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 December 31, 2017
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
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87-0398434
|
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S. Employer
Identification No.)
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|
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7030 Park Centre Drive, Cottonwood Heights, UT 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 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
☑
The number of
shares outstanding of the registrant’s common stock, no par
value, as of February 2, 2018 was 7,934,262.
DYNATRONICS
CORPORATION
QUARTER ENDED December 31, 2017
TABLE OF CONTENTS
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Page Number
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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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11
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17
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17
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18
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19
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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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$3,652,342
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$254,705
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Trade accounts
receivable, less allowance for doubtful accounts of $383,356 as of
December 31, 2017 and $382,333 as of June 30, 2017
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7,385,608
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5,281,348
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Other
receivables
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139,366
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33,388
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Inventories,
net
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11,605,299
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7,397,682
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Prepaid
expenses
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893,933
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503,800
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Total
current assets
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23,676,548
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13,470,923
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Property and
equipment, net
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5,970,836
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4,973,477
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Intangible assets,
net
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7,516,028
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2,754,118
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Goodwill
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7,872,863
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4,302,486
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Other
assets
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532,611
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562,873
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Total
assets
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$45,568,886
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$26,063,877
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Accounts
payable
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$4,451,050
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$2,334,563
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Accrued payroll and
benefits expense
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1,358,754
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1,472,773
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Accrued
expenses
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878,300
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656,839
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Income tax
payable
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9,654
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8,438
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Warranty
reserve
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205,850
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202,000
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Line of
credit
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6,742,979
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2,171,935
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Current portion of
long-term debt
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158,954
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151,808
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Current portion of
capital lease
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199,300
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193,818
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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
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430,624
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294,744
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Total
current liabilities
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14,585,913
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7,637,366
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Long-term debt, net
of current portion
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386,632
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461,806
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Capital lease, net
of current portion
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2,986,689
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3,087,729
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Deferred gain, net
of current portion
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1,604,777
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1,680,001
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Acquisition
holdback and earn out liability, net of current
portion
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2,716,667
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750,000
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Deferred
rent
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138,513
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122,585
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Total
liabilities
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22,419,191
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13,739,487
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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; 4,889,000 shares and
3,559,000 shares issued and outstanding as of December 31, 2017 and
June 30, 2017, respectively
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11,641,816
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8,501,295
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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
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19,802,351
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11,838,022
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Accumulated
deficit
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(8,294,472)
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(8,014,927)
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Total
stockholders' equity
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23,149,695
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12,324,390
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Total
liabilities and stockholders' equity
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$45,568,886
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$26,063,877
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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
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$18,081,333
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$8,713,355
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$30,879,304
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$16,876,089
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12,311,354
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5,640,048
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20,769,933
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11,008,094
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Gross
profit
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5,769,979
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3,073,307
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10,109,371
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5,867,995
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Selling, general,
and administrative expenses
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5,109,809
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2,851,236
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8,932,511
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5,615,594
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Research and
development expenses
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553,487
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309,476
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805,336
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588,360
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Operating profit
(loss)
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106,683
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(87,405)
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371,524
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(335,959)
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Other income
(expense):
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Interest
expense, net
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(103,706)
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(63,408)
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(180,514)
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(122,728)
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11,371
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55,494
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21,985
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77,735
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Net other
expense
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(92,335)
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(7,914)
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(158,529)
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(44,993)
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Income (loss)
before income taxes
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14,348
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(95,319)
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212,995
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(380,952)
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Income tax
(provision) benefit
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-
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-
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-
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-
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Net income
(loss)
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14,348
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(95,319)
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212,995
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(380,952)
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Deemed dividend on
convertible preferred stock and accretion of discount
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(1,023,786)
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(375,858)
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(1,023,786)
