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, 2020.
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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1200
Trapp Road, Eagan, Minnesota 55121
(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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The 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, 2019 (the last day of
the registrant’s most recently completed second fiscal
quarter), was approximately $6.1 million.
Indicate the number of
shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
As of September 21,
2020, there were 14,096,252 shares of the issuer’s common
stock 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 2, 2020 are
incorporated by reference into Part III.
TABLE
OF CONTENTS
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59
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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.
These risks and
uncertainties include, but are not limited to, the uncertainty
regarding the impact or duration of the
Novel Coronavirus
Disease 2019
("COVID-19") virus pandemic that is rapidly
spreading globally and adversely affecting communities and
businesses
. 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 designs, manufactures, and sells
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 Eagan, Minnesota, and
in other facilities located in Northvale, New Jersey;
Chattanooga,
Tennessee;
and
Cottonwood Heights,
Utah
. 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 a value-driven 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 sustained revenue
growth, strong financial performance, 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 1200 Trapp
Road, Eagan, Minnesota, 55121, 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;
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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;
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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 2020 refers to the fiscal year ended June 30, 2020. 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
Fulfillment and Distribution Service
Agreement
On June 23, 2020,
the Company announced its plans to close its Ooltewah, Tennessee
facility as part of its previously announced consolidation and cost
reduction initiatives.
The production of
products historically manufactured in our Tennessee facility have
been transferred to our New Jersey and Minnesota facilities.
As described more fully below, distribution operations were
transferred to a third party logistics ("3PL") partner to provide
fulfillment and distribution services.
Dynatronics
believes these actions will result in reduced costs, improved
operating profitability, and provide scalability for
growth.
The facility closure is in the final stages
at this time.
Effective July 8,
2020, the Company entered into a Master Service Agreement
(“Agreement”) with Millstone Medical Outsourcing, LLC
(“Millstone”) to provide fulfillment and distribution
services. Pursuant to the Agreement, Millstone will store and
distribute products as directed by the Company and the Company will
pay Millstone fees at prices and on terms provided in the
Agreement. The initial term of the Agreement is for
three years from the
effective date. The Agreement will automatically renew for one-year
terms thereafter. Either party may terminate the Agreement with or
without cause upon 180 days’ written notice. Either party may
terminate in the event of material breach by the other party,
following 60-days’ written notice and opportunity to cure, or
immediately upon written notice in the event of a material breach
incapable of cure that is resulting in continuing damage or loss.
Either party may also terminate immediately with written notice in
the event of the failure to obtain or renew any necessary
governmental permit, license or approval, or in the event of the
bankruptcy or insolvency of the other party. Management believes
the outsourcing of these distribution capabilities to Millstone is
consistent with the Company’s objectives of streamlining its
operations, continuing to align operating expenses with current
revenue levels and, where advantageous, producing additional
benefits from a reduction in workforce and related
costs.
2
Resignation of Principal Executive Officer
On July
7, 2020, Brian Baker, citing the need for a reduced work schedule
to allow more flexibility to address health issues relating to the
COVID-19 virus, stepped down as Chief Executive Officer of
Dynatronics Corporation. Mr. Baker continues to serve as a member
of the Company’s Board of Directors and, subject to the
conditions and provisions of the Company’s equity incentive
plans, equity awards held by Mr. Baker will continue to vest and be
exercisable according to their respective terms. In connection with
Mr. Baker’s resignation, the Company and Mr. Baker entered
into a Separation and Pay Continuation Agreement (“Separation
Agreement”). The Separation Agreement provides that through
October 7, 2020 (the “Separation Date”), Mr. Baker will
receive the same compensation and benefits, including continued
vesting of outstanding equity awards, as under his existing
employment agreement, effective August 19, 2019. The Separation
Agreement includes a general release of claims and waivers
customary in such agreements. Mr. Baker’s departure was not
the result of any disagreement with the Company on any matter
relating to the Company’s operations, policies or
practices.
The Company also
entered into a Consulting Agreement with Mr. Baker (the
“Baker Consulting Agreement”), effective October 8,
2020, pursuant to which Mr. Baker will provide consulting services
to the Company on a part-time basis following the Separation Date
for up to 20 hours per week.
Appointment of New Principal Executive Officer and
Director
The
Board named John Krier as the Company’s Chief Executive
Officer effective July 7, 2020. Mr. Krier has served as Chief
Financial Officer of Dynatronics since March 2020. Mr. Krier will
continue to serve as the Company’s Chief Financial Officer on
an interim basis until a successor has been hired. On the
recommendation of the Nominating Committee, the Board increased the
number of directors constituting the full Board from six to seven
directors and appointed Mr. Krier as a director to fill the
resultant vacancy. Mr. Krier’s initial term as director will
expire at the Company’s 2021 Annual Meeting of
Shareholders.
Prior
to joining the Company as Chief Financial Officer, Mr. Krier served
as Vice President of Marketing of Breg, Inc.
(“
Breg
”), a global medical
device company, from March 2014 to November 2019, and provided
consulting services to Breg from December 2019 until March 2020.
Prior to joining Breg, Mr. Krier was President of Viscent, LLC, an
orthopedic bracing supplier, from September 1, 2009 through October
1, 2012, and Executive Consultant to the Chief Executive Officer
and Board of Directors from October 2012 through September 2013.
Mr. Krier holds a B.S. degree in Business Administration from the
University of South Dakota. He is 43 years old.
In connection with
his appointment as Chief Executive Officer, Mr. Krier entered into
an employment agreement with the Company (the “
Krier Employment
Agreement
”). Pursuant to the Krier Employment
Agreement, the Company will pay Mr. Krier an annual base salary of
$250,000 per year and he will be eligible for an annual bonus
targeted at a maximum payout of $75,000, and an annual equity award
of restricted stock units, or RSUs, up to a maximum value of
$75,000, which amount will be determined by the Compensation
Committee of the Board, based on results of operations and Mr.
Krier’s performance against goals established by the
Compensation Committee. On the date of his appointment, Mr. Krier
received a grant of 50,000 RSUs under the Dynatronics 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. Krier will receive a number of shares
of common stock equal to the number of RSUs that have vested. Also
upon his appointment date, the Company granted Mr. Krier a stock
option under the 2018 Plan for the purchase of 15,000 shares of the
Company’s common stock, vesting over a four-year period with
one-fourth of the shares vesting annually on the anniversary of the
grant date. The exercise price of the stock option is the market
price of the Company’s common stock on the date of grant. Mr.
Krier will operate from the Company’s Eagan, Minnesota
location.
The
Krier Employment Agreement continues until terminated by the
Company or by Mr. Krier in accordance with the terms of the
agreement. If the Company terminates Mr. Krier’s employment
during the first 12 months without cause as defined under the
agreement, the Company must pay Mr. Krier an amount equal to three
months base salary. In addition, in such event, one-half of the
initial equity compensation awards granted to him at the time of
his appointment as CEO will automatically vest, subject to his
execution of a release of all claims against the Company. Mr. Krier
is also subject to a non-solicitation, non-competition and
confidentiality agreement with post-termination restrictive
covenants. The Company has also entered into an indemnification
agreement with Mr. Krier on the same terms as it has with its other
directors and executive officers.
Electrotherapy Manufacture and Assembly
Agreement
Effective March 2,
2020, the Company entered into a Master Supply Agreement with
Ascentron, Inc. (“Ascentron”) for the manufacture and
assembly of the Company’s electrotherapy products, previously
manufactured in our Utah facility. Ascentron manufactures and
assembles the products to specifications provided by the Company
and the Company purchases the finished products from Ascentron at
prices and on terms provided in the agreement.
Management believes
the outsourcing of these manufacturing capabilities to Ascentron is
consistent with the Company’s objectives of streamlining its
operations, continues to align operating expenses with current
revenue levels and, where advantageous, produces additional
benefits from a reduction in workforce and related costs.
The agreement limits price increases to 2.5% annually.
The Company retains
the right in its sole discretion to extend the agreement for up to
two additional two-year terms upon written notice to Ascentron. The
Company may terminate the agreement at any time and for any reason
upon 365-days’ written notice. Either party may terminate in
the event of breach by the other party, following 60-days’
written notice and opportunity to cure, or in the event of the
failure to obtain or renew any necessary governmental permit,
license or approval, or in the event of the bankruptcy or
insolvency of the other party.
3
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
or contract manufacturer 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 75% of our net sales
(excluding freight, repairs, and miscellaneous items) in fiscal
year 2020.
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
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
accelerated shipping options,
including 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 Products
Our orthopedic soft bracing products are designed to accelerate
health for patients both pre- and post-surgical intervention, and
during fracture recovery, joint stabilization, and ligament
injury.
|
Our
Bird & Cronin
®
Manufactured
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 Manufactured
Products.
4
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.
|
Our
Solaris
®
,
Hausmann™, and PROTEAM™ brands include products for
physical therapy, rehabilitation, and athletic training. These
products include treatment tables, exercise and rehabilitation
equipment, therapeutic modalities, and related
supplies.
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.
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.
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 2020 and 2019. Sales of Manufactured Products
represented approximately 75% and 74% of total product sales,
excluding freight and other revenue, in fiscal years 2020 and 2019,
respectively.
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 designed logo.
5
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.
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 manufacturing, 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
litigation related to our intellectual property 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, 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 $24,000 in fiscal year 2020, and $88,000 in fiscal
year 2019.
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
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. We utilize a network of over 300 independent dealers
throughout the United States. 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 2020 and 2019.
We
export products to approximately 30 different countries. Sales
outside North America totaled approximately $1,286,000 in fiscal
year 2020 (or approximately 2.4% of net sales) and $1,435,000 in
fiscal year 2019 (or approximately 2.3% of net sales). We have no
foreign manufacturing operations, but we purchase certain products
and components from foreign manufacturers.
6
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 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 Northvale, New
Jersey, Eagan, Minnesota, and Cottonwood Heights, Utah. The
production of products historically manufactured in our Ooltewah,
Tennessee facility have been transferred to our New Jersey and
Minnesota facilities. 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 third-party 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 Manufactured 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.
Ascentron
manufactures and assembles the Company's electrotherapy products,
previously manufactured in our Utah facility, to specifications
provided by the Company, and the Company purchases the finished
products from Ascentron.
