NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 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, 2020 (the
“Annual Report”) filed with the SEC on September 24, 2020. The
Condensed Consolidated Balance Sheet at June 30, 2020, 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 September 30, 2020 and its results of operations and its cash
flows for the periods presented. The results of operations for the
first three 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 2021” and “fiscal year
2020” refer to the Company’s fiscal year ending June
30, 2021 and the fiscal year ended June 30, 2020,
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.
Recent
Accounting Pronouncements
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. 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 September 30, 2020, and 2019, totaled 11,777,500
and 11,887,083,
respectively.
Note
3. Convertible
Preferred Stock
As of September
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 its 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 September 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. In November 2020, the Company issued 330,000
shares of common stock upon conversion of 230,000 shares of Series
C Preferred and 100,000 shares of Series B
Preferred.
In October 2020,
the Company paid approximately $194,000 of preferred stock
dividends with respect to the Series A Preferred and Series B
Preferred that accrued during the three months ended September 30,
2020, by issuing 276,519 shares of common
stock.
Note 4. Comprehensive Income
For the
three months ended September 30, 2020 and 2019, comprehensive
income was equal to the net income as presented in the accompanying
condensed consolidated statements of operations.
Note 5. Inventories
Inventories
consisted of the following:
|
|
|
Raw
materials
|
$3,042,377
|
$4,798,489
|
Work in
process
|
508,466
|
427,744
|
Finished
goods
|
3,109,568
|
3,713,692
|
Inventory
obsolescence reserve
|
(491,837)
|
(568,083)
|
|
$6,168,574
|
$8,371,842
|
Note 6. Related-Party Transactions
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 $264,703 and $261,666 for the three months
ended September 30, 2020 and 2019,
respectively.
Note 7. Line of Credit
Borrowings on the Line of Credit were
$0 and $1,012,934 as
of September 30, 2020 and June 30, 2020, respectively. As of
September 30, 2020, there was approximately $5,750,000 available to
borrow.
Note 8. Revenue
As of
September 30, 2020 and June 30, 2020, the rebate liability was
$284,187 and $247,388,
respectively. The rebate liability is included in accrued expenses
in the
accompanying condensed consolidated balance
sheets.
As of September
30, 2020 and June 30, 2020, the
allowance for sales discounts was $14,500 and $8,000, respectively.
The
allowance for sales discounts is included in trade accounts
receivable, less allowance for doubtful accounts in the accompanying
condensed consolidated balance sheets.
The
following table disaggregates revenue by major product category for
the three months ended September 30:
|
|
|
Orthopedic Soft
Bracing Products
|
$5,559,918
|
$6,279,026
|
Physical Therapy
and Rehabilitation Products
|
6,497,230
|
10,037,720
|
Other
|
75,620
|
72,803
|
|
$12,132,768
|
$16,389,549
|
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 adversely affecting communities and businesses
globally, 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,
2020, 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.
Item 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, 2020, and
our other filings with the SEC, including our quarterly and current
reports that we have filed since June 30, 2020 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 2021 refers to the year ending June 30, 2021. This
report covers the three months ended September 30, 2020. Results of
operations for the three months ended September 30, 2020 are not
necessarily indicative of the results that may be achieved for the
full fiscal year ending June 30,
2021.
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.
Results
of Operations
Net Sales
Net sales decreased $4,257,000, or 26.0%, to
$12,133,000 for the quarter ended September 30, 2020, compared
to net sales of $16,390,000 for the
quarter ended September
30, 2019. The year-over-year
decrease is primarily due to
COVID-19 precautions and associated deferral on elective procedures
which reduced demand for our products.
Gross
Profit
Gross profit for the quarter ended September
30, 2020 decreased $1,252,000, or about 24.3%, to $3,902,000, or
32.2% of net sales. By comparison, gross profit for the quarter
ended September 30,
2019 was $5,154,000,
or 31.4% of net sales. The year-over-year decrease in gross profit
was primarily attributable to lower sales which
reduced gross profit. The year-over-year increase in
gross margin percentage to 32.2% from 31.4% was
due primarily to changes in the mix of sales between our major
product categories.
Selling, General and
Administrative Expenses
Selling, general and administrative
(“SG&A”) expenses decreased $679,000, or 13.8%, to
$4,246,000 for the quarter ended September 30, 2020, compared
to $4,925,000 for the quarter ended September 30, 2019.
Selling
expenses decreased $577,000 compared to the prior year period,
due
primarily to lower commission expense on lower sales and decreased
sales management salaries. General and administrative
("G&A") expenses decreased $102,000 compared to the prior-year
period, driven primarily by a decrease in payroll and benefit costs
as a result of headcount
reductions.
Net (Loss) Income Before Income
Tax
Pre-tax loss for the quarter ended
September 30,
2020 was $378,000 compared to pre-tax income of
$99,000
for the quarter ended September 30, 2019. The $477,000 decline in
pre-tax income was attributable to a decrease of $1,252,000
in gross profit partially offset by a decrease of $679,000 in
SG&A and a decrease of $96,000 in other expense. The decrease
in other expense is primarily due to a decrease in interest expense
as a result of
lower
average borrowings on our line of
credit.
Income Tax Provision
(Benefit)
Income
tax provision was $0 for both quarters ended September 30, 2020 and
2019. See Liquidity and Capital
Resources - Deferred Income Tax Assets below for more
information.
Net (Loss) Income
Net
loss was $378,000 for
the quarter ended September 30, 2020, compared to net income of
$99,000 for the quarter ended September
30, 2019. The reasons for the changes in net (loss) income are the
same as explained above under the heading Net (Loss) Income Before Income
Tax.
Net Loss Attributable to Common
Stockholders
Net
loss attributable to common stockholders increased $504,000 to $572,000 for the
quarter ended September 30, 2020, compared to $68,000 for the quarter ended
September 30, 2019. The increase in net loss attributable to common
stockholders for the quarter is due primarily to a $477,000
increase in net loss. On a per share basis, net income attributable
to common stockholders was $(0.04) per share for the quarter
ended September 30, 2020, compared to $(0.01) per share for the quarter
ended September 30, 2019.
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 September 30, 2020, we had $2,291,000 in cash and
cash equivalents and restricted cash, compared to $2,316,000 as of
June 30, 2020. During the quarter ended September 30, 2020, we had
positive cash flows from operating activities.
Working capital was
$7,950,000 as of September 30, 2020, compared to working capital of
$8,396,000 as of June 30, 2020. The current ratio was 2.0 to 1 as
of September 30, 2020 and 2.1 to 1 as of June 30, 2020. Current
assets were 43.2% of total assets as of September 30, 2020, and
42.8% of total assets as of June 30, 2020.
We believe that our
cash generated from operations, current capital resources including
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.
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 have used
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.
Cash and Cash
Equivalents
Our
cash and cash equivalents and restricted cash position decreased
$25,000 to $2,291,000
as of September 30, 2020, compared to $2,316,000 as of June 30, 2020.
The primary source of cash in the three months ended September 30,
2020, was approximately $1,124,000 of net cash provided by
operating activities.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
increased approximately $715,000, or 14.6%, to $5,609,000 as
of September 30, 2020, from $4,894,000 as of June 30, 2020.
The increase was driven primarily by an increase in sales compared
to the quarter ended June 30, 2020. 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 $2,203,000 or 26.3%, to $6,169,000
as of September 30, 2020, compared to $8,372,000 as of June 30, 2020.
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. In addition, as of September 30, 2020, other
receivables includes $980,000 due from our contract manufacturer
for raw materials components provided for use in the production of
our products. 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
$244,000 or 8.1%, to
$3,258,000 as of September 30, 2020, from $3,014,000 as of June 30, 2020. The
increase was driven primarily by an increase in
inventory purchases and timing of
payments.
Line of Credit
Our
line of credit balance decreased $1,013,000 to $0 as of September
30, 2020, compared to $1,013,000 as of June 30, 2020.
The decrease was driven primarily by positive cash flows from
operating activities. As of September 30,
2020, there was approximately $5,750,000 available to
borrow.
Debt
Long-term
debt decreased approximately $43,000 to approximately $3,562,000 as
of September 30, 2020, compared to approximately $3,605,000 as of
June 30, 2020. 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, of which,
$433,000 is classified as current debt at September 30,
2020. The principal balance on the mortgage loan is
approximately $52,000, all of which is classified as current
portion of long-term debt at September 30,
2020, with monthly principal and interest payments of
$13,000.
Finance Lease
Liability
Finance lease liability as of September 30,
2020 and June 30, 2020 totaled approximately $2,836,000 and
$2,914,000, 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 $1,554,000 at September 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 September 30, 2020 is $1,341,000. 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 months ended September 30,
2020 was approximately $37,000. 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 September 30,
2020 and June 30, 2020 totaled approximately $3,138,000 and
$3,358,000, respectively. Our operating lease liability consists
primarily of building leases for office,
manufacturing, warehouse and storage
space.
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 September 30, 2020 and June 30, 2020, 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 months ended September 30,
2020.
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 September 30, 2020. No purchases have been made
under this plan since September 2011.
Off-Balance Sheet Arrangements
As of
September 30, 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 Form 10-K
for the year ended June 30, 2020. There have been no material
changes to the critical accounting policies previously disclosed in
that report.