SECURITIES AND EXCHANGE COMMISSION
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
☐ 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
(Exact name of registrant as specified in its charter)
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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, UT 84121
(Address of principal executive offices, Zip Code)
(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 or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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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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 May 12, 2016 is 2,773,280.
QUARTER ENDED MARCH 31, 2016
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Page Number
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PART I. FINANCIAL INFORMATION
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|
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Item 1. Financial Statements
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1
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Condensed Consolidated Balance Sheets (Unaudited) As of March 31, 2016 and June 30, 2015
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1
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|
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Condensed Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended March 31, 2016 and 2015
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2
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Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended March 31, 2016 and 2015
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3
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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4
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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12
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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17
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Item 4. Controls and Procedures
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17
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PART II. OTHER INFORMATION
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18
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Condensed Consolidated Balance Sheets
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(Unaudited)
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Assets
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March 31,
2016
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June 30,
2015
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|
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Current assets:
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Cash and cash equivalents
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$
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1,078,406
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|
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$
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3,925,967
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Trade accounts receivable, less allowance for doubtful accounts of $366,886 as of March 31, 2016 and $417,444 as of June 30, 2015
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|
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3,337,486
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3,346,770
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Other receivables
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|
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8,143
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6,748
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Inventories, net
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5,368,257
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5,421,787
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Prepaid expenses and other
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226,437
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273,629
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Prepaid income taxes
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|
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68,282
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338,108
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|
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Total current assets
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|
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10,087,011
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13,313,009
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Property and equipment, net
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4,754,949
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5,025,076
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Intangible assets, net
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164,891
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190,803
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Other assets
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561,933
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623,342
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Total assets
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$
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15,568,784
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$
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19,152,230
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Liabilities and Stockholders' Equity
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|
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Current liabilities:
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Current portion of long-term debt
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$
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135,165
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$
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121,884
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Current portion of capital lease
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180,764
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173,357
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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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Line of credit
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-
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1,909,919
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Warranty reserve
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153,359
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153,185
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Accounts payable
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1,843,418
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2,520,327
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Accrued expenses
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51,223
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279,547
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Accrued payroll and benefits expense
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448,620
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263,092
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Total current liabilities
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|
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2,962,997
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|
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5,571,759
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Long-term debt, net of current portion
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588,316
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651,118
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Capital lease, net of current portion
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3,328,336
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3,464,850
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Deferred gain, net of current portion
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1,868,061
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1,980,897
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Deferred rent
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74,419
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41,150
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Deferred income tax liabilities
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136,128
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136,128
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Total liabilities
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8,958,257
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11,845,902
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Commitments and contingencies
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-
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-
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Stockholders' equity:
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Preferred stock, no par value: Authorized 5,000,000 shares; 1,610,000 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively
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3,067,608
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3,087,554
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Common stock, no par value: Authorized 50,000,000 shares; 2,742,355 shares and 2,642,389 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively
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7,691,319
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7,610,244
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Accumulated deficit
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(4,148,400
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)
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(3,391,470
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)
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Total stockholders' equity
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6,610,527
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7,306,328
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|
|
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|
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Total liabilities and stockholders' equity
|
|
$
|
15,568,784
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|
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$
|
19,152,230
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See accompanying notes to condensed consolidated financial statements.
