DYNATRONICS CORP - Quarter Report: 2015 September (Form 10-Q)

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets		September 30, 2015				June 30, 2015
Current assets:
Cash and cash equivalents		$	2,080,775			$	3,925,967
Trade accounts receivable, less allowance for doubtful accounts of $423,076 as of September 30, 2015 and $417,444 as of June 30, 2015			3,172,939				3,346,770
Other receivables			8,533				6,748
Inventories, net			5,465,667				5,421,787
Prepaid expenses and other			358,928				273,629
Prepaid income taxes			334,508				338,108
Total current assets			11,421,350				13,313,009
Property and equipment, net			4,919,640				5,025,076
Intangible assets, net			183,133				190,803
Other assets			603,185				623,342
Total assets		$	17,127,308			$	19,152,230
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt		$	123,588			$	121,884
Current portion of capital lease			175,792				173,357
Current portion of deferred gain			150,448				150,448
Line of credit			717,819				1,909,919
Warranty reserve			153,650				153,185
Accounts payable			1,955,898				2,520,327
Accrued expenses			159,468				279,547
Accrued payroll and benefits expense			384,656				263,092
Total current liabilities			3,821,319				5,571,759
Long-term debt, net of current portion			619,514				651,118
Capital lease, net of current portion			3,419,978				3,464,850
Deferred gain, net of current portion			1,943,285				1,980,897
Deferred rent			52,957				41,150
Deferred income tax liabilities			130,478				136,128
Total liabilities			9,987,531				11,845,902
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value: Authorized 5,000,000 shares; 1,610,000 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively			3,087,554				3,087,554
Common stock, no par value: Authorized 50,000,000 shares; 2,643,583 shares and 2,642,389 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively			7,625,255				7,610,244
Accumulated deficit			(3,573,032	)			(3,391,470	)
Total stockholders' equity			7,139,777				7,306,328
Total liabilities and stockholders' equity		$	17,127,308			$	19,152,230

 

See accompanying notes to condensed consolidated financial statements.

 

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
		Three Months Ended
		September 30
		2015				2014
Net sales		$	7,397,196			$	7,216,324
Cost of sales			4,886,367				4,648,752
Gross profit			2,510,829				2,567,572
Selling, general, and administrative expenses			2,355,655				2,251,629
Research and development expenses			265,361				216,827
Operating income (loss)			(110,187	)			99,116
Other income (expense):
Interest income			614				2,321
Interest expense			(80,243	)			(48,293	)
Other income, net			2,604				3,342
Net other expense			(77,025	)			(42,630	)
Income (loss) before income taxes			(187,212	)			56,486
Income tax (provision) benefit			5,650				(15,563	)
Net income (loss)		$	(181,562	)		$	40,923
8% Convertible preferred stock dividend			(80,500	)			-
Net income (loss) attributable to common stockholders			(262,062	)			40,923
Basic and diluted net income (loss) per common share		$	(0.10	)		$	0.02
Weighted-average common shares outstanding:
Basic			2,643,297				2,520,389
Diluted			2,643,297				2,523,472

 

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
		Three Months Ended
		September 30
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(181,562	)		$	40,923
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment			55,103				89,836
Amortization of intangible assets			7,670				11,169
Amortization of other assets			12,843				12,843
Amortization of building lease			62,983				41,989
Stock-based compensation expense			15,011				17,454
Change in deferred income taxes			(5,650	)			(892,607	)
Change in provision for doubtful accounts receivable			5,632				24,000
Change in provision for inventory obsolescence			(1,782	)			30,000
Deferred gain on sale/leaseback			(37,612	)			(25,074	)
Change in operating assets and liabilities:
Receivables, net			166,414				(20,117	)
Inventories, net			(42,098	)			106,273
Prepaid expenses and other assets			(85,299	)			(418,840	)
Other assets			7,314				(333,121	)
Prepaid income taxes			3,600				907,570
Accounts payable and accrued expenses			(550,672	)			34,132
Net cash used in operating activities			(568,105	)			(373,570	)
Cash flows from investing activities:
Purchase of property and equipment			(12,650	)			(17,551	)
Proceeds from sale of property and equipment			-				3,800,000
Net cash provided by (used in) investing activities			(12,650	)			3,782,449
Cash flows from financing activities:
Principal payments on long-term debt			(29,900	)			(680,112	)
Principal payments on long-term capital lease			(42,437	)			(34,600	)
Net change in line of credit			(1,192,100	)			(2,349,138	)
Net cash used in financing activities			(1,264,437	)			(3,063,850	)
Net change in cash and cash equivalents			(1,845,192	)			345,029
Cash and cash equivalents at beginning of the period			3,925,967				332,800
Cash and cash equivalents at end of the period		$	2,080,775			$	677,829
Supplemental disclosure of cash flow information:
Cash paid for interest		$	98,274			$	57,069
Cash paid for income taxes			-				-
Supplemental disclosure of non-cash investing and financing activity:
Capital lease - building		$	-			$	3,800,000
Preferred stock dividend payable in common stock			80,500				-

 

 

See accompanying notes to condensed consolidated financial statements.

 

DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

September 30, 2015

NOTE 1.  PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated balance sheets as of September 30, 2015 and June 30, 2015, and the condensed consolidated statements of operations and cash flows for the three months ended September 30, 2015 and 2014 were prepared by Dynatronics Corporation (the "Company") without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all necessary adjustments, which consist only of normal recurring adjustments, to the financial statements have been made to present fairly the Company's financial position, results of operations and cash flows.  The results of operations for the three months ended September 30, 2015 are not necessarily indicative of the results of operations for the fiscal year ending June 30, 2016.  The Company previously filed with the SEC an annual report on Form 10-K, as amended, which included audited financial statements for each of the two years ended June 30, 2015 and 2014.  It is suggested that the financial statements contained in this Form 10-Q be read in conjunction with the financial statements and notes thereto contained in the Company's most recent Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate to inventory, allowance for doubtful accounts, stock-based compensation and valuation allowance for deferred income taxes.

Significant Accounting Policies

There have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

NOTE 2.  NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive common stock equivalents outstanding during the period.  Stock options, convertible preferred stock and warrants are considered to be common stock equivalents.  The computation of diluted net income (loss) per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Basic net income (loss) per common share is the amount of net income (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net income (loss) per common share is the amount of net income (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period and to each common stock equivalent outstanding during the period, unless inclusion of common stock equivalents would have an anti-dilutive effect.

The reconciliations between the basic and diluted weighted-average number of common shares outstanding for the three months ended September 30, 2015 and 2014 are as follows:

 

Outstanding options, convertible preferred stock and warrants for common shares not included in the computation of diluted net income (loss) per common share, because they were anti-dilutive, for the three months ended September 30, 2015 and 2014 totaled 4,112,409 and 141,356, respectively.

NOTE 3. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the employee's requisite service period. The Company recognized $15,011 and $17,454 in stock-based compensation expense during the three months ended September 30, 2015 and 2014, respectively. These expenses were recorded as selling, general and administrative expenses in the condensed consolidated statements of operations.

Stock Options.  The Company maintained a 2005 equity incentive plan for the benefit of employees, no further grants will be made under the 2005 equity incentive plan. On June 29, 2015 the shareholders approved a new 2015 equity incentive plan setting aside 500,000 shares. The 2015 plan was filed with the SEC on September 3, 2015.   Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other stock-based awards may be granted under the plan.  Awards granted under the plan may be performance-based.  As of September 30, 2015, there were 500,000 shares of common stock authorized and reserved for issuance, but not granted under the terms of the 2015 equity incentive plan.

The Company granted no equity awards under either its 2005 or 2015 equity incentive plan during the three months ended September 30, 2015.

The following table summarizes the Company's stock option activity for the 2005 equity incentive plan during the three-month period ended September 30, 2015.

 

The Black-Scholes option-pricing model is used to estimate the fair value of options granted under the Company's stock option plan.

Expected option lives and volatilities are based on historical data of the Company. The risk-free interest rate is based on the U.S. Treasury Bills rate on the grant date for constant maturities that correspond with the option life. Historically, the Company has not declared dividends and there are no future plans to do so.

As of September 30, 2015, there was $312,973 of unrecognized stock-based compensation cost related to grants under the stock option plan that is expected to be expensed over a weighted-average period of four to ten years. There was $2,802 of intrinsic value for options outstanding as of September 30, 2015.

NOTE 4.  CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS

On June 30, 2015, the Company completed a private placement with affiliates of Prettybrook Partners, LLC ("Prettybrook") and certain other purchasers (collectively with Prettybrook, the "Preferred Investors") for the offer and sale of shares of the Company's Series A 8% Convertible Preferred Stock (the "Series A Preferred") in the aggregate amount of approximately $4 million. Offering costs incurred in conjunction with the private placement were recorded net of proceeds. The Series A Preferred is convertible to common stock on a 1:1 basis.  A Forced Conversion can be initiated based on a formula related to share price and trading volumes as outlined in the terms of the private placement.  The dividend is fixed at 8% and is payable in either cash or common stock.  This dividend is payable quarterly and equates to an annual payment of $322,000 or equivalent value in common stock.  Certain redemption rights are attached to the Series A Preferred, but none of the redemption rights for cash are deemed outside the control of the Company. The redemption rights deemed outside the control of the Company require common stock payments or an increase in the dividend rate.  The Series A Preferred includes a liquidation preference under which Preferred Investors would receive cash equal to the stated value of their stock plus unpaid dividends.  In accordance with the terms of the sale of the Series A Preferred, the Company was required to register the underlying common shares associated with the Series A Preferred and the warrants.  That registration statement filed on form S-3 went effective on August 13, 2015.

The Series A Preferred votes on an as-converted basis, one vote for each share of common stock issuable upon conversion of the Series A Preferred, provided, however, that no holder of Series A Preferred shall be entitled to cast votes for the number of shares of common stock issuable upon conversion of such Series A Preferred held by such holder that exceeds the quotient of (x) the aggregate purchase price paid by such holder of Series A Preferred for its Series A Preferred, divided by (y) the greater of (i) $2.50 and (ii) the market price of the common stock on the trading day immediately prior to the date of issuance of such holder's Preferred Stock. The market price of the common stock on the trading day immediately prior to the date of issuance was $3.19 per share. Based on a $4,025,000 investment and a $3.19 per share price the number of common stock equivalents eligible for voting by Preferred shareholders is 1,261,755.

The Preferred Investors purchased a total of 1,610,000 shares of Series A Preferred Stock, and received in connection with such purchase, (i) A-Warrants, exercisable by cash exercise only, to purchase 1,207,500 shares of common stock, and (ii) B-Warrants, exercisable by "cashless exercise", to purchase 1,207,500 shares of common stock.  The warrants are exercisable for 72 months from the date of issuance and carry a Black-Scholes put feature in the event of a change in control.  The put right is not subject to derivative accounting as all equity holders are treated the same in the event of a change in control.

The Company's Board of Directors has the authority to cause the Company to issue, without any further vote or action by the shareholders, up to 3,390,000 additional shares of preferred stock, no par value per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.

The Series A Preferred includes a conversion right at a price that creates an embedded beneficial conversion feature.  A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The conversion price is 'in the money' and the holder realizes a benefit to the extent of the price difference. The issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference (i.e., the price difference times the number of shares received upon conversion) represents an additional financing cost. The conversion rights associated with the Series A Preferred issued by the Company do not have a stated life and, therefore, all of the beneficial conversion feature amount of $2,858,887 was amortized to dividends on the same date the preferred shares were issued.  The $2,858,887 dividend is added to the net loss to arrive at the net loss applicable to common stockholders for purposes of calculating loss per share for the year ended June 30, 2015. 

NOTE 5.  COMPREHENSIVE INCOME (LOSS)

For the three months ended September 30, 2015 and 2014, comprehensive income (loss) was equal to the net income (loss) as presented in the accompanying condensed consolidated statements of operations.

NOTE 6.  INVENTORIES

Inventories consisted of the following:

 

NOTE 7.  RELATED-PARTY TRANSACTIONS

The Company currently leases office and warehouse space in Detroit, Michigan and Hopkins, Minnesota from two shareholders and former independent distributors on an annual basis under operating lease arrangements. Management believes the lease agreements are on an arms-length basis and the terms are equal to or more favorable than would be available to third parties. The expense associated with these related-party transactions totaled $17,700 and $17,700 for the three months ended September 30, 2015 and 2014, respectively.

NOTE 8.  LINE OF CREDIT

In March 2015, the Company moved its working capital line of credit to a new lender. Interest on the new line of credit is prime rate plus 5%. The $3 million line of credit is collateralized by accounts receivable and inventories.  Borrowing limitations are based on 85% of eligible accounts receivable and $0.7 million of eligible inventory.  The current borrowing base on the new line of credit is approximately $2.4 million.  Interest payments on the line are due monthly.  All borrowings under the line of credit are presented as current liabilities in the accompanying consolidated balance sheet.

The line of credit matures on March 5, 2016.  Management expects to be able to renew this credit facility when it matures with the current lender or another lender. The effective interest rate on borrowed money is approximately 10% including interest and origination fees. The new line of credit requires that a minimum borrowing of approximately $700,000 be maintained during the term of the loan.

NOTE 9.  RECENT ACCOUNTING PRONOUNCEMENTS

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Furthermore, the acquirer should record in the same period's financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly, if the Company acquires any new businesses.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This update was issued to make some fairly minor wording adjustments to ASC 835-30. The new wording, presented as paragraph 835-30-S45-1, recognizes that ASU 2015-13 does not address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-13 requires companies to recognize debt issuance costs as a reduction of the carrying amount of the associated debt liability. ASU 2015-15 states that debt issuance costs related to line-of-credit arrangements may be recognized as an asset and amortized over the term of the line-of-credit arrangement, even if the line-of-credit does not carry a balance. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update was issued in response to feedback from preparers, practitioners, and users of financial statements to see the effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance back for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along with any interim reporting periods in that same period. All other entities will be required to implement the new guidance to reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): simplifying the Measurement of Inventory. The objective of this update is to simplify Topic 330, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update will be effective for fiscal years beginning after December 15, 2017. The Company currently applies a lower of cost or market and is currently assessing the magnitude of the difference between using market value versus net realizable value; however, it is not anticipated to have a material effect on the Company's financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. This pronouncement is part of the FASB's perpetual project started in November 2010 to address feedback received from stakeholders regarding the codification standards. Like other such pronouncements issued from time to time, the purpose of this pronouncement is not to issue new guidance, but rather to clarify, correct unintended application of the standards, and make various minor improvements as deemed necessary. The updates made are effective immediately. These changes are not expected to have a significant impact on the financial statements of guidance users. While some of the changes made in this pronouncement impact standards applicable to the Company, no material impact was noted.

In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting. This Accounting Standards Update amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No.115. The Company notes the update is effective immediately and will apply to the Company if the Company acquires a business.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements.