DYNATRONICS CORP - Quarter Report: 2018 December (Form 10-Q)

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets	December 31, 2018	June 30, 2018
Current assets:
Cash and cash equivalents	$523,524	$1,696,116
Trade accounts receivable, less allowance for doubtful accounts of $191,500 as of December 31, 2018 and $370,300 as of June 30, 2018	6,930,882	7,810,846
Other receivables	2,401	52,819
Inventories, net	10,435,504	10,987,855
Prepaid expenses	531,024	778,654
Income tax receivable	96,269	95,501
Total current assets	18,519,604	21,421,791
Property and equipment, net	5,722,366	5,850,899
Intangible assets, net	6,769,566	7,131,758
Goodwill	7,116,614	7,116,614
Other assets	524,281	532,872
Total assets	$38,652,431	$42,053,934
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$3,090,874	$3,412,960
Accrued payroll and benefits expense	1,270,334	1,929,465
Accrued expenses	1,050,247	830,243
Warranty reserve	205,850	205,850
Line of credit	5,148,356	6,286,037
Current portion of long-term debt	169,213	164,003
Current portion of capital lease obligations	226,029	226,727
Current portion of deferred gain	150,448	150,448
Current portion of acquisition holdback and earn-out liability	966,667	1,379,512
Total current liabilities	12,278,018	14,585,245
Long-term debt, net of current portion	215,089	303,348
Capital lease obligations, net of current portion	2,858,955	2,972,540
Deferred gain, net of current portion	1,454,329	1,529,553
Acquisition holdback and earn-out liability, net of current portion	-	875,000
Deferred tax liabilities, net	203,949	-
Other liabilities	290,798	411,466
Total liabilities	17,301,138	20,677,152
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value: Authorized 50,000,000 shares; 4,899,000 shares and 4,899,000 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively	11,641,816	11,641,816
Common stock, no par value: Authorized 100,000,000 shares; 8,188,815 shares and 8,089,398 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively	20,714,752	20,225,107
Accumulated deficit	(11,005,275)	(10,490,141)
Total stockholders' equity	21,351,293	21,376,782
Total liabilities and stockholders' equity	$38,652,431	$42,053,934
See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2018	2017	2018	2017
Net sales	$15,439,966	$18,081,333	$32,505,801	$30,879,304
Cost of sales	10,760,093	12,311,354	22,278,704	20,769,933
Gross profit	4,679,873	5,769,979	10,227,097	10,109,371
Selling, general, and administrative expenses	4,772,678	5,663,296	10,269,300	9,737,847
Operating (loss) income	(92,805)	106,683	(42,203)	371,524
Other income (expense):
Interest expense, net	(141,788)	(103,706)	(262,630)	(180,514)
Other (expense) income, net	(2,288)	11,371	383,553	21,985
Net other (expense) income	(144,076)	(92,335)	120,923	(158,529)
(Loss) income before income taxes	(236,881)	14,348	78,720	212,995
Income tax provision	(203,949)	-	(203,949)	-
Net (loss) income	(440,830)	14,348	(125,229)	212,995
Deemed dividend on convertible preferred stock and accretion of discount	-	(1,023,786)	-	(1,023,786)
Preferred stock dividend, cash	-	(104,884)	-	(104,884)
Convertible preferred stock dividend, in common stock	(203,268)	(200,594)	(389,905)	(387,655)
Net loss attributable to common stockholders	$(644,098)	$(1,314,916)	$(515,134)	$(1,303,330)
Basic and diluted net loss per common share	$(0.08)	$(0.23)	$(0.06)	$(0.25)
Weighted-average common shares outstanding:
Basic and diluted	8,193,324	5,735,159	8,176,877	5,241,604
See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Six Months Ended
	December 31,
	2018	2017
Cash flows from operating activities:
Net (loss) income	$(125,229)	$212,995
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	281,055	184,010
Amortization of intangible assets	362,192	254,090
Amortization of other assets	21,074	40,681
Amortization of capital lease assets	137,234	125,967
Loss (gain) on sale of property and equipment	1,813	(5,197)
Stock-based compensation expense	99,740	117,073
Change in allowance for doubtful accounts receivable	(178,800)	(6,978)
Change in allowance for inventory obsolescence	(35,147)	49,739
Amortization deferred gain on sale/leaseback	(75,224)	(75,224)
Deferred income taxes	203,949	-
Change in fair value of earn-out liability	(375,000)	-
Change in operating assets and liabilities:
Trade accounts receivable	1,109,182	33,546
Inventories	348,392	(120,175)
Prepaid expenses	247,630	(297,144)
Other assets	(12,483)	(10,419)
Income tax receivable	(768)	(1,236)
Accounts payable and accrued expenses	(881,881)	1,175,114
Net cash provided by operating activities	1,127,729	1,676,842
Cash flows from investing activities:
Purchase of property and equipment	(52,463)	(84,494)
Net cash paid in acquisitions	-	(9,063,017)
Proceeds from sale of property and equipment	-	10,355
Net cash used in investing activities	(52,463)	(9,137,156)
Cash flows from financing activities:
Principal payments on long-term debt	(83,049)	(68,028)
Principal payments on long-term capital lease	(114,283)	(95,558)
Payment of acquisition holdbacks	(912,845)	(44,744)
Net change in line of credit	(1,137,681)	4,571,044
Proceeds from issuance of preferred stock, net	-	6,600,121
Preferred stock dividends paid in cash	-	(104,884)
Net cash (used in) provided by financing activities	(2,247,858)	10,857,951
Net change in cash and cash equivalents	(1,172,592)	3,397,637
Cash and cash equivalents at beginning of the period	1,696,116	254,705
Cash and cash equivalents at end of the period	$523,524	$3,652,342
Supplemental disclosure of cash flow information:
Cash paid for interest	$265,251	$172,893
Supplemental disclosure of non-cash investing and financing activity:
Deemed dividend on convertible preferred stock and accretion of discount	-	1,023,786
Preferred stock dividends paid or to be paid in common stock	389,905	387,655
Inventory reclassified to demonstration equipment	239,106	-
Preferred stock issued to acquire "Bird & Cronin"	-	4,000,000
Acquisition holdback	-	2,147,291
Conversion of preferred stock to common stock	-	7,459,600
See accompanying notes to condensed consolidated financial statements.

 

Reclassification

Certain amounts in the prior year's condensed consolidated statement of operations have been reclassified for comparative purposes to conform to the presentation in the current year's condensed consolidated statement of operations.

Recent Accounting Pronouncements

 

In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders’ equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. The Company has adopted all relevant disclosure requirements, with the exception of the shareholders’ equity interim disclosures, which is allowed to be adopted in a future interim period. The Company will include a consolidated statement of shareholders’ equity with its interim financial statements beginning with the fiscal quarter ending March 31, 2019. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations, cash flows or shareholders’ equity.

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842,) a new guidance on leases. This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. Accordingly, the standard is effective for the Company on July 1, 2019. The Company is currently evaluating the impact that this guidance will have on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company adopted this updated accounting guidance beginning July 1, 2018, using the modified retrospective method. This adoption did not have a material impact on the Company’s consolidated financial statements other than additional disclosures (see Note 10) as the timing of revenue recognition under the new standard is not materially different from our previous revenue recognition policy. Based on our analysis of open contracts as of July 1, 2018, the cumulative effect of applying the new standard was not material.

Bird & Cronin

On October 2, 2017, the Company, through its wholly-owned subsidiary Bird & Cronin, LLC, completed the purchase of substantially all the assets of Bird & Cronin, Inc. (“Bird & Cronin”), a manufacturer and distributor of orthopedic soft goods and specialty patient care products. The purchase price is subject to an earn-out payment ranging from $500,000 to $1,500,000, based on sales in fiscal year 2019. The amount recognized for the earn-out liability was $875,000 as of June 30, 2018. The amount recognized for the earn-out liability was decreased by $375,000 to $500,000 as of December 31, 2018. The change in the fair value of the earn-out liability is included in other income in the accompanying condensed consolidated statements of operations. The earn-out liability is combined with the acquisition holdback in the accompanying condensed consolidated balance sheets. 

 

A holdback of cash totaling $647,291 and 184,560 shares of common stock was retained for purposes of satisfying adjustments to the purchase price. On October 2, 2018, the Company released to Bird & Cronin cash of $162,845 and 54,572 shares of common stock pursuant to the holdback provisions of the purchase agreement. In addition, the Company canceled 37,708 shares of common stock held back for the benefit of Bird & Cronin, pursuant to the settlement of working capital adjustments as provided in the purchase agreement. 

 

 

On September 28, 2017, the Company modified the Line of Credit to provide additional capital for funding the Bird & Cronin acquisition and for operating capital. The Line of Credit, as amended, provides for revolving credit borrowings by the Company in an amount up to the lesser of $11,000,000 or the calculated borrowing base. On July 13, 2018, the Company further amended the Line of Credit to modify the maximum monthly consolidated leverage and a minimum monthly consolidated fixed charge coverage ratio. An additional modification was executed on November 9, 2018, to extend the maturity date to December 15, 2020.

Results of Operations

Net Sales

 

Net sales decreased $2,641,000, or 14.6%, to $15,440,000 for the quarter ended December 31, 2018, compared to net sales of $18,081,000 for the quarter ended December 31, 2017. The year-over-year decrease in net sales was driven primarily by lower sales of physical therapy and rehabilitation equipment of approximately $2,613,000. The lower sales are reflective of general softness in demand in our direct sales channel, transitions in our sales force, and our product rationalization strategy.

 

Net sales increased $1,626,000, or 5.3%, to $32,506,000 for the six months ended December 31, 2018, compared to net sales of $30,879,000 for the six months ended December 31, 2017. The year-over-year increase in net sales included an increase of $5,974,000 attributable to the acquisition of Bird & Cronin partially offset primarily by lower sales of physical therapy and rehabilitation equipment and other revenue of approximately $4,347,000 compared to the prior year period. The lower sales are relective of general softness in demand in our direct sales channel, transitions in our sales force, and our product rationalization strategy.