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

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets	September 30, 2018	June 30, 2018
Current assets:
Cash and cash equivalents	$436,697	$1,696,116
Trade accounts receivable, less allowance for doubtful accounts of $357,817 as of September 30, 2018 and $370,300 as of June 30, 2018	8,529,395	7,810,846
Other receivables	60,457	52,819
Inventories, net	10,524,115	10,987,855
Prepaid expenses	866,027	778,654
Income tax receivable	97,285	95,501
Total current assets	20,513,976	21,421,791
Property and equipment, net	5,917,095	5,850,899
Intangible assets, net	6,950,872	7,131,758
Goodwill	7,116,614	7,116,614
Other assets	533,141	532,872
Total assets	$41,031,698	$42,053,934
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$4,043,843	$3,412,960
Accrued payroll and benefits expense	1,529,276	1,929,465
Accrued expenses	1,111,742	830,243
Warranty reserve	205,850	205,850
Line of credit	5,029,712	6,286,037
Current portion of long-term debt	166,587	164,003
Current portion of capital lease obligations	225,801	226,727
Current portion of deferred gain	150,448	150,448
Current portion of acquisition holdback and earn-out liability	1,879,512	1,379,512
Total current liabilities	14,342,771	14,585,245
Long-term debt, net of current portion	260,719	303,348
Capital lease obligations, net of current portion	2,915,132	2,972,540
Deferred gain, net of current portion	1,491,941	1,529,553
Acquisition holdback and earn-out liability, net of current portion	-	875,000
Other liabilities	285,094	411,466
Total liabilities	19,295,657	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 September 30, 2018 and June 30, 2018, respectively	11,641,816	11,641,816
Common stock, no par value: Authorized 100,000,000 shares; 8,161,029 shares and 8,089,398 shares issued and outstanding as of September 30, 2018 and June 30, 2018, respectively	20,455,402	20,225,107
Accumulated deficit	(10,361,177)	(10,490,141)
Total stockholders' equity	21,736,041	21,376,782
Total liabilities and stockholders' equity	$41,031,698	$42,053,934
See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
	Three Months Ended
	September 30,
	2018	2017
Net sales	$17,065,836	$12,797,971
Cost of sales	11,518,611	8,458,580
Gross profit	5,547,225	4,339,391
Selling, general, and administrative expenses	5,496,623	4,074,550
Operating income	50,602	264,841
Other income (expense):
Interest expense, net	(120,842)	(76,808)
Other income, net	385,841	10,614
Net other income (expense)	264,999	(66,194)
Income before income taxes	315,601	198,647
Income tax provision	-	-
Net income	315,601	198,647
Convertible preferred stock dividend, in common stock	(186,637)	(187,061)
Net income attributable to common stockholders	$128,964	$11,586
Net income per common share
Basic	$0.02	$0.00
Diluted	$0.02	$0.00
Weighted-average common shares outstanding:
Basic	8,160,431	4,748,049
Diluted	8,400,824	4,748,309
See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Three Months Ended
	September 30,
	2018	2017
Cash flows from operating activities:
Net income	$315,601	$198,647
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	130,358	67,822
Amortization of intangible assets	180,886	71,283
Amortization of other assets	12,189	86,245
Amortization of capital lease assets	68,617	62,983
Gain on sale of property and equipment	-	(5,197)
Stock-based compensation expense	43,658	71,786
Change in allowance for doubtful accounts receivable	(12,483)	(9,118)
Change in allowance for inventory obsolescence	(31,046)	(11,827)
Amortization of deferred gain on sale/leaseback	(37,612)	(37,612)
Change in fair value of earn-out liability	(375,000)	-
Change in operating assets and liabilities:
Trade accounts receivable	(713,704)	(652,811)
Inventories	255,680	255,111
Prepaid expenses	(87,373)	(88,905)
Other assets	(12,458)	(152,637)
Income tax payable/receivable	(1,784)	1,152
Accounts payable and accrued expenses	385,821	601,901
Net cash provided by operating activities	121,350	458,823
Cash flows from investing activities:
Purchase of property and equipment	(26,065)	(24,779)
Proceeds from sale of property and equipment	-	10,905
Net cash used in investing activities	(26,065)	(13,874)
Cash flows from financing activities:
Principal payments on long-term debt	(40,045)	(35,485)
Principal payments on long-term capital lease	(58,334)	(47,446)
Net change in line of credit	(1,256,325)	4,931,491
Net cash (used in) provided by financing activities	(1,354,704)	4,848,560
Net change in cash and cash equivalents	(1,259,419)	5,293,509
Cash and cash equivalents at beginning of the period	1,696,116	254,705
Cash and cash equivalents at end of the period	$436,697	$5,548,214
Supplemental disclosure of cash flow information:
Cash paid for interest	$133,811	$78,301
Supplemental disclosure of non-cash investing and financing activity:
Preferred stock dividends paid or to be paid in common stock	186,637	187,061
Inventory reclassified to demonstration equipment	239,106	-
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 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 September 30, 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. 

 

In addition, the Company has withheld approximately 185,000 shares of common stock to be released to Bird & Cronin pursuant to the holdback provisions in the asset purchase agreement. These shares are included in common stock on the Company’s balance sheet at September 30, 2018. Certain principals of Bird & Cronin are holders of the Company’s issued and outstanding common stock and two of the principals, Michael Cronin and Jason Anderson, are employees of the Company. 

 

 

On September 28, 2017, the Company modified the Line of Credit to provide asset-based financing to be used for funding the Bird & Cronin acquisition and for operating capital. The Line of Credit, as amended, provided for revolving credit borrowings by the Company in an amount up to the lesser of $11,000,000 or the calculated borrowing base. The Line of Credit, as amended, matures September 30, 2019.

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.