestors should not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by law.these cautionary statements.
The terms “we,” “us,” “Dynatronics,” or the “Company” refer collectively to Dynatronics Corporation and its wholly-owned subsidiaries, unless otherwise stated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Dynatronics CorporationManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“Company,” “Dynatronics,” “we”MD&A”) designs, manufacturesis designed to provide a reader of our Unaudited Condensed Consolidated Financial Statements and distributes advanced-technology therapeutic medical devices, therapeuticNotes thereto that are contained in this quarterly report, with a narrative from the perspective of management. You should also consider this information with the information included in our Annual Report on Form 10-K for the year ended June 30, 2020, 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, 2020 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 20182021 refers to the year ending June 30, 2018.
Recent Events
On November 29, 2017, we held our annual meeting of shareholders who approved2021. This report covers the automatic conversion of the Series C Preferred 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:
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Joining resources of the acquired entities to maximize cross-selling opportunities without disrupting each entity’s current channels of distribution;
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Exploring operating synergies with acquired companies while respecting established operating paradigms at each operation;
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Seeking to improve distribution of our products through expansion of sales channels;
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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;
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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;
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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
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Attending appropriate investor conferences to better publicize our strategic plans, attract new capital to support the business development strategy and identify other acquisition targets.
months ended September 30, 2020. Results of Operations
The following discussion and analysis of our financial condition and results of operations for the three and six months ended December 31, 2017, should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report, and our Annual Report on Form 10-K for the fiscal year ended JuneSeptember 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 includes the financial results of the newly acquired Bird and Cronin division. In connection with that acquisition, we filed a Current Report on Form 8-K on October 6, 2017.2021.
Overview
Dynatronics designs, manufactures, and sells a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through our distribution channels, we market and sell to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.
Results of Operations
Net Sales
Net sales increased $9,368,000,decreased $4,257,000, or 107.5%26.0%, to $18,081,000$12,133,000 for the quarter ended December 31, 2017,September 30, 2020, compared to net sales of $8,713,000$16,390,000 for the quarter ended December 31, 2016. September 30, 2019. The year-over-year increase in net sales for the quarter ended December 31, 2017 was driven by our acquisitions of Hausmann in April 2017 and Bird & Cronin in October 2017, that contributed $4,368,000 and $5,698,000, respectively, in net sales in the quarter ended December 31, 2017. These increases were partially offset by a decrease of approximately $699,000, or 8.0%, in net sales from Dynatronics’ legacy operations. Included in the quarter ended December 31, 2016 was a $517,000 non-recurring order that accounts for the majority of the $699,000 sales differential between the two comparative quarters.
For the six months ended December 31, 2017, net sales increased $14,003,000, or 83.0%, to $30,879,000, compared to net sales of $16,876,000 for the corresponding period ended December 31, 2016. The year-over-year increase 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 offset by a decrease of approximately $731,000, or 4.3%, in net sales from Dynatronics’ legacy operations,is primarily due to the $517,000 order in the second quarter of fiscal 2017 that did not repeat in the second quarter of fiscal 2018.COVID-19 precautions and associated deferral on elective procedures which reduced demand for our products.
Gross Profit
Gross profit for the quarter ended December 31, 2017 increased $2,697,000,September 30, 2020 decreased $1,252,000, or about 87.7%24.3%, to $5,770,000,$3,902,000, or 31.9%32.2% of net sales.sales. By comparison, gross profit for the quarter ended December 31, 2016 wasSeptember 30, 2019 $3,073,000,was $5,154,000, or 35.3%31.4% of net sales. The year-over-year decrease in gross profit was primarily attributable to lower sales. which reduced gross profit. The year-over-year increase in gross profitmargin percentage to 32.2% from 31.4% was due primarily to changes in the mix of sales between our major product categories.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased $679,000, or 13.8%, to $4,246,000 for the quarter ended September 30, 2020, compared to $4,925,000 for the quarter ended September 30, 2019. Selling expenses decreased $577,000 compared to the prior year period, due primarily to lower commission expense on lower sales and decreased sales management salaries. General and administrative ("G&A") expenses decreased $102,000 compared to the prior-year period, driven primarily by a decrease in payroll and benefit costs as a result of headcount reductions.
Net (Loss) Income Before Income Tax
Pre-tax loss for the quarter ended September 30, 2020 was $378,000 compared to pre-tax income of $99,000 for the quarter ended September 30, 2019. The $477,000 decline in pre-tax income was attributable to the acquisitionsa decrease of Hausmann and Bird & Cronin that contributed $1,066,000 and $2,082,000, respectively,$1,252,000 in gross profit in the quarter ended December 31, 2017. These increases were partially offset by a decrease of approximately $451,000$679,000 in Dynatronics’ legacy operations gross profit. ThatSG&A and a decrease was primarily attributable to lower sales which accounted for approximately $236,000 lower gross profit and reduced gross margin percentage resultingof $96,000 in $215,000 lower gross profit.other expense. The year-over-year decrease in gross margin percentageother expense is primarily due to 31.9% from 35.3% was due primarily to inclusiona decrease in interest expense as a result 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 marginsaverage borrowings on freight charged to customers.our line of credit.
Gross profit for the six months ended December 31, 2017 increased $4,241,000, or about 72.3% to $10,109,000, or 32.7%, of net sales, compared to gross profit for the six months ended December 31, 2016 of $5,868,000, or 34.8% of net sales. The year-over-year increase in gross profit was driven by the acquisitions of Hausmann 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 sales which accounted for approximately $171,000 lower gross profit and reduced gross margin percentage resulting in $354,000 lower gross profit. The year-over-year decrease in gross margin percentage to 32.7% from 34.8% was due primarily to the inclusion of Hausmann lower gross margin percentage as well as reduced gross margin in Dynatronics’ legacy operations, primarily attributable to reduced margins on freight charged to customers.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased $2,259,000, or 79.2%, to $5,110,000 for the quarter ended December 31, 2017, compared to $2,851,000 for the quarter ended December 31, 2016. Selling expenses in the current quarter represented $691,000 of the $2,259,000 increase in SG&A expenses. Increases in selling expenses included the addition of $858,000 of expenses associated with Hausmann and Bird & Cronin operations, partially offset by $167,000 lower selling costs in Dynatronics’ legacy operations comprised primarily of reduced commissions on lower sales. General and administrative (“G&A”) expenses represented $1,567,000 of the $2,259,000 increase in SG&A expenses for the quarter ended December 31, 2017. Increases in G&A expenses included the addition of $1,623,000 in G&A expenses from Hausmann’s and Bird & Cronin’s operations, partially offset by $56,000 in decreased G&A expenses in Dynatronics’ legacy operations. G&A expenses included approximately $100,000 in acquisition related expenses during the current quarter.
SG&A expenses for the six months ended December 31, 2017 increased $3,317,000, or 59.1%, to $8,933,000, 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)
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 quarterquarters ended September 30, 2020 and six months ended December 31, 2017, respectively. This compares to income tax provision of $02019. See Liquidity and Capital Resources - Deferred Income Tax Assets below for the quarter and six months ended December 31, 2016, respectively. We decreased the valuation allowance on our net deferred income tax assets equal to the one-time revaluation of our net deferred tax assets at the lower tax rate. more information.
Net (Loss) Income (Loss)
Net incomeloss was $14,000$378,000 for the quarter ended December 31, 2017,September 30, 2020, compared to a net lossincome of $95,000$99,000 for the quarter ended December 31, 2016. Net income was $213,000September 30, 2019. The reasons for the six months ended December 31, 2017, compared to a net loss of $381,000 for the six months ended December 31, 2016. The changes in net (loss) income (loss) are the same as explained above forunder the heading Net (Loss) Income (Loss) Before Income Tax.
Net Loss Attributable to Common Stockholders
Net loss attributable to common stockholders was $1,314,916 ($0.23 per share) for the quarter ended December 31, 2017, compared to $560,000 ($0.19 per share) for the quarter ended December 31, 2016. The $755,000 year-over-year increase in net loss attributable to common stockholders is due to approximately $217,000 of additional 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 quarter of the prior year.
Net loss attributable to common stockholders increased $368,000$504,000 to $1,303,330 ($0.25 per share)$572,000 for the six monthsquarter ended December 31, 2017,September 30, 2020, compared to $935,000 ($0.33 per share)$68,000 for the six monthsquarter ended December 31, 2016.September 30, 2019. The decreaseincrease in net loss attributable to common stockholders for the quarter is due primarily to approximately $594,000a $477,000 increase in highernet loss. On a per share basis, net income inattributable to common stockholders was $(0.04) per share for the six monthsquarter ended December 31, 2017,September 30, 2020, compared to $(0.01) per share for 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 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 Acquisitionin comparison to deemed dividends associated with Series A Preferred in December 2016.quarter ended September 30, 2019.
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 expectAs of September 30, 2020, we had $2,291,000 in cash and cash equivalents and restricted cash, compared to obtain capital for future acquisitions using borrowings and proceeds$2,316,000 as of June 30, 2020. During the quarter ended September 30, 2020, we had positive cash flows from debt and equity offerings. operating activities.
Working capital was $9,091,000$7,950,000 as of December 31, 2017,September 30, 2020, compared to working capital of $5,834,000$8,396,000 as of June 30, 2017.2020. The current ratio was 1.62.0 to 1 as of December 31, 2017September 30, 2020 and 1.82.1 to 1 as of June 30, 2017.2020. Current assets were 43.2% of total assets as of September 30, 2020, and 42.8% of total assets as of June 30, 2020.
We believe that our cash generated from operations, current capital resources including 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.
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 have used 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 all amounts due under the Note, in an amount equal to the sum of qualified expenses under the PPP incurred during the 24 weeks following initial disbursement. Notwithstanding our expected eligibility to apply for forgiveness, no assurance can be given that 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 monthly installments beginning 10 months after the completion of the 24 week covered period. 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 $3,397,000decreased $25,000 to $3,652,000 as$2,291,000 as of December 31, 2017,September 30, 2020, compared to $255,000$2,316,000 as of June 30, 2017.2020. The primary source of cash in the sixthree months ended December 31, 2017,September 30, 2020, was approximately $1,677,000$1,124,000 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, increased approximately $2,104,000,$715,000, or 39.8%14.6%, to $7,385,000$5,609,000 as of December 31, 2017,September 30, 2020, from $5,281,000$4,894,000 as of June 30, 2017.2020. The increase was driven primarily dueby an increase in sales compared to the addition of the Bird & Cronin that added $1,819,000 inquarter ended June 30, 2020. 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 $2,203,000 or 56.9%26.3%, to $11,605,000$6,169,000 as of December 31, 2017,September 30, 2020, compared to $7,398,000$8,372,000 as of June 30, 2017. 2020. The increasedecrease was driven byprimarily due to steps taken to right-size incoming material purchases and adjust inventory management as part of our working capital plans in response to the additionimpacts of the Bird & Cronin subsidiary that had $4,707,000 of net inventoryCOVID-19. In addition, as of December 31, 2017. Inventory levels fluctuate based on timingSeptember 30, 2020, other receivables includes $980,000 due from our contract manufacturer for raw materials components provided for use in the production of large inventory purchases from domestic and overseas suppliers as well as variations in sales and production activities.our products. 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$244,000 or 90.6%8.1%, to $4,451,000$3,258,000 as of December 31, 2017September 30, 2020, from $2,335,000$3,014,000 as of June 30, 2017.2020. The increase was driven primarily by the addition of the Bird & Cronin subsidiary that had $1,346,000 of accounts payable at December 31, 2017. The increase was also attributable to an increase in days payable from approximately 27 to 34.
inventory purchases and timing of payments.
