CAUTIONARY 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 Operation, contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, but are not limited to: any projections of net sales, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; expectations in connection with the company's previously announced business optimization plan; any statements concerning proposed new products or developments; any statements regarding 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 to differ materially from our 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, uncertainties related to the broader economic environment 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, 2022, filed with the SEC, as well as in our other public filings with the SEC. Actual results may differ from projections as a result of these risks, 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 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 or correct any forward-looking statements, investors should not conclude that we will make additional updates or corrections.
We qualify all of our forward-looking statements by 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
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our Unaudited Condensed Consolidated Financial Statements and Notes 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 10K for the year ended June 30, 2022, and our other filings with the SEC, including our quarterly and current reports that we have filed since June 30, 2022 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 approximate. All intercompany transactions have been eliminated. Our fiscal year ends on June 30. For example, reference to fiscal year 2023 refers to the year ending June 30, 2023. This report covers the three and nine months ended March 31, 2023. Results of operations for the three and nine months ended March 31, 2023 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2023.
Overview
Dynatronics is a leading medical device company committed to providing high-quality restorative products designed to accelerate achieving optimal health. The Company designs, manufactures, and sells a broad range of 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, and hospitals. The Company's products are marketed under a portfolio of high-quality, well-known industry brands including Bird & Cronin®, Solaris™, Hausmann®, and PROTEAM™, among others. More information is available at www.dynatronics.com.
Results of Operations
Net Sales
Net sales decreased $1,080,000, or 10.5%, to $9,236,000 for the quarter ended March 31, 2023, compared to net sales of $10,316,000 for the quarter ended March 31, 2022. Net sales decreased $975,000, or 2.9%, to $32,172,000 for the nine months ended March 31, 2023, compared to net sales of $33,147,000 for the nine months ended March 31, 2022. The year-over-year decrease is primarily attributable to the acquisition of a competitor by a rehabilitation product category customer, reduction in overall volume for OEM customers and a general reduction in demand for the orthopedic soft bracing product category.
Gross Profit
Gross profit for the quarter ended March 31, 2023 decreased $103,000, or about 4.5%, to $2,208,000, or 23.9% of net sales. By comparison, gross profit for the quarter ended March 31, 2022 was $2,311,000, or 22.4% of net sales. Gross profit for the nine months ended March 31, 2023 increased $857,000, or about 10.6%, to $8,913,000, or 27.7% of net sales. By comparison, gross profit for the nine months ended March 31, 2022 was $8,056,000, or 24.3% of net sales. The increase in gross profit as a percentage of net sales was driven by net price realization and overall product mix. The year-over-year increase in gross profit was primarily attributable to a reduction in freight-in expenses, stabilized raw material costs, and changes in product mix.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased $318,000, or 8.5%, to $3,429,000 for the quarter ended March 31, 2023, compared to $3,747,000 for the quarter ended March 31, 2022. The decrease in SG&A was driven primarily by a reduction in salaries and benefits.
SG&A expenses increased $84,000, or 0.7%, to $11,409,000 for the nine months ended March 31, 2023, compared to $11,325,000 for the nine months ended March 31, 2022. The increase in SG&A was driven primarily by an increase in marketing program expense offset by a reduction in salaries and benefits.
Net Other Income (Expense)
Net other expense for the quarter ended March 31, 2023, was $25,000 compared to net other expense of $36,000 for the quarter ended March 31, 2022. The decrease in net other expense is primarily due to a $9,000 decrease in interest expense as a result of lower average borrowings on long-term debt. Net other expense for the nine months ended March 31, 2023, was $93,000 compared to net other income of $841,000 for the nine months ended March 31, 2022. The increase in net other expense is primarily due to a $943,000 employee retention credit for funds received or receivable from the U.S. federal government under the CARES Act in the prior year.
Income Tax (Provision) Benefit
Income tax (provision) benefit was $27 and ($4,000) for the three and nine months ended March 31, 2023, respectively and $0 for the three and nine months ended March 31, 2022. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information.
Net Loss
Net loss for the quarter ended March 31, 2023 was $1,246,000 compared to a net loss of $1,472,000 for the quarter ended March 31, 2022. The $226,000 decrease in net loss was attributable to a decrease of $318,000 in SG&A, a decrease of $11,000 in other expense, and offset by a decrease of $103,000 in gross profit. Net loss was $2,592,000 for the nine months ended March 31, 2023, compared to a net loss of $2,427,000 for the nine months ended March 31, 2022. The $165,000 increase in net loss was attributable to an increase of $934,000 in other expense, increase of $84,000 in SG&A, increase of $4,000 in income tax provision, and offset by an increase of $857,000 in gross profit.
Net Loss Attributable to Common Stockholders
Net loss attributable to common stockholders decreased $234,000 to $1,420,000 for the quarter ended March 31, 2023, compared to $1,654,000 for the quarter ended March 31, 2022. The decrease in net loss attributable to common stockholders for the quarter is due primarily to a $226,000 decrease in net loss. On a per share basis, basic and diluted net loss attributable to common stockholders was $0.36 per share for the quarter ended March 31, 2023, compared to $0.46 per share for the quarter ended March 31, 2022.
Net loss attributable to common stockholders increased $132,000 to $3,111,000 for the nine months ended March 31, 2023, compared to $2,979,000 for the nine months ended March 31, 2022. On a per share basis, basic and diluted net loss attributable to common stockholders was $0.82 per share for the nine months ended March 31, 2023, compared to $0.84 per share for the nine months ended March 31, 2022.
Liquidity and Capital Resources
We have historically financed operations through cash from operating activities, available cash reserves, and proceeds from the sale of our equity securities. As of March 31, 2023, we had $670,000 in cash and cash equivalents and restricted cash, compared to $701,000 as of June 30, 2022.
Working capital was $7,144,000 as of March 31, 2023, compared to working capital of $9,291,000 as of June 30, 2022. The current ratio was 1.8 to 1 as of March 31, 2023 and 1.9 to 1 as of June 30, 2022. Current assets were 47.0% of total assets as of March 31, 2023, and 54.3% of total assets as of June 30, 2022.
We believe that our cash generated from operations, current capital resources, and proceeds of the equity sales contemplated below will provide sufficient liquidity to fund operations for the next 12 months. However, the continuing effects of the COVID-19 pandemic on the global supply chain, higher personnel costs, and changes to product mix, 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. Additionally, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
We are parties to an equity distribution agreement (as amended, the “Equity Distribution Agreement”) with Canaccord Genuity LLC and Roth Capital Partners LLC (the “Agents”), pursuant to which we may offer and sell up to $3,875,150 of our common stock in one or more “at the market offerings” through the Agents under our Registration Statement on Form S-3 (File No. 333-256280), which was declared effective by the SEC on July 1, 2021 (the “2021 Registration Statement”), subject to applicable limitations on the aggregate market value of securities that may be sold during any 12 calendar month period imposed by Form S-3 on registrants having an aggregate market value of securities of less than $75 million. Under the terms of the Equity Distribution Agreement, we have agreed to pay the Agents a fixed commission rate equal to 3.0% of the gross sale price per share of common stock sold. On April 7, 2023, we filed a prospectus supplement to the base prospectus included in the 2021 Registration Statement for the sale of up to $2,671,513 of our common stock pursuant to the terms of the Equity Distribution Agreement (the “ATM”). As of the date hereof, we have not commenced any sales under the ATM.
Reverse Stock Split
On November 17, 2022, the Company's shareholders approved Articles of Amendment to the Company's Amended and Restated Articles of Incorporation (the "Articles of Amendment") to effect a reverse stock split at a ratio in the range of 1-for-2 to 1-for-5, with such ratio to be determined in the discretion of the Company's board of directors and with such reverse stock split to be effected at such time and date, if at all, as determined by the Company's board of directors in its sole discretion. Thereafter, the Company's Board of Directors set the split ratio in the reverse stock split at 1-for-5 and approved and authorized the filing of the Articles of Amendment to effect the reverse stock split with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Articles of Amendment and reverse stock split became effective at 5:00 p.m. Eastern Standard Time on February 1, 2023. At the effective time, every five issued and outstanding shares of common stock were converted into one share of common stock, with any fractional shares resulting from the reverse stock split rounded up to the nearest whole share. The reverse stock split did not affect the Company's authorized shares of common stock or preferred stock, which remained at 100,000,000 and 50,000,000 shares, respectively. The par value of each share of common stock remained unchanged. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted stock and warrants outstanding at February 1, 2023, which resulted in a proportional decrease in the number of shares of the Company's common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock and warrants, and, in the case of stock options and warrants, a proportional increase in the exercise price of all such stock options and warrants. Additionally, the reverse stock split had no impact on the number of shares of the Company's preferred stock issued and outstanding. However, the conversion price of the outstanding preferred stock increased and the number of shares of common stock issuable upon conversion of such preferred stock decreased in proportion to the 1-for-5 split ratio.
Unless noted, all common shares and per share amounts contained in the condensed consolidated financial statements and management's discussion and analysis have been retroactively adjusted to reflect a one-for-five reverse stock split.
Cash and Cash Equivalents
Our cash and cash equivalents and restricted cash position decreased $31,000 to $670,000 as of March 31, 2023, compared to $701,000 as of June 30, 2022. The primary use of cash for the nine months ended March 31, 2023 was to pay down existing vendor payables.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, decreased approximately $1,049,000 or 19.4%, to $4,367,000 as of March 31, 2023, from $5,416,000 as of June 30, 2022. The decrease was driven primarily by a reduction in overall revenue and differences in the timing of collections around the end date of each respective quarter. Trade accounts receivable 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 40 days of invoicing.
Inventories
Inventories, net of reserves, decreased $2,368,000 or 19.6%, to $9,703,000 as of March 31, 2023, compared to $12,071,000 as of June 30, 2022. The decrease was primarily due to steps taken to adjust inventory management in response to the impact of COVID19 on the global supply chain and right-size incoming material purchases to demand. 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 decreased approximately $2,000 or 0.0%, to $6,167,000 as of March 31, 2023, from $6,169,000 as of June 30, 2022.
Debt
Long-term debt was $0 as of March 31, 2023, compared to $5,000 as of June 30, 2022.
Finance Lease Liability
Finance lease liability as of March 31, 2023 and June 30, 2022 totaled approximately $2,090,000 and $2,260,000, respectively. Our finance lease liability consists primarily of our Utah building lease. In conjunction with the sale and leaseback of our Utah building in August 2014, we entered into a 15year lease, classified as a finance lease, originally valued at $3,800,000. The building lease asset is amortized on a straight-line basis over 15 years at approximately $252,000 per year. Total accumulated amortization related to the leased building is approximately $2,183,000 at March 31, 2023. The sale generated a profit of $2,300,000, which is being recognized straight-line over the life of the lease at approximately $150,000 per year as an offset to amortization expense. The balance of the deferred gain as of March 31, 2023, is $965,000. Lease payments, currently approximately $32,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. Imputed interest for the three and nine months ended March 31, 2023 was approximately $29,000 and $89,000, respectively. In addition to the Utah building, we have certain equipment leases that we have determined are finance leases.
Operating Lease Liability
Operating lease liability as of March 31, 2023 and June 30, 2022 totaled approximately $3,843,000 and $1,574,000, respectively. Our operating lease liability consists primarily of building leases for office, manufacturing, and warehouse space. The increase was primarily due to the Company's decision to exercise its third option and extend its operating lease for an additional five years in New Jersey.
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 March 31, 2023 and June 30, 2022, 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 nine months ended March 31, 2023.
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 March 31, 2023. No purchases have been made under this plan since September 2011.
Off-Balance Sheet Arrangements
As of March 31, 2023, 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 Form 10K for the year ended June 30, 2022. There have been no material changes to the critical accounting policies previously disclosed in that report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information presented for the year ended June 30, 2022.
Item 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 filed under the Securities Exchange Act of 1934, or Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting 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, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a15(e) promulgated under the Exchange Act, as of March 31, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of March 31, 2023, our disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is (a) recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms and is (b) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There 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 March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A.
The risk factors described in our Annual Report on Form 10K for the year ended June 30, 2022 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.
Item 6. Exhibits
| 3.1 | Articles of Amendment to Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of registrant's Current Report on Form 8-K filed February 1, 2023) |
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| 4.1 | Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 of registrant's Current Report on Form 8-K filed February 1, 2023) |
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| 10.1 | Lease Agreement dated as of March 1, 2017 between Hausmann Industries, Inc. and Hausmann Enterprises, LLC |
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| 10.2 | Amendment to Lease Agreement dated as of January 2018 between Hausmann Industries, Inc. and Hausmann Enterprises, LLC |
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| 10.3 | Second Amendment to Lease Agreement dated effective as of April 1, 2023 between Hausmann Industries, Inc. and Hausmann Enterprises, LLC (incorporated by reference to Exhibit 10.1 of registrant’s Current Report on Form 8-K filed April 6, 2023) |
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| 31.1 | Certification under Rule 13a-14(a)/15d-14(a) of principal executive officer |
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| 31.2 | Certification under Rule 13a-14(a)/15d-14(a) of principal financial officer |
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| 32.1 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) of principal executive officer and principal financial officer |
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| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Date File because its XBRL tags are embedded with the Inline XBRL document |
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| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | Cover Page Interactive Data File - formatted as Inline XBRL and contained in Exhibit 101 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | DYNATRONICS CORPORATION |
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| Date: May 11, 2023 | By: | /s/ John A. Krier |
| | | John A. Krier |
| | | President, Chief Executive Officer, and Chief Financial Officer |
| | | (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