The
development and manufacture of a portion of our products
manufactured to our specifications by Ascentron is subject to
rigorous and extensive regulation by the U.S. Food and Drug
Administration, or FDA, and international regulatory agencies, as
applicable. 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 to enhance quality performance of the devices we
produce.
Our
Utah facility holds certification to ISO 13485:2016.
Products
manufactured at our facilities in New Jersey, and Minnesota meet
the requirements of cGMP. Applicable quality systems enhance our
ability to provide products and services that meet the expectations
of our customers.
Research and Development
Total
research and development (“R&D”) expenses in fiscal
year 2020 were $95,000, compared to approximately $54,000 in fiscal
year 2019. As a percentage of net sales, R&D expenses
represented approximately 0.2% and 0.1% in fiscal years 2020 and
2019, respectively.
7
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 FD&C Act, and regulations
promulgated under the FD&C 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 applicable.
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, as applicable.
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 reportable
events involving our devices. The FD&C 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 FD&C Act
or are considered 510(k) exempt. If a device is subject to section
510(k) clearance 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 into the market. Certain modifications to our marketed
devices may require a pre-market notification and clearance before
the changed device may be marketed, if the change or modification
could significantly affect safety and/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 FD&C 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 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.
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, Minnesota and New Jersey
facilities are subject to periodic inspection by the FDA for
compliance with the FDA’s cGMP and other requirements,
including appropriate reporting regulations and various
requirements for labeling and promotion.
Advertising of our
products is subject to regulation by the FTC under the FTC Act, as
applicable. 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.
8
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 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.
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.
9
Employees
As of
June 30, 2020, we employed 195 people, of which 190 were employed
on a full-time basis. Certain of our employees (38 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.
These risks and
uncertainties include, but are not limited to, the uncertainty
regarding the impact or duration of the
Novel Coronavirus
Disease 2019
("COVID-19") virus pandemic that is rapidly
spreading globally and adversely affecting communities and
businesses, including ours
. 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.
Risks Related to Our Business and Industry
We rely on a third party logistics
(“3PL”) provider for the storage, fulfillment, and
distribution of a majority of our Distributed Products. The failure
or inability of our 3PL to perform these services in accordance
with the terms of the arrangement, could result in an adverse
impact on our business and results of
operations.
We
generally rely on the uninterrupted and efficient operation of our
3PL provider to fulfill orders and distribute our products. This
provider may experience disruptions to their operations, including
disruptions caused by the COVID-19 pandemic and a shortage of
manpower. Disruptions experienced by our provider may result in
monetary damages and an adverse effect on our customer
relationships.
Furthermore, the
facilities where our products are stored by such provider may also
be harmed or rendered inoperable by natural or man-made disasters,
including earthquakes, power outages, communications failure or
terrorism. Any material damage to the facilities where our products
are stored could adversely affect its inventory and the ability of
such 3PL provider to meet the needs of its customers. In
addition, an inability to maintain
our logistics providers or a delay, disruption or quality
control problems in the operations of such provider,
including as a result of damage to the facilities of such provider
or a strike by such provider, could cause delays in our ability to
fulfill customer orders and may cause orders to be canceled, or
delivered late, our products to be returned, or receipt of products
to be refused, any of which could adversely affect our business and
results of operations.
Our
contract with our 3PL provider is terminable upon written notice by
either party for convenience without cause upon 180 days’
written notice. If we are unable to maintain our contract with
the provider, we would be required to retain a new 3PL
provider and may be unable to retain such third party at a cost
that is acceptable to us.
Finally, the
failure or inability of this provider to deliver products from us
to our customers, for any reason, could disrupt our business and
harm our reputation and operating results. We work closely with
our 3PL provider to anticipate issues, and also review public
information regarding their financial health. However, issues may
not be identified quickly, which may lead to lack of or poor
execution of services, loss, or litigation. Additionally,
deterioration of the financial condition of our 3PL provider could
result in delayed responsiveness or delivery failure, which would
ultimately affect our responsiveness to our customers and thus may
adversely affect our business, operations, and financial
performance.
We expect to rely on third-party
manufacturers and will be dependent on their quality and
effectiveness.
Our electrotherapy products require precise,
high-quality manufacturing. The failure to achieve and maintain
high manufacturing standards, including failure to detect or
control unexpected events or unanticipated manufacturing errors, or
the frequent occurrence of such errors, could result in patient
injury or death, delays or failures in product testing or delivery,
cost overruns, product recalls or withdrawals and other problems
that could seriously hurt our business. Third party manufacturers
can encounter difficulties involving manufacturing processes,
facilities, operations, production yields, quality control,
compliance, and shortages of qualified personnel.
10
If for
any reason our third-party manufacturer is unable or unwilling to
perform, we may not be able to terminate our agreements with them,
and we may not be able to locate alternative manufacturers or enter
into favorable agreements with them, nor can we be certain that any
such third-parties will have the manufacturing capacity to meet
future requirements. If these manufacturers, or any alternate
manufacturer, experience any significant difficulties in their
respective manufacturing processes for our electrotherapy products,
or should these manufacturers cease doing business with us, we
could experience significant interruptions in the supply of our
electrotherapy products or may not be able to create a supply of
our electrotherapy products at all. Were we to encounter
manufacturing issues, our ability to produce a sufficient supply of
our electrotherapy products might be negatively affected. Our
inability to coordinate the efforts of our
third-party manufacturer, or the lack of capacity available at
our third-party manufacturer, could impair our ability to
supply our electrotherapy products at required levels.
We
cannot guarantee our manufacturing and assembly partners will be
able to manufacture our electrotherapy products at commercial scale
on a cost-effective basis. If the commercial-scale manufacturing
costs of our electrotherapy products are higher than expected,
these costs may significantly impact our operating
results.
Disruption of our supply chain could have an
adverse impact on our business, financial condition, and results of
operations.
Our ability
to make, move, and sell our products is critical to our success.
Damage or disruption to our supply chain,
including third-party manufacturing, assembly or
transportation and distribution capabilities, due to weather,
including any potential effects of climate change, natural
disaster, fire or explosion, terrorism, pandemics (such as the
COVID-19 pandemic), strikes, government action, or other reasons
beyond our control or the control of our suppliers and business
partners, could impair our ability to manufacture or sell our
products. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such
events if they occur, particularly when a product is sourced from a
single supplier or location, could adversely affect our business or
financial results. In addition, disputes with significant
suppliers, including disputes regarding pricing or performance,
could adversely affect our ability to supply products to our
customers and could materially and adversely affect our product
sales, financial condition, and results of operations.
In
particular, we are actively monitoring the recent COVID-19 pandemic
and its potential impact on our supply chain and our consolidated
results of operations. Due to restrictions resulting from the
pandemic, global supply may become constrained, which may cause the
price of certain ingredients and raw materials used in our products
to increase and/or we may experience disruptions to our
operations.
We face risks related to health epidemics and
other widespread outbreaks of contagious disease, which could
significantly disrupt our supply chain and impact our operating
results
. Significant outbreaks of contagious diseases, and
other adverse public health developments, could have a material
impact on our business operations and operating results. In
December 2019, a novel strain of coronavirus causing respiratory
illness emerged in China and has continued to spread to other
countries, including the United States, and has been deemed a
pandemic. Global governments, including local, state and federal
government of the United States, have taken certain emergency
measures to combat the spread of the virus, including
implementation of stay-at-home orders, social distancing, travel
bans and closure of factories and businesses. We have implemented
guidelines and redundancies to promote employee health and wellness
in order to meet our obligations as a manufacturer and
infrastructure provider. If our employee health and wellness
activities are not fully successful, it could have a material
effect on our ability to manufacture products in required
quantities. Although we are considered an essential manufacturer,
some of our materials and products are sourced from suppliers
located in affected areas. Likewise, many of our customers have had
to temporarily close or limit their operations. While the full
impact of this outbreak is unknown at this time, we are closely
monitoring the developments and continually assessing the potential
impact on our business. Any prolonged disruption to our suppliers,
our manufacturing, or our customers could negatively impact our
sales, operating results, collection of receivables, and valuation
of inventory; however, the situation continues to develop and the
extent or duration is still uncertain.
Any current or future outbreak of
a health epidemic or other adverse public health developments, such
as the current outbreak of COVID-19, could disrupt our
manufacturing and supply chain, and adversely affect our business
and operating results.
Our business could be adversely
affected by the effects of health epidemics. For example, our
materials suppliers could be disrupted by conditions related
to COVID-19, or other epidemics, possibly resulting in
disruption to our supply chain. If our suppliers are unable or fail
to fulfill their obligations to us for any reason, we may not be
able to manufacture our products and satisfy customer demand or our
obligations under sales agreements in a timely manner, and our
business could be harmed as a result. At this point in time, there
is uncertainty relating to the potential effect
of COVID-19 on our business. Infections may become more
widespread and should that limit our ability to timely sell and
distribute our products or cause supply disruptions, it would have
a negative impact on our business, financial condition and
operating results. In addition, a significant health epidemic could
adversely affect the economies and financial markets of many
countries, resulting in an economic downturn that could affect
demand for our products, which could have a material adverse effect
on our business, operating results and financial
condition.
11
Although certain of our products are used by
healthcare professionals in settings where patients are treated, we
do not make claims that our products are effective in the
treatment, prevention or cure of disease, including COVID-19. If
sales representatives, retailers or online resellers make
unauthorized representations concerning the use of our products in
the prevention, treatment or mitigation of COVID-19, the response
to such statements may adversely affect our business and results of
operations and the market price of our common stock.
The
manufacture, marketing and sale of our products are regulated by
governmental agencies, including the U.S. Food and Drug
Administration or FDA, or FDA, and the Federal Trade Commission, or
FTC. Recently the FDA and the FTC issued warning letters to several
companies for selling fraudulent COVID-19 products, as part of
these agencies’ response in protecting Americans during the
global COVID-19 outbreak. Companies that sell products that
fraudulently claim to prevent, treat or cure COVID-19 may be
subject to legal action, including but not limited to seizure or
injunction. The extent to which the COVID-19 outbreak
continues to impact our financial condition will depend on future
developments that are highly uncertain and cannot be predicted,
including new government actions or restrictions, new information
that may emerge concerning the severity of COVID-19, the longevity
of COVID-19 and the impact of COVID-19 on economic
activity.
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 nine 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 January 2022, 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.
12
Our inability to successfully manage growth
through acquisitions, and the integration of acquired businesses,
products or technologies may present significant challenges and
could harm our operating results.
Our business plan includes
the acquisition of other businesses, products, and technologies. In
the future we expect to acquire or invest in 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, all of which 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.
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.
Our products are regulated by numerous
government agencies, both inside and outside the United
States.
The impact of this factor 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 marketing clearances are not certain.
Our facilities must be registered 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.
13
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.
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.
14
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
clearance 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. The CCPA went into effect on January 1,
2020.
●
The EU General Data
Protection Regulation (“GDPR”), effective May, 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.
The costs of
compliance with, and other burdens imposed by, the GDPR, CSL and
related 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.
15
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.
A significant percentage of our workforce is
subject to a collective bargaining agreement.
Approximately
19% 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 products or 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.
16
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.
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
Our failure to meet the continued listing
requirements of Nasdaq could result in a delisting of our common
stock.
Our common
stock is currently listed for trading on The Nasdaq Capital Market,
and the continued listing of our common stock on The Nasdaq Capital
Market is subject to our compliance with a number of listing
standards. On May 15, 2020, we received notice from the Listing
Qualifications Department of the Nasdaq Stock Market LLC
(“
Nasdaq
”) that because
the closing bid price for our common stock had fallen below $1.00
per share for 30 consecutive business days, we no longer complied
with the $1.00 minimum bid price requirement
for continued listing on The Nasdaq Capital Market under Rule
5550(a)(2) of the Nasdaq Listing Rules. Pursuant to Nasdaq Listing
Rules, as tolled for the extraordinary and unprecedented turmoil in
U.S. and world financial markets, we have until December 28, 2020
to regain compliance with
the minimum bid price requirement. To regain
compliance, the closing bid price of our common stock must meet or
exceed $1.00 per share for a minimum of ten consecutive business
days prior to December 28, 2020. If that occurs, Nasdaq will
provide written notification that the Company has achieved
compliance with the minimum bid requirement.
If the
Company does not regain compliance by December 28, 2020, it may be
eligible for an additional grace period, provided it meets the
applicable market value of publicly held shares requirement for
continued listing, and all other applicable Nasdaq standards for
initial listing on The Nasdaq Capital Market, with the exception of
bid price. If we do not regain compliance with
the minimum bid price requirement by December
28, 2020 and the Nasdaq staff determines that we will not be able
to cure the deficiency, or if we are otherwise not eligible for
such additional compliance period, Nasdaq will provide notice that
our common stock will be subject to delisting. We would have the
right to appeal a determination to delist our common stock, and the
common stock would remain listed on The Nasdaq Capital Market until
the completion of the appeal process. If our common stock were no
longer listed on The Nasdaq Capital Market, investors might only be
able to trade on one of the over-the-counter markets. This would
impair the liquidity of our common stock not only in the number of
shares that could be bought and sold at a given price, which might
be depressed by the relative illiquidity, but also through delays
in the timing of transactions and reduction in media coverage. In
addition, we could face significant material adverse consequences,
including:
●
a limited
availability of market quotations for our
securities
;
●
a limited amount of
news and analyst coverage for us; and
;
●
a decreased ability
to issue additional securities or obtain additional financing in
the future.
17
We may
take actions to restore our compliance with Nasdaq's listing
requirements, but we can provide no assurance that any such action
taken by us would allow our common stock to become listed again,
stabilize the market price or improve the liquidity of our common
stock, or prevent future non-compliance with Nasdaq's listing
requirements.
Our stock price has been volatile and we
expect that it will continue to be volatile.
For example,
during the year ended June 30, 2020, the selling price of our
common stock ranged from a high of $3.70 to a low of $0.63. 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.
The recent COVID-19 global pandemic has
increased capital markets volatility
. The global stock
markets have experienced, and may continue to experience,
significant volatility as a result of the COVID-19 pandemic, and
the price of our common stock has been volatile in recent months.
The COVID-19 pandemic and the significant uncertainties it has
caused for the global economy, business activity, and business
confidence have had, and is likely to continue to have, a
significant effect on the market price of securities generally,
including our securities. For example, in the 12 months ended June
30, 2020, the sales price on The Nasdaq Capital Market for our
common stock ranged from a low of $0.63 to a high of $3.70 per
share. Broad market and industry factors may seriously affect the
market price of our common stock, regardless of our actual
operating performance. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of
which we cannot control, including, among others, the current and
future public response and investor reaction to rumors or factual
reports of global events, terrorism, outbreaks of disease and other
natural disasters, such as the recent COVID-19 or coronavirus
pandemic and the other factors discussed in this report and in our
other reports and documents filed with the
SEC.
18
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 21, 2020, we
had outstanding a total of 1,992,000 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 230,000 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 3,681,000 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,
2020, Prettybrook Partners, LLC and its managing directors and
affiliates (collectively “Prettybrook”), owned
approximately
1,349,000
shares of common stock, 1,069,000 shares of Series A Preferred, and
300,000 shares of Series B Preferred. These securities represent
approximately 15% 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.
19
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 21,
2020, we had 3,681,000 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 46,319,000 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
We lease an 85,000
square-foot manufacturing, warehouse, and office facility in Eagan,
Minnesota, which houses our corporate headquarters and principal
executive offices. 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. We
have extended the term of the lease through October 2022. The
landlord is Bird & Cronin, Inc., from which we acquired the
Bird & Cronin assets and operations in 2017. Stockholders of
Bird & Cronin, Inc. include an employee 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
lease a 60,000 square-foot manufacturing and office facility in
Northvale, New Jersey to house our Hausmann Enterprises, LLC
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. We have
exercised options to extend the term of the lease through April
2023. The landlord is a stockholder and the previous owner of the
assets and operations acquired in 2017.
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 own a 53,000 square-foot manufacturing
facility and undeveloped acreage in Chattanooga, Tennessee, subject
to a mortgage requiring monthly payments to a bank of approximately
$13,000 and maturing in 2021. The interest rate on this obligation
is 6.4% per annum.
We
currently have this building for sale.
We lease a 36,000
square-foot manufacturing, warehouse, and office facility in
Cottonwood Heights, Utah. We sold the building in August 2014, and
now lease it back from the purchaser. The monthly lease payment is
approximately $30,000 and the lease terminates in 2029. We account
for the lease-back agreement as a finance 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 are currently exploring
leasing a portion of the building to a third-party and have engaged
a broker to assist us.
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.
20
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,
|
2020
|
2019
|
||
|
|
High
|
Low
|
High
|
Low
|
|
1
st
Quarter
(July-September)
|
$
1.86
|
$
1.00
|
$
3.25
|
$
2.65
|
|
2
nd
Quarter
(October-December)
|
$
1.28
|
$
0.63
|
$
2.99
|
$
2.50
|
|
3
rd
Quarter
(January-March)
|
$
3.70
|
$
0.81
|
$
2.79
|
$
1.96
|
|
4
th
Quarter
(April-June)
|
$
1.30
|
$
0.63
|
$
2.09
|
$
1.21
|
Outstanding Common Shares and Number of Shareholders
As of
September 21, 2020,
we had
approximately 14,096,252 shares of common stock issued and
outstanding
and approximately 400 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.
21
As of
September 21, 2020, we had outstanding 1,992,000 shares of Series A
Preferred, 1,459,000 shares of Series B Preferred, and 230,000
shares of 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.
Sales of Equity Securities
During the year
ended June 30, 2020, we sold an aggregate of 3,200,585 shares of
common stock. We incurred offering costs totaling $238,000,
inclusive of commissions paid to the sales agents at a fixed rate
of 3.0%, together with legal, accounting and filing fees. Net
proceeds from the sale of the shares totaled
$2,287,000.
Purchases of Equity Securities
We did
not purchase any shares of common stock during the year ended June
30, 2020 or in the prior eight fiscal years.
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 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 2020 Compared to Fiscal Year 2019
Net Sales
Net
sales in fiscal year 2020 decreased
$9,156,000
,
or 14.6%, to $53,409,000, compared to net sales of $
62,565,000
in fiscal year 2019.
The year-over-year
decrease
is primarily due to
the expected decline in sales due to stay-at-home policies and
government restrictions in response to the COVID-19 pandemic, as
well as the continued decline in physical therapy and
rehabilitation product sales
.
22
Gross Profit
Gross
profit for the year ended June 30, 2020 decreased $4,076,000, or
21.3%, to $15,098,000, or 28.3% of net sales. By comparison, gross
profit for the year ended June 30, 2019 was $
19,174,000
,
or 30.6% of net sales.
The year-over-year
decrease in gross profit was attributable
to: (1)
lower
sales which reduced gross profit by approximately $2,806,000 and
(2) reduced gross margin percent which reduced gross profit by
approximately $1,270,000.
The year-over-year decrease
in gross margin percentage to 28.3% from 30.6% was due primarily to
lower efficiency of the production process as a result of lower
sales.
Selling, General, and Administrative Expenses
Selling, general,
and administrative (“SG&A”) expenses decreased
$1,879,000
,
or 9.4%, to $18,091,000 for the year ended June 30, 2020, compared
to $
19,970,000
for the year ended June 30, 2019.
Selling expenses
decreased $1,605,000 compared to the prior year period,
due primarily to lower commission expense on lower sales and
decreased sales management salaries during the
year.
General and administrative ("G&A") expenses decreased $274,000
compared to the prior-year period, driven by a $234,000
increase in severance expenses offset by a $508,000 decrease in
other G&A expenses primarily related to lower payroll and
benefits as a result of headcount reductions.
Interest Expense
Interest expense
decreased approximately $76,000 in fiscal year 2020, to
approximately $436,000, compared to approximately $512,000 in
fiscal year 2019. The decrease in interest expense is primarily
related to lower interest rates and lower average borrowings on our
line of credit resulting in interest charges of $196,000 and
$
269
,000 for
the years ended June 30, 2020 and 2019, respectively. Another large
component of interest expense is imputed interest related to the
sale/leaseback of our corporate headquarters facility which totaled
$156,000 and $167,000, respectively, for the years ended June 30,
2020 and 2019. 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, 2020 was $3,436,000 compared to
$916
,000
for the
year ended June 30, 2019. The $2,519,000 increase in pre-tax loss
was primarily attributable to a decrease of $4,076,000 in gross
profit
and an increase of
$322,000 in net other expense,
partially offset by
a decrease of $1,879,000 in SG&A
. The increase in net
other expense was primarily attributable to a $375,000 gain on
revaluation of the Bird & Cronin acquisition earn-out liability
in the year ended June 30, 2019 partially offset by a decrease in
interest expense.
Income Tax
Income
tax benefit was $10,000 in fiscal year 2020, compared to an income
tax provision of $
5,000
in
fiscal year 2019.
Net Loss
Net
loss for the year ended June 30, 2020 was $3,425,000, compared to
$922
,000
for the
year ended June 30, 2019.
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”)
.
23
Net Loss Attributable to Common Stockholders
Net
loss attributable to common stockholders increased $2,601,000 to
$4,317,000 ($0.42 per share) for the year ended June 30, 2020,
compared to $
1,716
,000
($0.21 per share)
for the year ended June 30, 2019.
The increase in net
loss attributable to common stockholders for the year is due
primarily to: (1)
a $2,503,000
increase in net loss
; (2)
a $174,000 increase
in
deemed dividends on
convertible preferred stock and accretion of
discounts
; and (3)
a $77,000 decrease
in preferred stock dividends
.
Liquidity and Capital Resources
We have
historically financed operations through cash from operating
activities, available cash reserves, borrowings under a line of
credit facility (see,
Line of
Credit,
below) and proceeds from the sale of our equity
securities.
As of June 30,
2020, we had $2,216,000 in cash and cash equivalents, compared to
$
156,000
as
of June 30, 2019. During fiscal year 2020, we had positive cash
flows from operating activities.
Working capital
was $8,396,000 as of June 30, 2020, compared to working capital of
$5,638,000 as of June 30, 2019. The current ratio was 2.1 to 1 as
of June 30, 2020 and 1.4 to 1 as of June 30, 2019.
Current assets were
42.8% of total assets as of June 30, 2020, and 50.2% of total
assets as of June 30, 2019.
We
believe that our cash generated from operations, current capital
resources including recent loan and equity proceeds, and available
credit provide sufficient liquidity to fund operations for the next
12 months. However, the continuing effects of the COVID-19 pandemic
could have an adverse effect on our liquidity and cash and we
continue to evaluate and take action, as necessary, to preserve
adequate liquidity and ensure that our business can continue to
operate during these uncertain times.
In
March 2020, we entered into an equity distribution agreement with
Canaccord Genuity LLC and Roth Capital Partners LLC, pursuant to
which we arranged to offer and sell shares of our common stock in
an at-the-market offering (“ATM”) under a registration
statement previously filed by us on Form S-3 with the Securities
and Exchange Commission. On March 13, 2020, we filed a Prospectus
Supplement amending the registration statement and commenced the
ATM. Under the terms of the equity distribution agreement, we may
sell shares of our common stock in an aggregate amount of up to
$10,000,000, with Canaccord Genuity LLC and Roth Capital Partners
LLC acting as our sales agents at the market prices prevailing on
The Nasdaq Capital Market at the time of the sale of such shares.
We will pay Canaccord Genuity LLC and Roth Capital Partners, LLC a
fixed commission rate equal to 3.0% of the gross sale price per
share of common stock sold.
In
April 2020, we sold an aggregate of 3,200,585 shares of common
stock under the equity distribution agreement in the ATM.
We incurred offering costs totaling $238,000, inclusive of
commissions paid to the sales agents at a fixed rate of 3.0%,
together with legal, accounting and filing fees. Net proceeds from
the sale of the shares totaled $2,287,000. Proceeds were used to
strengthen our liquidity and working capital position.
On April 29, 2020, we entered into a
promissory note (the “Note”) with Bank of the West to
evidence a loan to the Company in the amount of $3,477,412 under
the Paycheck Protection Program (the “PPP”) established
under the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”), administered by the U.S. Small Business
Administration (“SBA”).
In accordance with the requirements of the CARES Act, we expect to
use the proceeds from the loan exclusively for qualified expenses
under the PPP, including payroll costs, mortgage interest, rent and
utility costs, as further detailed in the CARES Act and applicable
guidance issued by the SBA. Interest will accrue on the outstanding
balance of the Note at a rate of 1.00% per annum. We intend to
apply for forgiveness of all amounts due under the Note, in an
amount equal to the sum of qualified expenses under the PPP
incurred during the 24 weeks following initial disbursement.
Notwithstanding our expected eligibility to apply for forgiveness,
no assurance can be given that we will obtain forgiveness of all or
any portion of amounts due under the Note.
Subject to any forgiveness granted under the PPP, the Note is
scheduled to mature two years from the date of initial disbursement
under the Note and is payable in monthly installments beginning 10
months after the completion of the 24 week covered period. The Note
may be prepaid at any time prior to maturity without penalty. The
Note contains customary provisions related to events of default,
including, among others, failure to make payments, bankruptcy,
breaches of representations, significant changes in ownership, and
material adverse effects. The occurrence of an event of default may
result in the collection of all amounts owing under the Note,
and/or filing suit and obtaining judgment against us. Our
obligations under the Note are not secured by any collateral or
personal guarantees.
24
Cash and Cash Equivalents and Restricted Cash
Our
cash and cash equivalents and restricted cash position increased
$2,060,000 to $2,316,000 as of June 30, 2020, compared to
$256
,000
as of
June 30, 2019. The primary sources of cash in the year ended June
30, 2020, was $3,090,000 of net cash provided by operating
activities, $2,287,000 net proceeds from issuance of common stock,
and $3,477,000 proceeds from the PPP Note. Primary uses of cash
included net payments of $5,528,000 under our line of credit and
acquisition holdbacks of $500,000.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
decreased approximately $2,601,000, or 34.7%, to $4,894,000 as of
June 30, 2020, from $7,495
,000
as of
June 30, 2019. The decrease was primarily due to a decline in sales
in the year ended June 30, 2020.
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, decreased $3,156,000, or 27.4%, to $8,372,000 as of June
30, 2020, compared to $11,528
,000
as of
June 30, 2019. The decrease was primarily due to steps taken to
right-size incoming material purchases and adjust inventory
management as part of our working capital plans in response to the
impacts of COVID-19. During fiscal year 2020, we recorded in cost
of goods sold,
$460,000
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 $
0
in fiscal
year 2019. 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
decreased approximately $976,000, or 24.5%, to $3,014,000 as of
June 30, 2020, from $
3,990,000
as
of June 30, 2019.
The decrease in
accounts payable was driven primarily by a reduction in inventory
purchases and timing of payments.
Line of Credit
We have a line of
credit with Bank of the West (“Line of Credit”)
available pursuant to a loan and security agreement, as amended
(the “Loan and Security Agreement”), that matures on
January 15, 2022. Our obligations under the Line of Credit are
secured by a first-priority security interest in substantially all
of our assets. The Line of Credit 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
financial covenants including a minimum monthly consolidated fixed
charge coverage ratio which only applies
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
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% (approximately 2.4%
as of June 30, 2020). The Line of Credit is subject to a
quarterly unused line fee of .25%.
As of
June 30, 2020, we had borrowed $1,013,000 under the Line of Credit
compared to total borrowings of $
6,541,000
as
of June 30, 2019. There was approximately $
5,040,000
and $
1,480,000
available to borrow
as of June 30, 2020 and 2019,
respectively
.
25
Debt
Long-term debt
increased approximately $3,302,000 to approximately $3,605,000 as
of June 30, 2020, compared to approximately $303,000 as of June 30,
2019. Our long-term debt is primarily comprised of the PPP Note,
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 PPP Note is
$3,477,412
, all of which
is classified as long-term debt at June 30, 2020.
The
principal balance on the mortgage loan is approximately $91,000,
all of which is classified as current portion of long-term debt
at June 30,
2020
, with monthly principal and interest payments of
$13,000.
Finance Lease Liability
Finance
lease liability as of June 30, 2020 and 2019 totaled approximately
$2,914,000 and $3,199,000, respectively. Our capital lease
obligations consist primarily of a capitalized building lease. In
conjunction with the sale and leaseback of our Utah building in
August 2014, we entered into a 15-year lease, classified as a
finance lease, originally valued at $3,800,000. The building lease
asset is amortized on a straight line basis over 15 years at
approximately $252,000 per year. Total accumulated amortization
related to the leased building is approximately $1,491,000 at June
30, 2020. 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, 2020 is
$1,379,000. Lease payments, currently approximately $30,000, 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, 2020 was approximately $156,000. In addition to the
Utah building, we lease certain equipment which have been
determined to be finance leases. As of June 30, 2020, future
minimum gross lease payments required under the capital leases were
as follows:
|
2021
|
$
465,624
|
|
2022
|
472,874
|
|
2023
|
445,280
|
|
2024
|
384,754
|
|
2025
|
392,446
|
|
Thereafter
|
1,720,902
|
|
Total
|
$
3,881,880
|
Operating Lease Liability
Operating lease
liability as of June 30, 2020 and June 30, 2019 totaled
approximately $3,358,000 and $0, respectively. The operating lease
liability was recorded upon the adoption of ASU No. 2016-02,
Leases. Our operating lease liability consists primarily of
building leases for office, manufacturing, warehouse and storage
space.
Acquisition
Holdback and Earn-Out Liability
Acquisition
earn-out liability decreased $500,000 or
100.0%, to $0 as of
June 30, 2020, from $500
,000
as of
June 30, 2019. The decrease is due to payments during the year
ended June 30, 2020.
Inflation
Our
revenues and net income have not been unusually affected by
inflation or price increases for raw materials and parts from
vendors.
26
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, 2020, 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:
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, 2020, and 2019, our
inventory valuation reserve balance, was approximately $568,000 and
$
139,000
,
respectively, and our inventory balance was $8,372,000 and
$
11,528,000
,
net of reserves, respectively.
27
Revenue Recognition
Our
sales force and distributors sell Manufactured and Distributed
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 $4,894,000 and
$
7,495
,000
,
net of allowance for doubtful accounts of $185,000 and $90,000 as
of June 30, 2020, and 2019, respectively.
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 our
strategic plans will result in profitability.
●
A majority of our
tax attributes have indefinite carryover periods.
Negative evidence:
●
We have nine years
of cumulative losses as of June 30, 2020.
28
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. T
he
anticipated accumulated net operating loss carryforward as of June
30, 2020, is approximately $9,237,000, 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.
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 initiatives, 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 2021 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.
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:
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|
|
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|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
33
|
|
|
|
|
|
34
|
|
|
|
|
|
35
|
|
|
|
|
|
36
|
30
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, 2020 and 2019, 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, 2020 and 2019,
and the results of its operations and its cash flows for each of
the two years in the period ended June 30, 2020, 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
24, 2020
31
|
DYNATRONICS
CORPORATION
|
||
|
Consolidated
Balance Sheets
|
||
|
As
of June 30, 2020 and 2019
|
||
|
|
|
|
|
Assets
|
2020
|
2019
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
2,215,665
|
$
155,520
|
|
Restricted
cash
|
100,636
|
100,510
|
|
Trade accounts
receivable, less allowance for doubtful accounts of $184,713 and
$89,500 as of June 30, 2020 and June 30, 2019,
respectively
|
4,893,861
|
7,495,309
|
|
Inventories,
net
|
8,371,842
|
11,527,521
|
|
Prepaid expenses
and other receivables
|
492,704
|
634,837
|
|
|
|
|
|
Total
current assets
|
16,074,708
|
19,913,697
|
|
|
|
|
|
Property and
equipment, net
|
4,941,517
|
5,677,419
|
|
Operating lease
assets
|
3,347,378
|
-
|
|
Intangible assets,
net
|
5,682,991
|
6,407,374
|
|
Goodwill
|
7,116,614
|
7,116,614
|
|
Other
assets
|
433,109
|
516,841
|
|
|
|
|
|
Total
assets
|
$
37,596,317
|
$
39,631,945
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
3,013,949
|
$
3,989,546
|
|
Accrued payroll and
benefits expense
|
1,204,964
|
1,373,481
|
|
Accrued
expenses
|
768,117
|
1,038,726
|
|
Warranty
reserve
|
221,854
|
207,988
|
|
Line of
credit
|
1,012,934
|
6,540,639
|
|
Current portion of
long-term debt
|
108,713
|
173,921
|
|
Current portion of
finance lease liability
|
316,103
|
283,781
|
|
Current portion of
deferred gain
|
150,448
|
150,448
|
|
Current portion of
operating lease liability
|
852,419
|
-
|
|
Current portion of
acquisition earn-out liability
|
-
|
500,000
|
|
Income tax
payable
|
29,196
|
16,751
|
|
|
|
|
|
Total
current liabilities
|
7,678,697
|
14,275,281
|
|
|
|
|
|
Long-term debt, net
of current portion
|
3,496,222
|
129,428
|
|
Finance lease
liability, net of current portion
|
2,597,525
|
2,915,241
|
|
Deferred gain, net
of current portion
|
1,228,658
|
1,379,105
|
|
Operating lease
liability, net of current portion
|
2,505,232
|
-
|
|
Deferred tax
liabilities, net
|
-
|
-
|
|
Other
liabilities
|
194,102
|
177,181
|
|
|
|
|
|
Total
liabilities
|
17,700,436
|
18,876,236
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
Preferred stock, no
par value: Authorized 50,000,000 shares; 3,681,000 shares and
4,899,000 shares issued and outstanding as of June 30, 2020 and
June 30, 2019, respectively
|
8,770,798
|
11,641,816
|
|
Common stock, no
par value: Authorized 100,000,000 shares; 13,803,855 shares and
8,417,793 shares issued and outstanding as of June 30, 2020 and
June 30, 2019, respectively
|
27,474,411
|
21,320,106
|
|
Accumulated
deficit
|
(16,349,328
)
|
(12,206,213
)
|
|
|
|
|
|
Total
stockholders' equity
|
19,895,881
|
20,755,709
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$
37,596,317
|
$
39,631,945
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
32
|
DYNATRONICS
CORPORATION
|
||
|
Consolidated
Statements of Operations
|
||
|
For
the Years Ended June 30, 2020 and 2019
|
||
|
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Net
sales
|
$
53,409,046
|
$
62,565,117
|
|
Cost of
sales
|
38,311,169
|
43,391,518
|
|
Gross
profit
|
15,097,877
|
19,173,599
|
|
|
|
|
|
Selling, general,
and administrative expenses
|
18,091,038
|
19,969,696
|
|
Operating
loss
|
(2,993,161
)
|
(796,097
)
|
|
|
|
|
|
Other (expense)
income:
|
|
|
|
Interest
expense, net
|
(435,607
)
|
(512,186
)
|
|
Other
(expense) income, net
|
(6,782
)
|
392,035
|
|
Net other
expense
|
(442,389
)
|
(120,151
)
|
|
|
|
|
|
Loss before income
taxes
|
(3,435,550
)
|
(916,248
)
|
|
|
|
|
|
Income tax benefit
(provision)
|
10,067
|
(5,474
)
|
|
|
|
|
|
Net
loss
|
(3,425,483
)
|
(921,722
)
|
|
|
|
|
|
Deemed dividend on
convertible preferred stock and accretion of discount
|
(173,758
)
|
-
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
(717,632
)
|
(794,350
)
|
|
|
|
|
|
Net loss
attributable to common stockholders
|
$
(4,316,873
)
|
$
(1,716,072
)
|
|
|
|
|
|
Net loss per common
share
|
|
|
|
Basic and
diluted
|
$
(0.42
)
|
$
(0.21
)
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
Basic and
diluted
|
10,262,769
|
8,246,188
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
33
|
DYNATRONICS
CORPORATION
|
||||||
|
Condensed
Consolidated Statements of Stockholders' Equity
|
||||||
|
For
the Years Ended June 30, 2020 and 2019
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Common
stock
|
Preferred
stock
|
Accumulated
|
stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
deficit
|
equity
|
|
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
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
236,885
|
278,716
|
-
|
-
|
-
|
278,716
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
730,592
|
717,632
|
-
|
-
|
(717,632
)
|
-
|
|
|
|
|
|
|
|
|
|
Preferred stock
converted to common stock
|
1,218,000
|
2,871,018
|
(1,218,000
)
|
(2,871,018
)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock, net of issuance costs of $238,168
|
3,200,585
|
2,286,939
|
-
|
-
|
-
|
2,286,939
|
|
|
|
|
|
|
|
|
|
Preferred stock
beneficial conversion and accretion of discount
|
-
|
-
|
-
|
173,758
|
-
|
173,758
|
|
|
|
|
|
|
|
|
|
Dividend of
beneficial conversion and accretion of discount
|
-
|
-
|
-
|
(173,758
)
|
-
|
(173,758
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(3,425,483
)
|
(3,425,483
)
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2020
|
13,803,855
|
$
27,474,411
|
3,681,000
|
$
8,770,798
|
$
(16,349,328
)
|
$
19,895,881
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
34
|
DYNATRONICS
CORPORATION
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
For
the Years Ended June 30, 2020 and 2019
|
||
|
|
|
|
|
|
2020
|
2019
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$
(3,425,483
)
|
$
(921,722
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization of property and equipment
|
1,013,513
|
887,013
|
|
Amortization
of intangible assets
|
724,383
|
724,384
|
|
Amortization
of other assets
|
30,518
|
40,635
|
|
Loss
on sale of property and equipment
|
37,530
|
2,177
|
|
Stock-based
compensation expense
|
278,716
|
300,649
|
|
Change
in allowance for doubtful accounts receivable
|
95,213
|
(280,800
)
|
|
Change
in allowance for inventory obsolescence
|
429,529
|
(319,836
)
|
|
Amortization
deferred gain on sale/leaseback
|
(150,447
)
|
(150,448
)
|
|
Change
in fair value of earn-out liability
|
-
|
(375,000
)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Trade
accounts receivable
|
2,506,235
|
646,380
|
|
Inventories
|
2,726,150
|
(458,936
)
|
|
Prepaid
expenses and other receivables
|
142,133
|
146,593
|
|
Other
assets
|
53,214
|
(24,603
)
|
|
Income
tax payable
|
12,445
|
112,252
|
|
Accounts
payable, accrued expenses, and other current
liabilities
|
(1,383,936
)
|
(3,062
)
|
|
|
|
|
|
Net
cash provided by operating activities
|
3,089,713
|
325,676
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchase
of property and equipment
|
(292,359
)
|
(224,111
)
|
|
|
|
|
|
Net
cash used in investing activities
|
(292,359
)
|
(224,111
)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Proceeds
from long-term debt
|
3,477,412
|
-
|
|
Principal
payments on long-term debt
|
(175,826
)
|
(164,002
)
|
|
Principal
payments on finance lease liability
|
(297,903
)
|
(252,738
)
|
|
Payment
of acquisition earn-out liability and holdbacks
|
(500,000
)
|
(1,379,513
)
|
|
Net
change in line of credit
|
(5,527,705
)
|
254,602
|
|
Proceeds
from issuance of common stock, net
|
2,286,939
|
-
|
|
|
|
|
|
Net
cash used in financing activities
|
(737,083
)
|
(1,541,651
)
|
|
|
|
|
|
Net
change in cash and cash equivalents and restricted
cash
|
2,060,271
|
(1,440,086
)
|
|
|
|
|
|
Cash and cash
equivalents and restricted cash at beginning of the
period
|
256,030
|
1,696,116
|
|
|
|
|
|
Cash and cash
equivalents and restricted cash at end of the period
|
$
2,316,301
|
$
256,030
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid for interest
|
$
454,179
|
$
515,634
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
Deemed
dividend on convertible preferred stock and accretion of
discount
|
173,758
|
-
|
|
Preferred
stock dividend, in common stock, issued or to be
issued
|
717,632
|
794,350
|
|
Inventory
reclassified to demonstration equipment
|
-
|
239,106
|
|
Conversion
of preferred stock to common stock
|
2,871,018
|
-
|
|
Finance
lease obligations incurred to obtain ROU assets
|
12,509
|
252,493
|
|
Operating
lease obligations incurred to obtain ROU assets
|
4,203,925
|
-
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
|
|
|
35
DYNATRONICS
CORPORATION
N
otes to Consolidated Financial Statements
June 30, 2020 and
2019
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 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 $2,216,000 and $
156,000
as
of June 30, 2020 and 2019, respectively.
Restricted cash
totaled approximately $101,000 as of June 30, 2020 and 2019, 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.
36
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
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.
Goodwill
Goodwill
resulted from the Hausmann and Bird & Cronin acquisitions.
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.
Leases
Management
determines if a contract is or contains a lease at inception or
modification of a contract. A contract is or contains a lease if
the contract conveys the right to control the use of an identified
asset for a period in exchange for consideration. Control over the
use of the identified asset means the lessee has both (a) the right
to obtain substantially all of the economic benefits from the use
of the asset and (b) the right to direct the use of the asset. Such
assets are classified as right-of-use ("ROU") assets with a
corresponding lease liability.
Finance
and operating lease ROU assets and liabilities are recorded at
commencement at the present value of future minimum lease payments
over the expected lease term. As the implicit discount rate for the
present value calculation is not determinable in most of the
Company’s leases, management uses the Company’s
incremental borrowing rate based on the information available at
commencement of the lease. The expected lease terms include options
to extend the lease when it is reasonably certain the Company will
exercise such options. Lease expense for minimum lease payments is
recognized on a straight-line basis over the expected lease
term.
Leases with an
expected term of 12 months or less are not accounted for on the
balance sheet and the related lease expense is recognized on a
straight-line basis over the expected lease term.
37
The
Company has operating and finance leases for various
administrative, manufacturing, and distribution facilities and
equipment.
Most
of the Company’s leases include one or more options to renew
and extend the lease term two years to five years.
The exercise of lease renewal
options is typically at the Company's sole discretion, however, as
a material economic incentive to exercise the option exists, the
majority of renewals to extend the lease terms are included in the
ROU assets and lease liabilities as they are reasonably certain of
exercise.
The Company’s lease agreements do not
contain any material non-lease components, residual value
guarantees, or material restrictive covenants.
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
, 2020 and 2019 totaled
$95,000 and $54,000, 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.
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 11,211,018 as of
June 30, 2020 and
11,764,083
as of June 30, 2019.
38
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.
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.
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, 2020 and 2019, the Company had approximately $2,100,000
and $
0
,
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, 2020, approximately 19% 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.
39
Reclassification
Certain
amounts in the prior year's consolidated balance sheet have been
reclassified for comparative purposes to conform to the
presentation in the current year's consolidated balance
sheet.
Recent Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board issued ASU
No. 2016-02,
Leases
("Topic
842"). This guidance replaces the prior lease accounting guidance
in its entirety. The underlying principle of the new standard is
the recognition of ROU assets and lease liabilities by lessees for
substantially all leases. The standard also requires additional
quantitative and qualitative disclosures.
The Company adopted Topic 842 as of July 1, 2019
using a modified retrospective method. Under this method, financial
results reported in periods prior to July 1, 2019 are unchanged.
The Company elected the ‘package of practical
expedients’ which permits the Company to carryforward the
historical lease classification. Adoption of the standard resulted
in the recording of additional ROU assets and lease liabilities for
operating leases of $4,203,925 as of July 1, 2019. The adoption of
this guidance did not have an impact on net
loss.
In
December 2019, the FASB issued ASU 2019-12,
Income Taxes
(“Topic
740”):
Simplifying the
Accounting for Income Taxes
, which is intended to simplify
various aspects related to accounting for income taxes. The
standard is effective for annual periods beginning after December
15, 2020 and interim periods within, with early adoption permitted.
Adoption of the standard requires certain changes to be made
prospectively, with some changes to be made retrospectively. The
Company is currently assessing the impact of this standard on its
financial condition and results of operations.
In August 2020,
the FASB issued ASU 2020-06, Debt—
Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity
, which is intended to simplify the accounting for
certain financial instruments with characteristics of liabilities
and equity, including convertible instruments and contracts on an
entity’s own equity. The guidance allows for either full
retrospective adoption or modified retrospective adoption. The
guidance is effective for the Company in the first quarter of
fiscal year 2025 and early adoption is permitted. The Company is
evaluating the impact of adoption of this guidance will have on its
consolidated financial statements.
Note 2.
Acquisitions
On October 2,
2017, the Company, through its wholly-owned subsidiary Bird &
Cronin, LLC, completed the purchase of substantially all of the
assets of Bird & Cronin, Inc. (“Bird &
Cronin”), a manufacturer and distributor of orthopedic soft
bracing products.
The purchase price was subject to an earn-out
payment ranging from $500,000 to $1,500,000, based on future
sales.
The earn-out
liability was 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.
The earn-out
liability was $0 and $500,000 as of June 30, 2020 and 2019,
respectively, reflecting
p
ayments
during the year ended June 30, 2020 totaling $500,000
.
Note
3. Inventories
Inventories consist
of the following as of June 30:
|
|
2020
|
2019
|
|
Raw
materials
|
$
4,798,489
|
$
5,830,140
|
|
Work in
process
|
427,744
|
706,128
|
|
Finished
goods
|
3,713,692
|
5,129,806
|
|
Inventory
reserve
|
(568,083
)
|
(138,553
)
|
|
|
$
8,371,842
|
$
11,527,521
|
Included in cost of
goods sold for the years ended June 30, 2020 and 2019, are
inventory write-offs of $460,000 and $0, respectively. The
write-offs reflect inventories related to discontinued product
lines, excess repair parts, product rejected for quality standards,
and other non-performing inventories.
40
Note
4.
Property
and Equipment
Property
and equipment consist of the following as of June 30:
|
|
2020
|
2019
|
|
Land
|
$
30,287
|
$
30,287
|
|
Buildings
|
5,725,928
|
5,590,566
|
|
Machinery and
equipment
|
2,647,507
|
2,602,760
|
|
Office
equipment
|
336,942
|
322,297
|
|
Computer
equipment
|
2,585,469
|
2,445,488
|
|
Vehicles
|
109,560
|
109,560
|
|
|
11,435,693
|
11,200,958
|
|
Less accumulated
depreciation and amortization
|
(6,494,176
)
|
(5,523,539
)
|
|
|
$
4,941,517
|
$
5,677,419
|
Depreciation
expense for the years ended June 30, 2020 and 2019 was
$662,239 and $586,243, respectively.
Included
in the above caption, “Buildings” as of June 30, 2020
and 2019 is a building lease that is accounted for as a finance
lease asset (see Notes 9 and 10) with a gross value of
$3,800,000.
41
Note 5.
Intangible
Assets
Identifiable
intangible assets, other than goodwill, consisted of the following
as of and for the years ended June 30, 2020 and 2019:
|
|
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
|
|
|
Trade name -
indefinite life
|
Trade
name
|
Non-compete
covenant
|
Customer
relationships
|
Total
|
|
Gross carrying amount
|
|
|
|
|
|
|
June
30, 2019
|
$
1,084,000
|
$
270,600
|
$
473,400
|
$
6,243,400
|
$
8,071,400
|
|
Additions
|
-
|
-
|
-
|
-
|
-
|
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
|
June
30, 2020
|
1,084,000
|
270,600
|
473,400
|
6,243,400
|
8,071,400
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
June
30, 2019
|
$
-
|
$
207,480
|
$
224,200
|
$
1,232,346
|
$
1,664,026
|
|
Additions
|
-
|
17,290
|
87,600
|
619,493
|
724,383
|
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
|
June
30, 2020
|
-
|
224,770
|
311,800
|
1,851,839
|
2,388,409
|
|
Net book value at June 30, 2020
|
$
1,084,000
|
$
45,830
|
$
161,600
|
$
4,391,561
|
$
5,682,991
|
42
Amortization
expense associated with the intangible assets was
$724,383 for the
fiscal years ended June 30, 2020 and 2019. Estimated future
amortization expense for the identifiable intangible assets is
expected to be as follows for the years ending June
30:
|
2021
|
$
724,383
|
|
2022
|
706,633
|
|
2023
|
624,700
|
|
2024
|
620,550
|
|
2025
|
620,550
|
|
Thereafter
|
1,302,175
|
|
Total
|
$
4,598,991
|
Note 6.
Warranty
Reserve
A
reconciliation of the change in the warranty reserve consists of
the following for the fiscal years ended June 30:
|
|
2020
|
2019
|
|
Beginning warranty
reserve balance
|
$
207,988
|
$
205,850
|
|
Warranty costs
incurred
|
(23,646
)
|
(87,848
)
|
|
Warranty expense
accrued
|
37,512
|
89,986
|
|
Ending warranty
reserve
|
$
221,854
|
$
207,988
|
Note
7.
Line
of Credit
The
Company has a line of credit with Bank of the West (“Line of
Credit”) available pursuant to a loan and security agreement,
as amended (the “Loan and Security Agreement”), that
matures on January 15, 2022. 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 the Company's 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 minimum monthly consolidated fixed
charge coverage ratio which only applies
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
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% (approximately 2.4%
as of June 30, 2020). The Line of Credit is subject to a
quarterly unused line fee of .25%.
Borrowings
on the Line of Credit were $
1,012,934
and
$
6,540,639
as of June 30, 2020 and June 30, 2019, respectively. As of June 30,
2020, there was approximately $5,040
,000
available to
borrow.
43
Note
8.
Long-Term
Debt
As of June 30, 2020
and 2019, long-term debt was $3,604,935 and $303,349,
respectively.
Long-term debt is
primarily comprised of the mortgage loan on the Company's office
and manufacturing facility in Tennessee maturing in 2021 and
Paycheck Protection Program (the
“PPP”)
loan.
On April 29, 2020, the Company entered
into a promissory note (the “Note”) with Bank of the
West to evidence a loan to the Company in the amount of $3,477,412
under the PPP established under the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”), administered
by the U.S. Small Business Administration
(“SBA”).
In accordance with the requirements of the CARES Act, the Company
expects to use the proceeds from the loan exclusively for qualified
expenses under the PPP, including payroll costs, mortgage interest,
rent and utility costs, as further detailed in the CARES Act and
applicable guidance issued by the SBA. Interest will accrue on the
outstanding balance of the Note at a rate of 1.00% per annum. The
Company intends to apply for forgiveness of all amounts due under
the Note, in an amount equal to the sum of qualified expenses under
the PPP incurred during the 24 weeks following initial
disbursement. Notwithstanding the Company's expected eligibility to
apply for forgiveness, no assurance can be given that the Company
will obtain forgiveness of all or any portion of amounts due under
the Note.
Subject to any forgiveness granted under the PPP, the Note is
scheduled to mature two years from the date of initial disbursement
under the Note and is payable in monthly installments beginning 10
months after the completion of the 24 week covered period. The Note
may be prepaid at any time prior to maturity without penalty. The
Note contains customary provisions related to events of default,
including, among others, failure to make payments, bankruptcy,
breaches of representations, significant changes in ownership, and
material adverse effects. The occurrence of an event of default may
result in the collection of all amounts owing under the Note,
and/or filing suit and obtaining judgment against us. The Company's
obligations under the Note are not secured by any collateral or
personal guarantees.
Long-term debt
consists of the following as of June 30:
|
|
2020
|
2019
|
|
6.44% promissory
note secured by trust deed on real property, maturing January 2021,
payable in monthly installments of $13,278
|
$
90,979
|
$
239,229
|
|
5.99% promissory
note secured by a vehicle, payable in monthly installments of $833
through December 2020
|
4,914
|
14,311
|
|
5.01% promissory
note secured by copier equipment, payable in monthly installments
of $924 through October 2022
|
24,363
|
33,965
|
|
3.99% promissory
note secured by equipment, payable in monthly installments of $247
through February 2023
|
7,267
|
9,886
|
|
3.97% promissory
note secured by equipment, payable in monthly installments of $242
through February 2021
|
-
|
4,668
|
|
7.56% promissory
note secured by copier equipment, payable in monthly installments
of $166 through February 2020
|
-
|
1,290
|
|
1.00% Paycheck
Protection Program promissory note maturing April
2022
|
3,477,412
|
-
|
|
|
3,604,935
|
303,349
|
|
Less current
portion
|
(108,713
)
|
(173,921
)
|
|
|
$
3,496,222
|
$
129,428
|
44
The
aggregate maturities of long-term debt for each of the years
subsequent to June 30, 2020 are as follows:
|
2021
|
$
108,713
|
|
2022
|
3,490,860
|
|
2023
|
5,362
|
|
Total
|
$
3,604,935
|
Note
9.
Leases
Leases
recorded on the balance sheet consist of the
following:
|
|
Classification
on the Balance Sheet
|
June
30, 2020
|
June 30,
2019
|
|
Lease
Assets
|
|
|
|
|
Operating lease
assets
|
Operating lease
assets, net
|
$
3,347,378
|
$
-
|
|
Finance lease
assets
|
Property and
equipment, net
|
$
2,550,102
|
$
2,875,188
|
|
|
|
|
|
|
Lease
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
Current portion of
operating lease liability
|
$
852,419
|
$
-
|
|
Finance
|
Current portion of
finance lease liability
|
$
316,103
|
$
283,781
|
|
Noncurrent
|
|
|
|
|
Operating
|
Operating lease
liability, net of current portion
|
$
2,505,232
|
$
-
|
|
Finance
|
Finance lease
liability, net of current portion
|
$
2,597,525
|
$
2,915,241
|
Other
information related to lease term and discount rate is as
follows:
|
|
June 30,
2020
|
|
Weighted Average Remaining
Lease Term
|
|
|
Operating leases
|
3.8 years
|
|
Finance leases
|
8.6 years
|
|
|
|
|
Weighted Average Discount
Rate
|
|
|
Operating leases
|
4.6%
|
|
Finance leases
|
5.7%
|
45
The components of
lease expense are as follows:
|
|
Classification
on the Statement of Operations
|
Year
Ended June 30, 2020
|
|
Operating
lease cost
|
|
|
|
Operating lease
cost
|
Cost of
sales
|
$
282,060
|
|
Operating lease
cost
|
Selling, general,
and administrative expenses
|
764,590
|
|
Short term lease
cost
|
Selling, general,
and administrative expenses
|
63,000
|
|
|
|
|
|
Finance
lease cost
|
|
|
|
Amortization of
finance lease assets
|
Cost of
sales
|
$
142,680
|
|
Amortization of
finance lease assets
|
Selling, general,
and administrative expenses
|
196,102
|
|
Interest on finance
lease liabilities
|
Interest expense,
net
|
175,913
|
|
Total lease
cost
|
|
$
1,624,345
|
Supplemental cash
flow information related to leases is as
follows:
|
|
Year
Ended
June
30, 2020
|
|
ROU assets obtained
in exchange for lease liabilities:
|
|
|
Operating
leases
|
$
4,203,925
|
|
Financing
leases
|
$
12,509
|
Future minimum
lease payments are summarized as follows:
|
|
Operating
Leases
|
Finance
Leases
|
|
Year
ending June 30,
|
|
|
|
2021
|
$
959,721
|
$
465,624
|
|
2022
|
600,000
|
472,874
|
|
2023
|
150,000
|
445,280
|
|
2024
|
-
|
384,754
|
|
2025
|
-
|
392,446
|
|
Thereafter
|
-
|
1,720,902
|
|
Total future
minimum lease payments
|
$
1,709,721
|
$
3,881,880
|
|
|
|
|
|
Imputed
interest
|
|
772,836
|
|
Deferred
rent
|
|
195,416
|
In September 2020,
we exercised the option to extend the term of the New Jersey
facility operating lease by two years through April 2023.
The annual minimum lease payment for this facility is approximately
$390,000.
46
The Company leases
office, manufacturing and warehouse facilities in Northvale, New
Jersey; and Eagan, Minnesota from employees, shareholders, and
entities controlled by shareholders, who were previously principals
of businesses acquired by the Company.
The combined
expenses associated with these related-party transactions totaled
$1,046,677 and $1,041,187 for the
years ended June 30, 2020 and 2019, respectively.
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.
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:
|
|
2020
|
2019
|
|
Balance of deferred
gain
|
$
1,379,106
|
$
1,529,553
|
|
Less current
portion
|
(150,448
)
|
(150,448
)
|
|
|
$
1,228,658
|
$
1,379,105
|
Note 11.
Income
Taxes
Income tax benefit (provision) are as follows
for the years ended June 30:
|
|
Current
|
Deferred
|
Total
|
|
2020:
|
|
|
|
|
U.S.
federal
|
$
9,853
|
$
-
|
$
9,853
|
|
State and local
|
214
|
-
|
214
|
|
|
$
10,067
|
$
-
|
$
10,067
|
|
2019:
|
|
|
|
|
U.S.
federal
|
$
-
|
$
-
|
$
-
|
|
State and
local
|
(5,474
)
|
-
|
(5,474
)
|
|
|
$
(5,474
)
|
$
-
|
$
(5,474
)
|
47
The
components of the Company’s income tax benefit (provision)
are as follows for the years ended June 30:
|
|
2020
|
2019
|
|
Expected tax
benefit
|
$
737,981
|
$
183,655
|
|
State taxes, net of
federal tax benefit
|
127,620
|
30,705
|
|
Valuation
allowance
|
(840,027
)
|
(237,690
)
|
|
Incentive stock
options
|
(22,546
)
|
(8,812
)
|
|
Other,
net
|
7,039
|
26,668
|
|
|
$
10,067
|
$
(5,474
)
|
The
Company’s deferred income tax assets and (liabilities)
related to the tax effects of temporary differences are as follows
as of June 30:
|
|
2020
|
2019
|
|
Net deferred income
tax assets (liabilities):
|
|
|
|
Inventory
capitalization for income tax purposes
|
$
75,866
|
$
86,197
|
|
Inventory
reserve
|
136,352
|
36,024
|
|
Accrued employee
benefit reserve
|
89,800
|
90,536
|
|
Warranty
reserve
|
57,682
|
54,076
|
|
Interest expense
limitation
|
206,117
|
126,916
|
|
Allowance for
doubtful accounts
|
53,472
|
29,292
|
|
Property and
equipment, principally due to differences in
depreciation
|
(136,266
)
|
(151,146
)
|
|
Research and
development credit carryover
|
599,409
|
609,391
|
|
Other
intangibles
|
(278,321
)
|
(205,549
)
|
|
Deferred gain on
sale lease-back
|
501,791
|
527,340
|
|
Operating loss
carry forwards
|
2,403,886
|
1,666,684
|
|
Valuation
allowance
|
(3,709,788
)
|
(2,869,761
)
|
|
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,
2020 and 2019, the Company has established a full valuation
allowance.
The anticipated accumulated net operating loss carryforward as of
June 30, 2020, is approximately $9,237,000, which will begin to
expire in 2037. The Company has no uncertain tax positions as of
June 30, 2020.
48
Note 12. Major Customers and Sales by Geographic
Location
During
the fiscal years ended June 30, 2020 and 2019, 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 $1,286,000 or 2.4% of
net sales, for the fiscal year ended June 30, 2020, compared to
$1,435,000 or 2.3% of net sales, for the fiscal year ended June 30,
2019.
Note
13.
Common
Stock and Common Stock Equivalents
In March 2020, The
Company entered into an equity distribution agreement with
Canaccord Genuity LLC and Roth Capital Partners LLC, pursuant to
which the Company arranged to offer and sell shares of common stock
in an at-the-market offering (“ATM”) under a
registration statement previously filed on Form S-3 with the
Securities and Exchange Commission. On March 13, 2020, the Company
filed a Prospectus Supplement amending the registration statement
and commenced the ATM. Under the terms of the equity distribution
agreement, the Company may sell shares of common stock in an
aggregate amount of up to $10,000,000, with Canaccord Genuity LLC
and Roth Capital Partners LLC acting as our sales agents at the
market prices prevailing on The Nasdaq Capital Market at the time
of the sale of such shares. The Company will pay Canaccord Genuity
LLC and Roth Capital Partners, LLC a fixed commission rate equal to
3.0% of the gross sale price per share of common stock
sold.
In April 2020, the
Company sold an aggregate of 3,200,585 shares of common stock under
the equity distribution agreement in the ATM. Offering costs were
incurred totaling $238,168, inclusive of commissions paid to the
sales agents at a fixed rate of 3.0%, together with legal,
accounting and filing fees. Net proceeds from the sale of the
shares totaled $2,286,939. Proceeds were used to strengthen the
Company's liquidity and working capital
position.
The
Company issued 730,592 shares of common stock during the fiscal
year ended June 30, 2020 and
302,105
shares of common stock during the fiscal year ended June 30, 2019
as payment of preferred stock dividends.
For the year ended
June 30, 2020, the Company issued 1,218,000 shares of common stock
in conversion of 1,218,000 shares of preferred
stock.
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 approved 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, 2020, 463,978 shares
of common stock remained authorized and reserved for issuance, but
were not granted under the terms of the 2018 Equity
Plan.
For the year ended
June 30, 2020, the Company granted 165,491 shares of restricted
common stock to directors in connection with compensation
arrangements and 100,000 shares to employees.
For the
year ended June 30, 2019, the Company granted 63,998 shares of
restricted common stock to directors in connection with
compensation arrangements.
The
Company granted options for the purchase of 160,000 shares of
common stock under its equity incentive plans during fiscal year
2020 and options for purchase of 20,000 shares during fiscal year
2019. 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.
49
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:
|
|
2020
|
2019
|
|
Expected dividend
yield
|
0%
|
0%
|
|
Expected stock
price volatility
|
26% - 55%
|
42%
|
|
Risk-free interest
rate
|
0.38% - 1.94%
|
2.69%
|
|
Expected life of
options
|
0.25 years
-
5.25
years
|
5.25
years
|
The
weighted average fair value of options granted during fiscal year
2020 and 2019 was $0.26 and $0.86, respectively. The following
table summarizes the Company’s stock option activity during
the reported fiscal years:
|
|
2020
|
|
2019
|
||
|
|
|
|
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
|
126,577
|
$
2.73
|
5.63
years
|
191,796
|
$
3.04
|
|
Options
granted
|
160,000
|
1.33
|
6.98
years
|
20,000
|
2.07
|
|
Options canceled or
expired
|
(137,577
)
|
2.07
|
|
(85,219
)
|
3.28
|
|
|
|
|
|
|
|
|
Options outstanding
at end of the year
|
149,000
|
$
1.80
|
6.34
years
|
126,577
|
$
2.73
|
|
|
|
|
|
|
|
|
Options exercisable
at end of the year
|
33,000
|
$
2.58
|
|
38,083
|
$
2.92
|
|
|
|
|
|
|
|
|
Range of exercise
prices at end of the year
|
|
$
1.12 - 2.70
|
|
|
$
2.07 - 4.20
|
The
Company recognized $278,716 and $
300,649
in
stock-based compensation for the years ended June 30, 2020 and
2019, 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, 2020, there was $155,479 of unrecognized stock-based
compensation cost that is expected to be expensed over the next
four years.
No
options were exercised during fiscal years 2020 and 2019. The
aggregate intrinsic value of the outstanding options as of June 30,
2020 and 2019 was $0.
50
Note 14.
Convertible
Preferred Stock and Common Stock Warrants
As of June 30,
2020, the Company had issued and outstanding a total of 1,992,000
shares of Series A 8% Convertible Preferred Stock (“Series A
Preferred”) and 1,459,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred"). The Series A Preferred and
Series B Preferred are convertible into a total of 3,451,000 shares
of common stock. Dividends payable on these preferred shares accrue
at the rate of 8% per year and are payable quarterly in stock or
cash at the option of the Company. The Company generally pays the
dividends on the preferred stock by issuing shares of our common
stock. The formula for paying these dividends using common stock in
lieu of cash can change the effective yield on the dividend to more
or less than 8% depending on the market price of the common stock
at the time of issuance.
Certain redemption
rights are attached to the Series A Preferred and 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 A Preferred and Series
B Preferred includes a liquidation preference under which investors
would receive cash equal to the stated value of their stock plus
unpaid dividends.
A forced conversion
can be initiated based on a formula related to share price and
trading volumes
. As of
June 30,
2020
, there were also issued and outstanding 230,000 shares
of Series C Non-Voting Convertible Preferred Stock (“Series C
Preferred”). The Series C Preferred shares are non-voting, do
not receive dividends, and have no liquidation preferences or
redemption rights.
During the year ended June 30, 2020, the
Company issued 1,218,000 shares of common stock upon conversion of
1,210,000 shares of Series C Preferred
and 8,000 shares
of Series A Preferred.
As of June 30, 2020, the Company had issued
and outstanding a
total of 6,738,500 warrants to purchase 1.5 shares of Common Stock,
exercisable at $2.75 per share for cash
only
. The 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.
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,
2020, the Company recorded deemed dividend discount accretion of
$173,758 associated with the conversion of preferred
shares.
The
Company chose to pay preferred stock dividends by issuing common
shares valued at $745,714 in fiscal year 2020 and $
776,014
in
fiscal year 2019. At June 30, 2020, there was $180,123 in accrued
dividends payable for the quarter ended June 30, 2020, which were
paid by issuing 207,736 shares of common stock in July
2020.
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
|
1,992,000
|
$
4,980,000
|
|
Series B
Preferred
|
1,800,000
|
1,459,000
|
3,647,500
|
|
Series C
Preferred
|
2,800,000
|
230,000
|
-
|
51
Note
15.
Accrued
Payroll and Benefits Expense
As of
June 30, 2020 and 2019, accrued payroll and benefits expense was
$1,204,964 and $1,373,481,
respectively. Included in the balance as of June 30, 2020 and 2019,
was $199,914 and $310,903, respectively, of accrued severance
expense
maturing in less
than one year
. The Company recognized $533,706 and
$300
,011
in
severance expense during the years ended June 30, 2020 and 2019,
respectively. Severance expense is included in selling, general,
and administrative expenses in the accompanying consolidated
statements of operations.
Note
16.
Employee
Benefit Plan
The
Company has deferred savings plans which qualify under Internal
Revenue Code Section 401(k).
The plans covers
all employees of Dynatronics Corporation, who have at least 12
months of service and who are age 21 or older.
For fiscal year
2020, the Company made matching contributions of 50% of the first
6% of each employee’s contribution up to a maximum of $3,000,
with a six-year vesting schedule.
For fiscal year 2019, the
Company made matching contributions of 25% to 100% of the first 5%
of each employee’s contribution, with a six-year vesting
schedule. Contributions to the plan for fiscal years 2020 and 2019
were $206,366 and $322,728,
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, 2020, the Company had $2,316,301 in cash, compared to
$
256,030
as
of June 30, 2019. During fiscal year 2020 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, 2021.
As of
June 30, 2020 there was approximately $5,040,000 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
|
|
|
|
2020
|
2019
|
|
Physical Therapy
and Rehabilitation Products
|
$
32,672,788
|
$
39,000,967
|
|
Orthopedic Soft
Bracing Products
|
20,472,533
|
23,202,597
|
|
Other
|
263,725
|
361,553
|
|
|
$
53,409,046
|
$
62,565,117
|
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, 2020. Based on this evaluation, our principal executive officer
and principal financial officer concluded that as of June 30, 2020,
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,
2020. 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, 2020 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, 2020 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
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
33
|
|
|
|
|
|
34
|
|
|
|
|
|
35
|
|
|
|
|
|
36
|
55
(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
|
|
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
|
56
|
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
|
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
|
|
10.5
|
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
|
|
10.6
|
Fifth
Modification Agreement, dated June 21, 2019
among Dynatronics
Corporation, Hausmann Enterprises, LLC and Bird & Cronin, LLC
as Borrowers and Bank of the
West
|
Exhibit 10.1 to
Current Report on Form 8-K filed June 21,
2019
|
|
10.7
|
Employment Agreement with Brian D. Baker, dated August 26,
2019
|
Exhibit 10.2 to
Current Report on Form 8-K filed August 29,
2019
|
|
10.8
|
Sixth
Modification
Agreement, dated January 22, 2020
among Dynatronics
Corporation, Hausmann Enterprises, LLC and Bird & Cronin, LLC
as Borrowers and Bank of the
West
|
Exhibit 10.1 to
Current Report on Form 8-K filed January 28,
2020
|
|
10.9
|
Paycheck Protection Program Note, dated April 29, 2020, executed by
Dynatronics Corporation as Borrower and Bank of the
West
|
Exhibit 10.2 on
Form 10-Q filed May 14, 2020
|
|
10.10
|
Master
Supply Agreement between Dynatronics Corporation and Ascentron,
Inc., effective March 1, 2020
|
Exhibit 10.3 on
Form 10-Q filed May 14,
2020
|
|
10.11
|
Letter
Agreement between Dynatronics Corporation and John A. Krier (Chief
Financial Officer) dated effective March 23, 2020
|
Exhibit 10.4 on
Form 10-Q filed May 14, 2020
|
|
10.12
|
Equity
Distribution Agreement, dated as of March 12, 2020, by and among
Dynatronics Corporation, Canaccord Genuity LLC and Roth Capital
Partners, LLC
|
Exhibit 1.1 to
Current Report on Form 8-K filed March 13,
2020
|
|
10.13
|
Separation
and Pay Continuation Agreement with Brian D. Baker, dated July 8,
2020
|
Filed
herewith
|
|
10.14
|
Consulting
Agreement with Brian D. Baker, effective October 8,
2020
|
Filed
herewith
|
|
10.15
|
Employment Agreement with John A. Krier, dated July 7,
2020
|
Filed
herewith
|
|
10.16
|
Master
Service Agreement with Millstone Medical Outsourcing, LLC,
effective July 8, 2020
|
Filed
herewith
|
|
21
|
Subsidiaries
of the registrant
|
Filed
herewith
|
|
23.1
|
Consent
of Tanner LLC
|
Filed
herewith
|
57
|
31.1
|
Certification under Rule
13a-14(a)/15d-14(a) of principal executive 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 and
principal financial 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.
58
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 24, 2020
|
By:
|
/s/
John A.
Krier
|
|
|
|
|
John A.
Krier
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer and Principal Financial 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 24, 2020
|
By:
|
/s/
John A.
Krier
|
|
|
|
|
John A. Krier
|
|
|
|
|
President
and Chief Executive Officer
(Principal
Executive Officer and Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Skyler N. Black
|
|
|
|
|
Skyler
N. Black
|
|
|
|
|
Corporate
Controller
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Brian
D. Baker
|
|
|
|
|
Brian D. Baker
|
|
|
|
|
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
|
|
|
|
|
|
|
59
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