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(375,858)
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Preferred stock
dividend, cash
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(104,884)
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-
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(104,884)
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-
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Convertible
preferred stock dividend, in common stock
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(200,594)
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(88,792)
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(387,655)
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(177,777)
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Net loss
attributable to common stockholders
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$(1,314,916)
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$(559,969)
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$(1,303,330)
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$(934,587)
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Basic and diluted
net loss per common share
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$(0.23)
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$(0.19)
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$(0.25)
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$(0.33)
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Weighted-average
common shares outstanding:
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Basic and
diluted
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5,735,159
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2,881,111
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5,241,604
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2,861,299
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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 (loss)
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$212,995
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$(380,952)
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Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
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Depreciation
and amortization of property and equipment
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184,010
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106,098
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Amortization
of intangible assets
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254,090
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15,340
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Amortization
of other assets
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40,681
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60,069
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Amortization
of building capital lease
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125,967
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125,967
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Gain
on sale of property and equipment
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(5,197)
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(19,252)
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Stock-based
compensation expense
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117,073
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102,989
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Change
in allowance for doubtful accounts receivable
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(6,978)
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48,073
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Change
in allowance for inventory obsolescence
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49,739
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42,751
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Deferred
gain on sale/leaseback
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(75,224)
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(75,224)
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Change
in operating assets and liabilities:
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Receivables,
net
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33,546
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62,135
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Inventories,
net
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(120,175)
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(630,132)
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Prepaid
expenses
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(297,144)
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(174,016)
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Other
assets
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(10,419)
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(18,799)
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Income
tax payable
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(1,236)
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1,066
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Accounts
payable and accrued expenses
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1,175,114
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684,319
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Net
cash provided by (used in) operating activities
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1,676,842
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(49,568)
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Cash flows from
investing activities:
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Purchase
of property and equipment
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(84,494)
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(36,818)
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Net
cash paid in acquisition, net of cash received - see Note
2
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(9,063,017)
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-
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Proceeds
from sale of property and equipment
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10,355
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32,000
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Net
cash provided by (used in) investing activities
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(9,137,156)
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(4,818)
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Cash flows from
financing activities:
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Principal
payments on long-term debt
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(68,028)
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(84,239)
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Principal
payments on long-term capital lease
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(95,558)
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(90,373)
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Payment of
acquisition holdbacks
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(44,744)
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-
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Net
change in line of credit
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4,571,044
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-
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Proceeds
from issuance of preferred stock, net
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6,600,121
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928,554
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Preferred
stock dividends paid in cash
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(104,884)
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-
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Net
cash provided by (used in) financing activities
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10,857,951
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753,942
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Net
change in cash and cash equivalents
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3,397,637
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699,556
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Cash and cash
equivalents at beginning of the period
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254,705
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966,183
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Cash and cash
equivalents at end of the period
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$3,652,342
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$1,665,739
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$172,893
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$124,797
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Supplemental
disclosure of non-cash investing and financing
activity:
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Deemed
dividend on convertible preferred stock and accretion of
discount
|
$1,023,786
|
$375,858
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Preferred stock dividends paid or to be paid in common
stock
|
387,655
|
187,901
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Preferred
stock issued to acquire "Bird & Cronin"
|
4,000,000
|
-
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Acquisition
holdback
|
2,147,291
|
-
|
|
Conversion
of preferred stock to common stock
|
7,459,600
|
-
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Accrued
compensation paid in common stock
|
-
|
26,388
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|
|
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|
See accompanying
notes to condensed consolidated financial statements.
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DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
December 31, 2017
NOTE 1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The
condensed consolidated balance sheets as of December 31, 2017 and
June 30, 2017, the condensed consolidated 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 prepared by Dynatronics
Corporation 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”). Certain
information and disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”) have been
condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all necessary adjustments, which consist
only of normal recurring adjustments, to the financial statements
have been made to present fairly the Company’s financial
position, results of operations and cash flows. The results of
operations for the three and six months ended December 31, 2017,
are not necessarily indicative of the results of operations that
may be expected for the fiscal year ending June 30, 2018. The
Company previously filed with the SEC an Annual Report on Form 10-K
(the “2017 Form
10-K”) which included audited financial statements for
each of the years 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.
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 revenue and expenses during
the period. Actual results could differ 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. ACQUISITIONS
On
October 2, 2017, the Company acquired substantially all of the
assets of Bird & Cronin, Inc. (“B&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.
At the
Closing of the Acquisition, the Company paid B&C cash of
$9,063,017 and delivered 1,397,375 shares of its Series D Non
Voting Convertible Preferred Stock (“Series D
Preferred”) to B&C valued at approximately $3,533,333.
The purchase price is subject to customary representations,
warranties, indemnities, working capital adjustment and an earn-out
payment ranging from $500,000 to $1,500,000, based on future sales.
The balance of the earn-out liability at December 31, 2017 is
$1,500,000. A holdback of cash totaling $647,291 and 184,560 shares
of Series D Preferred valued at approximately $466,667 has been
retained for purposes of satisfying adjustments to the purchase
price.