DYNATRONICS CORPORATION
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Condensed Consolidated Statements of Operations
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(Unaudited)
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Three Months Ended
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Nine Months Ended
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March 31
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March 31
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2016
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2015
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2016
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2015
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Net sales
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$
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7,408,990
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$
|
6,690,705
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$
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22,281,107
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|
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$
|
21,210,219
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Cost of sales
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|
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4,922,570
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|
|
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4,498,818
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|
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14,606,877
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|
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13,987,149
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|
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|
|
|
|
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|
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Gross profit
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|
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2,486,420
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2,191,887
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|
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7,674,230
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7,223,070
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|
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Selling, general, and administrative expenses
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2,620,238
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2,217,397
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7,445,023
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|
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6,848,746
|
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Research and development expenses
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|
|
249,995
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|
|
|
236,461
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769,223
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|
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|
687,961
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating loss
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|
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(383,813
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)
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|
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(261,971
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)
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|
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(540,016
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)
|
|
|
(313,637
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest income
|
|
|
175
|
|
|
|
847
|
|
|
|
2,658
|
|
|
|
4,448
|
|
Interest expense
|
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(71,690
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)
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|
|
(87,127
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)
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|
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(229,207
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)
|
|
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(215,156
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)
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Other income, net
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4,640
|
|
|
|
3,696
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9,635
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10,151
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|
|
|
|
|
|
|
|
|
|
|
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|
|
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Net other expense
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|
|
(66,875
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)
|
|
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(82,584
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)
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(216,914
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)
|
|
|
(200,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
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|
|
(450,688
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)
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|
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(344,555
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)
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|
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(756,930
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)
|
|
|
(514,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax (provision) benefit
|
|
|
-
|
|
|
|
136,542
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|
|
-
|
|
|
|
213,562
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss
|
|
|
(450,688
|
)
|
|
|
(208,013
|
)
|
|
|
(756,930
|
)
|
|
|
(300,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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8% Convertible preferred stock dividend
|
|
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(80,500
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)
|
|
|
-
|
|
|
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(241,500
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)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(531,188
|
)
|
|
$
|
(208,013
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)
|
|
$
|
(998,430
|
)
|
|
$
|
(300,632
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted net loss per common share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,731,282
|
|
|
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2,520,389
|
|
|
|
2,681,493
|
|
|
|
2,520,389
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Diluted |
|
|
2,731,282 |
|
|
|
2,520,389 |
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|
|
2,681,493 |
|
|
|
2,520,389 |
|
See accompanying notes to condensed consolidated financial statements.
DYNATRONICS CORPORATION
|
|
Condensed Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(756,930
|
)
|
|
$
|
(300,632
|
)
|
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
|
|
|
168,439
|
|
|
|
325,015
|
|
Amortization of intangible assets
|
|
|
25,912
|
|
|
|
33,478
|
|
Amortization of other assets
|
|
|
38,529
|
|
|
|
38,529
|
|
Amortization of building lease
|
|
|
188,950
|
|
|
|
104,972
|
|
Stock-based compensation expense
|
|
|
81,075
|
|
|
|
50,176
|
|
Change in deferred income taxes
|
|
|
-
|
|
|
|
(1,121,732
|
)
|
Change in provision for doubtful accounts receivable
|
|
|
(50,558
|
)
|
|
|
67,543
|
|
Change in provision for inventory obsolescence
|
|
|
18,422
|
|
|
|
62,209
|
|
Deferred gain on sale/leaseback
|
|
|
(112,836
|
)
|
|
|
(100,298
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
58,447
|
|
|
|
252,058
|
|
Inventories, net
|
|
|
35,108
|
|
|
|
(50,478
|
)
|
Prepaid expenses and other assets
|
|
|
47,192
|
|
|
|
(765,337
|
)
|
Other assets
|
|
|
22,880
|
|
|
|
(326,584
|
)
|
Prepaid income taxes
|
|
|
269,826
|
|
|
|
539,800
|
|
Accounts payable and accrued expenses
|
|
|
(706,208
|
)
|
|
|
(43,006
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(671,752
|
)
|
|
|
(1,234,287
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(44,152
|
)
|
|
|
(49,143
|
)
|
Proceeds from sale of property and equipment
|
|
|
-
|
|
|
|
3,800,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(44,152
|
)
|
|
|
3,750,857
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(92,631
|
)
|
|
|
(745,860
|
)
|
Principal payments on long-term capital lease
|
|
|
(129,107
|
)
|
|
|
(119,944
|
)
|
Net change in line of credit
|
|
|
(1,909,919
|
)
|
|
|
(1,642,132
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,131,657
|
)
|
|
|
(2,507,936
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(2,847,561
|
)
|
|
|
8,634
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
3,925,967
|
|
|
|
332,800
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
1,078,406
|
|
|
$
|
341,434
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
247,545
|
|
|
$
|
215,334
|
|
Cash paid for income taxes
|
|
|
-
|
|
|
|
356,151
|
|
Supplemental disclosure of non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
Capital lease - building
|
|
$
|
-
|
|
|
$
|
3,800,000
|
|
Preferred stock dividend payable in common stock
|
|
|
241,500
|
|
|
|
-
|
|
See accompanying notes to condensed consolidated financial statements.
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2016
NOTE 1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated balance sheets as of March 31, 2016 and June 30, 2015, and the condensed consolidated statements of operations and cash flows for the three and nine months ended March 31, 2016 and 2015, were prepared by Dynatronics Corporation (the "Company") without audit pursuant to 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 nine months ended March 31, 2016, are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2016. The Company previously filed with the SEC an annual report on Form 10-K, as amended, which included audited financial statements for each of the two years ended June 30, 2015 and 2014. 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 Company's most recent 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 significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
NOTE 2. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive common stock equivalents outstanding during the period. Stock options, convertible preferred stock and warrants are considered to be common stock equivalents. The computation of diluted net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Basic net loss per common share is the amount of net loss for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net loss per common share is the amount of net loss for the period available to each weighted-average share of common stock outstanding during the reporting period and to each common stock equivalent outstanding during the period, unless inclusion of common stock equivalents would have an anti-dilutive effect.
The reconciliations between the basic and diluted weighted-average number of common shares outstanding for the three and nine months ended March 31, 2016 and 2015, are as follows:
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Three Months Ended
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Nine Months Ended
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March 31,
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March 31,
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2016
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2015
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2016
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2015
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Basic weighted-average number of common shares outstanding during the period
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2,731,282
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|
|
|
2,520,389
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|
|
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2,681,493
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2,520,389
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Weighted-average number of dilutive common stock equivalents outstanding during the period
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-
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-
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-
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-
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Diluted weighted-average number of common and common equivalent shares outstanding during the period
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2,731,282
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|
2,520,389
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|
2,681,493
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2,520,389
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Outstanding options 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 March 31, 2016 and 2015, totaled 4,167,814 and 143,609, respectively, and for the nine months ended March 31, 2016 and 2015, totaled 4,167,814 and 138,978, respectively.
NOTE 3. STOCK-BASED COMPENSATION
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the employee's requisite service period. The Company recognized $51,453 and $16,265 in stock-based compensation expense during the three months ended March 31, 2016 and 2015,
respectively, and recognized $81,075 and $50,176 in stock-based compensation expense during the nine months ended March 31, 2016 and 2015, respectively. These expenses were recorded as selling, general and administrative expenses in the condensed consolidated statements of operations.
Stock Options. The Company maintained a 2005 equity incentive plan ("2005 Plan") for the benefit of employees. On June 29, 2015 the shareholders approved a new 2015 equity incentive plan ("2015 Plan") setting aside 500,000 shares. No additional shares or awards will be granted under the 2005 Plan. The 2015 Plan was filed with the SEC on September 3, 2015. Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other stock-based awards may be granted under the 2015 Plan. Awards granted under the 2015 Plan may be performance-based. As of March 31, 2016, there were 380,404 shares of common stock authorized and reserved for issuance available for future grants under the terms of the 2015 Plan.
The Company granted 39,596 shares under its 2015 Plan during the nine months ended March 31, 2016. There were no equity awards granted under its 2005 Plan during that period.
The following table summarizes the Company's stock option activity for the 2005 and 2015 Plans during the nine-month period ended March 31, 2016.
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Number of
Options
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Weighted-
Average
Exercise
Price
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Outstanding at beginning of period
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91,152
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$
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5.07
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Granted
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80,000
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3.34
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Exercised
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-
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-
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Cancelled
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(23,395
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)
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7.10
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Outstanding at end of period
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147,757
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3.81
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Exercisable at end of period
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64,337
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4.76
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The Black-Scholes option-pricing model is used to estimate the fair value of options granted under the Company's stock option plans.
Expected option lives and volatilities are based on historical data of the Company. The risk-free interest rate is based on the U.S. Treasury Bills rate on the grant date for constant maturities that correspond with the option life. Historically, the Company has not declared dividends on common stock and there are no plans to do so.
As of March 31, 2016, there was $377,903 of unrecognized stock-based compensation cost related to grants under the 2005 and 2015 Plans that is expected to be expensed over a weighted-average period of four to ten years. There was $2,166 of intrinsic value for options outstanding as of March 31, 2016.
NOTE 4. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS
On June 30, 2015, the Company completed a private placement with affiliates of Prettybrook Partners, LLC ("Prettybrook") and certain other purchasers (collectively with Prettybrook, the "Preferred Investors") for the offer and sale of shares of the Company's Series A 8% Convertible Preferred Stock (the "Series A Preferred") in the aggregate amount of approximately $4 million. Offering costs incurred in conjunction with the private placement were recorded net of proceeds. The Series A Preferred is convertible to common stock on a 1:1 basis. A Forced Conversion can be initiated based on a formula related to share price and trading volumes as outlined in the terms of the private placement. The dividend is fixed at 8% and is payable in either cash or common stock. This dividend is payable quarterly and equates to an annual payment of $322,000 or equivalent value in common stock. Certain redemption rights are attached to the Series A Preferred, but none of the redemption rights for cash are deemed outside the control of the Company. The redemption rights deemed outside the control of the Company require common stock payments or an increase in the dividend rate. The Series A Preferred includes a liquidation preference under which Preferred Investors would receive cash equal to the stated value of their stock plus unpaid dividends. In accordance with the terms of the sale of the Series A Preferred, the Company was required to register the underlying common shares associated with the Series A Preferred and the warrants. That registration statement filed on form S-3 went effective on August 13, 2015.
The Series A Preferred votes on an as-converted basis, one vote for each share of common stock issuable upon conversion of the Series A Preferred, provided, however, that no holder of Series A Preferred shall be entitled to cast votes for the number of shares of common stock issuable upon conversion of such Series A Preferred held by such holder that exceeds the quotient of (x) the aggregate purchase price paid by such holder of Series A Preferred for its Series A Preferred, divided by (y) the greater of (i) $2.50 and (ii) the market price of the common stock on the trading day immediately prior to the date of issuance of such holder's Preferred Stock. The market price of the common stock on the trading day immediately prior to the date of issuance was $3.19 per share. Based on a $4,025,000 investment and a $3.19 per share price the number of common stock equivalents eligible for voting by preferred shareholders is 1,261,755.
The Preferred Investors purchased a total of 1,610,000 shares of Series A Preferred Stock, and received in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of common stock, and (ii) B-Warrants, exercisable by "cashless exercise", to purchase 1,207,500 shares of common stock after exercise of A-Warrants. The warrants are exercisable for 72 months from the date of issuance and carry a Black-Scholes put feature in the event of a change in control. The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.
The Company's Board of Directors has the authority to cause the Company to issue, without any further vote or action by the shareholders, up to 3,390,000 additional shares of preferred stock, no par value per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.
The Series A Preferred includes a conversion right at a price that creates an embedded beneficial conversion feature. A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The conversion price is 'in the money' and the holder realizes a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred issued by the Company do not have a stated life and, therefore, all of the beneficial conversion feature amount of $2,858,887 were recorded as a deemed dividend on the same date the preferred shares were issued. The June 2015 dividend of $2,858,887 was added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the year ended June 30, 2015.
NOTE 5. COMPREHENSIVE LOSS
For the three and nine months ended March 31, 2016 and 2015, comprehensive loss was equal to the net loss as presented in the accompanying condensed consolidated statements of operations.
NOTE 6. INVENTORIES
Inventories consisted of the following:
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March 31,
2016
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June 30,
2015
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Raw materials
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$
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2,101,074
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$
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2,086,411
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Finished goods
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3,644,150
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$
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3,693,921
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Inventory obsolescence reserve
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(376,967
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)
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(358,545
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)
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$
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5,368,257
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5,421,787
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NOTE 7. RELATED-PARTY TRANSACTIONS
The Company currently leases office and warehouse space in Detroit, Michigan and Hopkins, Minnesota from two shareholders and former independent distributors on an annual basis under operating lease arrangements. Management believes the lease agreements are on an arms-length basis and the terms are equal to or more favorable than would be available to the Company from third parties. The expense associated with these related-party transactions totaled $17,700 for the three months ended March 31, 2016 and 2015, and $53,100 for the nine months ended March 31, 2016 and 2015.
NOTE 8. LINE OF CREDIT
There was no outstanding balance on the line of credit as of March 31, 2016 compared to the $1.9 million balance as of June 30, 2015. The line of credit was paid in full in February 2016 and the credit facility was closed. The reduction was made possible by the capital infusion from the sale of preferred stock on June 30, 2015, to affiliates of Prettybrook Partners. The Company believes that cash balances and cash generated from operating activities will continue to be sufficient to meet its annual operating requirements.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2016, the FASB issued Accounting Standard Update (ASU) 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." The amendments in this update apply to entities with transactions included within the scope of Topic 606 (i.e., contracts with customers to transfer goods or services for consideration). Per Topic 606, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update do not change the core principle of the guidance in Topic 606, but rather clarify various aspects.
Prior to identifying performance obligations in a contract, an entity must first identify the promised goods or services in the contract. The amendments in this update clarify that:
1)
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An entity is not required to assess if goods or services are performance obligations if they are immaterial in the contract with the customer.
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2)
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An entity can account for shipping and handling as activities to fulfill the promise to transfer the goods rather than an additional promised service.
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To identify performance obligations, Topic 606 includes criteria for assessing whether promises to transfer goods or services are distinct. This update improves guidance by:
1)
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Emphasizing that an entity determines whether the promise in the contract is to transfer each of the goods or services or to transfer a combined item (or items) to which the promised goods and/or services are inputs.
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2)
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Revising the related factors and examples.
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The amendments in this update clarify licensing implementation guidance by stating:
1)
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An entity's promise to grant a customer a license to intellectual property that has significant standalone functionality does not include supporting or maintaining that intellectual property during the license period. An entity's promise to provide a customer with a right to use the entity's intellectual property is satisfied at the point in time the customer is able to use and benefit from the license, unless the entity expects to undertake activities that change the functionality of the intellectual property to which the customer has rights.
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2)
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An entity's promise to grant a customer a license to intellectual property that does not have significant standalone functionality (symbolic intellectual property) includes supporting or maintaining that intellectual property during the license period. The nature of the entity's promise is both to (a) grant the customer rights to use and benefit from the entity's intellectual property and (b) support or maintain the intellectual property during the license period. As such, a license to symbolic intellectual property is satisfied over time.
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3)
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An entity considers the nature of its promise in granting a license in order to apply the other guidance in Topic 606 to a single performance obligation that includes a license and other goods or services.
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Topic 606 includes implementation guidance on revenue recognition for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. The amendments in this update clarify the following:
1)
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An entity should not split a sales-based or usage-based royalty into a portion subject to the recognition guidance on sales-based and usage based royalties and a portion that is not subject to that guidance.
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2)
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The guidance on sales-based and usage-based royalties applies to a sales-based or usage-based royalty where the predominant item related to the royalty is a license of intellectual property.
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Lastly, this update clarifies that contractual provisions requiring an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that define the attributes of a single promised license.
The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of update 2014-09. That is, the amendments in this update are effective for annual reporting periods after December 15, 2017, including interim reporting periods within that reporting period. The Company has contracts with customers to transfer goods or services for consideration within the scope of Topic 606; therefore, the noted amendments in ASU 2016-10 are applicable and the Company will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The FASB is issuing this update as part of its simplification initiative, which is aimed at reducing the cost and complexity of certain areas of the accounting codification. This update simplifies the accounting for share-based payment transactions through the following amendments:
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All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement.
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·
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Excess tax benefits should be classified as an operating activity.
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·
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An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.
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·
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The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.
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·
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Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.
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For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." The amendments in this update apply to entities with transactions included within the scope of Topic 606 (i.e., contracts with customers to transfer goods or services for consideration). The amendment in this update does not change the core principles in Topic 606, but rather clarify the implementation guidance on principle versus agent considerations.
An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. To improve the implementation guidance on principal versus agent considerations, this update seeks to clarify the following:
1.
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An entity determines whether it is a principal or agent for each specified good or service promised to the customer. If a contract includes more than one specified good or service, an entity could be both a principal and agent.
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2.
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An entity determines the nature of each specified good or service, whether it is a good, a service, or a right to a good or service.
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3.
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When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of (a) a good or asset from the other party that it then transfers to the customer; (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity's behalf; or (c) a good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.
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4.
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The amendments in paragraph 606-10-55-39A clarify that indicators may be more or less relevant to the control assessment and that one or more indicators may be more or less persuasive to the control assessment.
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The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of update 2014-09. That is, the amendments in this update are effective for annual reporting periods after December 15, 2016, including interim reporting periods within that reporting period. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.
In March 2016, the FASB issued ASU 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." The FASB is issuing this update as part of its simplification initiative, which is aimed at reducing the cost and complexity of certain areas of the accounting codification. The amendments in this update eliminate the requirement to retroactively adopt the equity method of accounting. Instead, the investor adds the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopts the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The update requires that an entity with an available-for-sale security that qualifies for the equity method should recognize in earnings the unrealized holding gain or loss in accumulated comprehensive income as of the date that the investment becomes qualified for the equity method use. This update becomes effective for all entities for fiscal years beginning after December 15, 2016. The Company does not believe adoption of this ASU will have a material impact on its financial statements.
In March 2016, the FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)." The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The four-step decision sequence requires an entity to consider whether:
1)
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the payoff is adjusted based on changes in an index,
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2)
|
the payoff is indexed to an underlying other than interest rates or credit risk,
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3)
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the debt involves a substantial premium or discount, and
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4)
|
the call (put) option is contingently exercisable.
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For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016. The Company does not believe adoption of this ASU will have a material impact on its financial statements.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)." The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016. The Company does not believe adoption of this ASU will have a material impact on its financial statements.
In March 2016, the FASB issued ASU 2016-04, "Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force)." The amendments in this update apply to prepaid stored-value products, which are physical or digital products containing a stored monetary value that are issued for the purpose of being accepted as payment for goods or services. This update states that the liabilities related to the sale of prepaid stored-value products are financial liabilities. For public companies, not-for-profit entities with traded securities, and employee benefit plans that file financial statements with the SEC, the amendments in this update are effective for fiscal years beginning after December 15, 2018. The Company does not believe adoption of this ASU will have a material impact on its financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842), including Sections A, B, & C." The objective of this update is to increase transparency and comparability among organizations by recognizing leased assets and lease liabilities on the balance sheet. Topic 842 affects any entity that enters into a lease. The main difference between previous GAAP and Topic 842 is the recognition of leased assets and lease liabilities for leases classified as operating leases under previous GAAP.
For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the leased assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. If an entity elects to apply the practical expedients, it will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified. The exception is that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.
For public companies, not-for-profit entities with traded securities and employee benefit plans that file financial statements with the SEC, the amendments in this update are effective for fiscal years beginning after December 15, 2018. Early application of the amendments in this update is permitted for all entities. The Company notes the new lease standard is applicable and will implement the new guidance accordingly; however, due to the extensive nature of the new lease standard, the Company is currently evaluating the impact this new guidance will have on its financials.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update make the following eight improvements to GAAP:
1)
|
Equity investments (except those accounted for under the equity method or that result in consolidation of the investee) are to be measured at fair value with changes in fair value included in net income. However, an entity may choose to measure equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
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|
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2)
|
A qualitative assessment is required for investments without readily determinable fair values in order to identify impairment. If impairment is identified, the investment is to be measured at fair value.
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|
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3)
|
The requirement to disclose the fair value of financial instruments measured at amortized cost is eliminated for non-public business entities.
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4)
|
The requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost is eliminated for public business entities.
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|
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5)
|
Public entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
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|
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6)
|
An entity is required to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
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|
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7)
|
Separate presentation of financial assets and liabilities by measurement category and form of financial asset is required on the balance sheet or accompanying notes.
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|
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8)
|
An entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
|
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The Company notes this new guidance will apply to its reporting requirements and will implement the new guidance accordingly and is currently evaluating the impact this new guidance will have on its financials.
NOTE 10. SUBSEQUENT EVENTS
On April 4, 2016, the Company issued 30,925 shares of common stock as payment for the accrued "Preferred Stock Dividend."