Line of Credit
Our line of credit balance increased $4,571,000decreased $1,013,000 to $6,743,000$0 as of December 31, 2017,September 30, 2020, compared to $2,172,000$1,013,000 as of June 30, 2017. We drew $5,000,000 on2020. The decrease was driven primarily by positive cash flows from operating activities. As of September 29, 2017 in anticipation of closing the Acquisition of Bird & Cronin on October 2, 2017.30, 2020, there was approximately $5,750,000 available to borrow.
Debt
Long-term debt excluding current installments, decreased $75,000approximately $43,000 to $387,000approximately $3,562,000 as of December 31, 2017,September 30, 2020, compared to $462,000approximately $3,605,000 as of June 30, 2017. 2020. Our long-term debt is primarily comprised of the PPP Note, 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 PPP Note is $3,477,412, of which, $433,000 is classified as current debt at September 30, 2020.The principal balance on the mortgage loan wasis approximately $445,000$52,000, all of which $310,000 is classified as current portion of long-term debtat September 30, 2020, with monthly principal and interest payments of $13,278 through January 2021.$13,000.
Finance Lease Liability
Finance lease liability as of September 30, 2020 and June 30, 2020 totaled approximately $2,836,000 and $2,914,000, 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$1,554,000 at December 31, 2017.September 30, 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 December 31, 2017 was approximately $1,755,000.as of September 30, 2020 is $1,341,000. 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 months ended December 31, 2017,September 30, 2020 was approximately $45,000.$37,000. 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 September 30, 2020 and June 30, 2020 totaled approximately $3,138,000 and $3,358,000, respectively. Our operating lease liability consists primarily of building leases for office, manufacturing, warehouse and storage space.
Deferred Income Tax Assets
A valuation allowance is required when there is significant uncertainty as to the realizability of deferred income tax assets. The ability to realize deferred income tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have determined that we do not meet the “more likely than not” threshold that deferred income tax assets will be realized. Accordingly, a valuation allowance is required. Any reversal of the valuation allowance in future periods will favorably impact our results of operations in the period of reversal. As of December 31, 2017September 30, 2020 and June 30, 2017,2020, we recorded a full valuation allowance against our net deferred income tax assets. This resulted in no reported income tax expense associated with the operating profit reported during the three and six months ended December 31, 2017. September 30, 2020.
Inflation
Our revenues and net income have not been unusually affected by inflation or price increases for raw materials and parts from vendors.
Stock Repurchase Plans
We have a stock repurchase plan available to us at the discretion of the Board of Directors. Approximately $449,000 remained of this authorization as of December 31, 2017.September 30, 2020. No purchases have been made under this plan since September 28, 2011.
Off-Balance Sheet Arrangements
As of December 31, 2017,September 30, 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, 2017.2020. 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, 2017.2020.
Item 4.4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods that are specified in the Securities and Exchange Commission’s (“SEC”)SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2017.September 30, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.September 30, 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 December 31, 2017September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PARTART II. OTHER INFORMATION Item 1. Legal Proceedings
None.
Item 1A.
The risk factors described in our Annual Report on Form 10-K for the year ended June 30, 2020 have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
(a) Exhibits
3.1(a) | |
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3.1(b) | |
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3.1(c) | |
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3.1(d) | |
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10.2 | |
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10.3 | |
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10.4 | |
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10.5 | |
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10.6 | |
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11 | Computation of Net Income per Share (included in Notes to Consolidated Financial Statements) |
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31.1 | |
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31.2 | |
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32.1 | |
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| 101.INS | XBRL Instance Document |
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| 101.CAL | XBRL Taxonomy Extension Schema Document |
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| 101.SCH | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | DYNATRONICS CORPORATION | |
| | | | |
Date: February 13, 2018
November 12, 2020 | By: | /s/ Kelvyn H. Cullimore, Jr.John A. Krier | |
| | | Kelvyn H. Cullimore, Jr.John A. Krier | |
| | | President and Chief Executive Officer (Principal Executive Officer) | |
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Date: February 13, 2018
| By: | /s/ David A. Wirthlin
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| | David A. Wirthlin | |
| | Chief Financial Officer
(Principal Financial and Accounting Officer) | |