In
connection with the Acquisition, the Company completed a private
placement of Series C Non Voting Convertible Preferred Stock
(“Series C Preferred”) and common stock warrants to
raise cash proceeds of $7,000,000 pursuant to the terms and
conditions of a Securities Purchase Agreement entered into
September 26, 2017 (the “Private Placement”). See Note
4 for details of the Private Placement.
Also in
connection with the Acquisition, the Company entered into a lease
with Trapp Road Limited Liability Company, a Minnesota limited
liability company controlled by the former owners of B&C, to
occupy the facility housing the B&C operations for a term of
three years at annual rental payments of $600,000, payable in
monthly installments of $50,000. The lease term will automatically
be extended for two additional periods of two years each, without
any increase in the lease payment, subject to the Company’s
right to terminate the lease or to provide notice not to extend the
lease prior to the end of the term. The Company also offered
employees of B&C employment with Dynatronics at Closing
including the Co-Presidents of B&C, Mike Cronin and Jason
Anderson, who entered into employment agreements to serve as
Co-Presidents of Bird & Cronin, LLC, the Company’s
wholly-owned subsidiary that conducts the operations acquired in
the Acquisition.
The
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) 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) per common share does not assume exercise or
conversion of securities that would have an anti-dilutive
effect.
Basic
net income (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) 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 and to each share of
potential common stock outstanding during the period, unless
inclusion of potential common stock would have an anti-dilutive
effect.
Outstanding
options, warrants and convertible preferred stock for common shares
not included in the computation of diluted net loss per common
share because they were anti-dilutive, for the three months ended
December 31, 2017, and 2016, totaled 13,838,859 and
5,148,398, respectively, and for the six months ended December 31,
2017, and 2016, totaled 12,114,132 and 5,148,398,
respectively.
NOTE
4. CONVERTIBLE
PREFERRED STOCK AND COMMON STOCK WARRANTS
During
quarter ended December 31, 2017, the Company issued 25,000 shares
of common stock upon conversion of 25,000 shares of Series B
Convertible Preferred Stock (the “Series B Preferred”). As
of December 31, 2017, the Company had a total of 3,459,000 shares
of Series A 8% Convertible Preferred Stock (the “Series A Preferred”) and
Series B Preferred outstanding. Dividends payable on these shares
accrue at the rate of 8% per year and are payable quarterly in
stock or cash. The Company generally pays the dividends in common
stock. The formula for paying this dividend in common stock can
change the effective yield on the dividend to more or less than 8%
depending on the price of the stock at the time of
issuance.
In
connection with the Acquisition of B&C on October 2, 2017, the
Company issued 2,800,000 shares of Series C Preferred with common
stock warrants (“Series C Warrants”) and 1,581,935
shares of its Series D Preferred. The Series C Warrants have an
exercise price of $2.75 per share of common stock and a term of six
years. They may not be exercised unless and until shareholder
approval has been obtained. Each share of Series C Preferred and
Series D Preferred was convertible into one share of common stock
of the Company automatically upon, but not before receipt of
shareholder approval required under applicable Nasdaq Marketplace
Rules. A holder of Series C Preferred was able elect to retain the
Series C Preferred and not convert, subject to future beneficial
ownership limitations and loss of preferential rights. At the
Company’s 2017 Annual Meeting of Shareholders, held on
November 29, 2017, the Company sought and obtained shareholder
approval as described above. On November 29, 2017, the Company
issued 1,360,000 shares of Common Stock in conversion of a portion
of the Series C Preferred and 1,581,935 shares of Common Stock in
conversion of all of the Series D Preferred. As of December 31,
2017, the Company had 1,440,000 shares of Series C Preferred
outstanding. The Series C Preferred shares are non-voting, do not
receive dividends, and have no liquidation preferences or
redemption rights.
The
Company determined that the Series C Preferred contain a beneficial
conversion feature resulting in a deemed dividend of $829,559. Upon
conversion of a portion of the Series C Preferred during the three
months ended December 31, 2017, accretion of $194,227 in discounts
was recognized.
NOTE 5. COMPREHENSIVE INCOME (LOSS)
For the
three and six months ended December 31, 2017 and 2016,
comprehensive income (loss) was equal to the net income (loss) as
presented in the accompanying condensed consolidated statements of
operations.
NOTE 6. INVENTORIES
Inventories
consisted of the following:
|
|
|
|
|
Raw
materials
|
$6,332,413
|
$3,766,940
|
|
Work in
process
|
421,861
|
470,721
|
|
Finished
goods
|
5,303,501
|
3,562,758
|
|
Inventory
obsolescence reserve
|
(452,476)
|
(402,737)
|
|
|
$11,605,299
|
$7,397,682
|
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
approximately $257,400 and $17,700 for the three months ended
December 31, 2017 and 2016, respectively, and $365,400 and $35,400
for the six months ended December 31, 2017 and 2016,
respectively.
Certain
significant shareholders, officers and directors of the Company
participated as investors in the private placements of the
Company’s Series A Preferred, Series B Preferred and Series C
Preferred. The terms of these offerings were reviewed and approved
by disinterested members of the Company’s Board of Directors
who did not invest in the private placements and who do not own any
shares of Series A Preferred, Series B Preferred or Series C
Preferred. The affiliated investors participated in these offerings
on terms that were no more favorable than the terms granted to
unaffiliated investors.
Pursuant
to the Company’s acquisition of Hausmann Industries, Inc.
(“Hausmann”) in April 2017, the Company held back
approximately$1,045,000 of the purchase price. As of December 31,
2017, and June 30, 2017, the holdback liability to Hausmann under
the purchase agreement was $1,000,000 and $1,045,000, respectively.
Certain principals of Hausmann are holders of the Company’s
Series B Preferred and one of the principals, David Hausmann, is an
employee of the Company.
In
connection with the Acquisition of B&C in October 2017, the
Company held back approximately $647,000 in cash plus an earn-out
payment of a minimum of $500,000 up to $1,500,000. These
obligations to B&C, totaling approximately $2,147,000, are
liabilities on the Company’s balance sheet as of December 31,
2017. In addition, the Company withheld approximately 467,000
shares of common stock to be released to B&C pursuant to the
holdback provisions in the Asset Purchase Agreement. These shares
are included in common stock on the Company’s balance sheet
at December 31, 2017. Certain principals of B&C are holders of
the Company’s common stock and two of the principals, Michael
Cronin and Jason Anderson, are employees of the
Company.
NOTE 8. LINE OF CREDIT
On
September 28, 2017, the Company modified its credit agreement with
Bank of the West 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.
There was $1,874,268 available to borrow under the original loan
and security agreement as of December 31, 2017.
NOTE 9. INCOME TAXES
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act
(“Tax Act”). The Tax Act provides for significant
changes to the U.S. Internal Revenue Code of 1986, as amended.
Among other items, the Act permanently reduces the federal
corporate tax rate to 21% effective January 1, 2018. As the
Company’s fiscal year end falls on June 30, the statutory
federal corporate tax rate for fiscal 2018 will be prorated to
27.5%, with the statutory rate for fiscal 2019 and beyond at
21%.
As a result of the reduction in the corporate income tax rate from
35% to 21% under the Act, the Company revalued its net deferred tax
assets at December 31, 2017. As of December 31, 2017 and June 30,
2017, a full valuation allowance has been established against net
deferred tax assets. This resulted in no reported income tax
expense associated with the operating profit reported during the
three and six months ended December 31, 2017.
The final transition impacts of the Tax Act may vary from the
current estimate, possibly materially, due to, among other things,
further clarification and changes in interpretations of the Tax
Act, any legislative action to address questions that arise because
of the Tax Act, any changes in accounting standards for income
taxes or related interpretations in response to the Tax Act, and
the completion of the Company’s consolidated financial
statements as of and for the year ending June 30, 2018. In
accordance with SAB 118, any necessary measurement adjustments will
be recorded and disclosed within one year from the enactment date
within the period the adjustments are determined.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
On December 22, 2017, the U.S.
government enacted comprehensive tax legislation commonly referred
to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax
Act provides for significant changes to the U.S. Internal Revenue
Code of 1986, as amended. Among other items, the Act permanently
reduces the federal corporate tax rate to 21% effective January 1,
2018.
Additionally, the SEC released Staff Accounting Bulletin No. 118
(“SAB 118”) which provides guidance on accounting for
the Act’s impact under ASC Topic 740, Income Taxes
(“ASC 740”). The guidance in SAB 118 addresses certain
fact patterns where the accounting for changes in tax laws or tax
rates under ASC 740 is incomplete upon issuance of an entity's
financial statements for the reporting period in which the Act is
enacted. Under the staff guidance in SAB 118, in the financial
reporting period in which the Act is enacted, the income tax
effects of the Act (i.e., only for those tax effects in which the
accounting under ASC 740 is incomplete) would be reported as a
provisional amount based on a reasonable estimate (to the extent a
reasonable estimate can be determined), which would be subject to
adjustment during a “measurement period” until the
accounting under ASC 740 is complete. The measurement period is
limited to no more than one year beyond the enactment date under
the staff's guidance. SAB 118 also describes supplemental
disclosures that should accompany the provisional amounts,
including the reasons for the incomplete accounting, the additional
information or analysis that is needed, and other information
relevant to why the registrant was not able to complete the
accounting required under ASC 740 in a timely manner. For
discussion of the impacts of the Tax Act, refer to Note
9.
In November 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2017-14, Income Statement –
Reporting Comprehensive Income (Topic 220), Revenue Recognition
(Topic 605), and Revenue from Contracts with Customers (Topic 606):
Amendments to SEC Paragraphs Pursuant to the Staff Accounting
Bulletin (“SAB”) No. 116 and SEC Release No.
33-10403. This ASU amended,
superseded and added certain SEC paragraphs in Topic 220, Topic 605
and Topic 606 to reflect the August 2017 issuance of SAB 116 and
SEC Release No. 33-10403. The SEC staff issued SAB 116 to align its
revenue guidance with Accounting Standards Codification
(“ASC”) 606. For public business entities, this update
is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. Early
application is permitted. The Company is currently evaluating the
impact of the adoption of this update on its consolidated financial
statements.
In July
2017, the FASB issued ASU 2017-11 – Earnings per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Non-controlling Interests with a Scope Exception. Part I of
this update addresses the complexity of accounting for certain
financial instruments with down round features. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option.
Stakeholders asserted that accounting for freestanding and embedded
instruments with down round features as liabilities subject to fair
value measurement on an ongoing basis creates a significant
reporting burden and unnecessary income statement volatility
associated with changes in value of an entity’s own share
price. That is, current accounting guidance requires changes in
fair value of an instrument with a down round feature to be
recognized in earnings for both increases and decreases in share
price, even though an increase in share price will not cause a down
round feature to be triggered and a decrease will cause an
adjustment to the strike price only if and when an entity engages
in a subsequent equity offering.
Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from
Equity, because of the existence of the extensive pending
content in the FASB Accounting Standards Codification.
This pending content is the result of the indefinite deferral of
accounting requirements about mandatorily redeemable financial
instruments of certain nonpublic entities and certain mandatorily
redeemable non-controlling interests.
The
amendments in Part I of this update change the classification
analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining
whether certain financial instruments should be classified as
liabilities or equity instruments, a down round features no longer
precludes equity classification when assessing whether the
instrument is indexed to an entity’s own stock. The
amendments in Part II of this update recharacterize the indefinite
deferral of certain provisions of Topic 48 that now are presented
as pending content in the Codification, to a scope exception. Those
amendments do not have an accounting effect. The Company is
currently evaluating the impact the adoption of this update will
have on its consolidated financial statements and disclosures. This
amendment is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018.
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic
350), Simplifying the Test for Goodwill Impairment. The
amendment in this update simplifies how an entity is required to
test goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. An entity should apply the amendments in
this update on a prospective basis. This amendment will be
effective for the Company in its fiscal year beginning July 1,
2020. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company has early adopted this standard as of July 1,
2017.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying
the Definition of a Business. The Board issued this update
to clarify the definition of a business with the objective of
assisting entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. Under Topic 805, there are three elements of a
business—inputs, processes, and outputs (collectively
referred to as a “set”) although outputs are not
required as an element of a business set. The amendments in this
update provide a screen to determine when a set is not a business.
The screen requires that when substantially all of the fair value
of the gross assets acquired (or disposed of) is concentrated in a
single identifiable asset or a group of similar identifiable
assets, the set is not a business, reducing the number of
transactions that need to be further evaluated. If the screen is
not met, the amendments in this update:
1.
require that a
business set must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to
create output, and
2.
remove the
evaluation of whether a market participant could replace missing
elements.
The
amendments provide a framework for evaluating whether both an input
and a substantive process are present. Lastly, the amendments in
this update narrow the definition of the term output so that the
term is consistent with how outputs are described in Topic 606.
This amendment will be effective for the Company in its fiscal year
(including interim periods) beginning July 1, 2018. The Company is
currently evaluating the impact the adoption of ASU 2017-01 will
have on its consolidated financial statements and
disclosures.
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.
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 be
“forward-looking statements” within the safe harbors
provided by Section 27A of the Securities Act of 1933, as amended
(the “Securities
Act”) and Section 21E of the Securities Exchange Act
of 1934, as amended (“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-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.
Overview
Dynatronics
Corporation (“Company,”
“Dynatronics,”
“we”)
designs, manufactures and distributes advanced-technology
therapeutic medical devices, therapeutic and medical treatment
tables, rehabilitation equipment, custom athletic training
treatment tables and equipment, institutional cabinetry, orthopedic
soft goods, 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 a fiscal year ending June 30. For example, reference to
fiscal year 2018 refers to the year ending June 30,
2018.
Recent Events
On
November 29, 2017, we held our annual meeting of shareholders who
approved 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:
●
Joining resources
of the acquired entities to maximize cross-selling opportunities
without disrupting each entity’s current channels of
distribution;
●
Exploring operating
synergies with acquired companies while respecting established
operating paradigms at each operation;
●
Seeking to improve
distribution of our products through expansion of sales
channels;
●
Improving gross
profit margins by, among other initiatives, increasing market share
of manufactured products with emphasis on our high margin
therapeutic modalities including state-of-the-art
Dynatron® ThermoStim
probe, Dynatron Solaris® Plus and 25
Series™ products as
well as new products from other manufacturers such as
Zimmer;
●
Maintaining our
position as a technological leader and innovator in our markets
through the promotion of new products introduced over the last year
and seeking opportunities to introduce other new products during
the current fiscal year;
●
Exploring strategic
business acquisitions. This will leverage and complement our
competitive strengths, increase market reach and allow us to
ultimately broaden our footprint in the physical medicine markets;
and
●
Attending
appropriate investor conferences to better publicize our strategic
plans, attract new capital to support the business development
strategy and identify other acquisition targets.
Results of Operations
The
following discussion and analysis of our financial condition and
results of operations for the three and six months ended December
31, 2017, should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto
appearing in Part I, Item 1 of this report, and our Annual Report
on Form 10-K for the fiscal year ended June 30, 2017, which
includes audited financial statements for the year then ended. We
have rounded many numbers to the nearest thousand dollars in this
analysis. These numbers should be read as approximate. Results of
operations for the second fiscal quarter and six months ended
December 31, 2017, 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.
Net Sales
Net
sales increased $9,368,000, or 107.5%, to $18,081,000 for the
quarter ended December 31, 2017, compared to net sales of
$8,713,000 for the quarter ended December 31, 2016. 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, 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.
Gross Profit
Gross profit for the quarter ended December 31, 2017 increased $2,697,000, or
about 87.7%, to $5,770,000, or 31.9% of net sales. By comparison, gross profit for the
quarter ended December 31, 2016 was $3,073,000, or 35.3% of net
sales. The year-over-year
increase in gross profit was attributable to the acquisitions of
Hausmann and Bird & Cronin that contributed $1,066,000 and
$2,082,000, respectively, in gross profit in the quarter ended
December 31, 2017. These increases were partially offset by a
decrease of approximately $451,000 in Dynatronics’ legacy
operations gross profit. That decrease was primarily attributable
to lower sales which accounted for approximately $236,000 lower
gross profit and reduced gross margin percentage resulting in
$215,000 lower gross profit. The year-over-year decrease in gross
margin percentage to 31.9% from 35.3% was due primarily to
inclusion of Hausmann sales, which had a lower gross margin
percentage in the quarter, as well as reduced gross margin in
Dynatronics’ legacy operations, primarily attributable to
reduced margins on freight charged to customers.
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 quarter and six months ended
December 31, 2017, respectively. This compares to income tax
provision of $0 for the quarter and six months ended December 31,
2016, respectively. We decreased the valuation allowance on our net
deferred income tax assets equal to the one-time revaluation of our
net deferred tax assets at the lower tax rate.
Net Income (Loss)
Net
income was $14,000 for the quarter ended December 31, 2017,
compared to a net loss of $95,000 for the quarter ended December
31, 2016. Net income was $213,000 for the six months ended December
31, 2017, compared to a net loss of $381,000 for the six months
ended December 31, 2016. The changes in net income (loss) are the
same as explained above for Net
Income (Loss) Before Income Tax.
Net Loss Attributable to Common Stockholders
Net
loss attributable to common stockholders was $1,314,916 ($0.23 per
share) for the quarter ended December 31, 2017, compared to
$560,000 ($0.19 per share) for the quarter ended December 31, 2016.
The $755,000 year-over-year increase in net loss attributable to
common stockholders is due 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 to
$1,303,330 ($0.25 per share) for the six months ended December 31,
2017, compared to $935,000 ($0.33 per share) for the six months
ended December 31, 2016. The decrease in net loss is due to
approximately $594,000 in higher net income in the six months ended
December 31, 2017, compared to the same period of the prior year,
partially offset by $315,000 of additional preferred stock
dividends associated with issuance of the same preferred shares
described in the previous paragraph as well as an increase of
approximately $454,000 in additional deemed 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.
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 sales of equity securities. We expect to
obtain capital for future acquisitions using borrowings and
proceeds from debt and equity offerings. Working capital was
$9,091,000 as of December 31, 2017, compared to working capital of
$5,834,000 as of June 30, 2017. The current ratio was 1.6 to 1 as
of December 31, 2017 and 1.8 to 1 as of June 30, 2017.
Cash and Cash Equivalents
Our
cash and cash equivalents position increased $3,397,000 to
$3,652,000 as of December 31, 2017, compared to $255,000 as of June
30, 2017. The primary source of cash in the six months ended
December 31, 2017, was approximately $1,677,000 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.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
increased approximately $2,104,000, or 39.8%, to $7,385,000 as of
December 31, 2017, from $5,281,000 as of June 30, 2017. The
increase was primarily due to the addition of the Bird & Cronin
that added $1,819,000 in accounts receivable as of December 31,
2017. 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 30 days of invoicing.
Inventories
Inventories, net of
reserves, increased $4,207,000 or 56.9%, to $11,605,000 as of
December 31, 2017, compared to $7,398,000 as of June 30, 2017. The
increase was driven by the addition of the Bird & Cronin
subsidiary that had $4,707,000 of net inventory as of December 31,
2017. Inventory levels fluctuate based on timing of large inventory
purchases from domestic and overseas suppliers as well as
variations in sales and production activities. We believe that our
allowance for inventory obsolescence is adequate based on our
analysis of inventory, sales trends, and historical
experience.
Accounts Payable
Accounts payable
increased approximately $2,116,000 or 90.6%, to $4,451,000 as of
December 31, 2017 from $2,335,000 as of June 30, 2017. 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.
Line of Credit
Our
line of credit balance increased $4,571,000 to $6,743,000 as of
December 31, 2017, compared to $2,172,000 as of June 30, 2017. We
drew $5,000,000 on September 29, 2017 in anticipation of closing
the Acquisition of Bird & Cronin on October 2,
2017.
Debt
Long-term debt,
excluding current installments, decreased $75,000 to $387,000 as of
December 31, 2017, compared to $462,000 as of June 30, 2017. 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 $445,000 of which $310,000 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 15-year building
lease that we treated as a capital lease valued at $3,800,000. We
are amortizing the capital lease asset on a straight line basis
over 15 years at approximately $21,000 per month, or $63,000 per
quarter. Accumulated amortization of the capital lease asset was
approximately $861,000 at December 31, 2017. The building sale
resulted in a profit of $2,300,000 that is treated as a deferred
gain that is amortized as an offset to amortization expense over
the life of the lease at $12,500 per month, or approximately
$37,500 per quarter. The balance of the deferred gain at December
31, 2017 was approximately $1,755,000. Lease payments, currently
approximately $29,000, are payable monthly and increase
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 quarter ended December
31, 2017, was approximately $45,000.
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 December 31, 2017 and June 30, 2017, 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.
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. No purchases have been made
under this plan since September 28, 2011.
Off-Balance Sheet Arrangements
As of
December 31, 2017, 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. 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 to information from that presented in
our Annual Report on Form 10-K for the year ended June 30,
2017.
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
Securities and Exchange Commission’s (“SEC”) 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. 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.
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, 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 December 31, 2017 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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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
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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
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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: February 13,
2018
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By:
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/s/ Kelvyn H.
Cullimore, Jr.
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Kelvyn H.
Cullimore, Jr.
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President and Chief
Executive Officer
(Principal
Executive Officer)
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Date: February 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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