Blueprint
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 September 30, 2018
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)
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Utah
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87-0398434
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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7030 Park Centre Drive, Cottonwood Heights, Utah 84121
(Address
of principal executive offices, Zip Code)
(801)
568-7000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☑ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted 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 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.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐ (Do not check if a smaller reporting
company)
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Smaller
reporting company ☑
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Emerging
growth company ☐
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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
☑
As of
November 6, 2019, there were 8,188,815 shares of the
registrant’s common stock outstanding.
DYNATRONICS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
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1
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1
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2
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3
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4
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9
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9
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12
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13
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13
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14
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Condensed
Consolidated Balance Sheets
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Assets
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Current
assets:
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Cash and cash
equivalents
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$436,697
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$1,696,116
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Trade accounts
receivable, less allowance for doubtful accounts of $357,817 as of
September 30, 2018 and $370,300 as of June 30, 2018
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8,529,395
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7,810,846
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Other
receivables
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60,457
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52,819
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Inventories,
net
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10,524,115
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10,987,855
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Prepaid
expenses
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866,027
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778,654
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Income tax
receivable
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97,285
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95,501
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Total
current assets
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20,513,976
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21,421,791
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Property and
equipment, net
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5,917,095
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5,850,899
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Intangible assets,
net
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6,950,872
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7,131,758
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Goodwill
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7,116,614
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7,116,614
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Other
assets
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533,141
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532,872
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Total
assets
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$41,031,698
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$42,053,934
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Accounts
payable
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$4,043,843
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$3,412,960
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Accrued payroll and
benefits expense
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1,529,276
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1,929,465
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Accrued
expenses
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1,111,742
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830,243
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Warranty
reserve
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205,850
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205,850
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Line of
credit
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5,029,712
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6,286,037
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Current portion of
long-term debt
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166,587
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164,003
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Current portion of
capital lease obligations
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225,801
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226,727
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Current portion of
deferred gain
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150,448
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150,448
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Current portion of
acquisition holdback and earn-out liability
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1,879,512
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1,379,512
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Total
current liabilities
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14,342,771
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14,585,245
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Long-term debt, net
of current portion
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260,719
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303,348
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Capital lease
obligations, net of current portion
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2,915,132
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2,972,540
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Deferred gain, net
of current portion
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1,491,941
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1,529,553
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Acquisition
holdback and earn-out liability, net of current
portion
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875,000
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Other
liabilities
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285,094
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411,466
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Total
liabilities
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19,295,657
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20,677,152
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Commitments and
contingencies
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Stockholders'
equity:
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Preferred stock, no
par value: Authorized 50,000,000 shares; 4,899,000 shares and
4,899,000 shares issued and outstanding as of September 30, 2018
and June 30, 2018, respectively
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11,641,816
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11,641,816
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Common stock, no
par value: Authorized 100,000,000 shares; 8,161,029 shares and
8,089,398 shares issued and outstanding as of September 30, 2018
and June 30, 2018, respectively
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20,455,402
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20,225,107
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Accumulated
deficit
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(10,361,177)
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(10,490,141)
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Total
stockholders' equity
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21,736,041
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21,376,782
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Total
liabilities and stockholders' equity
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$41,031,698
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$42,053,934
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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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$17,065,836
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$12,797,971
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Cost of
sales
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11,518,611
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8,458,580
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Gross
profit
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5,547,225
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4,339,391
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Selling, general,
and administrative expenses
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5,496,623
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4,074,550
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Operating
income
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50,602
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264,841
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Other income
(expense):
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Interest
expense, net
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(120,842)
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(76,808)
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Other
income, net
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385,841
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10,614
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Net other income
(expense)
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264,999
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(66,194)
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Income before
income taxes
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315,601
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198,647
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Income tax
provision
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-
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-
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Net
income
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315,601
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198,647
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Convertible
preferred stock dividend, in common stock
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(186,637)
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(187,061)
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Net income
attributable to common stockholders
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$128,964
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$11,586
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Net income per
common share
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Basic
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$0.02
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$0.00
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Diluted
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$0.02
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$0.00
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Weighted-average
common shares outstanding:
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Basic
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8,160,431
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4,748,049
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Diluted
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8,400,824
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4,748,309
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See
accompanying notes to condensed consolidated financial
statements.
