DYNATRONICS CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
☑
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended June 30, 2019.
or
☐
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from __________ to ____________.
Commission
file number 0-12697
Dynatronics Corporation
(Exact
name of registrant as specified in its charter)
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Utah
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87-0398434
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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7030
Park Centre Drive, Cottonwood Heights, Utah
84121
(Address
of principal executive offices, Zip Code)
(801) 568-7000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading symbol
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Name of each exchange on which registered
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Common
Stock, no par value per share
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DYNT
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Nasdaq
Capital Market
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Securities
registered pursuant to Section 12(g) of the Exchange
Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐
No ☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No ☑
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit 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.
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Large
accelerated filer
☐
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Accelerated
filer
☐
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Non-accelerated
filer
☐
(Do not check if a smaller
reporting company)
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Smaller
reporting company
☑
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Emerging growth company
☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the common
stock of the registrant held by non-affiliates computed by
reference to the price at which the common stock was last sold on
December 31, 2018 (the last day of the registrant’s most
recently completed second fiscal quarter), was approximately $12.0
million.
As of September 20, 2019, the
registrant
had 8,679,231
shares of common stock, no par value per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive
Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on
December 4, 2019 are incorporated by reference into Part
III.
TABLE
OF
CONTENTS
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Cautionary Note Regarding
Forward-Looking Statements
This
Annual Report on Form 10-K, including documents incorporated
herein by reference, contains “forward-looking
statements” within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). These forward-looking statements
include, but are not limited to: any projections of net sales,
earnings, or other financial items; any statements of the
strategies, plans and objectives of management for future
operations; any statements concerning proposed new products or
developments; any statements regarding future economic conditions
or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. Forward-looking
statements can be identified by their use of such words as
“may,” “will,” “estimate,”
“intend,” “continue,”
“believe,” “expect,” or
“anticipate” and similar references to future
periods.
Forward-looking
statements are neither historical facts nor assurances of future
performance. Instead, they are based only on our current beliefs,
expectations and assumptions regarding the future of our business,
future plans and strategies, projections, anticipated events and
trends, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject
to inherent uncertainties, risks and changes in circumstances that
are difficult to predict and many of which are outside of our
control. Our actual results and financial condition may differ
materially from those indicated in the forward-looking statements.
Therefore, you should not rely on any of these forward-looking
statements. Important factors that
could
cause our actual results and financial condition to differ
materially from those indicated in the forward-looking statements
include, among others, those that are discussed in
“Business” (Part I, Item 1 of this Form 10-K),
“Risk Factors” (Part I, Item 1A of this Form 10-K), and
throughout “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” (Part II,
Item
7 of
this Form 10-K). Readers are cautioned that actual results could
differ materially from the anticipated results or other
expectations that are expressed in forward-looking statements
within this report. The forward-looking statements included in this
report speak only as of the date hereof, and we undertake no
obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise, except as required by law.
P
ART I
I
tem 1.
Business
Company Background
Dynatronics Corporation is a leading medical
device company committed to providing high-quality restorative
products designed to accelerate optimal health. We design,
manufacture, and sell a broad range of restorative products for
clinical use in physical therapy, rehabilitation, orthopedics, pain
management, and athletic training. Through our distribution
channels, we market and sell to orthopedists, physical therapists,
chiropractors, athletic trainers, sports medicine practitioners,
clinics, hospitals, and consumers.
We
conduct our operations at our headquarters in Cottonwood Heights,
Utah, a suburb of Salt Lake City, and in other facilities located
in Chattanooga, Tennessee; Northvale, New Jersey; and Eagan,
Minnesota. Organized in 1983, Dynatronics has grown by adding
product offerings, developing best-in-class distribution to meet
the needs of our target customers, and acquiring complementary
medical device businesses in related fields.
Unless
the context otherwise requires, all references in this report to
“registrant,” “we,” “us,”
“our,” “Dynatronics,” or the
“Company” refer to Dynatronics Corporation, a Utah
corporation and our wholly owned subsidiaries. In this report,
unless otherwise expressly indicated, references to
“dollars” and “$” are to United States
dollars.
Business Strategy
Dynatronics is a
leading manufacturer of restorative products known for trusted
high-quality brands, on-time delivery, and superior customer care.
We are executing a strategy to significantly grow our organization
through an aggressive acquisition program in order to realize our
vision to become the recognized standard in restorative solutions.
We intend to provide value to clinicians, investors, and all
stakeholders by executing on our core strategy of revenue growth,
margin enhancement, and focused business development.
1
Corporate Information
Dynatronics
Corporation is a Utah corporation founded in 1983 as Dynatronics
Laser Corporation to acquire our predecessor company, Dynatronics
Research Company, which was also a Utah corporation, formed in
1979. Our principal executive offices are located at 7030 Park
Centre Drive, Cottonwood Heights, Utah 84121, and our telephone
number is (801) 568-7000. Our website address is
www.dynatronics.com
.
Our
Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and other reports and documents we file with the
Securities and Exchange Commission (or “SEC”) are
available via a link to the SEC’s website
www.sec.gov
on
our website under the “Investors” tab which directs you
to our page at https://irdirect.net/dynt. Available on this website
as a portal investors can find or navigate to pertinent information
about us, including copies of the reports described above, as well
as other information such as the following:
●
Announcements of
investor conferences, press releases, and events at which our
executives talk about our products and business
operations;
●
Information about
our business strategies, financial results and metrics for
investors;
●
Press releases on
quarterly earnings, product and service announcements, legal
developments and other Company news;
●
Information and
documents related to corporate governance, including our articles
of incorporation, bylaws, governance guidelines, Board committee
charters, code of conduct and ethics and other governance policies;
and
●
Other information
we may post from time to time.
You may
also subscribe to receive Company alerts and information as it
becomes available from the Company. The information found on our
website and our Investors portal is not part of this or any other
report we file with, or furnish to, the SEC. We encourage
investors, the media, and others interested in Dynatronics to
review the information we post on our website and the social media
channels listed on our Investor Relations website.
We
operate on a fiscal year ending June 30. For example, reference to
fiscal year 2019 refers to the fiscal year ended June 30, 2019. All
references to financial statements in this report refer to the
consolidated financial statements of our parent company,
Dynatronics Corporation, and our wholly-owned subsidiaries, Bird
& Cronin, LLC, Hausmann Enterprises, LLC, and Dynatronics
Distribution Company, LLC.
Recent Developments
On August 26, 2019, Dr. Christopher R. von Jako
stepped down as our Chief Executive Officer. In connection with his
departure, Dr. von Jako also resigned from the board of
directors (“Board of Directors” or
“Board”) of the Company effective August 26, 2019.
On August 26, 2019, the Board appointed Brian D. Baker, our Chief
Operating Officer, to succeed Christopher R. von Jako as the Chief
Executive Officer. We entered into an employment agreement with Mr.
Baker, which provides for base salary of $275,000 per year and an
annual bonus targeted at a maximum payout of $100,000, with any
bonus amount to be determined by the Compensation Committee of the
Board of Directors based on results of operations and Mr.
Baker’s performance against goals established by the
Compensation Committee. Mr. Baker will also receive annual equity
grants as determined by the Compensation Committee of restricted
stock units valued at a maximum of $100,000, vesting 50% upon the
date of grant and 50% on the first anniversary of the date of
grant
. Upon the execution of
his employment agreement, the Compensation Committee and the Board
also approved the grant to Mr. Baker of 50,000 restricted stock
units (“RSUs”) under the Dynatronics Corporation 2018
Equity Incentive Plan (the “2018 Plan”), vesting in
four equal annual installments commencing on the first anniversary
of the grant date. Upon vesting, Mr. Baker will receive a number of
shares of common stock equal to the number of restricted stock
units that have vested
. The
Compensation Committee and the Board also approved a grant to Mr.
Baker of a non-qualified stock option to purchase 50,000 shares of
common stock in accordance with the terms of the 2018 Plan,
exercisable at a price per share equal to the closing price of the
Company’s common stock on the date of grant. The option also
vests in four equal annual installments, commencing on the first
anniversary of the date of grant. Mr. Baker will operate from our
Eagan, Minnesota location and as part of his compensation package,
the Company will pay certain relocation expenses for Mr. Baker, not
to exceed $25,000.
In connection with the change in management, we
entered into a Separation and Release Agreement (“Separation
Agreement”) with Dr. von Jako, effective August 26, 2019.
Under the terms of the Separation Agreement with Dr. von Jako, we
agreed to pay him a cash payment (less applicable withholding
taxes) equal to three months of base salary (excluding bonus or any
pro ration thereof) in installments over the three months following
September 1, 2019, the last day of his employment by the
Company
. The payment of the
severance benefit and his continued employment through September 1,
2019 are subject to the terms and conditions of the Separation
Agreement, including a release of all claims against the
Company.
We filed a Current Report on Form 8-K on August 28, 2019 to report
these and additional details concerning the change in its principal
executive officer.
2
Our Products
We sell products that we manufacture and we sell
and distribute products that are manufactured by unrelated third
parties
. To distinguish between
these types of products, in this report, we refer to products
manufactured by any of our Dynatronics affiliated entities as
“Manufactured Products” and we refer to our products
that we distribute that are manufactured by third parties as
“Distributed Products”
. All of these products are selected by us to
fulfill our goal of providing quality restorative products to our
customers. Manufactured Products accounted for approximately 74% of
our net sales (excluding freight, repairs, and miscellaneous items)
in fiscal year 2019.
We offer a broad range of restorative products for clinical use in
physical therapy, rehabilitation, orthopedics, pain management, and
athletic training. Our offerings include orthopedic soft bracing
and support products, treatment tables, exercise and rehabilitation
equipment, therapeutic modalities, and related
supplies.
We are
consistently recognized as Best in Class by our various
distribution, OEM, and branded partners for our trusted
high-quality products, on-time delivery, and superior customer
care.
Our focus on delivering products on-time is
supported by our
“Quick Ship” program
that promises shipment within one to 10 business days from date of
order for many of our products.
Our
products are used primarily by orthopedists, physical therapists,
chiropractors, athletic trainers, sports medicine practitioners,
clinics, hospitals, and consumers. The following illustrates a few
select restorative products in our portfolio.
Orthopedic Soft Bracing and Support Products
Our orthopedic soft bracing and support products are designed to
accelerate health for patients both pre- and post-surgical
intervention, and during fracture recovery, joint stabilization,
and ligament injury.
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Our
Bird & Cronin
®
brand products
include, among others, cervical collars, shoulder immobilizers, arm
slings, wrist and elbow supports, abdominal and lumbosacral
supports, maternity supports, knee immobilizers and supports, ankle
walkers and supports, plantar fasciitis splints, and cold therapy.
We
continually seek to update our line of soft bracing and support
Manufactured Products.
Physical Therapy and Rehabilitation Products
Our physical therapy and rehabilitation products are designed to
accelerate health in a wide range of clinical settings, including
physical therapy, rehabilitation, pain management, and athletic
training.
|
3
Our
Dynatron Solaris
®
,
Hausmann™, and PROTEAM™ brands, among others included
physical therapy, rehabilitation, and athletic training products.
These products include treatment tables, exercise and
rehabilitation equipment, therapeutic modalities, and related
supplies.
Treatment Tables, Exercise and Rehabilitation
Equipment
We
manufacture and distribute a premium line of power and manually
operated treatment tables, mat platforms, work tables, parallel
bars, training stairs, weight racks, treadmills, recumbent bikes,
and other related equipment. These products are essential to
treating patients in a variety of clinical
settings.
Therapeutic Modalities
We
manufacture and distribute a premium line of therapeutic modality
devices that include electrotherapy, ultrasound, phototherapy,
therapeutic laser, shortwave diathermy, radial pulse therapy, hot
and cold therapy, compression therapy, and electrodes. These
modalities can be effective in treating pain, increasing local
blood circulation, promoting relaxation of muscle spasms,
preventing retardation of disuse atrophy, and accelerating muscle
re-education. Our branded line of modalities are well known to
clinicians across all of our end-markets.
Supplies
We
manufacture and distribute various clinical supplies that include
exercise bands and tubing, topical analgesics, lotions and gels,
orthopedic bracing, paper products, athletic tape, and other
related supplies.
Sales Mix among Key Products
No single product accounted for more than
10% of total revenues in fiscal years 2019 and 2018. Sales of
Manufactured Products represented approximately 74% and 70% of
total product sales, excluding freight and other revenue, in fiscal
years 2019 and 2018, respectively. The increase in percentage of
products manufactured in fiscal year 2019 can be attributed to the
acquisition of Bird & Cronin in the second quarter of fiscal
year 2018.
Patents and Trademarks
Patents
. We own a United
States patent on our thermoelectric technology that will remain in
effect until February 2033. We also hold a United States patent on
our combination traction/phototherapy technology that will remain
in effect until December 2026, and a United States patent on our
phototherapy technology that will remain in effect until August
2025.
Trademarks and Copyrights
. We
own trademarks used in our business, particularly marks relating to
our corporate and product names. United States trademark
registrations that are significant to our business, include
Dynatron
®
, Dynatron
Solaris
®
,
Dynaheat
®
,
BodyIce
®
,
Powermatic
®
, Bird &
Cronin
®
,
Physician’s Choice
®
, and the
Hausmann Logo.
Federal
registration of a trademark enables the registered owner of the
mark to bar the unauthorized use of the registered mark in
connection with a similar product in the same channels of trade by
any third party anywhere in the United States, regardless of
whether the registered owner has ever used the trademark in the
area where the unauthorized use occurs. We may register additional
trademarks in countries where our products are or may be sold in
the future. Protection of registered trademarks in some
jurisdictions may not be as extensive as the protection provided by
registration under U.S. law.
Trademark protection continues in
some countries so long as the trademark is used, and in other
countries, so long as the trademark is registered. Trademark
registration is for fixed terms and can be renewed indefinitely.
Our print materials are also protected under copyright laws, both
in the United States and internationally.
We also
claim ownership and protection of certain product names,
unregistered trademarks, and service marks under common law. Common
law trademark rights do not provide the same level of protection
that is afforded by the registration of a trademark. In addition,
common law trademark rights are limited to the geographic area in
which the trademark is actually used. We believe these trademarks,
whether registered or claimed under common law, constitute valuable
assets, adding to recognition of the Company and the effective
marketing of our products.
4
Trade Secrets
. We own certain
intellectual property, including trade secrets that we seek to
protect, in part, through confidentiality agreements with key
employees and other parties involved in research and development.
Even where these agreements exist, there can be no assurance that
these agreements will not be breached, that we would have adequate
remedies for any breach, or that our trade secrets will not
otherwise become known to or independently developed by
competitors.
We
intend to protect our legal rights in our intellectual property by
all appropriate legal action. Consequently, we may become involved
from time to time in litigation to determine the enforceability,
scope, and validity of any of the foregoing proprietary rights. Any
patent litigation could result in substantial cost and divert the
efforts of management and technical personnel.
Warranty Service
We provide a warranty on all Manufactured
Products for time periods generally ranging in length from 90 days
to two years from the date
of sale. We service warranty claims on these products at our Utah,
Tennessee, New Jersey and Minnesota sites depending on the product
and service required. We also have field service available in other
parts of the United States. Our warranty policies are
comparable to warranties generally available in the industry.
Warranty claims were approximately $88,000 in fiscal year 2019, and
$123,000 in fiscal year 2018.
Distributed
Products carry warranties provided by the various manufacturers of
those products. We do not generally supplement these warranties or
provide unreimbursed warranty services for Distributed Products. We
also sell accessory items for our Manufactured Products that are
supplied by other manufacturers. These accessory products carry
warranties from their original manufacturers without supplement
from us.
Customers and Markets
We sell
our products to licensed practitioners such as orthopedists,
physical therapists, chiropractors, and athletic trainers. Our
customers also include professional sports teams and universities,
sports medicine specialists, post-acute care facilities, hospitals,
clinics, retail distributors and equipment manufacturer (OEM)
partners. Throughout the United States and internationally, we
utilize a network of over 300 independent dealers. Most dealers
purchase and take title to the products, which they then sell to
end users. In addition, we utilize a network of independent sales
representatives combined with a small number of targeted direct
sales representatives.
We have
entered into agreements with independent clinics and hospitals,
regional and national chains of physical therapy clinics and
hospitals, integrated delivery networks, group purchasing
organizations (“GPOs”), and government agencies. We
sell products directly to these clinics, hospitals, and groups
pursuant to preferred pricing arrangements. No single customer or
group of related accounts was responsible for 10% or more of net
sales in fiscal years 2019 and 2018.
We export products to approximately 30
different countries. Sales outside North America totaled
approximately $1,435,000 in fiscal year 2019 (or approximately 2.3%
of net sales) and $1,479,000 in fiscal year 2018 (or approximately
2.3% of net sales). We have no foreign manufacturing operations,
but we purchase certain products and components from foreign
manufacturers.
5
Competition
We do
not compete with a single competitor across all of our product
lines. Our industry comprises numerous competitors of varying
sizes, including personal care companies, branded consumer
healthcare companies and private label manufacturers. Information
necessary to determine or reasonably estimate our market share or
that of any competitor in any of these markets of our highly
fragmented industry is not readily available to us.
We compete against various manufacturers and
distributors, some of which are larger and more established, and
have greater resources available to them, than
Dynatronics.
Our competitors in soft bracing and
support products are primarily regional manufacturers, as well as
several large corporations. Our competitors in treatment
tables, exercise and
rehabilitation equipment, and related supplies are from several
domestic and international manufacturers and
distributors.
In the
clinical market for therapeutic modality devices we compete with
both domestic and foreign companies. Several of our products are
protected by patents or where patents have expired, the proprietary
technology on which those patents were based. We believe that the
integration of advanced technology in the design of our products
has distinguished Dynatronics-branded products in this competitive
market. For example, we were the first company to integrate
infrared phototherapy as part of a combination therapy device. We
believe these factors give us a competitive edge. Our primary
domestic competitors in the therapeutic device manufacturing market
include four large manufacturers.
Trusted
high-quality brands, on-time
product delivery, and superior customer care are of key importance
for us to remain competitive in this market and to maintain
established relationships within our distribution
channels.
Manufacturing and Quality Assurance
We
produce Manufactured Products at our facilities in Cottonwood
Heights, Utah, Chattanooga, Tennessee, Northvale, New Jersey and
Eagan, Minnesota. Our Manufactured Products utilize custom
components both fashioned internally from sourced raw materials, as
well as components purchased from third-party suppliers. All parts
and components purchased from these suppliers meet established
specifications. Trained staff performs all sub-assembly, final
assembly and quality assurance testing by following established
procedures. Our design and development process ensures that
products meet specified design requirements. The supply chain
process manages suppliers of components and materials to ensure
their quality and availability for our manufacturing
teams.
The
development and manufacture of a portion of our products
manufactured at our Utah facility is subject to rigorous and
extensive regulation by the U.S. Food and Drug Administration, or
FDA, and international regulatory agencies. In compliance with the
FDA’s Current Good Manufacturing Practices, or cGMP, and
standards established by the International Organization for
Standardization, or ISO, we have developed a comprehensive Quality
System that processes customer feedback and analyzes product
performance trends. Conducting prompt reviews of timely
information, allows us to respond to customer needs and ensure
quality performance of the devices we produce.
Our
Utah facility
holds certification
to ISO 13485:2016 (MDSAP Audit Model) related to country specific
requirements for the USA, Canada, and Japan.
Products
manufactured at our facilities in Utah, Tennessee, New Jersey, and
Minnesota meet the requirements of cGMP. This quality system
ensures the provision of products and services meet the
expectations of our customers.
6
Research and Development
Total research and development
(“R&D”) expenses in fiscal year 2019 were $54,000,
compared to approximately $1,194,000 in fiscal year 2018.
The
decrease is primarily due to the re-purposing of our engineering
resources to operational improvements
. As a percentage of
net sales, R&D expenses represented approximately 0.1% and 1.9%
in fiscal years 2019 and 2018,
respectively.
Regulatory Matters
The
manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by
numerous national and local governmental agencies in the United
States and other countries. In the United States, the FDA regulates
some of our products pursuant to the Medical Device Amendment of
the Food, Drug, and Cosmetic Act, or FDC Act, and regulations
promulgated under the FDC Act. Advertising and other forms of
promotion (including claims) and methods of marketing of the
products are subject to regulation by the FDA and by the Federal
Trade Commission, or FTC, under the Federal Trade Commission
Act.
As a
medical device manufacturer, we are required to register with the
FDA and once registered we are subject to inspection for compliance
with the FDA’s Quality Systems regulations. These regulations
require us to manufacture our products and maintain related
documents in a prescribed manner with respect to manufacturing,
testing, and control activities. Further, we are required to comply
with various FDA requirements for reporting customer complaints
involving our devices. The FDC Act and its medical device reporting
regulations require us to provide information to the FDA if
allegations are made that one of our products has caused or
contributed to a death or serious injury, or if a malfunction of a
product would likely cause or contribute to death or serious
injury. The FDA also prohibits an approved device from being
marketed for unapproved uses. All of our therapeutic treatment
devices as currently designed are cleared for marketing under
section 510(k) of the Medical Device Amendment to the FDC Act or
are considered 510(k) exempt. If a device is subject to section
510(k) approval requirements, the FDA must receive pre-market
notification from the manufacturer of its intent to market the
device. The FDA must find that the device is substantially
equivalent to a legally marketed predicate device before the agency
will clear the new device for marketing.
We
intend to continuously improve our products after they have been
introduced to the market. Certain modifications to our marketed
devices may require a pre-market notification and clearance under
section 510(k) before the changed device may be marketed, if the
change or modification could significantly affect safety or
effectiveness. As appropriate, we may therefore submit future
510(k) notifications to the FDA. No assurance can be given that
clearance or approval of such new applications will be granted by
the FDA on a timely basis, or at all. Furthermore, we may be
required to submit extensive pre-clinical and clinical data
depending on the nature of the product changes. All of our devices,
unless specifically exempted by regulation, are subject to the FDC
Act’s general controls, which include, among other things,
registration and listing, adherence to the Quality System
Regulation requirements for manufacturing, medical device reporting
and the potential for voluntary and mandatory recalls described
above.
In
March 2010, the Patient Protection and Affordable Care Act, known
as the Affordable Care Act, and the Health Care and Education
Reconciliation Act of 2010 were signed into law. The Affordable
Care Act provided for a 2.3% excise tax on U.S. sales of medical
devices, including our products, effective as of 2013. The excise
tax was suspended for a two-year period beginning January 1, 2016
and was further suspended through December 31, 2019. The passage of
the Affordable Care Act imposed new reporting and disclosure
requirements for device manufacturers with regard to payments or
other transfers of value made to certain healthcare providers.
Specifically, any transfer of value exceeding $10 in a single
transfer or cumulative transfers over a one-year period exceeding
$100 to any statutorily defined practitioner (primarily physicians,
podiatrists, and chiropractors) must be reported to the federal
government by March 31
st
of each year for
the prior calendar year. The data is assembled and posted to a
publicly accessible website by September 30
th
following the March
31
st
reporting date. If we fail to provide these reports, or if the
reports we provide are not accurate, we could be subject to
significant penalties. Several states have adopted similar
reporting requirements. We believe we are in compliance with the
Affordable Care Act and we have systems in place to assure
continued compliance.
7
The medical device excise tax included in
the Affordable Care Act is an excise tax on the first sale of
medical devices by a manufacturer, producer, or importer equal to
2.3% of the sales price. Taxable medical devices include any device
as defined in Section 201(h) of the FDC Act intended for humans,
with the exception of eyeglasses, contact lenses, hearing aids and
any other device determined by the Secretary of Health and Human
Services to be a type which is generally purchased by the general
public at retail for individual use (“exempt devices”).
On December 18, 2015, President Obama signed into law H.R. 2029,
the “Consolidated Appropriations Act, 2016,” which
included a two-year moratorium on the
medical device excise tax, effective January 1,
2016. In January 2018, the tax was suspended for an additional
two-year period. Absent further legislative action, the tax will be
automatically reinstated for medical device sales starting on
January 1, 2020.
In
March 2017, the FDA published guidance relating to Class II devices
that would no longer be required to submit a pre-market
notification (510(k)). This list was finalized in the Federal
Register on July 11, 2017. Among the Class II devices exempted by
this determination are some phototherapy devices such as those
manufactured by us. That guidance indicates that such devices are
considered safe and effective without adding the burden of a
pre-market approval by the FDA. While this change diminishes the
regulatory burden for such products, it also lowers the barriers to
entry for competitive products. We view this change as generally
positive for us and our ability to leverage existing technology
competencies in this segment.
Failure
to comply with applicable FDA regulatory requirements may result
in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines, and criminal prosecutions. Any such action
by the FDA could materially adversely affect our ability to
successfully market our products. Our Utah, Tennessee and New
Jersey facilities are inspected periodically by the FDA for
compliance with the FDA’s cGMP and other requirements,
including appropriate reporting regulations and various
requirements for labeling and promotion. The FDA Current Quality
Systems Regulations are similar to the ISO 13485 Quality Standard.
The cGMP regulation requires, among other things, that (i) the
manufacturing process be regulated and controlled by the use of
written procedures, and (ii) the ability to produce devices that
meet the manufacturer’s specifications be validated by
extensive and detailed testing of every aspect of the
process.
Advertising of our products is subject to
regulation by the FTC under the FTC Act. Section 5 of the FTC Act
prohibits unfair methods of competition and unfair or deceptive
acts or practices in or affecting commerce. Section 12 of the FTC
Act provides that the dissemination or the causing to be
disseminated of any false advertisement pertaining to, among other
things, drugs, cosmetics, devices or foods, is an unfair or
deceptive act or practice. Pursuant to this FTC requirement, we are
required to have adequate substantiation for all advertising claims
made about our products. The type of substantiation required
depends upon the product claims made.
If the
FTC has reason to believe the law is being violated (e.g., a
manufacturer or distributor does not possess adequate
substantiation for product claims), it can initiate an enforcement
action. The FTC has a variety of administrative and judicial
processes and remedies available to it for enforcement, including
compulsory process authority, cease and desist orders, and
injunctions. FTC enforcement could result in orders requiring,
among other things, limits on advertising, consumer redress, and
divestiture of assets, rescission of contracts, or such other
relief as may be deemed necessary. Violation of such orders could
result in substantial financial or other penalties. Any such action
against us by the FTC could materially and adversely affect our
ability to successfully market our products.
From
time to time, legislation is introduced in the Congress of the
United States or in state legislatures that could significantly
change the statutory provisions governing the approval,
manufacturing, and marketing of medical devices and products like
those we manufacture. In addition, FDA regulations and guidance are
often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted,
or FDA regulations, guidance, or interpretations will be changed,
and what the impact of such changes, if any, may be on our business
and our results of operations. We cannot predict the nature of any
future laws, regulations, interpretations, or applications, nor can
we determine what effect additional governmental regulations or
administrative orders, when and if promulgated, domestically or
internationally, would have on our business in the future. They
could include, however, the recall or discontinuance of certain
products, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling, and
additional scientific substantiation. The necessity of complying
with any or all such requirements could have a material adverse
effect on our business, results of operations or financial
condition.
In
addition to compliance with FDA rules and regulations, we are also
required to comply with international regulatory laws including
Health Canada, CE Mark, or other regulatory schemes used by other
countries in which we choose to do business. Foreign governmental
regulations have become increasingly stringent and more common, and
we may become subject to more rigorous regulation by foreign
governmental authorities in the future. Penalties for
non-compliance with foreign governmental regulation could be
severe, including revocation or suspension of a company’s
business license and criminal sanctions. Any domestic or foreign
governmental law or regulation imposed in the future may have a
material adverse effect on us. We believe all of our present
products are in compliance in all material respects with all
applicable performance standards in countries where the products
are sold. We also believe that our products comply with cGMP,
record keeping and reporting requirements in the production and
distribution of the products in the United States.
8
Foreign Government Regulation
Although it is not
a current focus, we may expand our activities to market our
products in select international markets in the future. The
regulatory requirements for our products vary from country to
country. Some countries impose product standards, packaging
requirements, labeling requirements and import restrictions on some
of the products we manufacture and distribute. Each country has its
own tariff regulations, duties and tax requirements. Failure to
comply with applicable foreign regulatory requirements may subject
us to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and
criminal prosecution.
Environment
Environmental
regulations and the cost of compliance with them are not material
to our business. Numerous federal, state and local laws regulate
the sale of products containing certain identified ingredients that
may impact human health and the environment. For instance,
California has enacted Proposition 65, which requires the
disclosure of specified listed ingredient chemicals on the labels
of products sold in that state and the use of warning labels when
such ingredients may be found. We believe we are compliant with
such regulations.
Seasonality
Our
business is affected by some seasonality, which could result in
fluctuation in our operating results. Sales are typically higher in
our first and fourth fiscal quarters (the summer and spring
months), while sales in our second and third fiscal quarters are
generally slower (the fall and winter months). Therefore, our
quarterly operating results are not necessarily indicative of
operating results for the entire year, and historical operating
results in a quarterly or annual period are not necessarily
indicative of future operating results.
Employees
As
of June 30, 2019, we employed 284 people, of which 269 were
employed on a full-time basis. Certain of our employees (52
individuals) are subject to a collective bargaining agreement
scheduled to expire in February 2022. We believe our labor
relations with both union and non-union employees are
satisfactory.
I
tem 1A. Risk Factors
In
addition to the risks described elsewhere in this report and in
certain of our other filings with the SEC, we have identified the
following risks and uncertainties, among others, as risks that
could cause our actual results to differ materially from those
contemplated by us or by any forward-looking statement contained in
this report. You should consider the following risk factors, in
addition to the information presented elsewhere in this report,
particularly under the heading "Cautionary Note Regarding
Forward-Looking Statements," on page 1 of this report, and
statements and disclosures contained in the sections “Part I,
Item 1. Business,” “Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations,” as well as in the filings we make from time to
time with the SEC, in evaluating us, our business and an investment
in our securities. The fact that some of these risk factors may be
the same or similar to those that we have included in other reports
that we have filed with the SEC in past periods means only that the
risks are present in multiple periods. We believe that many of the
risks that are described here are part of doing business in the
industry in which we operate and will likely be present in all
periods. The fact that certain risks are endemic to the industry
does not lessen their significance.
9
Risks Related to Our Business and Industry
We have a
recent history of losses, and we may not return to or sustain
profitability in the future.
We have incurred net losses for
eight consecutive fiscal years. We cannot predict when we will
again achieve profitable operations or that we will not require
additional financing to fulfill our business objectives. We may not
be able to increase revenue in future periods, and our revenue
could decline or grow more slowly than we expect. We may incur
significant losses in the future for many reasons, including due to
the risks described in this report.
We may need additional funding and may be
unable to raise additional capital when needed, which could
adversely affect our results of operations and financial
condition.
In the future, we may require additional capital
to pursue business opportunities or acquisitions or respond to
challenges and unforeseen circumstances. We may also decide to
engage in equity or debt financings or enter into credit facilities
for other reasons. We may not be able to secure additional debt or
equity financing in a timely manner, on favorable terms, or at all.
Any debt financing obtained by us in the future could involve
restrictive covenants relating to our capital raising activities
and other financial and operational matters, which may make it more
difficult for us to obtain additional capital and to pursue
business opportunities, including potential acquisitions. Failure
to obtain additional financing when needed or on acceptable terms
would have a material adverse effect on our business
operations.
Our level of indebtedness may harm our
financial condition and results of operations.
Our level of
indebtedness will impact our future operations in many important
ways, including, without limitation, by:
●
Requiring that a
portion of our cash flows from operations be dedicated to the
payment of any interest or amortization required with respect to
outstanding indebtedness;
●
Increasing our
vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure; and
●
Limiting our
ability to obtain additional financing for working capital,
acquisitions, capital expenditures, general corporate and other
purposes.
At the
scheduled maturity of our credit facilities or in the event of an
acceleration of a debt facility following an event of default, the
entire outstanding principal amount of the indebtedness under such
facility, together with all other amounts payable thereunder from
time to time, will become due and payable. It is possible that we
may not have sufficient funds to pay such obligations in full at
maturity or upon such acceleration. If we default and are not able
to pay any such obligations due, our lenders have liens on
substantially all of our assets and could foreclose on our assets
in order to satisfy our obligations. If we are unable to meet our
debt service obligations and other financial obligations, we could
be forced to restructure or refinance our indebtedness and other
financial transactions, seek additional equity capital or sell our
assets. We might then be unable to obtain such financing or capital
or sell our assets on satisfactory terms, if at all. Our line of
credit with a lender matures in December 2020, which will require
that we renew the facility at that time. There is no assurance we
will be successful in renewing the credit facility with our current
lender or refinancing the facility with another lender. In
addition, any refinancing of our indebtedness could be at
significantly higher interest rates, and/or result in significant
transaction fees.
If we fail to generate sufficient cash flow in
the future, we may require additional financing.
If we are
unable to generate sufficient cash flow from operations in the
future to service our debt, we may be required to refinance some or
all our existing debt, sell assets, borrow more money or raise
capital through the sale of our equity securities. If these or
other kinds of additional financing become necessary, we may be
unable to arrange such financing on terms that would be acceptable
to us or at all.
10
Our inability to successfully manage growth
through acquisitions, and the integration of recently acquired
businesses, products or technologies may present significant
challenges and could harm our operating results.
Over the
past 30 months, we have made two significant acquisitions. Our
business plan includes the acquisition of other businesses,
products, and technologies. In the future we expect to acquire or
invest in other businesses, products or technologies that we
believe could complement our existing product lines, expand our
customer base and operations, and enhance our technical
capabilities or otherwise offer growth or cost-saving
opportunities. As we grow through acquisitions, we face additional
challenges of integrating the operations, personnel, culture,
information management systems and other characteristics of the
acquired entity with our own. Efforts to integrate future
acquisitions may be hampered by delays, the loss of certain
employees, changes in management, suppliers or customers,
proceedings resulting from employment terminations, culture
clashes, unbudgeted costs, and other issues, which may occur at
levels that are more severe or prolonged than anticipated. If we
identify an appropriate acquisition candidate, we may not be
successful in negotiating favorable terms of the acquisition,
financing the acquisition or effectively integrating the acquired
business, product or technology into our existing business and
operations. Our due diligence may fail to identify all of the
problems, liabilities or other shortcomings or challenges of an
acquired business, product or technology, including issues related
to intellectual property, product quality or product architecture,
regulatory compliance practices, revenue recognition or other
accounting practices, or employee or customer issues.
We have
incurred, and will likely continue to incur, significant expenses
in connection with negotiating and consummating acquisitions, we
may not achieve the synergies or other benefits we expected to
achieve, and we may incur write-downs, impairment charges or
unforeseen liabilities that could negatively affect our operating
results or financial position or could otherwise harm our business.
If we finance acquisitions by issuing convertible debt or equity
securities, the ownership interest of our existing shareholders may
be significantly diluted, which could adversely affect the market
price of our stock. Further, contemplating, investigating,
negotiating or completing an acquisition and integrating an
acquired business, product or technology could divert management
and employee time and resources from other matters that are
important to our existing business.
If we fail to establish new sales and
distribution relationships or maintain our existing relationships,
or if our third party distributors and dealers fail to commit
sufficient time and effort or are otherwise ineffective in selling
our products, our results of operations and future growth could be
adversely impacted.
The sale and distribution of
certain of our products depend, in part, on our relationships with
a network of third-party distributors and dealers. These
third-party distributors and dealers maintain the customer
relationships with the hospitals, clinics, orthopedists, physical
therapists and other healthcare professionals that purchase, use
and recommend the use of our products. Although our internal sales
staff trains and manages these third-party distributors and
dealers, we do not control or directly monitor the efforts that
they make to sell our products. In addition, some of the dealers
that we use to sell our products also sell products that directly
compete with our core product offerings. These dealers may not
dedicate the necessary effort to market and sell our products or
they may source products we distribute directly from the
manufacturer. If we fail to attract and maintain relationships with
third-party distributors and dealers or fail to adequately train
and monitor the efforts of the third-party distributors and dealers
that market and sell our products, or if our existing third-party
distributors and dealers choose not to carry our products, our
results of operations and future growth could be adversely
affected.
11
Healthcare reform in the United States has had
and is expected to continue to have a significant effect on our
business and on our ability to expand and grow our business
.
The Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act, significantly expanded health
insurance coverage to uninsured Americans and changed the way
health care is financed by both governmental and private payers.
These provisions may be modified, repealed, or otherwise
invalidated, in whole or in part. Future rulemaking could affect
rebates, prices or the rate of price increases for health care
products and services, or required reporting and disclosure. We
cannot predict the timing or impact of any future rulemaking or
changes in the law. For example, in December 2015, Congress passed
legislation known as the PATH Act. This legislation suspended the
medical device tax imposed by the Affordable Care Act for calendar
years 2016 and 2017. In January 2018, the tax was suspended for an
additional two year period. Although the excise tax has been
suspended by Congress until the end of calendar 2019, its status is
unclear for 2020 and subsequent years. During each of the fiscal
years ended June 30, 2015 and 2016, prior to suspension of the
excise tax, we incurred approximately $200,000 in additional taxes,
related to this tax, which reduced our gross profit. Without
specific action by Congress to extend the suspension, the medical
device tax is scheduled to be reinstated in January 2020. We cannot
predict whether the suspension will be continued beyond January 1,
2020. If the excise tax is not repealed or further suspended, it
will likely adversely impact our future results of
operations.
Our products are regulated by numerous
government agencies, both inside and outside the United
States.
The impact of this on us is direct, to the extent we
are subject to these laws and regulations, and indirect in that in
a number of situations, even though we may not be directly
regulated by specific healthcare laws and regulations, our products
must be capable of being used by our customers in a manner that
complies with those laws and regulations. The manufacture,
distribution, marketing, and use of some of our products are
subject to extensive regulation and increased scrutiny by the FDA
and other regulatory authorities globally. Any new Class II product
must undergo lengthy and rigorous testing and other extensive,
costly and time-consuming procedures mandated by FDA and foreign
regulatory authorities. Changes to current Class II products may be
subject to vigorous review, including additional 510(k) and other
regulatory submissions, and approvals are not certain. Our
facilities must be approved and licensed prior to production and
remain subject to inspection from time to time thereafter. Failure
to comply with the requirements of FDA or other regulatory
authorities, including a failed inspection or a failure in our
adverse event reporting system, could result in adverse inspection
reports, warning letters, product recalls or seizures, monetary
sanctions, injunctions to halt the manufacture and distribution of
products, civil or criminal sanctions, refusal of a government to
grant approvals or licenses, restrictions on operations or
withdrawal of existing approvals and licenses. Any of these actions
could cause a loss of customer confidence in us and our products,
which could adversely affect our sales. The requirements of
regulatory authorities, including interpretative guidance, are
subject to change and compliance with additional or changing
requirements or interpretative guidance may subject us or our
products to further review, result in product launch delays or
otherwise increase our costs.
Changing market patterns may affect demand for
our products.
Increasingly, medical markets are moving
toward evidence-based practices. Such a move could shrink demand
for products we offer if it is deemed there is inadequate evidence
to support the efficacy of the products. Likewise, to achieve
market acceptance in such environments may require expenditure of
funds to do clinical research that may or may not prove adequate
efficacy to satisfy all customers.
The cost of healthcare has risen significantly
over the past decade and numerous initiatives and reforms initiated
by legislators, regulators and third-party payers to curb these
costs have resulted in a consolidation trend in the restorative
products industry as well as among our customers, including
healthcare providers.
These conditions could result in
greater pricing pressures and limitations on our ability to sell to
important market segments, such as group purchasing organizations,
integrated delivery networks and large single accounts. We expect
that market demand, government regulation, third-party
reimbursement policies and societal pressures will continue to
change the worldwide healthcare industry, resulting in further
business consolidations and alliances which may exert further
downward pressure on the prices of our products and adversely
impact our business, financial condition and results of
operations.
12
The sale, marketing, and pricing of our
products, and relationships with healthcare providers are under
increased scrutiny by federal, state, and foreign government
agencies.
Compliance with anti-kickback statutes, false
claims laws, the FDC Act (including as these laws relate to
off-label promotion of products), and other healthcare related
laws, as well as competition, data and patient privacy, and export
and import laws, is under increased focus by the agencies charged
with overseeing such activities, including FDA, the Office of
Inspector General (OIG), Department of Justice (DOJ) and the FTC.
The DOJ and the SEC have increased their focus on the enforcement
of the U.S. Foreign Corrupt Practices Act (“FCPA”)
described below under “
Our
commercial activities internationally are subject to special risks
associated with doing business in environments that present a
heightened corruption and trade sanctions risk.”
The
laws and standards governing the promotion, sale, and reimbursement
related to our products and laws and regulations governing our
relationships with healthcare providers and governments can be
complicated, are subject to frequent change and may be violated
unknowingly. Violations or allegations of violations of these laws
may result in large civil and criminal penalties, debarment from
participating in government programs, diversion of management time,
attention and resources and may otherwise have an adverse effect on
our business, financial condition and results of operations. In the
event of a violation, or the allegation of a violation of these
laws, we may incur substantial costs associated with compliance or
to alter one or more of our sales and marketing practices and we
may be subject to enforcement actions which could adversely affect
our business, financial condition and results of
operations.
Our commercial activities internationally are
subject to special risks associated with doing business in
environments and jurisdictions that present a heightened corruption
and trade sanctions risk.
We operate our business and market
and sell products internationally, including in countries in Asia,
Latin America, and the Middle East, which may be considered
business environments that pose a relatively higher risk of
corruption than the United States, and therefore present greater
political, economic and operational risk to us, including an
increased risk of trade sanction violations. In addition, there are
numerous risks inherent in conducting our business internationally,
including, but not limited to, potential instability in
international markets, changes in regulatory requirements
applicable to international operations, currency fluctuations in
foreign countries, political, economic and social conditions in
foreign countries and complex U.S. and foreign laws and treaties,
including tax laws, the FCPA, and the Bribery Act of 2010
(“U.K. Anti-Bribery Act”). The FCPA prohibits
U.S.-based companies and their intermediaries from making improper
payments to government officials for the purpose of obtaining or
retaining business. The FCPA also imposes recordkeeping and
internal controls requirements on public companies in the U.S. The
U.K. Anti-Bribery Act prohibits both domestic and international
bribery as well as bribery across both public and private sectors.
In recent years, the number of investigations and other enforcement
activities under these laws has increased. As we expand our
business to include pursuit of opportunities in certain parts of
the world that experience government corruption, in certain
circumstances compliance with anti-bribery laws may conflict with
local customs and practices. Our policies mandate compliance with
all applicable anti-bribery laws. Further, we require our partners,
subcontractors, agents and others who work for us or on our behalf
to comply with these and other anti-bribery laws. If we fail to
enforce our policies and procedures properly or maintain adequate
record-keeping and internal accounting practices to accurately
record our transactions, we may be subject to regulatory sanctions.
In the event that we believe or have reason to believe that our
employees have or may have violated applicable anti-corruption
laws, including the FCPA, trade sanctions or other laws or
regulations, we are required to investigate or have outside counsel
investigate the relevant facts and circumstances, and if violations
are found or suspected, could face civil and criminal penalties,
and significant costs for investigations, litigation, settlements
and judgments, which in turn could have a material adverse effect
on our business.
If
significant tariffs or other restrictions are placed on imports or
any related counter-measures are taken by foreign countries, our
revenue and results of operations may be materially harmed
.
Potential changes in international
trade relations between the United States and other countries,
could have a material adverse effect on our
business.
There is
currently significant uncertainty about the future relationship
between the United States and various other countries, with respect
to trade policies, treaties, government regulations and tariffs.
The
U.S. government has adopted a new approach to trade policy
including in some cases to renegotiate, or potentially terminate,
certain existing bilateral or multi-lateral trade agreements. The
U.S. government has also imposed tariffs on certain foreign goods.
These measures may materially increase costs for goods imported
into the United States. This in turn could require us to materially
increase prices to our customers which may reduce demand, or, if we
are unable to increase prices to adequately address any tariffs,
quotas or duties result in lowering our margin on products sold.
Changes in U.S. trade policy have resulted in, and could result in
more, U.S. trading partners adopting responsive trade policies,
including imposition of increased tariffs, quotas or duties, making
it more difficult or costly for us to export our products to those
countries. The implementation of a border tax, tariff or higher
customs duties on our products manufactured abroad or components
that we import into the U.S., or any potential corresponding
actions by other countries in which we do business, could
negatively impact our financial
performance.
13
If we fail to obtain regulatory approval in
foreign jurisdictions, then we cannot market our products in those
jurisdictions.
We sell some of our products in foreign
jurisdictions. Many foreign countries in which we market or may
market our products have regulatory bodies and restrictions similar
to those of the FDA. International sales are subject to foreign
government regulation, the requirements of which vary substantially
from country to country. The time required to obtain approval by a
foreign country may be longer or shorter than that required for FDA
approval and the requirements may differ. Companies are now
required to obtain a CE Mark, which shows conformance with the
requirements of applicable European Conformity directives, prior to
the sale of some medical devices within the European Union. Some of
our current products that require CE Markings have them and it is
anticipated that additional and future products may require them as
well. We may be required to conduct additional testing or to
provide additional information, resulting in additional expenses,
to obtain necessary approvals. If we fail to obtain approval in
such foreign jurisdictions, we would not be able to sell our
products in such jurisdictions, thereby reducing the potential
revenue from the sale of our products.
We store, process, and use data, some of which
contain personal information and are subject to complex and
evolving laws and regulations regarding privacy, data protection
and other matters, which are subject to change.
Some of the
data we store, process, and use, contains personal information,
subjecting us to a variety of laws and regulations in the United
States and other countries with respect to privacy, rights of
publicity, data protection, content, protection of minors, and
consumer protection. These laws can be particularly restrictive.
Both in the United States and abroad, these laws and regulations
are evolving and remain subject to change. Several proposals are
pending before federal, state and foreign legislative and
regulatory bodies that could significantly affect our business. A
number of states have enacted laws or are considering the enactment
of laws governing the release of credit card or other personal
information received from consumers:
●
California has
enacted legislation, the California Consumer Privacy Act
(“CCPA”) that, among other things, will require covered
companies to provide new disclosures to California consumers, and
afford such consumers new abilities to opt-out of certain sales of
personal information, when it goes into effect on January 1,
2020.
●
The EU General Data
Protection Regulation (“GDPR”), which came into effect
on May 25, 2018, establishes new requirements applicable to the
processing of personal data (i.e., data which identifies an
individual or from which an individual is identifiable), affords
new data protection rights to individuals, and imposes penalties
for serious data breaches. Individuals also have a right to
compensation under GDPR for financial or non-financial losses. GDPR
has imposed additional responsibility and liability in relation to
our processing of personal data in the EU. GDPR has also required
us to change our various policies and procedures in the EU and, if
we are not compliant, could materially adversely affect our
business, results of operations and financial
condition.
●
Canada’s
Personal Information and Protection of Electronic Documents Act
provides Canadian residents with privacy protections in regard to
transactions with businesses and organizations in the private
sector and sets out ground rules for how private sector
organizations may collect, use, and disclose personal information
in the course of commercial activities.
●
In November 2016,
the Standing Committee of China’s National People’s
Congress passed its Cybersecurity Law (“CSL”), which
took effect in June 2017. The CSL is the first Chinese law that
systematically lays out regulatory requirements on cybersecurity
and data protection, subjecting many previously under-regulated or
unregulated activities in cyberspace to government
scrutiny.
14
The costs of compliance with, and other
burdens imposed by, the GDPR, CSL and these other laws may limit
the use and adoption of our products and services and could have an
adverse impact on our business, operating results and financial
condition. Foreign governments also may attempt to apply such laws
extraterritorially or through treaties or other arrangements with
U.S. governmental entities. In addition, the application and
interpretation of these laws and regulations are often uncertain
and could result in investigations, claims, changes to our business
practices, increased cost of operations and declines in sales, any
of which could materially adversely affect our business, results of
operations and financial condition. We cannot assure you that the
privacy policies and other statements regarding our practices will
be found sufficient to protect us from liability or adverse
publicity relating to the privacy and security of personal
information. Whether and how existing local and international
privacy and consumer protection laws in various jurisdictions apply
to the internet and other online technologies is still uncertain
and may take years to resolve. Privacy laws and regulations, if
drafted or interpreted broadly, could be deemed to apply to the
technology we use and could restrict our information collection
methods or decrease the amount and utility of the information that
we would be permitted to collect. A determination by a court or
government agency of a failure, or perceived failure, by us, the
third parties with whom we work or our products and services to
protect employee, applicant, vendor, website visitor or customer
personal data (including as a result of a breach by or of a
third-party provider) or to comply with any privacy-related laws,
government regulations or directives or industry self-regulatory
principles or our posted privacy policies could result in damage to
our reputation, legal proceedings or actions against us by
governmental entities or otherwise, which could have an adverse
effect on our business. In addition, concerns about our practices
with regard to the collection, use, disclosure, or security of
personally identifiable information or other privacy-related
matters, even if unfounded and even if we are in compliance with
applicable laws, could damage our reputation and harm our business.
We have and post on our website our own privacy policy and cookie
statement concerning the collection, use and disclosure of user
personal data.
Failures in, material damage to, or
interruptions in our information technology systems, software or
websites, including as a result of cyber-attacks, and difficulties
in updating our existing software or developing or implementing new
software could have a material adverse effect on our business or
results of operations.
We depend increasingly on our
information technology systems in the conduct of our business. For
example, we own, license or otherwise contract for sophisticated
technology and systems to do business online with customers,
including for order entry and fulfillment, processing and payment,
product shipping and product returns. We also maintain internal and
external communications, product inventory, supply, production and
enterprise management, and personnel information on information
systems. Our information systems are subject to damage or
interruption from power outages, computer and telecommunications
failures, computer viruses, security breaches and natural and
manmade disasters. In particular, from time to time we and third
parties who provide services for us experience cyber-attacks,
attempted breaches of our or their information technology systems
and networks or similar events, which could result in a loss of
sensitive business or customer information, systems interruption or
the disruption of our operations. The techniques used to obtain
unauthorized access, disable or degrade service or sabotage systems
change frequently and may be difficult to detect for long periods
of time, and accordingly we may be unable to anticipate and prevent
all data security incidents. Like many businesses, our systems come
under frequent attack from third parties. We are required to expend
capital and other resources to protect against such cyber-attacks
and potential security breaches or to alleviate problems caused by
such potential breaches or attacks. Despite the constant monitoring
of our technology systems and hiring of specialized third parties
to identify and address any vulnerabilities through implementation
of multi-tiered network security measures, it is possible that
computer programmers and hackers, or even internal users, may be
able to penetrate, create systems disruptions or cause shutdowns of
our network security or that of third-party companies with which we
have contracted. As a result, we could experience significant
disruptions of our operations and incur significant expenses
addressing problems created by these breaches. Such unauthorized
access could disrupt our business and could result in a loss of
revenue or assets and any compromise of customer information could
subject us to customer or government litigation and harm our
reputation, which could adversely affect our business and growth.
Although we
maintain cyber liability insurance that provides liability and
insurance coverages, subject to limitations and conditions of the
policies, our insurance may not be sufficient to protect against
all losses or costs related to any future breaches of our
systems.
Market access could be a limiting factor in
our growth.
The emergence of GPO’s that control a
significant amount of product flow to hospitals and other acute
care customers may limit our ability to grow in the acute care
space. GPO’s issue contracts to manufacturers approximately
every three years through a bidding process. Despite repeated
efforts, we have been relatively unsuccessful in landing any
significant GPO contracts. The process for being placed on contract
with a GPO is rigorous and non-transparent. Performance Health, a
large competitor, controls the majority of GPO contracts in our
market space holding in many instances a sole source
contract.
15
A
significant percentage of our workforce is subject to a collective
bargaining agreement.
Approximately 18% of our workforce is
subject to a collective bargaining agreement, which is subject to
negotiation and renewal every three years. The current agreement is
scheduled to expire in February 2022. Our inability to negotiate
the renewal of this collective bargaining agreement, or any
prolonged work stoppages could have a material adverse effect on
our business, results of operations, financial condition and cash
flows. We cannot ensure that we will be successful in negotiating
new collective bargaining agreements, that such negotiations will
not result in significant increases in the cost of labor, or that a
breakdown in such negotiations will not result in the disruption of
our operations. In addition, employees who are not currently
represented by labor unions may seek representation in the future.
Although we have generally enjoyed good relations with both our
union and non-union employees, if we are subject to labor actions,
we may experience an adverse impact on our operating
results.
We rely on a combination of patents, trade
secrets, and nondisclosure and non-competition agreements to
protect our proprietary intellectual property, and we will continue
to do so.
While we intend to defend against any threats to
our intellectual property, these patents, trade secrets, or other
agreements may not adequately protect our intellectual property.
Third parties could obtain patents that may require us to negotiate
licenses to conduct our business, and the required licenses may not
be available on reasonable terms or at all. We also rely on
nondisclosure and non-competition agreements with certain
employees, consultants, and other parties to protect, in part,
trade secrets and other proprietary rights. We cannot be certain
that these agreements will not be breached, that we will have
adequate remedies for any breach, that others will not
independently develop substantially equivalent proprietary
information, or that third parties will not otherwise gain access
to our trade secrets or proprietary knowledge.
Certain of the products we sell are subject to
market and technological obsolescence.
We offer
approximately 10,000 variations of products. If our customers
discontinue purchasing a given product, we might have to record
expense related to the diminution in value of inventories we have
in stock, and depending on the magnitude, that expense could
adversely impact our operating results. In addition to the products
of others that we distribute, we design and manufacture our own
medical devices and products. We may be unable to effectively
develop and market products against the products of our competitors
in a highly competitive industry. Our present or future products
could be rendered obsolete or uneconomical by technological
advances by our competitors. Competitive factors include price,
customer service, technology, innovation, quality, reputation and
reliability. Our competition may respond more quickly to new or
emerging technologies, undertake more extensive marketing
campaigns, have greater financial, marketing and other resources
than us or be more successful in attracting potential customers,
employees and strategic partners. Given these factors, we cannot
guarantee that we will be able to continue our level of success in
the industry.
We are dependent on a limited number of
third-party suppliers for components and raw materials and the loss
of any of these suppliers, or their inability to provide us with an
adequate supply of materials that meet our quality and other
requirements, could harm our business
. We rely on
third-party suppliers to provide components for our products,
manufacture products that we do not manufacture ourselves and
perform services that we do not provide ourselves, including
package-delivery services. Because these suppliers are independent
third parties with their own financial objectives, actions taken by
them could have a materially adverse effect on our results of
operations. The risks of relying on suppliers include our inability
to enter into contracts with such suppliers on reasonable terms,
breach, or termination by suppliers of their contractual
obligations, inconsistent or inadequate quality control, relocation
of supplier facilities, and disruption to suppliers’
business, including work stoppages, suppliers’ failure to
comply with complex and changing regulations, and third-party
financial failure. Any problems with our suppliers and associated
disruptions to our supply chain could materially negatively impact
our ability to supply the market, substantially decrease sales,
lead to higher costs, or damage our reputation with our customers,
and any longer-term disruptions could potentially result in the
permanent loss of our customers, which could reduce our recurring
revenues and long-term profitability. Disruption to our supply
chain could occur as a result of any number of events, including,
but not limited to, increases in wages that drive up prices; the
imposition of regulations, trade protection measures, tariffs,
duties, import/export restrictions, quotas or embargoes on key
components; labor stoppages; transportation failures affecting the
supply and shipment of materials and finished goods; the
unavailability of raw materials; severe weather conditions; natural
disasters; civil unrest, geopolitical developments, war or
terrorism; computer viruses, physical or electronic breaches, or
other information system disruptions or security breaches; and
disruptions in utility and other services.
We may be adversely affected by product
liability claims, unfavorable court decisions or legal
settlements.
Our business exposes us to potential product
liability risks that are inherent in the design, manufacture and
marketing of medical devices. We maintain product liability
insurance coverage which we deem to be adequate based on historical
experience; however, there can be no assurance that coverage will
be available for such risks in the future or that, if available, it
would prove sufficient to cover potential claims or that the
present amount of insurance can be maintained in force at an
acceptable cost. In addition, we may incur significant legal
expenses regardless of whether we are found to be liable.
Furthermore, the assertion of such claims, regardless of their
merit or eventual outcome, also may have a material adverse effect
on our business reputation and results of operations.
16
Intellectual property litigation and
infringement claims could cause us to incur significant expenses or
prevent us from selling certain of our products.
The medical
device industry is characterized by extensive intellectual property
litigation and, from time to time, we are the subject of claims by
third parties of potential infringement or misappropriation.
Regardless of outcome, such claims are expensive to defend and
divert the time and effort of management and operating personnel
from other business issues. A successful claim or claims of patent
or other intellectual property infringement against us could result
in our payment of significant monetary damages and/or royalty
payments or negatively impact our ability to sell current or future
products in the affected category.
Risks Related to Our Common Stock
A decline in the price of our common stock
could affect our ability to raise working capital and adversely
impact our operations.
Our operating results, including
components of operating results such as gross margin and cost of
product sales, may fluctuate from time to time, and such
fluctuations could adversely affect our stock price. Our operating
results have fluctuated in the past and can be expected to
fluctuate from time to time in the future. The market price for our
common stock may also be affected by our ability to meet or exceed
expectations of analysts or investors. Any failure to meet these
expectations, even if minor, could materially adversely affect the
market price of our common stock. A prolonged decline in the price
of our common stock for any reason could result in a reduction in
our ability to raise capital.
Our stock price has been volatile and we
expect that it will continue to be volatile.
For example,
during the year ended June 30, 2019, the selling price of our
common stock ranged from a high of $3.25 to a low of $1.21. The
volatility of our stock price can be due to many factors,
including:
●
quarterly
variations in our operating results;
●
changes in the
market’s expectations about our operating
results;
●
failure of our
operating results to meet the expectation of securities analysts or
investors in a particular period;
●
changes in
financial estimates and recommendations by securities analysts
concerning us or the healthcare industry in general;
●
strategic decisions
by us or our competitors, such as acquisitions, divestments,
spin-offs, joint ventures, strategic investments or changes in
business strategy;
●
operating and stock
price performance of other companies that investors deem comparable
to us;
●
news reports
relating to trends in our markets;
●
changes in laws and
regulations affecting our business;
●
material
announcements by us or our competitors;
●
material
announcements by the manufacturers and suppliers we
use;
●
sales of
substantial amounts of our common stock by our directors, executive
officers or significant shareholders or the perception that such
sales could occur; and
●
general economic
and political conditions such as trade wars and tariffs, recession,
and acts of war or terrorism.
17
Investors
in our securities may experience substantial dilution upon the
conversion of preferred stock to common, exercise of stock options
and warrants, future issuances of stock, grants of restricted stock
and the issuance of stock in connection with acquisitions of other
companies.
Our articles of incorporation authorize the
issuance of up to 100,000,000 shares of common stock and 50,000,000
shares of preferred stock. Our Board of Directors has the authority
to issue additional shares of common and preferred stock up to the
authorized capital stated in the articles of incorporation. The
Board may choose to issue some or all of such shares of common or
preferred stock to acquire one or more businesses or to provide
additional financing in the future. As of September 20, 2019, we
had outstanding a total of 2,000,000 shares of Series A 8%
Convertible Preferred Stock (the “Series A Preferred”),
1,459,000 shares of Series B Convertible Preferred Stock (the
“Series B Preferred”), and 1,440,000 shares of Series C
Non-Voting Convertible Preferred Stock (the “Series C
Preferred”), as well as warrants for the purchase of
approximately 6,738,500 shares of common stock. The Series A
Preferred, Series B Preferred and Series C Preferred shares are
convertible into a total of 4,899,000 shares of common stock. The
conversion of these outstanding shares of preferred stock and the
exercise of the warrants will result in substantial dilution to our
common shareholders. In addition, from time to time, we have issued
and we expect we will continue to issue stock options or restricted
stock grants or similar awards to employees, officers, and
directors pursuant to our equity incentive award plans. Investors
in our equity securities may expect to experience dilution as these
awards vest and are exercised by their holders and as the
restrictions lapse on the restricted stock grants. We also may
issue stock or stock purchase warrants for the purpose of raising
capital to fund our growth initiatives, in connection with
acquisitions of other companies, or in connection with the
settlement of obligations or indebtedness, which would result in
further dilution of existing shareholders. The issuance of any such
shares of common or preferred stock may result in a reduction of
the book value or market price of the outstanding shares of our
common stock. If we do issue any such additional shares of common
stock or securities convertible into or exercisable for the
purchase of common stock, such issuance also will cause a reduction
in the proportionate ownership and voting power of all other
shareholders and may result in a change in control of the
Company.
The stock markets (including the NASDAQ
Capital Market, on which we list our common stock) have experienced
significant price and volume fluctuations.
As a result, the
market price of our common stock could be similarly volatile, and
investors in our common stock may experience a decrease in the
value of their shares, including decreases unrelated to our
financial condition, operating performance or prospects. The market
price of our common stock could be subject to wide fluctuations in
response to a number of factors, including strategic decisions by
us or our competitors, such as acquisitions, divestments,
spin-offs, joint ventures, strategic investments or changes in
business strategy.
We are able to issue shares of preferred stock
with greater rights and preferences than our common stock.
Our Board of Directors is authorized to issue one or more series of
preferred stock from time to time without any action on the part of
our shareholders. The Board also has the power, without shareholder
approval, to set the terms of any such series of preferred stock
that may be issued, including voting rights, dividend rights and
preferences over our common stock with respect to dividends and
other terms. If we issue additional preferred stock in the future
that has a preference over our common stock with respect to the
payment of dividends or other terms, or if we issue additional
preferred stock with voting rights that dilute the voting power of
our common stock, the rights of holders of our common stock or the
market price of our common stock would be adversely
affected.
The holders
of the Series A and Series B Preferred are entitled to receive
dividends on the Series A and Series B Preferred they hold and
depending on whether these dividends are paid in cash or stock, the
payment of such dividends will either decrease cash that is
available to us to invest in our business or dilute the holdings of
other shareholders
.
Our agreements
with the holders of the Series A and Series B Preferred provide
that they will receive quarterly dividends at 8%, subject to
adjustment as provided in the applicable declarations of the rights
and preferences of these series of preferred stock. We may under
certain circumstances elect to pay these dividends in stock.
Payment of the dividends in cash decreases cash available to us for
use in our business and the use of shares of common stock to pay
these dividends results in dilution of our existing
shareholders.
The
concentration or potential concentration of equity ownership
by
Prettybrook Partners,
LLC and its affiliates may limit your ability to influence
corporate matters.
As of June 30,
2019, Prettybrook Partners, LLC and its managing directors and
affiliates (collectively “Prettybrook”), owned
approximately
1,096,000
shares of common stock, 1,069,000 shares of Series A Preferred, and
300,000 shares of Series B Preferred. These securities represent
approximately 20% of the voting power of our issued and outstanding
equity securities. Under the terms of the Series A Preferred, by
agreement with us and the remaining holders of the Series A
Preferred, Prettybrook has the right to appoint up to three members
of our seven-member Board of Directors (the Preferred Directors)
and has appointed a non-voting observer to the Board. Moreover, the
exercise of warrants issued to Prettybrook in the Series A
Preferred financing and the Series B Preferred financing
transactions in which Prettybrook was an investor could further
enable Prettybrook to exert significant control over operations and
influence over all corporate activities, including the election or
removal of directors and the outcome of tender offers, mergers,
proxy contests or other purchases of common stock that could give
our shareholders the opportunity to realize a premium over the
then-prevailing market price for their shares of common stock. This
concentrated control will limit your ability to influence corporate
matters and, as a result, we may take actions that our shareholders
do not view as beneficial. In addition, such concentrated control
could discourage others from initiating changes of control. In such
cases, the perception of our prospects in the market and the market
price of our common stock may be adversely
affected.
18
Sales of a large number of our securities, or
the perception that such sales might occur, could depress the
market price of our common stock.
A substantial number of
shares of our equity securities are eligible for immediate resale
in the public market. Any sales of substantial amounts of our
securities in the public market, or the perception that such sales
might occur, could depress the market price of our common
stock.
Our ability
to issue preferred stock could delay or prevent takeover
attempts.
As of September 20, 2019, we had 4,899,000 shares
of convertible preferred stock outstanding and our Board of
Directors has the authority to cause us to issue, without any
further vote or action by the shareholders, up to approximately
45,101,000 additional shares of preferred stock, no par value per
share, in one or more series, and 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 of preferred
stock. In the event of issuance, the preferred stock could be used
as a method of discouraging, delaying, deferring or preventing a
change in control without further action by the shareholders, even
where shareholders might be offered a premium for their shares.
Although we have no present intention to issue any shares of our
preferred stock, we may do so in the future under appropriate
circumstances.
Not
applicable.
I
tem 2. Properties
Our
corporate headquarters and principal executive offices are located
at 7030 Park Centre Drive, Cottonwood Heights, Utah. Cottonwood
Heights is a suburb of Salt Lake City, Utah. The headquarters
consist of a single facility housing administrative offices,
manufacturing and warehousing space, totaling approximately 36,000
square feet. We sold the building in August 2014, and now lease it
back from the purchaser. The monthly lease payment is approximately
$27,000 and the lease terminates in 2029. We account for the
lease-back agreement as a capital lease which results in
depreciation and implied interest expense each period, offset by an
amortized gain on the sale of the property. Overall the net monthly
occupancy cost of this lease is $29,000.
We own
a 53,200 square-foot manufacturing facility and undeveloped acreage
available for future expansion in Chattanooga, Tennessee, subject
to a mortgage requiring monthly payments to a bank of approximately
$14,000 and maturing in 2021. The interest rate on this obligation
is 6.4% per annum.
We lease a 60,000 square-foot manufacturing
and office facility in Northvale, New Jersey to house our Hausmann
brand operations. The initial two-year term of this lease commenced
in April 2017, with monthly lease payments of $30,000 for the first
year and 2% increases in each subsequent year. The lease provides
for two options to extend the term of the lease for two years per
extension term, subject to annual 2% per year increases in base
rent, and a third extension option at the end of the second option
term for an additional five years at fair market value.
The lease was
negotiated at arms’ length as part of the applicable
acquisition transaction. We believe that the terms of the agreement
are commercially reasonable for the market in which the facility is
located.
We lease a 85,000 square-foot manufacturing
and office facility in Eagan, Minnesota to house our Bird &
Cronin brand operations. This lease has an initial three-year term
that commenced in October 2017, with monthly lease payments of
$50,000. We may extend the lease under two, two-year optional
extensions. The landlord is Bird & Cronin, Inc., from which we
acquired the Bird & Cronin assets and operations in 2017.
Stockholders of Bird & Cronin, Inc. include employees of the
Company.
The lease was
negotiated at arms’ length as part of the applicable
acquisition transaction. We believe that the terms of the agreement
are commercially reasonable for the market in which the facility is
located.
We believe the facilities described above
are adequate for our current needs and that they will accommodate
our presently expected growth and operating needs. As our business
continues to grow, additional facilities or the expansion of
existing facilities may be
required.
We also own equipment used in the
manufacture and assembly of our products and computer equipment.
The nature of this equipment is not specialized and replacements
may be readily obtained from any of a number of
suppliers.
19
I
tem 3.
Legal Proceedings
There
are no pending legal proceedings of a material nature to which we
are a party or to which any of our property is the
subject.
I
tem 4.
Mine Safety Disclosures
Not
applicable.
PART II
I
tem 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information
Our common stock is included on the NASDAQ
Capital Market (symbol: DYNT). The following table shows the range
of high and low sales prices for our common stock as quoted on the
NASDAQ system for the quarterly periods
indicated.
|
Fiscal
Year Ended June 30,
|
2019
|
2018
|
||
|
|
High
|
Low
|
High
|
Low
|
|
1
st
Quarter
(July-September)
|
$
3.25
|
$
2.65
|
$
3.15
|
$
2.10
|
|
2
nd
Quarter
(October-December)
|
$
2.99
|
$
2.50
|
$
3.05
|
$
2.15
|
|
3
rd
Quarter
(January-March)
|
$
2.79
|
$
1.96
|
$
3.55
|
$
2.40
|
|
4
th
Quarter
(April-June)
|
$
2.09
|
$
1.21
|
$
3.25
|
$
2.80
|
Outstanding Common Shares and
Number of Shareholders
As of September 20, 2019,
we had
approximately 8,679,231 shares of common stock issued and
outstanding
and approximately 390 shareholders of record,
not including shareholders whose shares are held in
“nominee” or “street” name by a bank,
broker or other holder of record.
Dividends
We have
never paid cash dividends on our common stock. Our anticipated
capital requirements are such that we intend to follow a policy of
retaining earnings, if any, in order to finance the development of
the business.
As of September 20, 2019, we had outstanding
2,000,000 shares of Series A Preferred, 1,459,000 shares of Series
B Preferred, and 1,440,000 shares of Series C Non-Voting
Convertible Preferred Stock (“Series C Preferred”).
These series of preferred stock have rights and preferences that
rank senior to or in certain circumstances, on par with, our common
stock. The declarations of the rights and preferences of these
series of preferred stock contain covenants that prohibit us from
declaring and distributing dividends on our common stock without
first making all distributions that are due to any senior
securities. Dividends payable on the Series A and the Series B
Preferred accrue at the rate of 8% per year and are payable
quarterly. We may, at our option under certain circumstances, make
distributions of these dividends in cash or in shares of common
stock. When possible, we pay dividends on the Series A and Series B
Preferred in shares of common stock. The formula for paying these
dividends in common stock can change the effective yield on the
dividend to more or less than 8% depending on the market price of
the common stock at the time of
issuance.
Purchases of Equity Securities
We did
not purchase any shares of common stock during the year ended June
30, 2019 or in the prior seven fiscal years.
20
I
tem 6. Selected Financial
Data
Not
applicable.
I
tem 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion contains assumptions,
estimates and other forward-looking statements that involve a
number of risks and uncertainties, including those discussed under
“Risk Factors,” “Cautionary Note Regarding
Forward-Looking Statements,” and elsewhere in this Annual
Report on Form 10-K. These risks could cause our actual results to
differ materially from those anticipated in these forward-looking
statements
.
The following discussion contains assumptions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties, including those discussed under the heading
“Cautionary Note Regarding Forward-Looking Statements,”
on page 1 of this Form 10-K,
“
Risk Factors
”
(Part I, Item 1A of this Form 10-K) and elsewhere in this Form
10-K. These risks could cause our actual results to differ
materially from those anticipated in these forward-looking
statements.
The following discussion and
analysis of our financial condition and results of operations
should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto, which are included in Part
II, Item 8 of this report.
Overview
We
design,
manufacture, and sell a broad range of restorative products for
clinical use in physical therapy, rehabilitation, orthopedics, pain
management, and athletic training. Through our distribution
channels, we market and sell to orthopedists, physical therapists,
chiropractors, athletic trainers, sports medicine practitioners,
clinics, hospitals, and consumers.
Results of Operations
Fiscal Year 2019 Compared to
Fiscal Year 2018
Net Sales
Net sales in fiscal year 2019 decreased
$1,850,000
, or 2.9%, to
$62,565,000, compared to net sales of $
64,415,000
in fiscal year 2018
.
The
year-over-year decrease in net sales included an increase of
$5,969,000 attributable to the acquisition of Bird & Cronin,
offset by a decrease of $7,819,000, primarily of
physical therapy
and rehabilitation products
compared to the prior year
period. The lower sales are reflective of general softness in
demand primarily in our direct sales channel, transitions in our
sales force, and our product rationalization strategy.
Gross Profit
Gross profit for the year ended June 30,
2019 decreased $1,247,000, or 6.1%, to $19,174,000, or 30.6% of net
sales. By comparison, gross profit for the year ended June 30, 2018
was $
20,421,000
,
or 31.7% of net sales.
The year-over-year
decrease in gross profit included an increase of $1,978,000
attributable to the acquisition of Bird & Cronin, offset by
lower sales of physical therapy and rehabilitation products, which
accounted for approximately $2,340,000 in lower gross profit, and
by reduced gross margin percentage resulting in $885,000 in lower
gross profit. The year-over-year decrease in gross margin
percentage to 30.6% from
31.7
%
was caused primarily by lower sales of manufactured physical
therapy and rehabilitation products and a change in channel mix for
our physical therapy and rehabilitation products as sales in our
direct channels decreased proportionally more than in our dealer
channels.
Selling, General, and
Administrative Expenses
Selling, general, and administrative
(“SG&A”) expenses decreased
$1,702,000
, or 7.9%, to
$19,970,000 for the year ended June 30, 2019, compared to
$
21,672,000
for the year ended June 30, 2018.
Selling expenses
decreased $1,022,000 compared to the prior year period, which
included an increase of $413,000 associated with the addition of
Bird & Cronin operations, offset by $1,435,000 in lower selling
expenses due primarily to lower fixed sales management salaries and
reduced commissions. General and administrative expenses decreased
$680,000 compared to the prior-year period, driven primarily by:
(1) a $1,232,000 increase associated with the addition of the Bird
& Cronin operations, (2) a $197,000 increase in other G&A
expenses, (3) a decrease of $679,000 in severance expenses, (4) a
decrease of $290,000 in acquisition expenses, and (5) a $1,140,000
decrease in research and development expenses due to the
re-purposing of our engineering resources to operational
improvements.
21
Interest
Expense
Interest expense increased approximately
$84,000 in fiscal year 2019, to approximately $512,000, compared to
approximately $428,000 in fiscal year 2018. The increase in
interest expense is primarily related to higher interest rates and
higher average borrowings on our line of credit resulting in
interest charges of $269,000 and $185,000 for the years ended June
30, 2019 and 2018, respectively. Another large component of
interest expense is imputed interest related to the sale/leaseback
of our corporate headquarters facility which totaled $167,000 and
$179,000, respectively, for the years ended June 30, 2019 and 2018.
Interest expense also included interest on the mortgage on our
Tennessee property, imputed interest related to other capital
leases, and interest paid on equipment loans for office furnishings
and vehicles.
Net Loss Before Income
Tax
Pre-tax
loss for the year ended June 30, 2019 was $916,000 compared to
$
1,673,000
for the year ended June 30, 2018. The $757,000 improvement in
pre-tax loss was primarily attributable to a decrease of $1,702,000
in SG&A
and a $375,000 gain
on revaluation of the Bird & Cronin acquisition earn-out
liability
, partially offset by a decrease of
$1,247,000 in gross profit, and an increase of $84,000 in interest
expense discussed above.
Income Tax
Income tax provision was $5,000 in fiscal
year 2019, compared to an income tax benefit of $
70,000
in
fiscal year 2018.
Net
Loss
Net loss for the year ended June 30, 2019
was $921,000, compared to $
1,602,000
for the year ended June 30, 2018.
The reasons for the
change in net loss are the same as those given under the headings
Net Loss Before Income Tax
and
Income Tax
in this
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(“MD&A”)
.
Net Loss Attributable to Common
Stockholders
Net loss attributable to common stockholders
decreased $1,783,000 to $1,716,000 ($0.21 per share) for the year
ended June 30, 2019, compared to $
3,499,000 ($0.53
per share)
for the year ended June 30, 2018.
The decrease in net
loss attributable to common stockholders for the is due primarily
to: (1) a $78,000 decrease in preferred stock dividends; (2) a
$1,024,000 decrease in deemed dividends and accretion of discounts;
and (3) a $681,000 decrease in net
loss.
22
Liquidity and Capital Resources
We have historically financed operations
through cash from operations, available cash reserves, borrowings
under our asset-based lending facility (see
Line of Credit
, below), and the
proceeds from the sale of our equity securities. As of June 30,
2019, we had $156,000 in cash and cash equivalents, compared to
$
1,596,000
as
of June 30, 2018. During fiscal year 2019, we had positive cash
flows from operating activities. We believe that our existing
revenue stream, cash flows from consolidated operations, current
capital resources, and borrowing availability under the line of
credit provide sufficient liquidity to fund operations through at
least September 30, 2020.
Working
capital was $5,638,000 as of June 30, 2019, compared to working
capital of $
6,837,000
as
of June 30, 2018. The current ratio was 1.4 to 1 as of June 30,
2019, compared to 1.5 to 1 as of June 30, 2018. Current assets were
50.2% of total assets as of June 30, 2019, and 50.9% of total
assets as of June 30, 2018.
Cash and Cash Equivalents and
Restricted Cash
Our cash and cash equivalents and restricted
cash position decreased $1,440,000 to $256,000 as of June 30, 2019,
compared to $
1,696,000
as
of June 30, 2018. The primary sources of cash in the year ended
June 30, 2019, were net borrowings of $255,000 under our line of
credit and approximately $326,000 of net cash provided by operating
activities. Primary uses of cash included payments of acquisition
holdbacks of $1,380,000.
Accounts
Receivable
Trade accounts receivable, net of allowance
for doubtful accounts, decreased approximately $316,000, or 4.0%,
to $7,495,000 as of June 30, 2019, from $
7,811,000
as
of June 30, 2018. The decrease was primarily due to a decline in
sales in the year ended June 30, 2019.
Trade accounts
receivable represents amounts due from our customers including
dealers and distributors, medical practitioners, clinics,
hospitals, colleges, universities and sports teams.
We
believe that our estimate of the allowance for doubtful accounts is
adequate based on our historical experience and relationships with
our customers. Accounts receivable are generally collected within
approximately 40 days of invoicing.
Inventories
Inventories, net of reserves, increased
$540,000, or 4.9%, to $11,528,000 as of June 30, 2019, compared to
$
10,988,000
as of June 30, 2018. The increase resulted primarily from inventory
level fluctuations based on timing of large inventory purchases
from domestic and overseas suppliers as well as variations in sales
and production activities. During fiscal year 2019, we recorded in
cost of goods sold of $0 in non-cash write-offs of inventory
related to discontinued product lines, excess repair parts, product
rejected for quality standards, and other non-performing inventory
compared to inventory write-offs of $
692,000
in
fiscal year 2018. We believe that our estimate of the allowance for
inventory reserves is adequate based on our historical knowledge
and product sales trends.
Accounts Payable
Accounts payable increased approximately
$577,000, or 16.9%, to $3,990,000 as of June 30, 2019, from
$
3,413,000
as
of June 30, 2018.
The increase in
accounts payable was driven primarily by the timing of purchases
and payments.
23
Line of
Credit
The
asset-based line of credit facility (“Line of Credit”)
is available pursuant to the loan and security agreement, as
amended (the “Loan and Security Agreement”),
entered into with Bank of the West in March 2017, that matures on
December 15, 2020. Our obligations under the Line of Credit
are secured by a first-priority security interest in substantially
all of our assets. The Loan and Security Agreement requires a
lockbox arrangement and contains affirmative and negative
covenants, including covenants that restrict our ability to, among
other things, incur or guarantee indebtedness, incur liens, dispose
of assets, engage in mergers and consolidations, make acquisitions
or other investments, make changes in the nature of our business,
and engage in transactions with affiliates. The agreement also
contains a financial covenant requiring a minimum monthly
consolidated fixed charge coverage ratio. The Line of Credit
provides for revolving credit borrowings in an amount 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% (4.6% as of June 30, 2019). The Line of Credit is
subject to an unused line fee of .25%.
On
June 21, 2019, we entered into the Fifth Modification Agreement
(the “Modification”) to modify the Loan and Security
Agreement and amend certain terms applicable to the Line of Credit.
The Modification includes, among other things, an amendment to
certain provisions of the Loan and Security Agreement, including
changes to the financial covenants of the Line of Credit,
eliminates the consolidated leverage ratio and amends the minimum
consolidated fixed charge coverage ratio. As modified, the fixed
charge coverage ratio will apply only when the excess availability
amount under the Line of Credit is less than the greater
of $1,000,000 or 10% of the borrowing base.
As of
June 30, 2019, we had borrowed $6,541,000 under the Line of Credit
compared to total borrowings of $
6,286,000
as
of June 30, 2018. There was approximately $
1,480,000
and $
1,370,000
available to borrow
as of June 30, 2019 and 2018,
respectively
.
Debt
Long-term debt
decreased approximately $164,000 to approximately $303,000 as of
June 30, 2019, compared to approximately $467,000 as of June 30,
2018. Our long-term debt is primarily comprised of the mortgage
loan on our office and manufacturing facility in Tennessee maturing
in 2021, and also includes loans related to equipment and a
vehicle. The principal balance on the mortgage loan is
approximately $239,000, of which $91,000 is classified as long-term
debt, with monthly principal and interest payments of
$13,000.
Capital Lease Obligations
Capital
lease obligations as of June 30, 2019 and 2018 totaled
approximately $3,199,000. Our capital lease obligations consist
primarily of a capitalized building lease.
In conjunction with the sale and leaseback of our
corporate headquarters in August 2014, we entered into a 15-year
lease, classified as a capital lease, originally valued at
$3,800,000. The building lease asset is amortized on a straight
line basis over 15 years at approximately $252,000 per year. Total
accumulated amortization related to the leased building is
approximately $1,239,000 at June 30, 2019. The sale generated a
profit of $2,300,000, which is being recognized straight-line over
the life of the lease at approximately $150,000 per year as an
offset to amortization expense. The balance of the deferred gain as
of June 30, 2019 is $1,529,000. Lease payments, currently
approximately $27,000, are payable monthly and increase annually by
approximately 2% per year over the life of the lease. Imputed
interest for the fiscal year ended June 30, 2019 was approximately
$167,000. In addition to the Utah building, we lease certain
equipment which have been determined to be capital leases. As of
June 30, 2019, future minimum gross lease payments required under
the capital leases were as follows:
|
2020
|
$
454,150
|
|
2021
|
461,266
|
|
2022
|
468,516
|
|
2023
|
442,631
|
|
2024
|
384,754
|
|
Thereafter
|
2,113,348
|
|
Total
|
$
4,324,665
|
24
Acquisition
Holdback and Earn-Out Liability
Acquisition
holdback and earn-out liabilities decreased $1,755,000 or
77.8%, to $500,000 as of June 30, 2019, from
$2,255
,000
as of
June 30, 2018. The decrease was driven by a $375,000 reduction in
the fair value of the earn-out liability and payments of
acquisition holdbacks of $1,380,000.
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 Plan
In 2011, our Board of Directors adopted a
stock repurchase plan authorizing repurchases of shares in the open
market, through block trades or otherwise. Decisions to repurchase
shares under this plan are based upon market conditions, the level
of our cash balances, general business opportunities, and other
factors. The Board may periodically approve amounts for share
repurchases under the plan. As of June 30, 2019, approximately
$449,000 remained available under this authorization for purchases
under the plan.
No purchases have
been made under this plan since September 28,
2011.
Critical Accounting Policies
This
MD&A is based upon our Consolidated Financial Statements (see
Part II, Item 8 below), which have been prepared in accordance with
accounting principles generally accepted in the U.S.
(“GAAP”). The preparation of these financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses as
well as the disclosure of contingent assets and liabilities. We
regularly review our estimates and assumptions. The SEC has
requested that all registrants address their most critical
accounting policies. The SEC has indicated that a “critical
accounting policy” is one which is both important to the
representation of the registrant’s financial condition and
results and requires management’s most difficult, subjective
or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain. We base our estimates on past experience and on various
other assumptions our management believes to be reasonable under
the circumstances, the results of which form the basis for making
judgments about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results will
differ, and may differ materially from these estimates under
different assumptions or conditions. Additionally, changes in
accounting estimates could occur in the future from period to
period. Our management has discussed the development and selection
of our most critical financial estimates with the audit committee
of our Board of Directors. The following paragraphs identify our
most critical accounting policies:
25
Inventories
The nature of our business requires that we
maintain sufficient inventory on hand at all times to meet the
requirements of our customers. We record finished goods inventory
at the lower of standard cost, which approximates actual cost
(first-in, first-out) or market. Raw materials are recorded at the
lower of cost (first-in, first-out) or market. Inventory valuation
reserves are maintained for the estimated impairment of the
inventory. Impairment may be a result of slow-moving or excess
inventory, product obsolescence or changes in the valuation of the
inventory. In determining the adequacy of reserves, we analyze the
following, among other things:
●
Current inventory
quantities on hand;
●
Product acceptance
in the marketplace;
●
Customer
demand;
●
Historical
sales;
●
Forecast
sales;
●
Product
obsolescence;
●
Strategic marketing
and production plans
●
Technological
innovations; and
●
Character of the
inventory as a distributed item, finished manufactured item or raw
material.
Any modifications to estimates of inventory
valuation reserves are reflected in cost of goods sold within the
statements of operations during the period in which such
modifications are determined necessary by management. As of June
30, 2019, and 2018, our inventory valuation reserve balance, was
approximately $139,000 and $
458,000
,
respectively, and our inventory balance was $11,528,000 and
$
10,988,000
,
net of reserves, respectively.
Revenue
Recognition
Our
sales force and distributors sell our products to end users,
including
orthopedists,
physical therapists, chiropractors, athletic trainers, sports
medicine practitioners, clinics, hospitals, and
consumers
.
Revenue is recognized when performance obligations
under the terms of a contract with a customer are satisfied which
occurs upon the transfer of control of a product. This occurs
either upon shipment or delivery of goods, depending on whether the
contract is FOB origin or FOB destination.
Revenue
is measured as the amount of consideration expected to be received
in exchange for transferring products to a
customer.
Contracts
sometimes allow for forms of variable consideration including
rebates and incentives. In these cases, the Company estimates the
amount of consideration to which it will be entitled in exchange
for transferring products to customers utilizing the most likely
amount method. Rebates and incentives are estimated based on
contractual terms or historical experience and a liability is
maintained for rebates and incentives that have been earned but are
unpaid.
Revenue
is reduced by estimates of potential future contractual discounts
including prompt payment discounts. Provisions for contractual
discounts are recorded as a reduction to revenue in the period
sales are recognized. Estimates are made of the contractual
discounts that will eventually be incurred. Contractual discounts
are estimated based on negotiated contracts and historical
experience.
Shipping
and handling activities are accounted for as fulfillment
activities. As such, shipping and handling are not considered
promised services to our customers.
Costs for shipping
and handling of products to customers are recorded as cost of
sales.
Allowance for Doubtful
Accounts
We must
make estimates of the collectability of accounts receivable. In
doing so, we analyze historical bad debt trends, customer credit
worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $7,495,000 and
$
7,811,000
,
net of allowance for doubtful accounts of $90,000 and $370,000 as
of June 30, 2019, and 2018, respectively.
26
Deferred Income Taxes
A
valuation allowance is required when there is significant
uncertainty as to the realizability of deferred tax assets. The
realization of deferred 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 considered
the following possible sources of taxable income when assessing the
realization of our deferred tax assets:
●
future reversals of
existing taxable temporary differences;
●
future taxable
income or loss, exclusive of reversing temporary differences and
carryforwards;
●
tax-planning
strategies; and
●
taxable income in
prior carryback years.
We
considered both positive and negative evidence in determining the
continued need for a valuation allowance, including the
following:
Positive evidence:
●
Current forecasts
indicate that we will generate pre-tax income and taxable income in
the future. However, there can be no assurance that the new
strategic plans will result in profitability.
●
A majority of our
tax attributes have indefinite carryover periods.
Negative evidence:
●
We have eight years
of cumulative losses as of June 30, 2019.
We
place more weight on objectively verifiable evidence than on other
types of evidence and management currently believes that available
negative evidence outweighs the available positive evidence. We
have therefore determined that we do not meet the “more
likely than not” threshold that deferred tax assets will be
realized. Accordingly, a valuation allowance is required. Any
reversal of the valuation allowance will favorably impact our
results of operations in the period of reversal.
As
of June 30, 2019 and June 30, 2018, we recorded a full valuation
allowance against our net deferred income tax assets.
The anticipated accumulated net
operating loss carryforward as of June 30, 2019, is approximately
$6,212,000, which will begin to expire in
2037.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements included in
Item 8 of the Form 10-K for a description of recent accounting
pronouncements.
27
Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations. We have
no transactions or obligations with related parties that are not
disclosed, consolidated into or reflected in our reported results
of operations or financial position. We do not guarantee any
third-party debt.
Business
Plan and Outlook
This past year our
focus has been on driving profitability in our legacy business
through multiple cost-reduction initiations, while continuing to
build our restorative products platform for long-term success. We
are confident that the steps we have taken will position the
company for success moving forward. In fiscal 2020 we are focused
on executing our strategies as follows:
●
Drive sales through
enhancing our partnerships with key strategic accounts, optimizing
our sales channels, demand generation, and continuing to deliver
superior customer care;
●
Increase our
operating profitability through disciplined management of our
financial ratios, cost reduction initiatives, and product portfolio
management;
●
Pursue merger and
acquisition opportunities in our core markets through pipeline
management, disciplined valuation, and superior execution;
and
●
Bolster our
communication with the investor community through investor
conferences, non-deal road shows, and calls with equity research
analysts and investors.
We are
actively pursuing an acquisition strategy to consolidate other
manufacturers and distributors in our core markets (i.e. physical
therapy, rehabilitation, orthopedics, pain management, and athletic
training). We are primarily seeking candidates that fall into the
following categories:
●
Manufacturers in
markets where we have a competitive advantage;
●
Distributors that
extend geographic reach or provide different channel
access;
●
Tuck-in
manufacturers / distributors in adjacent markets;
and
●
Value-oriented businesses with
growth potential, stable margins, and cash
flow.
I
tem 7A. Quantitative and
Qualitative Disclosures about Market Risk
Not
Applicable.
28
I
tem 8. Financial Statements and
Supplementary Data
Audited
consolidated financial statements and related documents required by
this item are included in this report on the pages indicated in the
following table:
|
|
Page
|
|
|
|
|
30
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
33
|
|
|
|
|
|
34
|
|
|
|
|
|
35
|
29
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders
Dynatronics
Corporation
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Dynatronics
Corporation and subsidiaries (the “Company”) as of June
30, 2019 and 2018, the related consolidated statements of
operations, stockholders’ equity, and cash flows for the
years then ended, and the related notes (collectively referred to
as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects,
the financial position of the Company as of June 30, 2019 and 2018,
and the results of its operations and its cash flows for each of
the two years in the period ended June 30, 2019, in conformity with
U.S. generally accepted accounting principles.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we
express no such opinion.
Our
audits included performing procedures to assess the risk of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company’s auditor since October 24,
2016.
/s/
Tanner LLC
Salt
Lake City, Utah
September
25, 2019
30
|
DYNATRONICS
CORPORATION
|
||
|
C
onsolidated Balance Sheets
|
||
|
As
of June 30, 2019 and 2018
|
||
|
|
|
|
|
Assets
|
2019
|
2018
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
155,520
|
$
1,595,757
|
|
Restricted
cash
|
100,510
|
100,359
|
|
Trade accounts
receivable, less allowance for doubtful accounts of $89,500 as of
June 30, 2019 and $370,300 as of June 30, 2018
|
7,495,309
|
7,810,846
|
|
Other
receivables
|
2,776
|
52,819
|
|
Inventories,
net
|
11,527,521
|
10,987,855
|
|
Prepaid
expenses
|
632,061
|
778,654
|
|
Income tax
receivable
|
-
|
95,501
|
|
|
|
|
|
Total
current assets
|
19,913,697
|
21,421,791
|
|
|
|
|
|
Property and
equipment, net
|
5,677,419
|
5,850,899
|
|
Intangible assets,
net
|
6,407,374
|
7,131,758
|
|
Goodwill
|
7,116,614
|
7,116,614
|
|
Other
assets
|
516,841
|
532,872
|
|
|
|
|
|
Total
assets
|
$
39,631,945
|
$
42,053,934
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
3,989,546
|
$
3,412,960
|
|
Accrued payroll and
benefits expense
|
1,373,481
|
1,929,465
|
|
Accrued
expenses
|
1,038,726
|
830,243
|
|
Warranty
reserve
|
207,988
|
205,850
|
|
Line of
credit
|
6,540,639
|
6,286,037
|
|
Current portion of
long-term debt
|
173,921
|
164,003
|
|
Current portion of
capital lease obligations
|
283,781
|
226,727
|
|
Current portion of
deferred gain
|
150,448
|
150,448
|
|
Current portion of
acquisition holdback and earn-out liability
|
500,000
|
1,379,512
|
|
Income tax
payable
|
16,751
|
-
|
|
|
|
|
|
Total
current liabilities
|
14,275,281
|
14,585,245
|
|
|
|
|
|
Long-term debt, net
of current portion
|
129,428
|
303,348
|
|
Capital lease
obligations, net of current portion
|
2,915,241
|
2,972,540
|
|
Deferred gain, net
of current portion
|
1,379,105
|
1,529,553
|
|
Acquisition
holdback and earn-out liability, net of current
portion
|
-
|
875,000
|
|
Other
liabilities
|
177,181
|
411,466
|
|
|
|
|
|
Total
liabilities
|
18,876,236
|
20,677,152
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
Preferred stock, no
par value: Authorized 50,000,000 shares; 4,899,000 shares and
4,899,000 shares issued and outstanding as of June 30, 2019 and
June 30, 2018, respectively
|
11,641,816
|
11,641,816
|
|
Common stock, no
par value: Authorized 100,000,000 shares; 8,417,793 shares and
8,089,398 shares issued and outstanding as of June 30, 2019 and
June 30, 2018, respectively
|
21,320,106
|
20,225,107
|
|
Accumulated
deficit
|
(12,206,213
)
|
(10,490,141
)
|
|
|
|
|
|
Total
stockholders' equity
|
20,755,709
|
21,376,782
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$
39,631,945
|
$
42,053,934
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
31
|
DYNATRONICS
CORPORATION
|
||
|
C
onsolidated Statements of Operations
|
||
|
For
the Years Ended June 30, 2019 and 2018
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
sales
|
$
62,565,117
|
$
64,414,910
|
|
Cost of
sales
|
43,391,518
|
43,994,235
|
|
Gross
profit
|
19,173,599
|
20,420,675
|
|
|
|
|
|
Selling, general,
and administrative expenses
|
19,969,696
|
21,671,569
|
|
Operating
loss
|
(796,097
)
|
(1,250,894
)
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
Interest
expense, net
|
(512,186
)
|
(428,462
)
|
|
Other
income, net
|
392,035
|
6,786
|
|
Net other
expense
|
(120,151
)
|
(421,676
)
|
|
|
|
|
|
Loss before income
taxes
|
(916,248
)
|
(1,672,570
)
|
|
|
|
|
|
Income tax
(provision) benefit
|
(5,474
)
|
70,314
|
|
|
|
|
|
Net
loss
|
(921,722
)
|
(1,602,256
)
|
|
|
|
|
|
Deemed dividend on
convertible preferred stock and accretion of discount
|
-
|
(1,023,786
)
|
|
Preferred stock
dividend, cash
|
-
|
(104,884
)
|
|
Convertible
preferred stock dividend, in common stock
|
(794,350
)
|
(768,074
)
|
|
|
|
|
|
Net loss
attributable to common stockholders
|
$
(1,716,072
)
|
$
(3,499,000
)
|
|
|
|
|
|
Basic and diluted
net loss per common share
|
$
(0.21
)
|
$
(0.53
)
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
Basic and
diluted
|
8,246,188
|
6,622,429
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
32
|
DYNATRONICS
CORPORATION
|
||||||
|
C
onsolidated Statements of Stockholders'
Equity
|
||||||
|
For
the Years Ended June 30, 2019 and 2018
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Common
stock
|
Preferred
stock
|
Accumulated
|
stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
deficit
|
equity
|
|
Balance at July 1,
2017
|
4,653,165
|
$
11,838,022
|
3,559,000
|
$
8,501,295
|
$
(8,014,927
)
|
$
12,324,390
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
103,853
|
254,758
|
-
|
-
|
-
|
254,758
|
|
|
|
|
|
|
|
|
|
Issuance of
preferred stock and warrants, net of issuance costs of
$399,879
|
-
|
-
|
4,381,935
|
10,600,121
|
-
|
10,600,121
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in cash
|
-
|
-
|
-
|
-
|
(104,884
)
|
(104,884
)
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
290,445
|
768,074
|
-
|
-
|
(768,074
)
|
-
|
|
|
|
|
|
|
|
|
|
Preferred stock
converted to common stock
|
3,041,935
|
7,459,600
|
(3,041,935
)
|
(7,459,600
)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Reduction in equity
retained for acquisition holdback
|
-
|
(95,347
)
|
-
|
-
|
-
|
(95,347
)
|
|
|
|
|
|
|
|
|
|
Preferred stock
beneficial conversion and accretion of discount
|
-
|
-
|
-
|
1,023,786
|
-
|
1,023,786
|
|
|
|
|
|
|
|
|
|
Dividend of
beneficial conversion and accretion of discount
|
-
|
-
|
-
|
(1,023,786
)
|
-
|
(1,023,786
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,602,256
)
|
(1,602,256
)
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2018
|
8,089,398
|
$
20,225,107
|
4,899,000
|
$
11,641,816
|
$
(10,490,141
)
|
$
21,376,782
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
63,998
|
300,649
|
-
|
-
|
-
|
300,649
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
302,105
|
794,350
|
-
|
-
|
(794,350
)
|
-
|
|
|
|
|
|
|
|
|
|
Reduction in equity
retained for acquisition holdback
|
(37,708
)
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(921,722
)
|
(921,722
)
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2019
|
8,417,793
|
$
21,320,106
|
4,899,000
|
$
11,641,816
|
$
(12,206,213
)
|
$
20,755,709
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
33
|
DYNATRONICS
CORPORATION
|
||
|
C
onsolidated Statements of Cash Flows
|
||
|
For
the Years Ended June 30, 2019 and 2018
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$
(921,722
)
|
$
(1,602,256
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization of property and equipment
|
887,013
|
673,566
|
|
Amortization
of intangible assets
|
724,384
|
638,360
|
|
Amortization
of other assets
|
40,635
|
74,568
|
|
Loss
(gain) on sale of property and equipment
|
2,177
|
20,438
|
|
Stock-based
compensation expense
|
300,649
|
254,758
|
|
Change
in allowance for doubtful accounts receivable
|
(280,800
)
|
(20,033
)
|
|
Change
in allowance for inventory obsolescence
|
(319,836
)
|
55,652
|
|
Amortization
deferred gain on sale/leaseback
|
(150,448
)
|
(150,448
)
|
|
Change
in fair value of earn-out liability
|
(375,000
)
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
Trade
accounts receivable
|
646,380
|
(292,090
)
|
|
Inventories
|
(458,936
)
|
491,356
|
|
Prepaid
expenses
|
146,593
|
(181,865
)
|
|
Other
assets
|
(24,603
)
|
(44,567
)
|
|
Income
tax receivable
|
112,252
|
(106,391
)
|
|
Accounts
payable and accrued expenses
|
(3,062
) |
950,754
|
|
|
|
|
|
Net
cash provided by operating activities
|
325,676
|
761,802
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchase
of property and equipment
|
(224,111
)
|
(242,911
)
|
|
Net
cash paid in acquisitions
|
-
|
(9,063,017
)
|
|
Proceeds
from sale of property and equipment
|
-
|
12,160
|
|
|
|
|
|
Net
cash used in investing activities
|
(224,111
)
|
(9,293,768
)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Principal
payments on long-term debt
|
(164,002
)
|
(146,263
)
|
|
Principal
payments on long-term capital lease
|
(252,738
)
|
(194,955
)
|
|
Payment
of acquisition holdbacks
|
(1,379,513
)
|
(294,744
)
|
|
Net
change in line of credit
|
254,602
|
4,114,102
|
|
Proceeds
from issuance of preferred stock, net
|
-
|
6,600,121
|
|
Preferred
stock dividends paid in cash
|
-
|
(104,884
)
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
(1,541,651
)
|
9,973,377
|
|
|
|
|
|
Net
change in cash and cash equivalents and restricted
cash
|
(1,440,086
)
|
1,441,411
|
|
|
|
|
|
Cash and cash
equivalents and restricted cash at beginning of the
period
|
1,696,116
|
254,705
|
|
|
|
|
|
Cash and cash
equivalents and restricted cash at end of the period
|
$
256,030
|
$
1,696,116
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid for interest
|
$
515,634
|
$
412,455
|
|
Supplemental
disclosure of non-cash investing and financing
activity:
|
|
|
|
Deemed
dividend on convertible preferred stock and accretion of
discount
|
-
|
1,023,786
|
|
Preferred
stock dividends paid or to be paid in common stock
|
794,350
|
768,074
|
|
Inventory
reclassified to demonstration equipment
|
239,106
|
-
|
|
Preferred
stock issued to acquire "Bird & Cronin"
|
-
|
3,904,654
|
|
Acquisition
holdback
|
-
|
1,504,512
|
|
Conversion
of preferred stock to common stock
|
-
|
7,459,600
|
|
Capital
lease obligations incurred to acquire property and
equipment
|
252,493
|
112,675
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
34
DYNATRONICS
CORPORATION
N
otes to Consolidated Financial Statements
June
30, 2019 and 2018
Note
1.
Basis
of Presentation and Summary of Significant Accounting
Policies
Description of Business
Dynatronics
Corporation
(“Company,” “Dynatronics”)
is a
leading medical device company committed to providing high-quality
restorative products designed to accelerate optimal health. The
Company designs, manufactures, and sells a broad range of
restorative products for clinical use in physical therapy,
rehabilitation, orthopedics, pain management, and athletic
training. Through its distribution channels, Dynatronics markets
and sells to orthopedists, physical therapists, chiropractors,
athletic trainers, sports medicine practitioners, clinics,
hospitals, and consumers.
Principles of
Consolidation
The
consolidated financial statements include the accounts and
operations of Dynatronics Corporation and its wholly owned
subsidiaries, Hausmann Enterprises, LLC, Bird & Cronin, LLC
(see Note 2) and Dynatronics Distribution Company, LLC. The
consolidated financial statements are prepared in conformity with
U.S. generally accepted accounting principles (U.S. GAAP). All
significant intercompany account balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include all highly
liquid investments with maturities of three months or less at the
date of purchase. Also included within cash and cash equivalents
are deposits in-transit from banks for payments related to
third-party credit card and debit card transactions. Cash and cash
equivalents totaled approximately $156,000 and $
1,596,000
as
of June 30, 2019 and 2018, respectively.
Restricted cash totaled approximately
$101,000 and $100
,000
as of
June 30, 2019 and 2018, respectively, and consisted of a
certificate of
deposit.
Inventories
Finished
goods inventories are stated at the lower of standard cost, which
approximates actual cost using the first-in, first-out method, or
net realizable value. Raw materials are stated at the lower of cost
(first-in, first-out method) or net realizable value. The Company
periodically reviews the value of items in inventory and records
write-downs or write-offs based on its assessment of slow moving or
obsolete inventory. The Company maintains a reserve for obsolete
inventory and generally makes inventory value adjustments against
the reserve.
Trade Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not
bear interest, although finance charges may be applied to past due
accounts. The Company maintains an allowance for doubtful accounts
that is the Company’s estimate of credit risk in the
Company’s existing accounts receivable. The Company
determines the allowance based on a combination of statistical
analysis, historical collection patterns, customers’ current
credit worthiness, the age of account balances, and general
economic conditions. All account balances are reviewed on an
individual basis. Account balances are charged against the
allowance when the potential for recovery is considered remote.
Recoveries of accounts previously written off are recognized when
payment is received.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Buildings and improvements
are depreciated over estimated useful lives that range from 5 to
31.5 years. Leasehold improvements are amortized over the
remaining term of the respective building lease. Machinery, office
equipment, computer equipment and software and vehicles are
depreciated over estimated useful lives that range from 3 to 7
years.
35
Goodwill
Goodwill
resulted from the Hausmann and Bird & Cronin acquisitions (see
Note 2). Goodwill in a business combination represents the purchase
price in excess of identifiable tangible and intangible assets.
Goodwill and intangible assets that have an indefinite useful life
are not amortized. Instead they are reviewed periodically for
impairment.
The
Company evaluates goodwill on an annual basis in the fourth quarter
or more frequently if management believes indicators of impairment
exist. Such indicators could include, but are not limited to (1) a
significant adverse change in legal factors or in business climate,
(2) unanticipated competition, or (3) an adverse action or
assessment by a regulator. The Company first assesses qualitative
factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount,
including goodwill. If management concludes that it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount, management conducts a quantitative goodwill
impairment test. The impairment test involves comparing the fair
value of the applicable reporting unit with its carrying value. The
Company estimates the fair values of its reporting units using a
combination of the income, or discounted cash flows, approach and
the market approach, which utilizes comparable companies’
data. If the carrying amount of a reporting unit exceeds the
reporting unit’s fair value, an impairment loss is recognized
in an amount equal to that excess, limited to the total amount of
goodwill allocated to that reporting unit. The Company’s
evaluation of goodwill completed during the year resulted in no
impairment losses.
Long-Lived
Assets
Long–lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the
difference between the carrying amount of the asset and the fair
value of the asset. Assets to be disposed are separately presented
in the balance sheet at the lower of net book value or fair value
less estimated disposition costs, and are no longer
depreciated.
Intangible Assets
Costs
associated with the acquisition of trademarks, certain trade names,
license rights and non-compete agreements are capitalized and
amortized using the straight-line method over periods ranging from
3 months to 20 years. Trade names determined to have an indefinite
life are not amortized, but are required to be tested for
impairment and written down, if necessary. The Company assesses
indefinite lived intangible assets for impairment each fiscal year
or more frequently if events and circumstances indicate impairment
may have occurred.
Revenue
Recognition
Research and Development
Costs
Research and development ("R&D") costs
are expensed as incurred.
R&D expense for
the years ended June 30
, 2019 and 2018 totaled
$54,438 and $1,194,013, respectively. R&D expense is included
in selling, general, and administrative expenses in the
consolidated statements of
operations.
Product Warranty Costs
The
Company provides a warranty on all products it manufactures for
time periods ranging in length from 90 days to five
years from the date of sale. Costs
estimated to be incurred in connection with the Company’s
product warranty programs are charged to expense as products are
sold based on historical warranty rates. The Company maintains a
reserve for estimated product warranty costs to be incurred related
to products previously sold.
36
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
potential common shares outstanding during the year. Convertible
preferred stock, stock options and warrants are considered to be
potential common shares. 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 year
available to each weighted-average share of common stock
outstanding during the year. Diluted net loss per common share is
the amount of net loss for the year available to each
weighted-average share of common stock outstanding during the year
and to each potential common share outstanding during the year,
unless inclusion of potential common shares 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, totaled 11,764,083 as of June 30, 2019 and
11,222,589
as of June 30, 2018.
These potential common shares are not
included in the computation because they would be
anti-dilutive.
Income
Taxes
The
Company recognizes an asset or liability for the deferred income
tax consequences of all temporary differences between the tax bases
of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or
deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled. Accounting
standards require the consideration of a valuation allowance for
deferred tax assets if it is “more likely than not”
that some component or all of the benefits of deferred tax assets
will not be realized. Accruals for uncertain tax positions are
provided for in accordance with applicable accounting standards.
The Company may recognize the tax benefits from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. Judgment is
required in assessing the future tax consequences of events that
have been recognized in the financial statements or tax returns.
Variations in the actual outcome of these future tax consequences
could materially impact the Company’s financial position,
results of operations and cash flows.
Income Tax
Reform
On
December 22, 2017, the U.S. government enacted comprehensive tax
reform 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 Tax 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 was 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 and included these estimates in our
consolidated financial statements for the year ended June 30, 2018.
No measurement adjustments were determined to be necessary as a
result of further clarification and changes in interpretations of
the Tax Act, any legislative action to address questions that arise
because of the Tax Act, or any changes in accounting standards for
income taxes or related interpretations in response to the Tax
Act.
Stock-Based Compensation
Stock-based
compensation cost is measured at the grant date based on the fair
value of the award determined by using the Black-Scholes
option-pricing model and is recognized as expense over the
applicable vesting period of the stock award (zero to five years)
using the straight-line method.
37
Concentration of
Risk
In the
normal course of business, the Company provides unsecured credit to
its customers. Most of the Company’s customers are involved
in the medical industry. The Company performs ongoing credit
evaluations of its customers and maintains allowances for probable
losses which, when realized, have been within the range of
management’s expectations. The Company maintains its cash in
bank deposit accounts which at times may exceed federally insured
limits.
As of June 30, 2019 and 2018, the Company
had approximately $0 and $
1,575,000
,
respectively, in cash and cash equivalents in excess of federally
insured limits. The Company has not experienced any losses in such
accounts.
Certain of the Company's employees are
covered by a collective bargaining agreement. As of June 30, 2019,
approximately 18% of the Company's employees were covered by a
collective bargaining agreement scheduled to expire in
2022.
Operating
Segments
The
Company operates in one line of business: the development,
manufacturing, marketing, and distribution of a broad line of
medical products for the orthopedic, physical therapy and similar
markets. As such, the Company has only one reportable operating
segment.
Use of Estimates
Management
of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities
in accordance with U.S. GAAP. Significant items subject to such
estimates and assumptions include the impairment and useful lives
of long-lived assets; valuation allowances for doubtful accounts
receivables, deferred income taxes, and obsolete inventories;
accrued product warranty costs; and fair values of assets acquired
and liabilities assumed in an acquisition. Actual results could
differ from those estimates.
Reclassification
Certain
amounts in the prior year's consolidated statements of operations
and cash flows have been reclassified for comparative purposes to
conform to the presentation in the current year's consolidated
statements of operations and cash flows.
Recent Accounting Pronouncements
On December 22, 2017, the U.S.
government enacted comprehensive tax reform legislation commonly
referred to as the Tax Cuts and Jobs Act. The Tax Act provides for
significant changes to the U.S. Internal Revenue Code of 1986, as
amended. Among other items, the Tax Act permanently reduces the
federal corporate tax rate to 21% effective January 1, 2018. The
SEC issued SAB 118, which provides guidance on accounting for the
tax effects of the Tax Act. SAB 118 provides a measurement period
that should not extend beyond one year from the Tax Act enactment
date for companies to complete the accounting under Accounting
Standards Codification (ASC) 740 - Income Taxes (“ASC
740”). In accordance with SAB 118, a company must reflect the
income tax effects of those aspects of the Tax Act for which the
accounting under ASC 740 is complete. To the extent that a
company’s accounting for certain income tax effects of the
Tax Act is incomplete but it can determine a reasonable estimate,
it must record a provisional estimate in the consolidated financial
statements. If a company cannot determine a provisional estimate to
be included in the consolidated financial statements, it should
continue to apply ASC 740 on the basis of the provisions of the tax
laws that were in effect immediately before the enactment of the
Tax Act. Under the staff guidance in SAB 118, in the financial
reporting period in which the Tax Act is enacted, the income tax
effects of the Tax 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. The impact of
the Tax Act is reflected in Note 11.
In January 2017, the Financial Accounting Standards Board
(“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. The amendment
will be effective for reporting periods beginning after December
15, 2019, and early adoption is permitted. The Company early
adopted this standard as of July 1, 2017. This adoption did not
have a material impact on the consolidated financial
statements.
38
In August 2018, the
SEC adopted a final rule under SEC Release No. 33-10532,
Disclosure Update and
Simplification
that amends certain disclosure requirements
that were redundant, duplicative, overlapping, outdated or
superseded. The amendments also expanded the disclosure
requirements on the analysis of shareholders’ equity for
interim financial statements, in which registrants must now analyze
changes in shareholders’ equity, in the form of
reconciliation, for the current and comparative year-to-date
periods, with subtotals for each interim period. This final rule
was effective on November 5, 2018. The Company has adopted all
relevant disclosure requirements. The adoption of these SEC
amendments did not have a material impact on the Company’s
financial position, results of operations, cash flows or
stockholders’
equity.
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 has evaluated the impact of adopting
ASU No.
2016-02
on its consolidated financial
statements. The new guidance will primarily impact the balance
sheet by establishing a right of use asset and corresponding lease
liability on the Company's consolidated balance sheet for operating
leases. Management estimates adoption of this guidance will result
in the recognition of right of use assets and lease liabilities for
operating leases of approximately $3,700,000 and $3,700,000,
respectively, as of July 1, 2019. The Company does not expect the
adoption of this guidance to have a material impact on the
consolidated statements of operations or consolidated statements of
cash flows. The Company will be in a position to report under this
new standard in the first quarter of 2020.
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. Companies may
use either a full retrospective or a modified retrospective
approach to adopt this guidance. The Company adopted this updated
accounting guidance beginning July 1, 2018 using the modified
retrospective method. This adoption has not had a material impact
on the Company’s consolidated financial statements other than
additional disclosures.
Note
2.
Acquisitions
Bird & Cronin
On
October 2, 2017, the Company, through its wholly-owned subsidiary
Bird & Cronin, LLC, a newly formed Utah limited liability
company, completed the purchase of substantially all of the assets
of Bird & Cronin, Inc. (“Bird & Cronin”), a
manufacturer and distributor of orthopedic soft bracing and support
products. This acquisition has expanded the Company’s sales
in the orthopedic and patient care markets by leveraging the
products and distribution network offered by Bird &
Cronin.
At the
closing of the acquisition, the Company paid Bird & Cronin cash
of $9,063,017 and delivered 1,397,375 shares of its Series D
Non-Voting Convertible Preferred Stock (“Series D
Preferred”) to Bird & Cronin 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.
As part of the
acquisition, the Company assumed certain liabilities and
obligations of Bird & Cronin related to its ongoing business
(primarily trade accounts and similar obligations in the ordinary
course).
39
A
holdback of cash totaling $933,334 and 184,560 shares of common
stock (converted from Series D Preferred) valued at approximately
$466,667 was retained for purposes of satisfying adjustments to the
purchase price as may be required. Pursuant to a working capital
adjustment and indemnification claim provisions, the purchase price
was subsequently decreased $399,169. The cash portion of the
holdback was also increased by $95,347 in exchange for a reduction
in retained shares of common stock for the same value.
As a result, the
Company canceled 37,708 shares of common stock held back for the
benefit of Bird & Cronin.
On October 2, 2018,
the Company released to Bird & Cronin cash of $162,845 and
54,572 shares of common stock pursuant to the holdback provisions
of the purchase agreement.
On April 2, 2019,
the Company released to Bird & Cronin cash of $466,667 and
92,280 shares of common stock pursuant to the holdback provisions
of the purchase
agreement.
In
addition, the amount recognized for the earn-out liability was
subsequently reduced by $625,000 to $875,000 as of June 30, 2018.
The earn-out
liability was further reduced by $375,000 in fiscal year 2019, with
the change in the fair value of the earn-out liability being
included in other income in the accompanying consolidated
statements of operations. As of June 30, 2019, the earn-out
liability was $500,000.
The earn-out liability is
combined with the acquisition holdback in the accompanying
consolidated balance sheets.
On August 19, 2019,
the Company enter
ed
an agreement to pay the earn-out in four equal monthly payments of
$125,000,
plus 10% interest,
beginning in September 2019
. The first payment was
made on September 4, 2019, for $129,110.
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 on
September 26, 2017 (see Note 14). Certain principals of Bird &
Cronin are holders of the Company’s issued and outstanding
common stock and two of the principals are employees of the
Company.
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 shareholders of Bird
& Cronin, to lease the facility in Eagan, Minnesota (the
“Minnesota Facility”) effective as of the closing date
with an initial three-year term. Annual rental payments of $600,000
are 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 Bird & Cronin employment with
Dynatronics at closing.
The
acquisition of Bird & Cronin 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 $14,472,182
(which is comprised
of cash of $9,063,017, holdbacks of $1,504,512, and preferred stock
of $3,904,653 net of offering costs)
. The following table
summarizes the estimated fair value of the assets acquired and
liabilities assumed as of the date of acquisition:
|
Cash and cash
equivalent
|
$
454
|
|
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
|
2,814,128
|
|
Warranty
reserve
|
(5,000
)
|
|
Accounts
payable
|
(607,084
)
|
|
Accrued
expenses
|
(247,611
)
|
|
Accrued payroll and
benefits
|
(189,579
)
|
|
Purchase
price
|
$
14,472,182
|
40
Intangible
assets subject to amortization include $4,313,000 that relate to
customer relationships 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 of $620,000 relate to
trade names. 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.
Hausmann
On April 3, 2017,
the Company, through its wholly-owned subsidiary Hausmann
Enterprises, LLC, completed the purchase of substantially all the
assets of Hausmann Industries, Inc. (“Hausmann”), a
manufacturer of physical therapy rehabilitation
equipment.
The purchase price
included a holdback of cash totaling $1,044,744 for purposes of
satisfying adjustments to the purchase price and indemnification
claims, if any. In the second and third fiscal quarters of 2018,
the Company released $44,744 and $250,000, respectively, of the
holdback to Hausmann. On October 3, 2018, the Company released the
remaining holdback amount totaling
$750,000.
Financial Impact of Acquired
Business
The
Bird
& Cronin
business purchased by the Company in fiscal
year 2018 contributed revenues of $17,233,000, and a net income
of $1,354,000, inclusive of $336,000 of acquired
intangible amortization, to the Company for the year ended June 30,
2018.
The
unaudited pro forma financial results for the year ended June 30,
2018 combines the consolidated results of the Company and Bird
& Cronin assuming the Bird & Cronin acquisition had been
completed on July 1, 2016.
The reported
revenue and net loss of $64,414,910 and $1,602,256 would have been
$70,870,000 and $1,556,000 for the year ended June 30, 2018,
respectively, on an unaudited pro forma basis. For 2017, the
reported revenue and net loss of $35,758,330 and $1,866,395 would
have been revenue and net income of $60,028,000 and $286,000 for
the year ended June 30, 2017, respectively, on an unaudited pro
forma basis.
The
unaudited pro forma consolidated results are not to be considered
indicative of the results if the acquisitions occurred in the
periods mentioned above, or indicative of future operations or
results. The unaudited supplemental pro forma earnings were
adjusted to exclude $70,000 of acquisition-related costs incurred
in fiscal year 2017.
41
Note
3. Inventories
Inventories consist
of the following as of June 30:
|
|
2019
|
2018
|
|
Raw
materials
|
$
5,830,140
|
$
6,216,150
|
|
Work in
process
|
706,128
|
625,830
|
|
Finished
goods
|
5,129,806
|
4,604,264
|
|
Inventory
reserve
|
(138,553
)
|
(458,389
)
|
|
|
$
11,527,521
|
$
10,987,855
|
Included in cost of goods sold for the years
ended June 30, 2019 and 2018, are inventory write-offs of $0 and
$692,000, respectively. The write-offs reflect inventories related
to discontinued product lines, excess repair parts, product
rejected for quality standards, and other non-performing
inventories.
Note
4.
Property
and Equipment
Property
and equipment consist of the following as of June 30:
|
|
2019
|
2018
|
|
Land
|
$
30,287
|
$
30,287
|
|
Buildings
|
5,690,566
|
5,664,096
|
|
Machinery and
equipment
|
2,602,760
|
2,229,202
|
|
Office
equipment
|
322,297
|
318,613
|
|
Computer
equipment
|
2,445,488
|
2,136,078
|
|
Vehicles
|
109,560
|
115,233
|
|
|
11,200,958
|
10,493,509
|
|
Less accumulated
depreciation and amortization
|
(5,523,539
)
|
(4,642,610
)
|
|
|
$
5,677,419
|
$
5,850,899
|
Depreciation and amortization expense for
the years ended June 30, 2019 and 2018 was $586,243 and
$419,148, respectively.
Included in the above caption,
“Buildings” as of June 30, 2019 and 2018 is a building
lease that is accounted for as a capital lease asset (see Notes 9
and 10) with a gross value of $3,800,000. The net book value of
capital lease assets as of June 30, 2019 and 2018 was $2,875,188
and $2,923,449, respectively. Amortization of capital lease assets
was $300,770 and $254,418 for the years ended June 30, 2019 and
2018.
42
Note 5.
Intangible
Assets
Identifiable
intangible assets, other than goodwill, consisted of the following
as of and for the years ended June 30, 2019 and 2018:
|
|
Trade name - indefinite life
|
Trade name
|
Non-compete covenant
|
Customer relationships
|
Total
|
|
Gross carrying amount
|
|
|
|
|
|
|
June 30,
2017
|
$
464,000
|
$
389,800
|
$
504,400
|
$
2,030,800
|
$
3,389,000
|
|
Additions
|
620,000
|
-
|
83,000
|
4,313,000
|
5,016,000
|
|
Disposals
|
-
|
(119,200
)
|
(114,000
)
|
(100,400
)
|
(333,600
)
|
|
June 30,
2018
|
1,084,000
|
270,600
|
473,400
|
6,243,400
|
8,071,400
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
June 30,
2017
|
$
-
|
$
266,149
|
$
167,150
|
$
201,583
|
$
634,882
|
|
Additions
|
-
|
43,241
|
83,450
|
511,669
|
638,360
|
|
Disposals
|
-
|
(119,200
)
|
(114,000
)
|
(100,400
)
|
(333,600
)
|
|
June 30,
2018
|
-
|
190,190
|
136,600
|
612,852
|
939,642
|
|
Net book value at June 30,
2018
|
$
1,084,000
|
$
80,410
|
$
336,800
|
$
5,630,548
|
$
7,131,758
|
|
|
Trade
name - indefinite life
|
Trade
name
|
Non-compete
covenant
|
Customer
relationships
|
Total
|
|
Gross carrying amount
|
|
|
|
|
|
|
June 30,
2018
|
$
1,084,000
|
$
270,600
|
$
473,400
|
$
6,243,400
|
$
8,071,400
|
|
Additions
|
-
|
-
|
-
|
-
|
-
|
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
|
June 30,
2019
|
1,084,000
|
270,600
|
473,400
|
6,243,400
|
$
8,071,400
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
June 30,
2018
|
$
-
|
$
190,190
|
$
136,600
|
$
612,852
|
$
939,642
|
|
Additions
|
-
|
17,290
|
87,600
|
619,494
|
724,384
|
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
|
June 30,
2019
|
-
|
207,480
|
224,200
|
1,232,346
|
1,664,026
|
|
Net book value at June 30,
2019
|
$
1,084,000
|
$
63,120
|
$
249,200
|
$
5,011,054
|
$
6,407,374
|
During
the year ended June 30, 2018, as a result of discontinuing the use
of one of its previously acquired dealers, the Company wrote-off
the related trade name, non-compete covenants, and customer
relationships of the dealer.
43
Amortization expense associated with the
intangible assets was $724,384 and $
638,360
for
the fiscal years ended June 30, 2019 and 2018, respectively.
Estimated future amortization expense for the identifiable
intangible assets is expected to be as follows for the years ending
June 30:
|
2020
|
$
724,383
|
|
2021
|
724,383
|
|
2022
|
706,633
|
|
2023
|
624,700
|
|
2024
|
620,550
|
|
Thereafter
|
1,922,725
|
|
Total
|
$
5,323,374
|
Note 6.
Warranty
Reserve
A
reconciliation of the change in the warranty reserve consists of
the following for the fiscal years ended June 30:
|
|
2019
|
2018
|
|
Beginning warranty
reserve balance
|
$
205,850
|
$
202,000
|
|
Warranty costs
incurred
|
(87,848
)
|
(122,708
)
|
|
Warranty expense
accrued
|
89,986
|
120,524
|
|
Warranty reserve
assumed in the Acquisition
|
-
|
5,000
|
|
Changes in
estimated warranty costs
|
-
|
1,034
|
|
Ending warranty
reserve
|
$
207,988
|
$
205,850
|
Note
7.
Line
of Credit
The Company has a line of credit (“Line of Credit”)
available pursuant to a loan and security agreement (the
“Loan and Security Agreement”), as amended, with Bank
of the West, that matures on December 15, 2020. The
Company’s obligations under the Line of Credit are secured by
a first-priority security interest in substantially all of the
Company’s assets. The Line of Credit requires a lockbox
arrangement and contains affirmative and negative covenants,
including covenants that restrict its ability to, among other
things, incur or guarantee indebtedness, incur liens, dispose of
assets, engage in mergers and consolidations, make acquisitions or
other investments, make changes in the nature of its business, and
engage in transactions with affiliates. The agreement also
contains financial covenants including a maximum monthly
consolidated leverage and a minimum monthly consolidated fixed
charge coverage ratio. As amended, the Loan and Security Agreement
provides for revolving credit borrowings in an amount 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% (4.6% as of June 30, 2019). The Line of Credit is
subject to an unused line fee of .25%.
On June 21, 2019, the Company entered into a Fifth Modification of
the Loan and Security Agreement (the
“Modification”).
The Modification includes, among other
things, an amendment to certain provisions of the Loan and Security
Agreement, including changes to the financial covenants of
the Line of Credit, eliminates the consolidated leverage ratio
and amends the minimum consolidated fixed charge coverage ratio. As
modified, the fixed charge coverage ratio will apply only when the
excess availability amount under the Line of Credit is
less than the greater of $1,000,000 or 10% of the borrowing base.
The Modification also adjusts upward the permissible limits of
senior funded indebtedness and capital
expenditures.
As of June 30, 2019, the Company had borrowed $6,540,639 under the
Line of Credit compared to $6,286,037 as of June 30, 2018.
There was approximately $1,480,000 and
$1,370,000 available to borrow as of June 30, 2019 and 2018,
respectively.
44
Note
8.
Long-Term
Debt
Long-term debt
consists of the following as of June 30:
|
|
2019
|
2018
|
|
6.44%
promissory note secured by trust deed on real property, maturing
January 2021, payable in monthly installments of
$13,278
|
$
239,229
|
$
378,255
|
|
5.99%
promissory note secured by a vehicle, payable in monthly
installments of $833 through December 2020
|
14,311
|
23,162
|
|
5.01%
promissory note secured by copier equipment, payable in monthly
installments of $924 through October 2022
|
33,965
|
43,099
|
|
3.99%
promissory note secured by equipment, payable in monthly
installments of $247 through February 2023
|
9,886
|
12,403
|
|
3.97%
promissory note secured by equipment, payable in monthly
installments of $242 through February 2021
|
4,668
|
7,325
|
|
7.56%
promissory note secured by copier equipment, payable in monthly
installments of $166 through February 2020
|
1,290
|
3,107
|
|
|
303,349
|
467,351
|
|
Less
current portion
|
(173,921
)
|
(164,003
)
|
|
|
$
129,428
|
$
303,348
|
The
aggregate maturities of long-term debt for each of the years
subsequent to June 30, 2019 are as follows:
|
2020
|
$
173,921
|
|
2021
|
110,617
|
|
2022
|
13,448
|
|
2023
|
5,363
|
|
Total
|
$
303,349
|
45
Note 9.
Leases
Operating Leases
The
Company rents office, manufacturing, warehouse and storage space
and office equipment under agreements which run one year or more in
duration. Rent expense for the years ended June 30, 2019 and
2018 was $1,087,987 and $961,886, respectively. Future minimum
rental payments required under operating leases that have a
duration of one year or more as of June 30, 2019 are as
follows:
|
2020
|
1,030,538
|
|
2021
|
508,782
|
|
Total
|
$
1,539,320
|
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 leases are related-party
transactions. The expense associated with these related-party
transactions totaled $1,041,187 and $887,926 for the years ended
June 30, 2019 and 2018, respectively.
Capital Leases
The
Company leases certain equipment and the Utah building (see Note
10) that have been determined to be capital leases. The capital
lease assets are included in Property and Equipment (see Note 4).
The balance of the capital lease obligation was as follows as of
June 30:
|
|
2019
|
2018
|
|
Balance of capital
lease obligation
|
$
3,199,022
|
$
3,199,267
|
|
Less current
portion
|
(283,781
)
|
(226,727
)
|
|
|
$
2,915,241
|
$
2,972,540
|
At June
30, 2019, future minimum gross lease payments required under the
capital leases were as follows:
|
2020
|
$
454,150
|
|
2021
|
461,266
|
|
2022
|
468,516
|
|
2023
|
442,631
|
|
2024
|
384,754
|
|
Thereafter
|
2,113,348
|
|
Total
|
$
4,324,665
|
|
|
|
|
Imputed
interest
|
$
948,462
|
|
Deferred
rent
|
177,181
|
46
Note
10.
Deferred
Gain
On
August 8, 2014, the Company sold the property that houses its
operations in Utah and leased back the premises for a term of 15
years. The sale price was $3.8 million. Proceeds from the sale were
primarily used to reduce debt obligations of the
Company.
The
sale of the building resulted in a $2,269,255 gain, which is
recorded in the consolidated balance sheets as deferred gain that
is being recognized as an offset to amortization in selling,
general and administrative expenses over the 15 year life of the
lease on a straight line basis. The balance of the deferred gain
was as follows as of June 30:
|
|
2019
|
2018
|
|
Balance of deferred
gain
|
$
1,529,553
|
$
1,680,001
|
|
Less current
portion
|
(150,448
)
|
(150,448
)
|
|
|
$
1,379,105
|
$
1,529,553
|
Note
11.
Income
Taxes
Income
tax benefit (provision) are as follows for the years ended June
30:
|
|
Current
|
Deferred
|
Total
|
|
2019:
|
|
|
|
|
U.S.
federal
|
$
-
|
$
-
|
$
-
|
|
State and local
|
(5,474
)
|
-
|
(5,474
)
|
|
|
$
(5,474
) |
$
-
|
$
(5,474
)
|
|
2018:
|
|
|
|
|
U.S.
federal
|
$
71,930
|
$
-
|
$
71,930
|
|
State and
local
|
(1,616
)
|
-
|
(1,616
)
|
|
|
$
70,314
|
$
-
|
$
70,314
|
The
components of the Company’s income tax benefit (provision)
are as follows for the years ended June 30:
|
|
2019
|
2018
|
|
Expected tax
benefit
|
$
183,655
|
$
459,957
|
|
State taxes, net of
federal tax benefit
|
30,705
|
45,817
|
|
Business tax
credits
|
-
|
45,000
|
|
Effect of corporate
income tax rate change
|
-
|
(784,860
)
|
|
Valuation
allowance
|
(237,690
) |
332,193
|
|
Incentive stock
options
|
(8,812
)
|
(9,977
)
|
|
Other,
net
|
26,668
|
(17,816
)
|
|
|
$
(5,474
)
|
$
70,314
|
47
The
Company’s deferred income tax assets and liabilities related
to the tax effects of temporary differences are as follows as of
June 30:
|
|
2019
|
2018
|
|
Net deferred income
tax assets (liabilities):
|
|
|
|
Inventory
capitalization for income tax purposes
|
$
86,197
|
$
60,944
|
|
Inventory
reserve
|
36,024
|
119,181
|
|
Accrued employee
benefit reserve
|
90,536
|
93,496
|
|
Warranty
reserve
|
54,076
|
53,522
|
|
Interest expense
limitation
|
126,916
|
7,949
|
|
Allowance for
doubtful accounts
|
29,292
|
95,522
|
|
Property and
equipment, principally due to differences in
depreciation
|
(151,146
)
|
(155,096
)
|
|
Research and
development credit carryover
|
609,391
|
588,707
|
|
Other
intangibles
|
(205,549
)
|
(98,067
)
|
|
Deferred gain on
sale lease-back
|
527,340
|
548,026
|
|
Operating loss
carry forwards
|
1,666,684
|
1,317,887
|
|
Valuation
allowance
|
(2,869,761
)
|
(2,632,071
)
|
|
Total deferred
income tax assets (liabilities)
|
$
-
|
$
-
|
Quarterly, the Company assesses the likelihood by jurisdiction that
its net deferred income tax assets will be recovered. Based on the
weight of all available evidence, both positive and negative, the
Company records a valuation allowance against deferred income tax
assets when it is more-likely-than-not that a future tax benefit
will not be realized.
When there is a change in judgment
concerning the recovery of deferred income tax assets in future
periods, a valuation allowance is recorded into earnings during the
quarter in which the change in judgment occurred. As of June 30,
2019 and 2018, the Company has established a full valuation
allowance.
The anticipated accumulated net
operating loss carryforward as of June 30, 2019, is approximately
$6,212,000, which will begin to expire in 2037. The Company has no
uncertain tax positions as of June 30,
2019.
Note 12. Major Customers and Sales by Geographic
Location
During
the fiscal years ended June 30, 2019 and 2018, no sales to any
single customer exceeded 10% of total net sales.
The Company exports products to
approximately 30 countries. Sales outside North America totaled
approximately $1,435,000 or 2.3% of net sales, for the fiscal year
ended June 30, 2019, compared to $1,479,000 or 2.3% of net sales,
for the fiscal year ended June 30, 2018.
Note
13.
Common
Stock and Common Stock Equivalents
For the year ended June 30, 2019, the
Company granted 63,998 shares of restricted common stock to
directors in connection with compensation
arrangements.
For the year ended June 30, 2018, the
Company granted 50,000 shares of restricted common stock to
directors in connection with compensation arrangements and 53,853
shares to employees.
48
For the
year ended June 30, 2018, the Company issued 3,041,935 shares of
common stock in conversion of 3,041,935 shares of preferred
stock.
The Company issued 302,105 shares of common
stock during the fiscal year ended June 30, 2019 and
290,445
shares of common stock during the fiscal year ended June 30, 2018
as payment of preferred stock dividends.
The
Company maintains an equity incentive plan for the benefit of
employees. On June 29, 2015 the shareholders approved the 2015
equity incentive plan setting aside 500,000 shares (“2015
Equity Plan”).
On December 3,
2018, the shareholders approve a new 2018 equity incentive plan
(
“
2018
Equity Plan
”
),
setting aside 600,000 shares of common stock. Share remaining
available under the 2015 Equity Plan are eligible for use under the
2018 Equity Plan.
Incentive and nonqualified stock
options, restricted common stock, stock appreciation rights, and
other share-based awards may be granted under the plans including
performance-based awards. As of June 30, 2019, 762,376 shares
of common stock remained authorized and reserved for issuance, but
were not granted under the terms of the 2018 Equity
Plan.
The Company granted options for the purchase
of 20,000 shares of common stock under its equity incentive plans
during fiscal year 2019 and options for purchase of 70,000 shares
during fiscal year 2018. The options were granted at not less than
100% of the market price of the underlying common stock at the date
of grant. Option terms are determined by the board of directors or
the compensation committee of the board of directors, and exercise
dates may range from 6 months to 10 years from the date of
grant.
The
fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
2019
|
2018
|
|
Expected dividend
yield
|
0%
|
0%
|
|
Expected stock
price volatility
|
42%
|
43% - 45%
|
|
Risk-free interest
rate
|
2.69%
|
2.60% - 2.75%
|
|
Expected life of
options
|
5.25
years
|
4 - 5
years
|
The
weighted average fair value of options granted during fiscal year
2019 and 2018 was $0.86 and $1.11, respectively. The following
table summarizes the Company’s stock option activity during
the reported fiscal years:
|
|
2019
|
|
2018
|
||
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
average
|
|
Weighted
|
|
|
Number
|
average
|
remaining
|
Number
|
average
|
|
|
of
|
exercise
|
contractual
|
of
|
exercise
|
|
|
shares
|
price
|
term
|
shares
|
price
|
|
|
|
|
|
|
|
|
Options outstanding
at beginning of the year
|
191,796
|
$
3.04
|
5.38
years
|
166,990
|
$
3.14
|
|
Options
granted
|
20,000
|
2.07
|
7.67
years
|
70,000
|
2.88
|
|
Options canceled or
expired
|
(85,219
)
|
3.28
|
|
(45,194
)
|
5.90
|
|
|
|
|
|
|
|
|
Options outstanding
at end of the year
|
126,577
|
$
2.73
|
5.63
years
|
191,796
|
$
3.04
|
|
|
|
|
|
|
|
|
Options exercisable
at end of the year
|
38,083
|
$
2.92
|
|
56,843
|
$
3.32
|
|
|
|
|
|
|
|
|
Range of exercise
prices at end of the year
|
|
$
2.07 – 4.20
|
|
|
$
1.75 – 4.25
|
49
The
Company recognized $300,649 and $
254,758
in
stock-based compensation for the years ended June 30, 2019 and
2018, respectively, which is included in selling, general, and
administrative expenses in the consolidated statements of
operations. The stock-based compensation includes amounts for both
restricted stock and stock options.
As of
June 30, 2019, there was $180,362 of unrecognized stock-based
compensation cost that is expected to be expensed over the next
four years.
No options were exercised during fiscal
years 2019 and 2018. The aggregate intrinsic value of the
outstanding options as of June 30, 2019 and 2018 was $0 and $4,530,
respectively.
Note 14.
Convertible
Preferred Stock and Common Stock Warrants
On
December 28, 2016, the Company completed a private placement with
affiliates of Prettybrook Partners, LLC (“Prettybrook”)
and certain other purchasers (collectively with Prettybrook, the
“Series A Preferred Investors”) for the offer and sale
of the remaining designated 390,000 shares of the Company’s
Series A 8% Convertible Preferred Stock (the “Series A
Preferred”) for gross proceeds of approximately $975,000.
Proceeds from the private placement were recorded net of offering
costs incurred. 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 Certificate Designating the Preferences, Rights and Limitations
of the Series A Preferred (“Series A Designation”). The
dividend is fixed at 8% and is payable in either cash or common
stock subject to conditions contained in the Series A Designation.
This dividend is payable quarterly and equates to an annual payment
of $400,000 in cash or a value in common stock based on the trading
price of the stock on the date the dividend is declared. 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 Series A Preferred Investors would receive
cash equal to the stated value of their stock plus unpaid
dividends. The Company filed a registration statement to register
the underlying common shares associated with the Series A Preferred
and the Series A Warrants on Form S-3 on January 28, 2017 and
amended on February 1, 2017. The registration statement became
effective on February 10, 2017.
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 the number of shares of potential common stock
eligible for voting by the Preferred Investors is
390,000.
The
Preferred Investors purchased a total of 390,000 shares of Series A
Preferred and common stock purchase warrants (collectively, the
“Series A Warrants”) as follows: (i) A-Warrants,
exercisable by cash exercise only, to purchase 292,500 shares of
common stock, and (ii) B-Warrants, exercisable by “cashless
exercise”, to purchase 292,500 shares of common stock, but
only after exercise of holder’s A-Warrants. The Series A
Warrants are exercisable for 72 months from the date of issuance
and carry a 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 shareholders originally authorized the issuance of
2,000,000 shares of the Series A Preferred in June, 2015. The
Company sold and issued 1,610,000 shares of Series A Preferred in
June 2015, leaving 390,000 shares available for future issuance.
The remaining 390,000 shares were sold and issued in December 2016
as described above. The only difference between the shares of
Series A Preferred issued in June 2015 and those issued in December
2016 is that the formula determining voting rights for the shares
issued in June 2015 indicated a cutback in the voting power of
those shares as required by the Series A Designation. The shares of
Series A Preferred issued in December 2016 were not subject to any
cutback. For information regarding the original issuance of the
Series A Preferred in June 2015, see the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30,
2016.
In April 2017, the Company closed the
private placement in which it raised gross proceeds of $7,795,000
pursuant to the terms of a Securities Purchase Agreement dated
March 21, 2017 (the “Securities Purchase Agreement”).
Certain accredited investors, including institutional investors
(the “Series B Preferred Investors”) participated in
the private placement pursuant to which the Company issued a total
of 1,559,000 units at $5.00 per unit, with each unit made up of one
share of common stock at $2.50 per share, one share of Series B
Convertible Preferred Stock (“Series B Preferred”) at
$2.50 per share, and a warrant to purchase 1.5 shares of Common
Stock, exercisable at $2.75 per share for six years. Ladenburg
Thalmann & Co. Inc. (“Ladenburg”) acted as
placement agent in connection with the private placement and the
Company paid Ladenburg fees and expenses related to placing certain
investors in the private placement. The Series B 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 Certificate Designating the Preferences,
Rights and Limitations of the Series B Preferred (“Series B
Designation”). The dividend is fixed at 8% and is payable in
either cash or common stock subject to conditions contained in the
Series B Designation. This dividend is payable quarterly and
equates to an annual payment of $311,800 in cash or a value in
common stock based on the trading price of the stock on the date
the dividend is declared. Certain redemption rights are attached to
the Series B 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 B
Preferred includes a liquidation preference, subject to the
liquidation preference of the Series A Preferred, under which
Series B Preferred Investors would receive cash equal to the stated
value of their stock plus unpaid dividends. On April 14, 2017, the
Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission to register the shares of common
stock issued in this offering and the shares underlying conversion
of the Series B Preferred and the exercise of warrants issued to
the Series B Investors. The registration statement became effective
on April 24, 2017.
50
In
connection with the acquisition of Bird & Cronin on October 2,
2017, the Company issued 2,800,000 shares of Series C Convertible
Preferred Stock (“Series C Preferred”) and warrants to
purchase 1,400,000 shares of common stock (“Series C
Warrants”), as well as 1,581,935 shares of its Series D
Convertible Preferred Stock (the “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. The exercise of the Series C
Warrants and the conversion of the Series C Preferred and Series D
Preferred was subject to the prior approval of the Company’s
shareholders as required under applicable Nasdaq Marketplace Rules.
At the Company’s 2017 Annual Meeting of Shareholders, held on
November 29, 2017, the Company sought and obtained that shareholder
approval. Upon the receipt of the shareholder approval, each share
of Series C Preferred and each share of Series D Preferred was
automatically convertible into one share of common stock; provided,
however, that the holders of the Series C Preferred were permitted
to elect to retain the Series C Preferred and not convert, subject
to future beneficial ownership limitations and forfeiture of
preferential rights of their shares of Series C Preferred. On
November 29, 2017, the Company issued 1,360,000 shares of common
stock in conversion of 1,360,000 shares of Series C Preferred and
1,581,935 shares of common stock in conversion of all outstanding
shares of the Series D Preferred.
During
year ended June 30, 2018, the Company issued 100,000 shares of
common stock upon conversion of 100,000 shares of Series B
Preferred.
As of
June 30, 2019, the Company had 2,000,000 shares of Series A
Preferred and 1,459,000 shares of Series B Preferred outstanding,
convertible into a total of 3,459,000 shares of common stock.
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 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. As of June 30, 2019, 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.
In connection with each of the issuances of
the Series A Preferred, the Series B Preferred and the Series C
Preferred, the Company recorded a deemed dividend related to a
beneficial conversion feature, which reflects the difference
between the underlying common share value of the Series A
Preferred, the Series B Preferred, and the Series C Preferred
shares as if converted, based on the closing price of the
Company’s common stock on the date of the applicable
transaction, less an amount of the purchase price assigned to the
Series A Preferred, the Series B Preferred or the Series C
Preferred, as applicable, in an allocation of purchase price
between the preferred shares and common stock purchase warrants
that were issued with the Series A Preferred, the Series B
Preferred and the Series C Preferred. For the year ended June 30,
2018, the Company recorded deemed dividends of $1,023,786
associated with the Series C Preferred. The deemed dividends are
combined with net loss and payment of dividends on preferred stock
to compute net loss attributable to common stockholders for
purposes of calculating loss per share.
The Company chose to pay preferred stock
dividends by issuing common shares valued at $776,014 in fiscal
year 2019 and $
772,719
in
fiscal year 2018.
The Company also
paid preferred stock dividends of $104,884 in cash in fiscal year
2018.
At June 30, 2019, there was $208,205 in accrued
dividends payable for the quarter ended June 30, 2019, which were
paid by issuing 126,185 shares of common stock in July
2019.
In case
of liquidation, dissolution or winding up of the Company, preferred
stock has preferential treatment beginning with the Series A
Preferred, then the Series B Preferred, followed by the Series C
Preferred. After preferential amounts, if any, to which the holders
of preferred stock may be entitled, the holders of all outstanding
shares of common stock shall be entitled to share ratably in the
remaining assets of the Company. Liquidation preference is as
follows:
|
|
Shares
Designated
|
Shares
Outstanding
|
Liquidation
Value/ Preference
|
|
Series A
Preferred
|
2,000,000
|
2,000,000
|
$
5,000,000
|
|
Series B
Preferred
|
1,800,000
|
1,459,000
|
3,647,500
|
|
Series C
Preferred
|
2,800,000
|
1,440,000
|
-
|
51
Note
15.
Accrued
Payroll and Benefits Expense
As of June 30, 2019 and 2018, accrued
payroll and benefits expense was $1,373,481 and $
1,929,465
,
respectively. Included in the balance as of June 30, 2019 and 2018,
was $310,903 and $473,146, respectively, of accrued severance
expense
maturing in less
than one year
. As of June 30, 2019 and 2018, long-term
severance accrual included in other liabilities was $0 and
$258,145, respectively. The Company recognized $300,011 and
$
978,433
in
severance expense during the years ended June 30, 2019 and 2018,
respectively. Severance expense is included in selling, general,
and administrative expenses.
In August 2019, the Company incurred
severance expense of approximately $70,000 which will be recognized
in the first fiscal quarter of 2020, in connection with the
separation of the previous chief executive
officer.
Note
16.
Employee
Benefit Plan
The
Company has three deferred savings plans which qualify under
Internal Revenue Code Section 401(k).
The first plan covers all employees of
Dynatronics Corporation, (the “Parent Company”), who
have at least one month of service and who are age 20 or older. For
fiscal years 2019 and 2018, the Parent Company made matching
contributions of 25% of the first $2,000 of each employee’s
contribution, with a six-year vesting schedule. Contributions to
the plan for fiscal years 2019 and 2018 were $26,116 and
$
11,852
,
respectively. Matching contributions for future years are at the
discretion of the board of directors.
The second plan covers all employees of
Hausmann Enterprises LLC, who have at least twelve months of
service and who are age 21 or older. For fiscal years 2019 and
2018, Hausmann Enterprises LLC made matching contributions of 50%
of the first 6% of each employee’s deferred contribution up
to a maximum of 3% of compensation, with a six-year vesting
schedule. Contributions to the plan for fiscal years 2019 and 2018
were $84,623 and $104,347, respectively.
Matching contributions for future years are
at the discretion of the board of
directors.
The third plan covers all employees of Bird
& Cronin LLC, who have at least six months of service and who
are age 21 or older. For fiscal years 2019 and 2018, Bird &
Cronin LLC made matching contributions of 100% of the first 5% of
each employee’s contribution up to a maximum of 5% of
compensation, with a six-year vesting schedule. Contributions to
the plan for fiscal year 2019 and 2018 were $211,988 and $164,772,
respectively.
Matching contributions for future years are
at the discretion of the board of
directors.
Note
17.
Liquidity
and Capital Resources
As of
June 30, 2019, the Company had $256,030 in cash, compared to
$
1,696,116
as
of June 30, 2018. During fiscal year 2018 and 2019, the Company had
positive cash flows from operating activities. The Company believes
that its existing revenue stream, cash flows from consolidated
operations, current capital resources, and borrowing availability
under the Line of Credit provide sufficient liquidity to fund
operations through at least September 30, 2020.
As of
June 30, 2019 there was approximately $1,480,000 of additional
borrowing capacity available on the Line of Credit. To fully
execute on its business strategy of acquiring other entities, the
Company will need to raise additional capital. Absent additional
financing, the Company may have to curtail its current acquisition
strategy.
Note 18. Revenue
On
July 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
,
which establishes principles for recognizing revenue and reporting
information about the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. The
guidance was applied using the modified retrospective transition
method. The adoption of this guidance had no material impact on the
amount and timing of revenue recognized, therefore, no adjustments
were recorded to the consolidated financial statements upon
adoption. For the year ended June 30, 2019, revenue recognized
pursuant to ASC 606 would not have differed materially had revenue
continued to be recognized under ASC 605.
The
following table disaggregates revenue by major product
category:
|
|
Year
Ended
June
30
|
|
|
|
2019
|
2018
|
|
Physical Therapy
and Rehabilitation Products
|
$
39,000,967
|
$
46,340,332
|
|
Orthopedic Soft
Bracing and Support Products
|
23,202,597
|
17,233,155
|
|
Other
|
361,553
|
841,423
|
|
|
$
62,565,117
|
$
64,414,910
|
52
I
tem 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
None.
I
tem 9A. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure
controls and procedures that are designed to ensure that
information that is required to be disclosed in our reports filed
under the Securities Exchange Act of 1934, or Exchange Act, is
recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to management,
including the Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial and accounting
officer), as appropriate, to allow timely decisions regarding any
required disclosure. In designing and evaluating these disclosure
controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures.
Under the supervision and with the
participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation
of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Exchange Act, as of June 30, 2019. Based on
this evaluation, our principal executive officer and principal
financial officer concluded that as of June 30, 2019, our
disclosure controls and procedures were effective, at a reasonable
assurance level, to ensure that information we are required to
disclose in the reports we file or submit under the Exchange Act is
(a) recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms and is (b)
accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, (as defined in
Rule 13a-15(f) under the Exchange Act). Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Under
the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of June 30,
2019. In making this assessment, management used the criteria that
have been set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in
Internal Control – Integrated Framework
(2013)
. Based on our evaluation under the COSO criteria, our
management concluded that our internal control over financial
reporting as of June 30, 2019 is effective.
This
Annual Report on Form 10-K does not include an attestation report
of our independent registered public accounting firm regarding
internal control over financial reporting since we are a smaller
reporting company under the rules of the SEC. Management’s
report was not subject to attestation by our registered public
accounting firm pursuant to an exemption for non-accelerated filers
set forth in Section 989G of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) during the
year ended June 30, 2019 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
53
I
tem 9B. Other
Information
None.
PART III
I
tem 10. Directors, Executive
Officers, and Corporate Governance
The
information for this Item is incorporated by reference to the
definitive proxy statement to be filed no later than 120 days after
the close of our last fiscal year, pursuant to Regulation 14A under
the Exchange Act.
I
tem 11.
Executive Compensation
The
information for this Item is incorporated by reference to the
definitive proxy statement to be filed
no later than 120
days after the close of our last fiscal year,
pursuant to
Regulation 14A under the Exchange Act.
I
tem 12.
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The
information for this Item is incorporated by reference to the
definitive proxy statement to be filed
no later than 120
days after the close of our last fiscal year,
pursuant to
Regulation 14A under the Exchange Act.
I
tem 13.
Certain Relationships and Related Transactions,
and Director Independence
The
information for this Item is incorporated by reference to the
definitive proxy statement to be filed
no later than 120
days after the close of our last fiscal year,
pursuant to
Regulation 14A under the Exchange Act.
I
tem 14. Principal Accounting Fees
and Services
The
information for this Item is incorporated by reference to the
definitive proxy statement to be filed
no later than 120
days after the close of our last fiscal year,
pursuant to
Regulation 14A under the Exchange Act.
54
PART IV
I
tem 15. Exhibits, Financial
Statement Schedules
(a)
Financial
Statements and Schedules
The financial statements are set forth under Item
8 of
this Annual Report on Form
10-K, as indexed below. Financial statement schedules have been
omitted since they either are not required, not applicable, or the
information is otherwise included.
Index
to Financial Statements
|
|
Page
|
|
|
|
|
30
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
33
|
|
|
|
|
|
34
|
|
|
|
|
|
35
|
(b)
Exhibit
Listing.
An
index of exhibits incorporated by reference or filed with this
Annual Report on Form 10-K is provided below.
|
Exhibit
Number
|
Description of Exhibit
|
Filing
Reference
|
|
2.1
|
Asset Purchase
Agreement, dated September 26, 2017, by and between Dynatronics
Corporation and Bird & Cronin, Inc.
|
Exhibit 10.1 to
Current Report on Form 8-K filed September 27,
2017
|
|
3.1(i)
|
Amended and
Restated Articles of Incorporation of Dynatronics
Corporation
|
Exhibit 3.1 to
Registration Statement on Form S-3 filed January 27,
2017
|
|
3.1(ii)
|
Certificate
Designating the Preferences, Rights and Limitations of the Series A
8% Convertible Preferred Stock of the Registrant
(Corrected)
|
Exhibit 3.1 to
Current Report on Form 8-K, (File No. 000-12697) filed July 1,
2015
|
|
3.1(iii)
|
Certificate of
Designations, Preferences and Rights of the Series B Convertible
Preferred Stock of Dynatronics Corporation
|
Exhibit 3.1 to
Current Report on Form 8-K filed April 4, 2017
|
|
3.1(iv)
|
Certificate of
Designation of Rights and Preferences of Series C Non-Voting
Convertible Preferred Stock as filed with the Utah Division of
Corporations and Commercial Code September 29,
2017
|
Exhibit 3.1 to
Current Report on Form 8-K filed October 6,
2017
|
|
3.1(v)
|
Certificate of
Designation of Rights and Preferences of Series D Non-Voting
Convertible Preferred Stock as filed with the Utah Division of
Corporations and Commercial Code September 29,
2017
|
Exhibit 3.2 to
Current Report on Form 8-K filed October 6,
2017
|
|
3.2
|
Amended
and Restated Bylaws of Dynatronics
Corporation
|
Exhibit
3.2 to Current Report on Form 8-K filed July 22, 2015
|
|
4.2(i)
|
Specimen
Common Stock Certificate
|
Exhibit
4.1 to Registration Statement on Form S-1 (file no. 00-285045),
filed July 11, 1983
|
|
4.2(ii)
|
Specimen Series A
8% Convertible Preferred Stock Certificate
|
Exhibit 4.2 to
Registration Statement on Form S-3 (file no. 333-205934) filed July
29, 2015
|
|
4.2(iii)
|
Specimen Series B
Convertible Preferred Stock Certificate
|
Exhibit 4.2 to
Registration Statement on Form S-3 (file no. 333-217322) filed
April 14, 2017
|
|
4.1(iv)
|
Form of Common
Stock Purchase Warrant (A Warrant) 2015 A
Warrant
|
Exhibit 4.1
to
Current Report on Form 8-K (file no. 000-12697) filed
July 1, 2015
|
|
4.1(v)
|
Form of Common
Stock Purchase Warrant (B Warrant) 2015 B
Warrant
|
Exhibit 4.2
to
Current Report on form 8-K (file no. 000-12697) filed
July 1, 2015
|
55
|
4.1(vi)
|
Form of Common
Stock Purchase Warrant 2017
|
Exhibit 4.2 of
Current Report on Form 8-K (file no. 000-12697) filed March 22,
2017
|
|
4.1(vii)
|
Form of Common
Stock Purchase Warrant (September 2017)
|
Exhibit 4.1 of
Current Report on Form 8-K (file no. 000-12697) filed September 27,
2017
|
|
10.1
|
Loan and Security
Agreement with Bank of the West
|
Exhibit 10.1 to
Current Report on Form 8-K filed April 4, 2017
|
|
10.2
|
Dynatronics
Corporation 2015 Equity Incentive Award Plan and Forms of Statutory
and Non- Statutory Stock Option Awards
|
Exhibit 4.1 to
Registration Statement on form S-8, effective September 3,
2015
|
|
10.3
|
Dynatronics
Corporation
2018 Equity
Incentive Plan
|
Appendix to
Definitive Proxy Statement on Schedule 14A, filed October 10,
2018
|
|
10.4
|
Severance agreement
for Kelvyn H. Cullimore, Jr.
|
Exhibit 10.1 to
Current Report on Form 8-K on March 28, 2012
|
|
10.5
|
Lease Agreement,
dated October 2, 2017, by and between Dynatronics Corporation and
Trapp Road Limited Liability Company
|
Exhibit 10.2 to
Current Report on Form 8-K filed October 6,
2017
|
|
10.6
|
Modification
Agreement, dated October 2, 2017 among Dynatronics Corporation,
Hausmann Enterprises, LLC and Bird & Cronin, LLC as Borrowers
and Bank of the West
|
Exhibit 10.6 to
Current Report on Form 8-K filed October 6,
2017
|
|
10.7
|
Employment contract
with Chris R. von Jako, Ph.D.
|
Exhibit 10.1 to
Current Report on Form 8-K filed June 26, 2018
|
|
10.8
|
Waiver and Modification Agreement, dated July 13, 2018 among
Dynatronics Corporation, Hausmann Enterprises, LLC and Bird &
Cronin, LLC as Borrowers and Bank of the West
|
Exhibit 10.11 on Form 10-K filed September 27,
2018
|
|
10.9
|
Fifth Modification
Agreement, dated June 21, 2019
|
Exhibit 10.1 to
Current Report on Form 8-K filed June 21, 2019
|
|
10.10
|
Severance Agreement
with Christopher R. von Jako, dated August 26,
2019
|
Exhibit 10.1 to
Current Report on Form 8-K filed August 29,
2019
|
|
10.11
|
Employment
Agreement with Brian D. Baker, dated August 26,
2019
|
Exhibit 10.2 to
Current Report on Form 8-K filed August 29,
2019
|
|
21
|
Subsidiaries of the
registrant
|
Filed
herewith
|
|
23.1
|
Consent of Tanner
LLC
|
Filed
herewith
|
56
|
31.1
|
Certification under
Rule 13a-14(a)/15d-14(a) of principal executive
officer
|
Filed
herewith
|
|
31.2
|
Certification under
Rule 13a-14(a)/15-14(a) of principal accounting officer and
principal financial officer
|
Filed
herewith
|
|
32.1
|
Certification under
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350)
of principal
executive officer
|
Filed
herewith
|
|
32.2
|
Certification
under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section
1350)
of principal financial officer and principal
accounting officer
|
Filed
herewith
|
|
101.INS**
|
XBRL
Instance Document
|
Filed
herewith
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema Document
|
Filed
herewith.
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
Filed
herewith
|
|
101.LAB**
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
Filed
herewith
|
|
101.PRE**
|
XBRL
Taxonomy Extension Label Linkbase Document
|
Filed
herewith
|
|
101.DEF**
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
Filed
herewith
|
**
Pursuant to
Regulation S-T, this interactive data file is deemed not filed or
part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of Section 18 of the Securities Exchange Act of
1934, and otherwise is not subject to liability under these
sections.
I
tem 16. Form 10-K
Summary
None.
57
S
IGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
DYNATRONICS
CORPORATION
|
|
|
|
|
|
|
|
|
Date:
September 25, 2019
|
By:
|
/s/
Brian D. Baker
|
|
|
|
|
Brian
D. Baker
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Date:
September 25, 2019
|
By:
|
/s/
Brian D. Baker
|
|
|
|
|
Brian
D. Baker
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
David A. Wirthlin
|
|
|
|
|
David
A. Wirthlin
|
|
|
|
|
Chief
Financial Officer
(Principal
Accounting Officer and Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Kelvyn H. Cullimore, Jr.
|
|
|
|
|
Kelvyn
H. Cullimore, Jr.
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/
Erin S. Enright
|
|
|
|
|
Erin S.
Enright
|
|
|
|
|
Director,
Chairman
|
|
|
|
|
|
|
|
|
|
/s/
David B. Holtz
|
|
|
|
|
David
B. Holtz
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/
Scott A. Klosterman
|
|
|
|
|
Scott
A. Klosterman
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/
Brian M. Larkin
|
|
|
|
|
Brian
M. Larkin
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/ R.
Scott Ward, Ph.D.
|
|
|
|
|
R.
Scott Ward, Ph.D.
|
|
|
|
|
Director
|
|
|
|
|
|
|
58
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 2. AcquisitionsNote 3. InventoriesNote 4. Property and EquipmentNote 5. Intangible AssetsNote 6. Warranty ReserveNote 7. Line Of CreditNote 8. Long-term DebtNote 9. LeasesNote 10. Deferred GainNote 11. Income TaxesNote 12. Major Customers and Sales By Geographic LocationNote 13. Common Stock and Common Stock EquivalentsNote 14. Convertible Preferred Stock and Common Stock WarrantsNote 15. Accrued Payroll and Benefits ExpenseNote 16. Employee Benefit PlanNote 17. Liquidity and Capital ResourcesNote 18. RevenueItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary