DYNATRONICS CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 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
|
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:
|
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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Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☑ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). ☑Yes ☐
No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☑
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Emerging
growth company ☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No
☑
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date:
As of
May 6, 2020, there were 13,803,855 shares of the issuer’s
common stock outstanding.
DYNATRONICS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
TABLE OF CONTENTS
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Page
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1
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2
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3
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4
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5
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10
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10
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13
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14
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14
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14
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15
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15
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15
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15
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15
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16
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DYNATRONICS
CORPORATION
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Condensed
Consolidated Balance Sheets
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(Unaudited)
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Assets
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March
31, 2020
|
June
30, 2019
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Current
assets:
|
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Cash and cash
equivalents
|
$
1,428,957
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$
155,520
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Restricted
cash
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100,636
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100,510
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Trade accounts
receivable, less allowance for doubtful accounts of $103,462 and
$89,500 as of March 31, 2020 and June 30, 2019,
respectively
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6,635,441
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7,495,309
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Inventories,
net
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11,322,887
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11,527,521
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Prepaid expenses
and other receivables
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764,256
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634,837
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Total
current assets
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20,252,177
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19,913,697
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Property and
equipment, net
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5,157,470
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5,677,419
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Operating lease
assets
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3,045,883
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-
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Intangible assets,
net
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5,864,087
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6,407,374
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Goodwill
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7,116,614
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7,116,614
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Other
assets
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607,315
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516,841
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Total
assets
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$
42,043,546
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$
39,631,945
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Accounts
payable
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$
5,539,558
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$
3,989,546
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Accrued payroll and
benefits expense
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1,479,462
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1,373,481
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Accrued
expenses
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767,633
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1,038,726
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Warranty
reserve
|
207,988
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207,988
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Line of
credit
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6,368,559
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6,540,639
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Current portion of
long-term debt
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148,922
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173,921
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Current portion of
finance lease liability
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311,073
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283,781
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Current portion of
deferred gain
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150,448
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150,448
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Current portion of
operating lease liability
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902,476
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-
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Acquisition
earn-out liability
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-
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500,000
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Income tax
payable
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7,351
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16,751
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Total
current liabilities
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15,883,470
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14,275,281
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Long-term debt, net
of current portion
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22,073
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129,428
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Finance lease
liability, net of current portion
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2,679,110
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2,915,241
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Deferred gain, net
of current portion
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1,266,270
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1,379,105
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Operating lease
liability, net of current portion
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2,143,407
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-
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Other
liabilities
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190,160
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177,181
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Total
liabilities
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22,184,490
|
18,876,236
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Commitments and
contingencies
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Stockholders'
equity:
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Preferred stock, no
par value: Authorized 50,000,000 shares; 3,681,000 shares and
4,899,000 shares issued and outstanding as of March 31, 2020 and
June 30, 2019, respectively
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8,770,798
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11,641,816
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Common stock, no
par value: Authorized 100,000,000 shares; 10,407,775 shares and
8,417,793 shares issued and outstanding as of March 31, 2020 and
June 30, 2019, respectively
|
24,962,007
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21,320,106
|
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Accumulated
deficit
|
(13,873,749
)
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(12,206,213
)
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Total
stockholders' equity
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19,859,056
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20,755,709
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Total
liabilities and stockholders' equity
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$
42,043,546
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$
39,631,945
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See accompanying
notes to condensed consolidated financial statements.
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1
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DYNATRONICS
CORPORATION
|
||||
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Condensed
Consolidated Statements of Operations
|
||||
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(Unaudited)
|
||||
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Three
Months Ended
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Nine
Months Ended
|
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March
31,
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March
31,
|
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2020
|
2019
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2020
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2019
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Net
sales
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$
13,706,319
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$
14,551,519
|
$
45,292,860
|
$
47,057,320
|
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Cost of
sales
|
9,761,864
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10,146,361
|
31,608,541
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32,425,066
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Gross
profit
|
3,944,455
|
4,405,158
|
13,684,319
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14,632,254
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Selling, general,
and administrative expenses
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4,907,363
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4,818,093
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14,450,155
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15,087,393
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Operating
loss
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(962,908
)
|
(412,935
)
|
(765,836
)
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(455,139
)
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Other (expense)
income:
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Interest
expense, net
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(110,101
)
|
(124,477
)
|
(351,382
)
|
(387,107
)
|
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Other
(expense) income, net
|
(18,193
)
|
6,905
|
(12,809
)
|
390,459
|
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Net other (expense)
income
|
(128,294
)
|
(117,572
)
|
(364,191
)
|
3,352
|
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Loss before income
taxes
|
(1,091,202
)
|
(530,507
)
|
(1,130,027
)
|
(451,787
)
|
|
|
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Income tax
(provision) benefit
|
-
|
(32,880
)
|
-
|
(236,829
)
|
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Net
loss
|
(1,091,202
)
|
(563,387
)
|
(1,130,027
)
|
(688,616
)
|
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Deemed dividend on
convertible preferred stock and accretion of discount
|
(65,219
)
|
-
|
(173,758
)
|
-
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
(168,356
)
|
(196,240
)
|
(537,509
)
|
(586,145
)
|
|
|
|
|
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|
|
Net loss
attributable to common stockholders
|
$
(1,324,777
)
|
$
(759,627
)
|
$
(1,841,294
)
|
$
(1,274,761
)
|
|
|
|
|
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|
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Net loss per common
share
|
|
|
|
|
|
Basic and
diluted
|
$
(0.13
)
|
$
(0.09
)
|
$
(0.20
)
|
$
(0.16
)
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
Basic and
diluted
|
10,168,596
|
8,307,117
|
9,216,027
|
8,189,890
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
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2
|
DYNATRONICS
CORPORATION
|
||||||
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Condensed
Consolidated Statements of Stockholders' Equity
|
||||||
|
(Unaudited)
|
||||||
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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
|
5,000
|
43,658
|
-
|
-
|
-
|
43,658
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
66,631
|
186,637
|
-
|
-
|
(186,637
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
315,601
|
315,601
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
8,161,029
|
20,455,402
|
4,899,000
|
11,641,816
|
(10,361,177
)
|
21,736,041
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
56,082
|
-
|
-
|
-
|
56,082
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
65,494
|
203,268
|
-
|
-
|
(203,268
)
|
-
|
|
|
|
|
|
|
|
|
|
Reduction in equity
retained for acquisition holdback
|
(37,708
)
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(440,830
)
|
(440,830
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
8,188,815
|
20,714,752
|
4,899,000
|
11,641,816
|
(11,005,275
)
|
21,351,293
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
58,998
|
85,566
|
-
|
-
|
-
|
85,566
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
74,731
|
196,240
|
-
|
-
|
(196,240
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(563,387
)
|
(563,387
)
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2019
|
8,322,544
|
20,996,558
|
4,899,000
|
11,641,816
|
(11,764,902
)
|
20,873,472
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
115,343
|
-
|
-
|
-
|
115,343
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
95,249
|
208,205
|
-
|
-
|
(208,205
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(233,106
)
|
(233,106
)
|
|
|
|
|
|
|
|
|
|
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
|
135,244
|
129,793
|
-
|
-
|
-
|
129,793
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
126,194
|
166,904
|
-
|
-
|
(166,904
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
98,838
|
98,838
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2019
|
8,679,231
|
21,616,803
|
4,899,000
|
11,641,816
|
(12,274,279
)
|
20,984,340
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
5,446
|
58,238
|
-
|
-
|
-
|
58,238
|
|
|
|
|
|
|
|
|
|
Preferred stock
converted to common stock
|
760,000
|
1,791,320
|
(760,000
)
|
(1,791,320
)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
165,251
|
202,249
|
-
|
-
|
(202,249
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(137,663
)
|
(137,663
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
9,609,928
|
23,668,610
|
4,139,000
|
9,850,496
|
(12,614,191
)
|
20,904,915
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
96,195
|
45,343
|
-
|
-
|
-
|
45,343
|
|
|
|
|
|
|
|
|
|
Preferred stock
converted to common stock
|
458,000
|
1,079,698
|
(458,000
)
|
(1,079,698
)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend, in common stock, issued or to be issued
|
243,652
|
168,356
|
-
|
-
|
(168,356
)
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,091,202
)
|
(1,091,202
)
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2020
|
10,407,775
|
$
24,962,007
|
3,681,000
|
$
8,770,798
|
$
(13,873,749
)
|
$
19,859,056
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
3
|
DYNATRONICS
CORPORATION
|
||
|
Condensed
Consolidated Statements of Cash Flows
|
||
|
(Unaudited)
|
||
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
2019
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$
(1,130,027
)
|
$
(688,616
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization of property and equipment
|
763,197
|
650,289
|
|
Amortization
of intangible assets
|
543,287
|
543,292
|
|
Amortization
of other assets
|
27,007
|
32,219
|
|
Loss
on sale of property and equipment
|
18,878
|
2,177
|
|
Stock-based
compensation expense
|
233,374
|
185,306
|
|
Change
in allowance for doubtful accounts receivable
|
13,962
|
(280,800
)
|
|
Change
in allowance for inventory obsolescence
|
(22,694
)
|
(58,268
)
|
|
Amortization
deferred gain on sale/leaseback
|
(112,835
)
|
(112,836
)
|
|
Deferred
income taxes
|
-
|
236,829
|
|
Change
in fair value of earn-out liability
|
-
|
(375,000
)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Trade
accounts receivable and other receivables
|
848,565
|
1,285,182
|
|
Inventories
|
227,328
|
(411,918
)
|
|
Prepaid
expenses
|
(132,078
)
|
72,070
|
|
Other
assets
|
(117,481
)
|
(15,692
)
|
|
Income
tax receivable
|
(9,400
)
|
35,518
|
|
Accounts
payable and accrued expenses
|
1,397,879
|
452,212
|
|
|
|
|
|
Net
cash provided by operating activities
|
2,548,962
|
1,551,964
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchase
of property and equipment
|
(249,617
)
|
(124,804
)
|
|
|
|
|
|
Net
cash used in investing activities
|
(249,617
)
|
(124,804
)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Principal
payments on long-term debt
|
(132,354
)
|
(122,035
)
|
|
Principal
payments on finance lease liability
|
(221,348
)
|
(181,609
)
|
|
Payment
of acquisition earn-out liability and holdbacks
|
(500,000
)
|
(912,845
)
|
|
Net
change in line of credit
|
(172,080
)
|
(1,492,532
)
|
|
|
|
|
|
Net
cash used in financing activities
|
(1,025,782
)
|
(2,709,021
)
|
|
|
|
|
|
Net
change in cash and cash equivalents and restricted
cash
|
1,273,563
|
(1,281,861
)
|
|
|
|
|
|
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
|
$
1,529,593
|
$
414,255
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid for interest
|
$
362,595
|
$
392,039
|
|
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
|
537,509
|
586,145
|
|
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
|
3,749,809
|
-
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to condensed consolidated financial statements.