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Condensed
Consolidated Statements of Cash
Flows
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Cash flows from
operating activities:
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Net
income
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$315,601
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$198,647
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization of property and equipment
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130,358
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67,822
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Amortization
of intangible assets
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180,886
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71,283
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Amortization
of other assets
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12,189
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86,245
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Amortization
of capital lease assets
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68,617
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62,983
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Gain
on sale of property and equipment
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(5,197)
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Stock-based
compensation expense
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43,658
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71,786
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Change
in allowance for doubtful accounts receivable
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(12,483)
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(9,118)
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Change
in allowance for inventory obsolescence
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(31,046)
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(11,827)
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Amortization
of deferred gain on sale/leaseback
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(37,612)
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(37,612)
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Change
in fair value of earn-out liability
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(375,000)
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Change
in operating assets and liabilities:
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Trade
accounts receivable
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(713,704)
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(652,811)
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Inventories
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255,680
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255,111
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Prepaid
expenses
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(87,373)
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(88,905)
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Other
assets
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(12,458)
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(152,637)
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Income
tax payable/receivable
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(1,784)
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1,152
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Accounts
payable and accrued expenses
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385,821
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601,901
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Net
cash provided by operating activities
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121,350
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458,823
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Cash flows from
investing activities:
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Purchase
of property and equipment
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(26,065)
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(24,779)
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Proceeds
from sale of property and equipment
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10,905
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Net
cash used in investing activities
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(26,065)
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(13,874)
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Cash flows from
financing activities:
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Principal
payments on long-term debt
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(40,045)
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(35,485)
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Principal
payments on long-term capital lease
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(58,334)
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(47,446)
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Net
change in line of credit
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(1,256,325)
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4,931,491
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Net
cash (used in) provided by financing activities
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(1,354,704)
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4,848,560
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Net
change in cash and cash equivalents
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(1,259,419)
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5,293,509
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Cash and cash
equivalents at beginning of the period
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1,696,116
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254,705
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Cash and cash
equivalents at end of the period
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$436,697
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$5,548,214
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$133,811
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$78,301
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Supplemental
disclosure of non-cash investing and financing
activity:
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Preferred
stock dividends paid or to be paid in common stock
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186,637
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187,061
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Inventory reclassified to demonstration
equipment
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239,106
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-
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See accompanying
notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 2018
Note 1. Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets as of
September 30, 2018 and June 30, 2018, the condensed consolidated
statements of operations for the three months ended September 30,
2018 and 2017, and condensed consolidated statements of cash flows
for the three months ended September 30, 2018 and 2017,
should be read in conjunction with the
audited financial statements
and notes thereto
as of and for the year ended June
30, 2018 included in the Dynatronics Corporation and subsidiaries (the “Company”) Annual Report on Form 10-K (“Annual Report”) filed with the
U.S. Securities and Exchange
Commission (the
“SEC”) on September 27, 2018. The accompanying
financial statements have
been prepared by us in
accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial
information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have
been condensed or omitted. In
the opinion of our
management, the accompanying condensed consolidated
financial statements for the periods presented reflect
all adjustments, consisting of only normal, recurring
adjustments, necessary
to fairly state our financial position, results of operations and
cash flows. The
September 30, 2018 condensed
consolidated balance sheet was derived from audited financial
statements, but does not include all GAAP disclosures. The
unaudited condensed consolidated financial statements for the
interim periods are not
necessarily indicative of results for
the full
year.
The preparation
of these unaudited condensed
consolidated financial
statements requires
our management to make estimates and
judgments that affect the amounts reported in the financial statements and the
accompanying notes. The
Company’s actual results may differ from these estimates
under different assumptions or conditions.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and
development expenses for the three months ended September 30, 2018
and 2017 totaled $11,306 and $251,848, respectively. Research and
development expenses are included in Selling, general, and
administrative expenses in the condensed consolidated statement of
operations.
Reclassification
Certain
amounts in the prior year's condensed consolidated statement of
operations have been reclassified for comparative purposes to
conform to the presentation in the current year's condensed
consolidated statement of operations.
Recent
Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board
("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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(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. Companies may use either a full retrospective or a
modified retrospective approach to adopt this guidance. The
Company adopted this
updated accounting guidance beginning July 1, 2018, using the
modified retrospective method. This adoption did not have a
material impact on the Company’s consolidated financial
statements other than additional disclosures (see Note 10)
as the timing of revenue recognition under the new standard is not
materially different from our previous revenue recognition policy.
Based on our analysis of open contracts as of July 1, 2018, the
cumulative effect of applying the new standard was not
material.
Note 2. Acquisitions
Bird & Cronin
On
October 2, 2017, the Company, through its wholly-owned subsidiary
Bird & Cronin, LLC, completed the purchase of substantially all
the assets of Bird & Cronin, Inc. (“Bird &
Cronin”), a manufacturer and distributor of orthopedic soft
goods and specialty patient care products. The purchase price
is subject to an earn-out payment ranging from $500,000 to
$1,500,000, based on sales in fiscal year 2019.
The
amount recognized for the earn-out liability was $875,000 as of
June 30, 2018. The amount
recognized for the earn-out liability was decreased by $375,000 to
$500,000 as of September 30, 2018. The change in the fair
value of the earn-out liability is included in other income in the
accompanying condensed consolidated statements of operations. The
earn-out liability is combined with the acquisition holdback in the
accompanying condensed consolidated balance
sheets.
In addition, the Company has withheld approximately 185,000 shares
of common stock to be released to Bird & Cronin pursuant to the
holdback provisions in the asset purchase agreement. These shares
are included in common stock on the Company’s balance sheet
at September 30, 2018. Certain principals of Bird & Cronin are
holders of the Company’s issued and outstanding common stock
and two of the principals, Michael Cronin and Jason Anderson, are
employees of the Company.
As of
September 30, 2018, the earn-out liability and holdbacks of
$1,129,512 are payable, contingent upon the terms set forth in the
purchase agreement, as follows:
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October 2,
2018
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$162,845
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April 2,
2019
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466,667
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August 15,
2019
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500,000
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Acquisition
holdback and earn-out liability
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$1,129,512
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On October
2, 2018, the Company released to Bird & Cronin $162,845 and
54,572 shares of common stock pursuant to the holdback provisions
of the purchase agreement.
Hausmann
On
April 3, 2017, the Company, through its wholly-owned subsidiary
Hausmann Enterprises, LLC, completed the purchase of substantially
all the assets of Hausmann Industries, Inc.
(“Hausmann”), a manufacturer of physical therapy
rehabilitation equipment.
The purchase price
included a holdback of cash totaling $1,044,744 for purposes of
satisfying adjustments to the purchase price and indemnification
claims, if any. In the second and third fiscal quarters of 2018,
the Company released $44,744 and $250,000, respectively, of the
holdback to the sellers. As of September 30, 2018, the Company
retained a holdback of $750,000 due to be paid to the seller. On
October 3, 2018, the Company released the remaining holdback amount
totaling $750,000. Certain principals
of Hausmann are holders of the Company’s Series B Convertible
Preferred Stock (the "Series B
Preferred") and one of the principals, David
Hausmann, is an employee of the Company.
Note 3. Net Income per Common Share
Net
income 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
per common share does not assume exercise or conversion of
securities that would have an anti-dilutive effect.
Basic net income
per common share is the amount of net income for the period
available to each weighted-average share of common stock
outstanding during the reporting period. Diluted net income per
common share is the amount of net income 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.
The reconciliations between the basic and diluted weighted-average
number of common shares outstanding for
the three months ended September 30 are as
follows:
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Basic
weighted-average number of common shares outstanding during the
period
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8,160,431
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4,748,049
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Weighted-average
number of dilutive potential common shares outstanding during the
period
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240,393
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260
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Diluted
weighted-average number of common and potential common shares
outstanding during the period
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8,400,824
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4,748,309
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Certain
outstanding options, warrants and convertible preferred stock for
common shares are not included in the computation of diluted net
income per common share because they were anti-dilutive, which for
the three months ended September 30, 2018, and 2017, totaled
2,776,106 and
8,910,190, respectively.
Note
4. Convertible
Preferred Stock and Common Stock Warrants
During
the three months ended September 30 2017, the Company issued 75,000
shares of common stock upon conversion of 75,000 shares of Series B
Preferred. No conversions occurred during the quarter ended
September 30, 2018. As of September 30, 2018, the Company had
issued and outstanding a total of 2,000,000 shares of Series A 8%
Convertible Preferred Stock (“Series A Preferred”) and
1,459,000 shares of Series B Preferred outstanding. The Series A
Preferred and Series B Preferred are convertible into a total of
3,459,000 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 at the option of the Company. The
Company generally pay the dividends on the preferred stock by
issuring shares of our common stock. The formula for paying this
dividend using common stock in lieu 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. As
of September 30, 2018, there were also issued and outstanding
1,440,000 shares of Series C Non-Voting Convertible Preferred Stock
(“Series C Preferred”). The Series C Preferred shares
are non-voting, do not receive dividends, and have no liquidation
preferences or redemption rights.
Note 5. Comprehensive Income
For the
three months ended September 30, 2018 and 2017, comprehensive
income was equal to the net income as presented in the accompanying
condensed consolidated statements of operations.
Note 6. Inventories
Inventories
consisted of the following:
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Raw
materials
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$5,602,615
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$6,216,150
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Work in
process
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576,780
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625,830
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Finished
goods
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4,772,063
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4,604,264
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Inventory
obsolescence reserve
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(427,343)
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(458,389)
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$10,524,115
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$10,987,855
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Note 7. Related-Party Transactions
The
Company leases office, manufacturing and warehouse facilities in
Detroit, Michigan, Hopkins, Minnesota, Northvale, New Jersey 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
$261,780 and $108,000 for the three months
ended September 30, 2018 and 2017, respectively.
Certain
significant shareholders, officers and directors of the Company
have from time to time participated as investors in the private
placements of the Company’s equity securities. 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 in question. The affiliated investors who
participated in these offerings did so on terms that were no more
favorable than the terms granted to investors who were not
affiliated with the Company.
Note 8. Line of Credit
On March 31, 2017, the Company entered into an $8,000,000, loan and
security agreement with Bank of the West to provide asset-based
financing to the Company for funding acquisitions and for working
capital (“Line of Credit”). The Line of Credit
provided for revolving credit borrowings by the Company in an
amount up to the lesser of $8,000,000 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%.
On
September 28, 2017, the Company modified the Line of Credit to
provide asset-based financing to be used for funding the Bird &
Cronin acquisition and for operating capital. The Line of Credit,
as amended, provided for revolving credit borrowings by the Company
in an amount up to the lesser of $11,000,000 or the calculated
borrowing base. The Line of Credit, as amended, matures September
30, 2019.
On July
13, 2018, the Company further amended the Line of Credit to modify
the maximum monthly consolidated leverage and a minimum monthly
consolidated fixed charge coverage ratio. An additional
modification was executed on November 9, 2018, to extend the
maturity date to December 15, 2020.
Borrowings
on the Line of Credit were $5,029,712 and $6,286,037
as of September 30, 2018 and June 30, 2018, respectively. As of
September 30, 2018, there was approximately $3,456,000 available to
borrow.
Note 9. Accrued Payroll and Benefits Expense
As of
September 30, 2018 and June 30, 2018, the accrued payroll and benefits
expense balance included $499,038 and $473,146,
respectively, of accrued severance expense. As of September 30,
2018 and June 30, 2018, long-term severance accrual included in
other liabilities was $125,000 and $258,145,
respectively. Quarterly payments will be made in cash through March
31, 2020. The Company recognized $103,858 in severance expense
during the three months ended September 30, 2018 related to the
termination of four employees on
August 1, 2018.
Severance expense is included in selling, general, and
administrative expenses.
Note 10. Revenue
On July 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers,
which establishes principles for recognizing revenue and reporting
information about the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. The
guidance was applied using the modified retrospective transition
method. The adoption of this guidance had no material impact on the
amount and timing of revenue recognized, therefore, no adjustments
were recorded to the consolidated financial statements upon
adoption. For the quarter ended September 30, 2018, revenue
recognized would not have differed materially had revenue continued
to be recognized under ASC 605.
Revenue is recognized when performance obligations under the terms
of a contract with a customer are satisfied which occurs upon the
transfer of control of a product. This occurs either upon shipment
or delivery of goods, depending on whether the contract is FOB
origin or FOB destination. Revenue
is measured as the amount of consideration expected to be received
in exchange for transferring products to a
customer.
Contracts sometimes allow for forms of variable consideration
including rebates and incentives. In these cases, the Company
estimates the amount of consideration to which it will be entitled
in exchange for transferring products to customers utilizing the
most likely amount method. Rebates and incentives are estimated
based on contractual terms or historical experience and a liability
is maintained for rebates and incentives that have been earned but
are unpaid. As of September 30, 2018 and 2017, the rebate liability
was $164,000 and $0, respectively. The rebate liability is included
in accrued expenses in the accompanying
condensed consolidated balance sheets.
Revenue is reduced by estimates of potential future contractual
discounts including prompt payment discounts. Provisions for
contractual discounts are recorded as a reduction to revenue in the
period sales are recognized. Estimates are made of the contractual
discounts that will eventually be incurred. Contractual discounts
are estimated based on negotiated contracts and historical
experience. As of September 30, 2018 and 2017, the allowance for
sales discounts was $14,500 and $0, respectively. The
allowance for sales discounts is included in trade accounts
receivable, less allowance for doubtful accounts in the accompanying
condensed consolidated balance sheets.
The Company made an accounting policy election to account for
shipping and handling activities as fulfillment activities. As
such, shipping and handling are not considered promised services to
our customers. Costs for shipping
and handling of products to customers are recorded as cost of
sales.
The following table disaggregates revenue by major product category
for the three months ended September 30:
|
|
|
|
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Orthopedic
Soft Goods and Medical Supplies
|
$7,692,115
|
$2,195,788
|
|
Physical
Therapy and Rehabilitation Equipment
|
9,224,895
|
10,418,155
|
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Other
|
148,826
|
184,028
|
|
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$17,065,836
|
$12,797,971
|
NOTE 11. SUBSEQUENT EVENTS
In
October 2018, the Company paid approximately $190,000 of preferred
stock dividends with respect to the Series A Preferred and Series B
Preferred that accrued during the three months ended September 30,
2018, by issuing 65,494 shares of common stock.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING
STATEMENTS
This report includes estimates, projections,
statements relating to our business plans, objectives, and expected
operating results that are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements may
appear throughout this report, including the following section,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
These
statements refer to our expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of words or phrases such
as “believes,” “expects,”
“anticipates,” “should,”
“plans,” “estimates,”
“intends,” and “potential,” among others.
Forward-looking statements include, but are not limited to,
statements regarding product development, market acceptance,
financial performance, revenue and expense levels in the future and
the sufficiency of existing assets to fund future operations and
capital spending needs. Actual results could differ materially from
the anticipated results or other expectations expressed in such
forward-looking statements. The forward-looking statements
contained in this report are made as of the date of this report and
we assume no obligation to update them or to update the reasons why
actual results could differ from those projected in such
forward-looking statements, except as required by law.
We have
based our forward-looking statements on management’s current
expectations and projections about trends affecting our business
and industry and other future events. 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.
Some of the risks and uncertainties that may cause actual results
to differ from those expressed or implied in the forward-looking
statements are described in the section “Risk Factors”
included in Part I, Item 1A of our Annual Report on Form 10-K for
the fiscal year ended June 30, 2018, filed with the SEC, as well as
in our other public filings with the SEC. In addition, 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 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 we
make speak only as of the date on which they are made. We expressly
disclaim any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to
actual results or to changes in our opinions or expectations,
except as required by applicable law or the rules of The Nasdaq
Stock Market, LLC. 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.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis
in conjunction with the Unaudited
Condensed Consolidated Financial Statements and Notes thereto that
are contained in this quarterly report, as well as
Management’s Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form
10-K for the year ended June 30, 2018, and our other filings,
including Current Reports on Form 8-K, that we have filed with the
SEC through the date of this report. We have rounded many numbers to the nearest
thousand dollars in the
following analysis. These
numbers should be read as approximate. All inter-company
transactions have been eliminated. Our fiscal year ends on June 30. For example, reference to fiscal
year 2019 refers to the year ending June 30, 2019.
This report covers the first
quarter of fiscal year 2019. Results of operations for the first fiscal
quarter are not necessarily indicative of the results that may be
achieved for the full fiscal year ending June 30,
2019. Reference to the
“Company” or “Dynatronics” in this report
means Dynatronics Corporation, a Utah
corporation.
Overview
Dynatronics
Corporation (“Company,” “Dynatronics,”
“we”) designs, manufactures, markets, and distributes
orthopedic soft goods, medical supplies, and physical therapy,
rehabilitation, and athletic training products. Through our various
distribution channels, we market and sell to orthopedists, physical
therapists, chiropractors, athletic trainers, sports medicine
practitioners, clinics, and
hospitals.
Results
of Operations
Net Sales
Net
sales increased $4,268,000, or 33.3%, to $17,066,000 for the
quarter ended September
30, 2018, compared to net sales of $12,798,000 for the
quarter ended September
30, 2017. The year-over-year increase in net
sales was driven
by our acquisition of Bird & Cronin in October 2017, which
contributed $5,872,000 in net sales in the quarter ended September
30, 2018. This increase was partially offset lower sales of
physical therapy and rehabilitation equipment and medical supplies
of approximately $1,604,000 compared to the prior year
period.
Gross Profit
Gross profit for the quarter ended September 30, 2018
increased $1,208,000, or about
27.8%, to $5,547,000, or 32.5% of net sales. By comparison, gross profit for the
quarter ended September
30, 2017 was $4,339,000,
or 33.9% of net sales. The
year-over-year increase in gross profit was attributable to the
acquisition of Bird & Cronin that contributed $2,065,000 in
gross profit in the quarter ended September 30, 2018. Gross
profit in the quarter ended September 30, 2018 was adversely
affected by approximately $857,000 primarily due to: (1) lower
sales which accounted for approximately $536,000 in lower gross
profit, and (2) reduced gross margin percentage resulting in
$321,000 lower gross profit. The year-over-year decrease in gross
margin percentage to 32.5% from 33.9% was due primarily to physical
therapy and rehabilitation equipment sales, which had a lower gross
margin percentage in the quarter ended September 30,
2018.
Selling, General and Administrative Expenses
Selling, general
and administrative (“SG&A”) expenses increased
$1,422,000, or 34.9%, to $5,497,000 for the quarter ended
September 30,
2018, compared to $4,075,000 for the quarter ended
September 30,
2017. Selling expenses represented
$200,000 of the increase in SG&A expenses, including
an
increase of $569,000 associated with the acquired Bird & Cronin
operations, partially offset by $369,000 in lower selling costs due
primarily to lower commission expense on lower sales during the
quarter. General and administrative (“G&A”)
expenses represented $1,463,000 of the increase in SG&A
expenses. The primary
components of the increase in G&A expenses included: (1)
$1,174,000 added by the acquired Bird & Cronin operations; (2)
$104,000 in severance expense; (3) $210,000 in other G&A
expenses; and (4) $183,000 in increased salaries and benefits.
Increased G&A expense in the quarter ended September 30, 2018
was partially offset by a $208,000 decrease in acquisition expenses
compared to the prior year period. Research and
development (“R&D”) expenses for the quarter ended
September 30,
2018 decreased $241,000, or 95.5%, to $11,000 from $252,000
in the quarter ended September 30, 2017. The decrease is primarily due to
the re-purposing of our engineering resources to operational
improvements.
Net Income Before Income Tax
Pre-tax income for
the
quarter ended September
30, 2018 was $316,000 compared to $199,000 for the
quarter ended September 30, 2017. The $117,000 improvement in
pre-tax income was attributable to the impact of (1) $1,208,000
improvement in gross profit and (2) $375,000 increase in other
income due to the change in the fair
value of the earn-out payment related to the Bird & Cronin
acquisition offset by (1) $1,422,000 in
increased SG&A expenses and (2) $44,000 in
increased interest expense due to an increase in the average
balance of our line of
credit.
Income Tax Provision (Benefit)
Income
tax provision was $0 for both quarters ended September 30, 2018 and
2017. See Liquidity and Capital
Resources - Deferred Income Tax Assets below for more
information.
Net Income
Net
income was $316,000
for the quarter ended September 30, 2018, compared to $199,000 for the quarter ended
September 30, 2017. The reasons for the changes in net income are
the same as explained above under the heading Net Income Before Income
Tax.
Net Income Attributable to Common Stockholders
Net
income attributable to common stockholders increased $117,000 to $129,000 for the
quarter ended September 30, 2018, compared to $12,000 for the quarter ended
September 30, 2017. The increase in net income attributable to
common stockholders for the quarter is due primarily to a $117,000
increase in net income. On a per share basis, net income
attributable to common stockholders was $0.02 per share for the quarter
ended September 30, 2018, compared to $0.00 per share for the quarter
ended September 30, 2017.
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 proceeds from the sale of our equity
securities. During the quarter ended September 30, 2018, we had
positive cash flows from operating activities. We believe that our
existing revenue stream, cash flows from consolidated operations,
current capital resources, and borrowing availability under the
line of credit provide sufficient liquidity to fund operations
through at least November 13, 2019.
Working
capital was $6,171,000
as of September 30, 2018, compared to working capital of
$6,837,000 as of June
30, 2018. The current ratio was 1.4 to 1 as of September 30, 2018
and 1.5 to 1 as of
June 30, 2018.
Cash and Cash Equivalents
Our
cash and cash equivalents position decreased $1,259,000 to $437,000 as of
September 30, 2018, compared to $1,696,000 as of June 30, 2018.
The primary source of cash in the three months ended September 30,
2018, was approximately $121,000 of net cash provided by operating
activities.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
increased approximately $719,000, or 9.2%, to $8,529,000 as
of September 30, 2018, from $7,811,000 as of June 30, 2018.
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 $464,000
or 4.2%, to $10,524,000 as of September 30, 2018, compared
to $10,988,000 as of
June 30, 2018. Inventory levels fluctuate based on timing of large
inventory purchases from domestic and overseas suppliers as well as
variations in sales and production activities. We believe that our
allowance for inventory obsolescence is adequate based on our
analysis of inventory, sales trends, and historical
experience.
Accounts Payable
Accounts payable
increased approximately $631,000 or 18.5%, to $4,044,000
as of September 30, 2018, from $3,413,000 as of June 30, 2018. The
increase was driven primarily by an increase in the average time to
pay suppliers.
Line of Credit
Our
line of credit balance decreased $1,256,000 to $5,030,000 as of
September 30, 2018, compared to $6,286,000 as of June 30, 2018.
The decrease was driven primarily by a decrease in our cash balance
by approximately $1,259,000 with the remaining increase being used
to fund working capital requirements.
Debt
Long-term debt,
excluding current installments, decreased $42,000 to $261,000 as of
September 30, 2018, compared to $303,000 as of June 30, 2018. Our
long-term debt is primarily comprised of the mortgage loan on our
office and manufacturing facility in Tennessee and also includes
loans related to equipment and a vehicle. The principal balance on
the mortgage loan was approximately $344,000 of which $203,000 is
classified as long-term debt, with monthly principal and interest
payments of $13,278 through January 2021.
In conjunction with
the sale and leaseback of our corporate headquarters in August
2014, we entered into a $3,800,000 lease for a 15-year term with an
investor group. That sale generated a profit of $2,300,000 which is
being recorded monthly over the life of the lease at $13,000 per
month, or approximately $150,000 per year. The building lease is
recorded as a capital lease with the related amortization being
recorded on a straight line basis over 15 years at approximately
$252,000 per year. Lease payments, currently approximately $27,000,
are payable monthly and increase annually by approximately 2% per
year over the life of the lease. Total accumulated amortization
related to the leased building is approximately $1,050,000 at
September 30, 2018. Imputed interest for the quarter ended
September 30, 2018, was approximately
$43,000.
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 September 30, 2018 and June 30, 2018, 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 months ended September 30,
2018.
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 September 30, 2018. No purchases have been made
under this plan since September 28, 2011.
Off-Balance Sheet Arrangements
As of
September 30, 2018, 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 10-K
for the year ended June 30, 2018. 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, 2018.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information that is required to be disclosed in our
reports under the Exchange Act is recorded, processed, summarized,
and reported within the time periods that are specified in the
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 September 30, 2018. Based
on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2018.
Changes in Internal Control over Financial Reporting
There were no
changes in our internal control over financial reporting during the
quarter ended September 30, 2018, that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
(a)
Exhibits
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31.1
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31.2
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32.1
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32.2
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101.INS
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XBRL
Instance Document
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101.CAL
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XBRL
Taxonomy Extension Schema Document
|
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101.SCH
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XBRL
Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document
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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.
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DYNATRONICS
CORPORATION
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Date:
November 13, 2018
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By:
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/s/
Christopher R. von Jako, Ph.D.
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Christopher
R. von Jako, Ph.D.
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Chief
Executive Officer (Principal
Executive Officer)
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Date:
November 13, 2018
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By:
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/s/
David A. Wirthlin
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David
A. Wirthlin
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Chief
Financial Officer (Principal Financial and Accounting
Officer)
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