|
|
|
4
D
YNATRONICS CORPORATION
N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
March 31, 2020
Note 1. Presentation and Summary of Significant Accounting
Policies
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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements (the “Condensed Consolidated Financial
Statements”) have been prepared by the Company in accordance
with generally accepted accounting principles in the United States
(“GAAP”) and pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to the rules and regulations of the
SEC. As such, these Condensed Consolidated Financial Statements
should be read in conjunction with the Company’s audited
financial statements and accompanying notes included in its Annual
Report on Form 10-K for the fiscal year ended June 30, 2019 (the
“Annual Report”)
filed
with the SEC on September 25, 2019. The Condensed Consolidated
Balance Sheet at June 30, 2019, has been derived from the Annual
Report.
The accounting policies followed by the Company are set forth in
Part II, Item 8, Note 1, Basis of Presentation and Summary of
Accounting Policies, of the Notes to Financial Statements included
in the Company’s Annual Report. In the opinion of management,
the Condensed Consolidated Financial Statements contain all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company’s financial position
as of March 31, 2020 and its results of operations and its cash
flows for the periods presented. The results of operations for the
first nine months of the fiscal year are not necessarily indicative
of results for the full year or any future periods.
The
Company’s fiscal year begins on July 1 and ends on June 30
and references made to “fiscal year 2020” and
“fiscal year 2019” refer to the Company’s fiscal
year ending June 30, 2020 and the fiscal year ended June 30, 2019,
respectively.
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods presented.
The
Company evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, and adjusts those
estimates and assumptions when facts and circumstances dictate.
Actual results could differ materially from those estimates and
assumptions.
Reclassification
Certain
amounts in the prior year's Financial Statements have been
reclassified for comparative purposes to conform to the
presentation in the current year's Financial
Statements.
Risks and Uncertainties
The
pandemic caused by an outbreak of the Novel Coronavirus Disease
2019 (“COVID-19”) has resulted, and is likely to
continue to result, in significant national and global economic
disruption and has adversely affected and may continue to adversely
affect the Company’s business. However, the Company is
actively monitoring this situation and the possible effects on its
financial condition, liquidity, operations, suppliers, industry,
and workforce. Certain federal, state and local governmental
authorities have issued stay-at-home orders, proclamations and/or
directives aimed at minimizing the spread of COVID-19. Additional,
more restrictive proclamations and/or directives may be issued in
the future.
The
ultimate impact of the COVID-19 pandemic on the Company’s
operations is unknown and will depend on future developments, which
are highly uncertain and cannot be predicted with confidence,
including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic,
and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an
extended period of continued business disruption, reduced customer
orders, and reduced operations.
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 right-of-use ("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 $3,749,809
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.
5
Note 2. Acquisitions
The earn-out
liability was $0 as of March 31, 2020. Payments
during
the quarters ended December 31, 2019 and September 30, 2019
totaled
$375,000
and
$125,000,
respectively
.
Note 3. 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 stock outstanding during the period. Stock
options, convertible preferred stock and warrants are considered to
be potential common stock. 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 income for the
period available to each weighted-average share of common stock
outstanding during the reporting period. Diluted net loss per
common share is the amount of net loss for the period available to
each weighted-average share of common stock outstanding during the
reporting period and to each share of potential common stock
outstanding during the period, unless inclusion of potential common
stock would have an anti-dilutive effect.
All
outstanding options, warrants and convertible preferred stock for
common shares are not included in the computation of diluted net
loss per common share because they are anti-dilutive, which for the
three months ended March 31, 2020, and 2019, totaled 10,946,022 and
11,744,083
,
respectively, and for the nine months ended March 31, 2020, and
2019, totaled
11,452,544 and
11,744,083
,
respectively.
Note
4.
Convertible
Preferred Stock and Common Stock Warrants
As of March 31,
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. As of
March 31,
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 quarter ended December 31,
2019, the Company issued 760,000 shares of common stock upon
conversion of 760,000 shares of Series C Preferred.
During the quarter ended March 31, 2020, the
Company issued 450,000 and 8,000 shares of common stock upon
conversion of 450,000 and 8,000 shares of Series C Preferred and
Series A Preferred,
respectively.
In April 2020, the
Company paid approximately $202,000 of preferred stock dividends
with respect to the Series A Preferred and Series B Preferred that
accrued during the three months ended March 31, 2020, by issuing
195,490 shares of common stock.
Note 5. Common Stock
As of March 31,
2020, the Company had issued and outstanding a total of
10,407,775
shares of common
stock.
On March 12, 2020, the Company entered into an Equity Distribution
Agreement with Canaccord Genuity LLC and Roth Capital Partners, LLC
relating to the offer and sale of shares of its common stock in an
at-the-market offering (“ATM”). In accordance with the
terms of the equity distribution agreement, the Company may offer
and sell common stock having an aggregate offering price of up to
$10,000,000 from time to time through Canaccord Genuity LLC and
Roth Capital Partners, LLC, acting as the Company’s sales
agents. The shares of common stock will be distributed at the
market prices prevailing on The Nasdaq Capital Market at the time
of the sale of such shares. Canaccord Genuity LLC and Roth Capital
Partners, LLC will be entitled to compensation at a fixed
commission rate equal to 3.0% of the gross sale price per share of
common stock sold. No shares were sold in the ATM during the three
months ended March 31, 2020.
Note 6. Comprehensive Income
For the
three and nine months ended March 31, 2020 and 2019, comprehensive
loss was equal to the net loss as presented in the accompanying
Condensed Consolidated Statements of Operations.
Note 7. Inventories
Inventories
consisted of the following:
|
|
March 31, 2020
|
June 30, 2019
|
|
Raw
materials
|
$
5,765,534
|
$
5,830,140
|
|
Work in
process
|
553,470
|
706,128
|
|
Finished
goods
|
5,160,985
|
5,129,806
|
|
Inventory
obsolescence reserve
|
(157,102
)
|
(138,553
)
|
|
|
$
11,322,887
|
$
11,527,521
|
6
Note
8. Leases
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.
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.
Leases
recorded on the balance sheet consist of the
following:
|
|
Classification on the Balance Sheet
|
March 31, 2020
|
|
Lease Assets
|
|
|
|
Operating lease
assets
|
Operating lease
assets, net
|
$
3,045,883
|
|
Finance lease
assets
|
Property and
equipment, net
|
$
2,630,542
|
|
|
|
|
|
Lease Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Current portion of
operating lease liability
|
$
902,476
|
|
Finance
|
Current portion of
finance lease liability
|
$
311,073
|
|
Noncurrent
|
|
|
|
Operating
|
Operating lease
liability, net of current portion
|
$
2,143,407
|
|
Finance
|
Finance lease
liability, net of current portion
|
$
2,679,110
|
Other
information related to lease term and discount rate is as
follows:
|
|
March 31, 2020
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating
leases
|
3.3
years
|
|
Finance
leases
|
8.8
years
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating
leases
|
4.6%
|
|
Finance
leases
|
5.7%
|
7
The components of lease expense are as
follows:
|
|
Classification on the Statement of Operations
|
Three Months Ended
March 31, 2020
|
Nine Months Ended
March 31, 2020
|
|
Operating lease cost
|
|
|
|
|
Operating
lease cost
|
Cost
of sales
|
$
70,515
|
$
211,545
|
|
Operating
lease cost
|
Selling,
general, and administrative expenses
|
188,256
|
564,188
|
|
Short
term lease cost
|
Selling,
general, and administrative expenses
|
15,750
|
47,250
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
Amortization
of finance lease assets
|
Cost
of sales
|
$
35,670
|
$
107,010
|
|
Amortization
of finance lease assets
|
Selling,
general, and administrative expenses
|
54,968
|
152,923
|
|
Interest
on finance lease liabilities
|
Interest
expense, net
|
43,477
|
133,566
|
|
Total
lease cost
|
|
$
408,636
|
$
1,216,482
|
Supplemental cash flow information related to leases is
as follows:
|
|
Three Months Ended
March 31, 2020
|
Nine Months Ended
March 31, 2020
|
|
ROU
assets obtained in exchange for lease liabilities:
|
|
|
|
Operating
leases
|
-
|
3,749,809
|
|
Financing
leases
|
9,423
|
12,509
|
Future minimum lease payments
are summarized as
follows:
|
|
Operating Leases
|
Finance Leases
|
|
Year ending June 30,
|
|
|
|
2020 (excluding
the nine months ended March 31, 2020)
|
$
257,916
|
$
114,028
|
|
2021
|
959,721
|
465,624
|
|
2022
|
150,000
|
472,874
|
|
2023
|
-
|
445,280
|
|
2024
|
-
|
384,754
|
|
Thereafter
|
-
|
2,113,348
|
|
Total future
minimum lease payments
|
$
1,367,637
|
$
3,995,908
|
|
|
|
|
|
Imputed
interest
|
|
815,566
|
|
Deferred
rent
|
|
190,160
|
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
$261,666
and $
261,792
for the three months ended March 31, 2020 and 2019, respectively,
and $784,999
and $
785,353
for the nine months ended March 31, 2020 and 2019,
respectively.
8
Note 9. 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 3% as
of March 31, 2020). The Line of Credit is subject to an unused
line fee of .25%.
Borrowings
on the Line of Credit were $
6,368,559
and
$
6,540,639
as of March 31, 2020 and June 30, 2019, respectively. As of March
31, 2020, there was approximately $
1,000,000
available to
borrow.
Note 10. Long-term Debt
As of
March 31, 2020 and June 30, 2019 long-term debt was $170,995 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.
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 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, 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 expects to apply for forgiveness of up to all amounts due
under the Note, in an amount equal to the sum of qualified expenses
under the PPP incurred during the eight 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, April 29, 2022, two years from the date of
initial disbursement under the Note and is payable in 18 equal
monthly payments of principal and interest beginning six months
from the date of initial disbursement. 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 the Company. The
Company’s obligations under the Note are not secured by any
collateral or personal guarantees.
Note 11. Accrued Payroll and Benefits Expense
As of
March 31, 2020 and June 30, 2019,
the
accrued payroll and benefits
expense
balance
included
$294,662
and
$310,903
,
respectively, of accrued severance expense. The Company recognized
$311,701 and $54,778
in severance expense during the three months ended March 31, 2020
and 2019, respectively, and
$464,787
and
$185,831
in severance expense
during the nine months ended March 31, 2020 and 2019, respectively.
The severance expense was incurred in connection with reductions of
the Company's workforce to better align its resources with the
needs of the business and
cost-reduction
initiatives. Severance expense is included in selling, general, and
administrative expenses.
Note 12. Revenue
The
following table disaggregates revenue by major product category for
the three and nine months ended March 31:
|
|
Three Months Ended
March 31
|
Nine Months Ended
March 31
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Orthopedic Soft
Bracing Products
|
$
5,303,246
|
$
5,510,461
|
$
17,416,245
|
$
17,182,340
|
|
Physical Therapy
and Rehabilitation Products
|
8,342,162
|
8,973,207
|
27,662,899
|
29,576,820
|
|
Other
|
60,911
|
67,851
|
213,716
|
298,160
|
|
|
$
13,706,319
|
$
14,551,519
|
$
45,292,860
|
$
47,057,320
|
9
This
report, including the disclosures contained in Part I. Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operation, 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.
We have
based our forward-looking statements on management’s current
expectations and assumptions about future events and trends
affecting our business and industry that are subject to risks and
uncertainties. Although we do not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we
cannot guarantee their accuracy. Forward-looking statements are
subject to substantial risks and uncertainties that could cause our
future business, financial condition, results of operations or
performance to differ materially from our historical results or
those expressed or implied in any forward-looking statement
contained in this report. 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, as well as those factors described in
the section “Risk Factors” included in Part I, Item 1A
of our Annual Report on Form 10-K for the fiscal year ended June
30, 2019, filed with the SEC, as well as in our other public
filings with the SEC. Actual results may differ as a result of
additional risks and uncertainties of which we are currently
unaware or which we do not currently view as material to our
business.
You
should read this report in its entirety, together with the
documents that we file as exhibits to this report and the documents
that we incorporate by reference into this report, with the
understanding that our future results may be materially different
from what we currently expect. The forward-looking statements
contained in this report are made as of the date of this report and
we assume no obligation to update them after the date hereof to
revise or conform such statements to actual results or to changes
in our opinions or expectations. If we do update or correct any
forward-looking statements, investors should not conclude that we
will make additional updates or corrections.
We
qualify all of our forward-looking statements by these cautionary
statements.
The
terms “we,” “us,”
“Dynatronics,” or the “Company” refer
collectively to Dynatronics Corporation and its wholly-owned
subsidiaries, unless otherwise stated.
I
tem 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) is designed to provide a reader
of our Unaudited Condensed Consolidated Financial Statements and
Notes thereto that are contained in this quarterly report, with a
narrative from the perspective of management. You should also
consider this information with the information included in our
Annual Report on Form 10-K for the year ended June 30, 2019, and
our other filings with the SEC, including our quarterly and current
reports that we have filed since June 30, 2019 through the date of
this report. In the following MD&A, we have rounded many
numbers to the nearest one thousand dollars. These numbers should
be read as approximate. All inter-company transactions have been
eliminated. Our fiscal year ends on June 30. For example, reference
to fiscal year 2020 refers to the year ending June 30, 2020. This
report covers the three and nine months ended March 31, 2020.
Results of operations for the three and nine months ended March 31,
2020 are not necessarily indicative of the results that may be
achieved for the full fiscal year ending June 30,
2020.
Overview
Dynatronics
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.
Impact of COVID-19 on Our Business
The
pandemic caused by an outbreak of COVID-19 has resulted, and is
likely to continue to result, in significant national and global
economic disruption. Various policies and initiatives have been
implemented around the world to reduce the spread of COVID-19,
including work-from-home requirements or requests, shelter-in-place
requirements, social distancing requirements, travel restrictions
or bans in and to certain countries, bans or limitations on medical
procedures and elective surgeries, closure of retail centers,
restaurants and other business establishments, and the cancellation
of major sporting and entertainment events. The response to and
economic impact of COVID-19 adversely affected our business during
the quarter ended March 31, 2020 and may continue to have an
adverse effect in the fourth quarter ending June 30, 2020 and into
the first half of fiscal year 2021.
Uncertainty exists
concerning the magnitude of the impact and duration of the COVID-19
pandemic. We are uncertain as to the effect the pandemic ultimately
will have on our financial condition, liquidity, and results of
operations. Management is actively monitoring this situation and
the possible effects on our financial condition, liquidity,
operations, suppliers, industry, and workforce. Given the daily
evolution of the COVID-19 outbreak and the response to curb its
spread, we are not able to estimate the effects of the COVID-19
outbreak to our results of operations, financial condition, or
liquidity. Due to the COVID-19 pandemic we have been unable
to: (i) conduct face-to-face meetings with customers and
prospective customers, (ii) present in-person demonstrations of our
products, (iii) attend trade shows and conferences which typically
generate future sales opportunities, (iv) operate our manufacturing
facilities at full capacity, or
(v) meet with prospective
strategic partners. The temporary suspension of elective medical
procedures and other restrictions related to stay-at-home orders
reduced demand for our products. We believe that these and other
effects caused by the COVID-19 pandemic will likely have an adverse
impact on our revenue over the next several quarters.
10
Results
of Operations
Net Sales
Net
sales decreased $845,000, or 5.8%, to $13,706,000 for the quarter
ended March 31, 2020, compared to net sales of
$14,552
,000
for the
quarter ended
March 31,
2019
. The year-over-year decrease in net sales was driven by a reduction in
sales of
physical therapy
and rehabilitation products
as well as a decline
due
to COVID-19 stay-at-home restrictions and holds on elective
procedures.
Net sales decreased $1,764,000, or 3.7%, to
$45,293,000 for the nine months ended March 31, 2020, compared to net sales of
$47,057,
000
for the
nine months ended
March
31, 2019
. The year-over-year decrease in net
sales was driven
by a reduction in sales of
physical therapy
and rehabilitation products
as well as a decline due to
COVID-19 stay-at-home restrictions and holds on elective
procedures.
Gross
Profit
Gross profit for the quarter ended March 31,
2020 decreased $461,000, or 10.5%, to $3,944,000, or 28.8% of net
sales. By comparison, gross profit for the quarter ended
March 31, 2019
was
$4,405,000
,
or 30.3% of net sales. The year-over-year decrease in gross profit
was attributable
to
lower sales of
physical therapy and rehabilitation products, which accounted for
approximately $256,000 in lower gross profit, and to reduced gross
margin percent which accounted for approximately $205,000 in lower
gross profit.
The year-over-year decrease in gross
margin percentage to 28.8% from 30.3% was due primarily to lower
sales of our physical therapy and rehabilitation
equipment.
Gross
profit for the nine months ended March 31, 2020 decreased $948,000,
or 6.5%, to $13,684,000, or 30.2% of net sales. By comparison,
gross profit for the nine months ended
March 31, 2019
was
$14,632,000
,
or 31.1% of net sales. The year-over-year decrease in gross profit
was attributable
to
lower sales of
physical therapy and rehabilitation products, which accounted for
approximately $549,000 in lower gross profit, and to reduced gross
margin percent which accounted for approximately $399,000 in lower
gross profit.
The year-over-year decrease in gross
margin percentage to 30.2% from 31.1% was due primarily to lower
sales of our physical therapy and rehabilitation
equipment.
Selling, General and Administrative Expenses
Selling, general and administrative
(“SG&A”) expenses increased $89,000, or 1.9%, to
$4,907,000 for the quarter ended
March 31, 2020
, compared to
$4,818,000 for the quarter ended
March 31, 2019
. The increase
in SG&A is primarily related to a $257,000 increase in
severance expense related to consolidation of management and
certain operations, and cost-reduction initiatives in response to
COVID-19. This increase was partially offset by a $219,000
reduction in selling expense
due
primarily to lower commission expense on lower sales and decreased
sales management salaries during the quarter.
SG&A expenses decreased $637,000, or
4.2%, to $14,450,000 for the nine months ended
March 31, 2020
, compared to
$15,087,000 for the nine months ended
March 31, 2019
. The decrease
in SG&A is primarily related to a
$718,000 decrease
in selling expense
due to lower
commission expense on lower sales and decreased sales management
salaries during the nine month period. General and administrative
(“G&A”) expenses increased $81,000 primarily
related
to a $279,000 increase in severance expense due to
consolidation of management and certain
operations
, and cost-reduction initiatives in
response to COVID-19. This increase in G&A was partially offset
by
other G&A
decreases primarily related to reductions in salaries and
wages.
Net Loss Before Income
Tax
Pre-tax loss for
the
quarter ended
March 31,
2020
was $1,091,000 compared to $531
,000
for the quarter ended March 31, 2019. The $560,000 increase in
pre-tax loss was primarily attributable to the impact of $461,000
decrease in gross profit and $89,000 increase in SG&A
expenses
.
Pre-tax loss for
the
nine months ended
March
31, 2020
was $1,130,000 compared to
$452,0
00
for the nine months ended March 31, 2019. The $678,000 increase in
pre-tax loss was attributable to the impact of (1) $368,000
decrease in other income primarily due to a $375,000 change in the
fair value of the earn-out liability related to the Bird and Cronin
acquisition during the nine months ended March 31, 2019, and (2)
$948,000 decrease in gross profit partially offset by a $637,000
decrease in
SG&A
expenses.
Income Tax (Provision) Benefit
Income
tax provision was $0 for the three and nine months ended March 31,
2020, respectively, compared to $33,000 and
$237,000 for the
three and nine months ended March 31, 2019, respectively
.
See
Liquidity and Capital
Resources - Deferred Income Tax Assets
below for more
information.
Net
Loss
Net loss was
$1,091,000
for the
quarter ended March 31, 2020, compared to $563
,000
for the quarter ended
March 31, 2019.
Net loss was
$1,130,000
for the
nine months ended March 31, 2020, compared to $689
,000
for the nine months
ended March 31, 2019.
The reasons for the increase in net
loss are
the same as
explained above under the heading
Net Loss Before Income Tax
and
Income Tax (Provision)
Benefit
.
Net Loss Attributable to Common
Stockholders
Net loss attributable to common stockholders
increased
$565,000 to
$1,325,000
for the quarter ended March 31, 2020, compared to
$760
,000
for the
quarter ended March 31, 2019. The increase in net loss attributable
to common stockholders for the quarter is due primarily to a
$528,000 increase in net loss and a $65,000 increase in deemed
dividend on convertible preferred stock and accretion of discount
as a result of the conversion of preferred stock. On a per share
basis, net loss attributable to common stockholders was
$
(0.13)
per share for
the quarter ended March 31, 2020, compared to $
(0.09)
per share for the quarter
ended March 31, 2019.
Net loss
attributable to common stockholders increased
$566,000 to $1,841,000
for the
nine months ended March 31, 2020, compared to $1,275
,000
for the nine months ended
March 31, 2019. The increase in net loss attributable to common
stockholders is due
primarily to a
$441,000 increase in net loss and a $174,000
increase in deemed
dividend on convertible preferred stock and accretion of discount
as a result of the conversion of preferred stock
. On a per
share basis, net loss attributable to common stockholders was
$
(0.20) per share and
$(0.16)
per share for the nine months ended March 31, 2020
and 2019, respectively.
11
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. While we had positive
cash flows from
operating activities for the nine months ended March 31,
2020
, during the quarter ended March 31, 2020, we had
negative cash flows from operating activities.
Working
capital was $4,369,000 as of March 31, 2020, compared to working
capital of $5,638,000 as of June 30, 2019. The current ratio was
1.3 to 1 as of March 31, 2020 and 1.4 to 1 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.
Subsequent
to the end of the quarter, during 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
$238,169, 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
and we will use the proceeds 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 up to all amounts due under the Note, in
an amount equal to the sum of qualified expenses under the PPP
incurred during the eight weeks following initial disbursement.
Notwithstanding our expected eligibility to apply for forgiveness,
no assurance can be given that the 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 18 equal monthly payments of
principal and interest beginning six months from the date of
initial disbursement. 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.
Cash and Cash
Equivalents
Our
cash and cash equivalents and restricted cash position increased
$1,274,000 to $1,530,000
a
s of March 31, 2020, compared to
$256,000
as of June 30, 2019. The
primary source of cash in the nine months ended March 31, 2020, was
approximately $2,549,000 of net cash provided by operating
activities.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
decreased approximately $
860,000, or 11.5%, to $6,635,000
as of March 31, 2020, from
$7,495,000 as
of June 30, 2019.
The decrease was driven primarily by a decrease in sales and the
time to collect receivables. Trade accounts receivable represents
amounts due from our customers including dealers and distributors
that purchase our products for redistribution, medical
practitioners, clinics, hospitals, colleges, universities and
sports teams
. We believe that our
estimate of the allowance for doubtful accounts is adequate based
on our historical experience and relationships with our customers.
Accounts receivable are generally collected within approximately 40
days of invoicing.
Inventories
Inventories, net of
reserves, decreased
$205,000
or 1.8%, to $11,323,000
as of March 31, 2020, compared to
$11,528
,000
as of June
30, 2019. Inventory levels fluctuate based on timing of large
inventory purchases from domestic and overseas suppliers as well as
variations in sales and production activities. We believe that our
allowance for inventory obsolescence is adequate based on our
analysis of inventory, sales trends, and historical
experience.
Accounts Payable
Accounts payable increased approximately
$1,550,000 or 38.9%, to
$5,540,000
as of March 31, 2020, from $
3,990,000
as of June 30, 2019. The
increase was driven primarily by improved payment terms with our
primary suppliers and changes in the average time to pay suppliers
which we increased to manage working capital in response to
COVID-19.
12
Line of Credit
Our
line of credit balance decreased
$172,000 to $6,369,000
as of March
31, 2020, compared to
$6,541,000
as of June 30, 2019.
The decrease was driven primarily by positive cash flows from
operating activities used to pay down the line of credit.
As of
March 31, 2020, there was approximately $
1,000,000
available to
borrow.
Debt
Long-term debt decreased
approximately $132,000 to approximately $171,000 as of March 31,
2020, compared to approximately $303,000 as of June 30, 2019. Our
long-term debt is primarily comprised of the mortgage loan on our
office and manufacturing facility in Tennessee maturing in 2021,
and also includes loans related to equipment and a vehicle. The
principal balance on the mortgage loan is approximately $129,000,
with monthly principal and interest payments of
$13,000.
Finance Lease Liability
Finance lease liability as of March 31, 2020
and June 30, 2019 totaled approximately $2,990,000 and $3,199,000,
respectively. Our finance lease liability consists primarily of our
Utah 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
$1,428,000 at March 31, 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 March
31, 2020 is $1,417,000. 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
three and nine months ended March 31, 2020 was approximately
$40,000 and $118,000, respectively. In addition to the Utah
building, we have certain equipment leases that we have determined
are finance leases.
Operating Lease Liability
Operating lease
liability as of March 31, 2020 and June 30, 2019 totaled
approximately $3,045,000 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 Earn-Out Liability
Acquisition
earn-out liability decreased $500,000 or
100.0%, to $0 as of
March 31, 2020, from $500
,000
as of
June 30, 2019. The decrease is due to payment in full of the
obligations during the nine months ended March 31,
2020.
Deferred Income Tax Assets
A
valuation allowance is required when there is significant
uncertainty as to the realizability of deferred income tax assets.
The ability to realize deferred income tax assets is dependent upon
our ability to generate sufficient taxable income within the
carryforward periods provided for in the tax law for each
tax jurisdiction.
We
have determined that we do not meet the “more likely than
not” threshold that deferred income tax assets will be
realized. Accordingly, a valuation allowance is required. Any
reversal of the valuation allowance in future periods will
favorably impact our results of operations in the period of
reversal. As of March 31, 2020 and June 30, 2019, we recorded a
full valuation allowance against our net deferred income tax
assets.
This resulted in no
reported income tax expense associated with the operating profit
reported during the three and nine months ended
March 31,
2020
.
As a result of a
temporary book to tax difference associated with the amortization
of goodwill for tax purposes, income tax expense was $33,000 and
$237,000 for the three and nine months ended March 31, 2019,
respectively.
Stock Repurchase
Plans
We have
a stock repurchase plan available to us at the discretion of the
Board of Directors. Approximately $449,000 remained of this
authorization as of March 31, 2020. No purchases have been made
under this plan since September 2011.
Off-Balance Sheet Arrangements
As of
March 31, 2020, we had no off-balance sheet
arrangements.
Critical Accounting Policies
The
preparation of our financial statements requires that we make
estimates and judgments. We base these on historical experience and
on other assumptions that we believe to be reasonable. Our critical
accounting policies are discussed in Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section of our Annual
Report for the year ended June 30, 2019. There have been no
material changes to the critical accounting policies previously
disclosed in that report.
There
have been no material changes from the information presented for
the year ended June 30, 2019.
13
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 under the Exchange Act is recorded, processed, summarized,
and reported within the time periods that are specified in the
SEC’s rules and forms and that such information is
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding any required disclosure. In
designing and evaluating these disclosure controls and procedures,
management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) of the Exchange Act) as of March 31, 2020. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective as of March 31, 2020.
Changes in Internal Control over Financial Reporting
There were no
changes in our internal control over financial reporting during the
quarter ended March 31, 2020, that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
P
ART
II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Our
business, results of operations, and financial condition are
subject to various risks. We have described and discussed these
risks elsewhere in this Quarterly Report on Form 10-Q and in our
other filings with the SEC, including our Annual Report. The
following additional risk factors relating to the Novel Coronavirus
2019 (“COVID-19”) pandemic should be read in
conjunction with the risk factors previously disclosed in our
Annual Report and in our other filings made with the SEC as well as
the information contained in this Quarterly Report on Form
10-Q.
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 the 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,
has 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. 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 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.
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 the 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.
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 April 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.
14
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
I
tem 6. Exhibits
(a)
Exhibits
Exhibits marked with an asterisk (*) are filed
herewith.
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10.1
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| 10.2 | |
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10.3
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10.4
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10.5
|
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)
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|
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31.1
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31.2
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32.1
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32.2
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|
|
101.INS
|
XBRL
Instance Document*
|
|
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Schema Document*
|
|
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Calculation Linkbase Document*
|
|
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document*
|
|
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|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document*
|
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|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document*
|
15
S
IGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
DYNATRONICS
CORPORATION
|
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Date:
May 14, 2020
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By:
|
/s/
Brian D. Baker
|
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Brian
D. Baker
|
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President
and Chief Executive Officer
(Principal
Executive Officer)
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Date:
May 14, 2020
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By:
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/s/
John A. Krier
|
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John A.
Krier
|
|
|
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Chief
Financial Officer (Principal Financial Officer)
|
|
16
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Presentation and Summary Of Significant Accounting PoliciesNote 2. AcquisitionsNote 3. Net Loss Per Common ShareNote 4. Convertible Preferred Stock and Common Stock WarrantsNote 5. Common StockNote 6. Comprehensive IncomeNote 7. InventoriesNote 8. LeasesNote 9. Line Of CreditNote 10. Long-term DebtNote 11. Accrued Payroll and Benefits ExpenseNote 12. RevenueItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits