DYNATRONICS CORP - Quarter Report: 2018 March (Form 10-Q)
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, 2018
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
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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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7030 Park Centre Drive, Cottonwood Heights, Utah 84121
(Address
of principal executive offices, Zip Code)
(801) 568-7000
(Registrant’s
telephone number, including area code)
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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post 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. (Check one)
|
Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐ (Do not check if a smaller reporting
company)
|
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
☑
As of
May 2, 2018, there were 8,089,398 shares of the registrant’s
common stock outstanding.
DYNATRONICS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
TABLE OF CONTENTS
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Page Number
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1
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1
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2
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3
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4
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10
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10
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16
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16
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17
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18
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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,
2018
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June
30, 2017
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Current
assets:
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Cash and cash
equivalents
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$1,497,455
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$254,705
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Trade accounts
receivable, less allowance for doubtful accounts of $388,772 as of
March 31, 2018 and $382,333 as of June 30, 2017
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7,117,194
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5,281,348
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Other
receivables
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111,071
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33,388
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Inventories,
net
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12,389,387
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7,397,682
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Prepaid
expenses
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720,868
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503,800
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Total
current assets
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21,835,975
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13,470,923
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Property and
equipment, net
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5,839,436
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4,973,477
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Intangible assets,
net
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7,312,854
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2,754,118
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Goodwill
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7,872,863
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4,302,486
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Other
assets
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522,621
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562,873
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Total
assets
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$43,383,749
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$26,063,877
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Accounts
payable
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$3,320,322
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$2,334,563
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Accrued payroll and
benefits expense
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2,019,218
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1,472,773
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Accrued
expenses
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654,920
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656,839
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Income tax
payable
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6,994
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8,438
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Warranty
reserve
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205,850
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202,000
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Line of
credit
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6,542,690
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2,171,935
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Current portion of
long-term debt
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161,458
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151,808
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Current portion of
capital lease
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202,099
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193,818
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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
acquisition holdback
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180,624
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294,744
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Total
current liabilities
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13,444,623
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7,637,366
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Long-term debt, net
of current portion
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345,316
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461,806
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Capital lease, net
of current portion
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2,935,103
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3,087,729
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Deferred gain, net
of current portion
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1,567,165
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1,680,001
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Acquisition
holdback and earn out liability, net of current
portion
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2,716,667
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750,000
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Other
liabilities
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407,937
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122,585
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Total
liabilities
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21,416,811
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13,739,487
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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; 4,889,000 shares and
3,559,000 shares issued and outstanding as of March 31, 2018 and
June 30, 2017, respectively
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11,641,816
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8,501,295
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Common stock, no
par value: Authorized 100,000,000 shares; 8,023,236 shares and
4,653,165 shares issued and outstanding as of March 31, 2018 and
June 30, 2017, respectively
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20,087,549
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11,838,022
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Accumulated
deficit
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(9,762,427)
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(8,014,927)
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Total
stockholders' equity
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21,966,938
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12,324,390
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Total
liabilities and stockholders' equity
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$43,383,749
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$26,063,877
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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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2018
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2017
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2018
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2017
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Net
sales
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$16,634,067
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$7,715,955
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$47,513,371
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$24,592,043
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Cost of
sales
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11,342,518
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5,014,175
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32,112,451
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16,022,269
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Gross
profit
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5,291,549
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2,701,780
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15,400,920
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8,569,774
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Selling, general,
and administrative expenses
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6,213,490
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3,153,257
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15,146,001
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8,768,851
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Research and
development expenses
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242,306
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230,594
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1,047,642
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818,954
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Operating
loss
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(1,164,247)
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(682,071)
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(792,723)
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(1,018,031)
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Other income
(expense):
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Interest
expense, net
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(118,045)
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(74,992)
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(298,559)
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(198,084)
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Other
income, net
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4,859
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2,332
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26,845
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80,431
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Net other
expense
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(113,186)
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(72,660)
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(271,714)
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(117,653)
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Loss before income
taxes
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(1,277,433)
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(754,731)
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(1,064,437)
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(1,135,684)
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Income tax
(provision) benefit
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-
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-
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-
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-
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Net
loss
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(1,277,433)
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(754,731)
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(1,064,437)
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(1,135,684)
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Deemed dividend on
convertible preferred stock and accretion of discount
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-
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-
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(1,023,786)
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(375,858)
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Preferred stock
dividend, cash
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-
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-
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(104,884)
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Convertible
preferred stock dividend, in common stock
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(190,523)
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(93,979)
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(578,178)
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(271,756)
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Net loss
attributable to common stockholders
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$(1,467,956)
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$(848,710)
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$(2,771,285)
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$(1,783,298)
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Basic and diluted
net loss per common share
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$(0.18)
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$(0.28)
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$(0.45)
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$(0.61)
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Weighted-average
common shares outstanding:
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Basic and
diluted
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7,962,179
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3,022,443
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6,135,224
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2,914,229
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See
accompanying notes to condensed consolidated financial
statements.
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2
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DYNATRONICS CORPORATION
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Condensed
Consolidated Statements of Cash Flows
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(Unaudited)
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Nine
Months Ended
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March
31,
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2018
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2017
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Cash flows from
operating activities:
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Net
loss
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$(1,064,437)
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$(1,135,684)
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Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
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Depreciation
and amortization of property and equipment
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298,973
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161,961
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Amortization
of intangible assets
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457,265
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23,010
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Amortization
of other assets
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56,433
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92,323
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Amortization
of building capital lease
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188,950
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188,950
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Gain
on sale of property and equipment
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(7,002)
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(19,252)
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Stock-based
compensation expense
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211,747
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171,798
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Change
in allowance for doubtful accounts receivable
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(1,561)
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70,650
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Change
in allowance for inventory obsolescence
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162,528
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7,028
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Deferred
gain on sale/leaseback
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(112,836)
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(112,836)
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Change
in operating assets and liabilities net of
acquisitions:
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Receivables,
net
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324,838
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509,154
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Inventories,
net
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(1,017,052)
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(793,101)
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Prepaid
expenses
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(124,079)
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35,722
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Other
assets
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(16,181)
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(205,570)
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Income
tax payable
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(3,896)
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(3,967)
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Accounts
payable and accrued expenses
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750,894
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255,194
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Net
cash provided by (used in) operating activities
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104,584
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(754,620)
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Cash flows from
investing activities:
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Purchase
of property and equipment
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(131,040)
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(164,181)
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Net
cash paid in acquisition - see Note 2
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(9,063,017)
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-
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Proceeds
from sale of property and equipment
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12,160
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32,000
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Net
cash used in investing activities
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(9,181,897)
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(132,181)
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Cash flows from
financing activities:
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Principal
payments on long-term debt
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(106,840)
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(42,561)
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Principal
payments on long-term capital lease
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(144,345)
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(136,513)
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Payment of
acquisition holdbacks
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(294,744)
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2,540,073
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Net
change in line of credit
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4,370,755
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928,554
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Proceeds
from issuance of preferred stock, net
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6,600,121
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(16,241)
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Preferred
stock dividends paid in cash
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(104,884)
|
-
|
|
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Net
cash provided by financing activities
|
10,320,063
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3,273,312
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Net
change in cash and cash equivalents
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1,242,750
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2,386,511
|
|
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Cash and cash
equivalents at beginning of the period
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254,705
|
966,183
|
|
|
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Cash and cash
equivalents at end of the period
|
$1,497,455
|
$3,352,694
|
|
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Supplemental
disclosure of cash flow information:
|
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Cash
paid for interest
|
$284,437
|
$198,572
|
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Supplemental
disclosure of non-cash investing and financing
activities:
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Deemed
dividend on convertible preferred stock and accretion of
discount
|
1,023,786
|
375,858
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Preferred
stock dividends paid or to be paid in common stock
|
578,178
|
276,693
|
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Preferred
stock issued to acquire Bird & Cronin, Inc.
|
4,000,000
|
-
|
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Acquisition
holdback
|
2,147,291
|
-
|
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Conversion
of preferred stock to common stock
|
7,459,600
|
-
|
|
Accrued
severance paid in common stock
|
-
|
185,000
|
|
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See accompanying
notes to condensed consolidated financial statements.
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3
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2018
NOTE 1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The
condensed consolidated balance sheets as of March 31, 2018 and June
30, 2017, the condensed consolidated statements of operations for
the three and nine months ended March 31, 2018 and 2017, and
condensed consolidated statements of cash flows for the nine months
ended March 31, 2018 and 2017, were prepared by Dynatronics
Corporation and its subsidiaries (collectively, the
“Company”) without audit
pursuant to the instructions to Form 10-Q and 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 and nine months ended March 31, 2018, are
not necessarily indicative of the results of operations that may be
expected for the fiscal year ending June 30, 2018. The Company
previously filed with the SEC an Annual Report on Form 10-K (the
“2017 Form
10-K”) which included audited financial statements for
each of the years ended June 30, 2017 and 2016. 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 2017 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 changes to the Company’s significant accounting
policies as described in the 2017 Form 10-K.
NOTE 2. ACQUISITIONS
Bird & Cronin
On
October 2, 2017, the Company acquired substantially all of the
assets of Bird & Cronin, Inc. (“Bird & Cronin”), a
manufacturer and distributor of orthopedic soft goods and specialty
patient care products. The transaction is referred to as the
“Acquisition”. The
Acquisition will expand the Company’s sales in the orthopedic
and patient care markets by leveraging the products and
distribution network offered by Bird & Cronin.
At the
closing of the Acquisition, the Company paid Bird & Cronin cash
of $9,063,017 and delivered 1,397,375 shares of its Series D Non
Voting Convertible Preferred Stock (“Series D Preferred”) to
Bird & Cronin valued at approximately $3,533,333. The purchase
price is subject to customary representations, warranties,
indemnities, working capital adjustment and an earn-out payment
ranging from $500,000 to $1,500,000, based on future sales. As of
March 31, 2018, there has been no change to the acquisition date
amount recognized for the earn-out liability. The balance of the
earn-out liability at March 31, 2018 is $1,500,000. A holdback of
cash totaling $647,291 and 184,560 shares of common stock
(converted from Series D Preferred) valued at approximately
$466,667 have been retained for purposes of satisfying adjustments
to the purchase price.
In
connection with the Acquisition, the Company completed a private
placement of Series C Non Voting Convertible Preferred Stock
(“Series C
Preferred”) and common stock warrants to raise cash
proceeds of $7,000,000 pursuant to the terms and conditions of a
Securities Purchase Agreement entered into on September 26, 2017
(“Private
Placement”). See Note 4 for details of the Private
Placement.
Also in
connection with the Acquisition, the Company entered into a lease
with Trapp Road Limited Liability Company, a Minnesota limited
liability company controlled by the former owners of Bird &
Cronin, to occupy the facility housing the Bird & Cronin
operations for a term of three years at annual rental payments of
$600,000, payable in monthly installments of $50,000. The lease
term will automatically be extended for two additional periods of
two years each, without any increase in the lease payment, subject
to the Company’s right to terminate the lease or to provide
notice not to extend the lease prior to the end of the term. The
Company also offered employees of Bird & Cronin employment with
Dynatronics at closing including the Co-Presidents of Bird &
Cronin, Mike Cronin and Jason Anderson, who entered into employment
agreements to serve as Co-Presidents of Bird & Cronin, LLC, the
Company’s wholly-owned subsidiary that conducts the
operations acquired in the Acquisition.
4
The
Acquisition has been accounted for under the purchase method as
prescribed by applicable accounting standards. Under this method,
the Company has allocated the purchase price to the assets acquired
and liabilities assumed at estimated fair values. The total
consideration transferred or to be transferred, totaled
$15,213,959. The following table summarizes the preliminary
estimated fair value of the assets acquired and liabilities assumed
as of the date of acquisition:
|
Cash and cash
equivalents
|
$4,104
|
|
Trade accounts
receivable
|
2,232,703
|
|
Inventories
|
4,137,181
|
|
Prepaid
expenses
|
92,990
|
|
Property and
equipment
|
1,228,000
|
|
Intangible
assets
|
5,016,000
|
|
Goodwill
|
3,570,376
|
|
Warranty
reserve
|
(5,000)
|
|
Accounts
payable
|
(607,084)
|
|
Accrued
expenses
|
(265,732)
|
|
Accrued payroll and
benefits
|
(189,579)
|
|
Purchase
price
|
$15,213,959
|
The
estimates of fair value of identifiable assets acquired and
liabilities assumed are preliminary, pending finalization of a
valuation, and are subject to revisions that may result in
adjustments to the values presented above.
Intangible
assets subject to amortization include $4,313,000 that relate to
customer relationships with a useful life of ten years and other
intangible assets of $83,000 with a useful life of five years.
Intangible assets not subject to amortization of $620,000 relate to
trade names. The goodwill recognized from the Acquisition is
estimated to be attributable, but not limited to, the acquired
workforce and expected synergies that do not qualify for separate
recognition. The full amount of goodwill and intangible assets are
expected to be deductible for tax purposes.
As of
March 31, 2018, the Acquisition earn-out liability and holdbacks of
$2,147,291 come due, contingent upon the terms set forth in the
purchase agreement, as follows:
|
October 2,
2018
|
$180,624
|
|
April 1,
2019
|
466,667
|
|
August 15,
2019
|
1,500,000
|
|
Acquisition
holdback
|
$2,147,291
|
|
|
|
The amounts of Bird & Cronin’s net sales and net income included in the
Company's consolidated statement of operations for the period from
October 2, 2017 to March 31, 2018, were $11,384,235 and $879,349
respectively. Pro forma net sales and net loss of the combined
operations had the acquisition date been July 1, 2016
are:
|
|
Net Sales
|
Net Loss
|
|
Unaudited
supplemental pro forma July 1, 2017 to March 31, 2018
|
$53,968,355
|
$(1,017,788)
|
|
Unaudited
supplemental pro forma July 1, 2016 to June 30, 2017
|
$60,027,677
|
$(285,951)
|
The unaudited pro forma consolidated results are not to be
considered indicative of the results if the Acquisition occurred in
the periods mentioned above, or indicative of future operations or
results. The unaudited supplemental pro forma earnings were
adjusted to exclude $70,000 of acquisition-related costs incurred
in fiscal year 2017.
Hausmann
On
April 3, 2017, the
Company acquired substantially all of the assets of Hausmann
Industries, Inc. (“Hausmann”). In the third
fiscal quarter of 2018, the Company finalized its valuation of the
Hausmann assets acquired and liabilities assumed and determined
that no material adjustments to any of the balances were required.
The following table
summarizes the fair values of the assets acquired and liabilities
assumed as of the date of acquisition:
|
Cash and cash
equivalents
|
$600
|
|
Trade accounts
receivable
|
1,691,420
|
|
Inventories
|
2,117,430
|
|
Prepaid
expenses
|
136,841
|
|
Property and
equipment
|
512,950
|
|
Intangible
assets
|
2,689,000
|
|
Goodwill
|
4,302,486
|
|
Warranty
reserve
|
(50,000)
|
|
Accounts
payable
|
(544,625)
|
|
Accrued
expenses
|
(33,981)
|
|
Accrued payroll and
benefits
|
(661,288)
|
|
Purchase
price
|
$10,160,833
|
The
estimated purchase price included a holdback of cash totaling
$1,044,744 for purposes of satisfying adjustments to the purchase
price and indemnification claims, if any. In the second and third
fiscal quarters of 2018, the Company released $45,000 and $250,000,
respectively, of the holdback to the sellers. As of March 31, 2018,
the Company retained a holdback of $750,000 due to be paid to the
seller on October 3, 2018.
5
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 loss 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.
Outstanding
options, warrants and convertible preferred stock for common shares
not included in the computation of diluted net loss per common
share because they were anti-dilutive, for the three months ended
March 31, 2018, and 2017, totaled 11,772,349 and
5,165,008, respectively, and
for the nine months ended March 31, 2018 and 2017, totaled
12,003,052 and 5,165,798,
respectively.
NOTE
4. CONVERTIBLE
PREFERRED STOCK AND COMMON STOCK WARRANTS
In
connection with the Acquisition of Bird & Cronin on October 2,
2017, the Company issued 2,800,000 shares of Series C Preferred and
warrants to purchase 1,400,000 shares of common stock
(“Series C
Warrants”), as well as 1,581,935 shares of its Series
D Preferred. The Series C Warrants have an exercise price of $2.75
per share of common stock and a term of six years. The exercise of
the Series C Warrants and the conversion of the Series C Preferred
and Series D Preferred was subject to the prior approval of the
Company’s shareholders as required under applicable Nasdaq
Marketplace Rules. At the Company’s 2017 Annual Meeting of
Shareholders, held on November 29, 2017, the Company sought and
obtained that shareholder approval. Upon the receipt of the
shareholder approval, each share of Series C Preferred and each
share of Series D Preferred was automatically convertible into one
share of common stock; provided, however, that the holders of the
Series C Preferred were permitted to elect retain the Series C
Preferred and not convert, subject to future beneficial ownership
limitations and forfeiture of preferential rights of Series C
Preferred. On November 29, 2017, the Company issued 1,360,000
shares of common stock in conversion of 1,360,000 shares of Series
C Preferred and 1,581,935 shares of common stock in conversion of
all outstanding shares of the Series D Preferred. As of March 31,
2018, the Company had 1,440,000 shares of Series C Preferred
outstanding. The Series C Preferred shares are non-voting, do not
receive dividends, and have no liquidation preferences or
redemption rights.
The
Company determined that the Series C Preferred contain a beneficial
conversion feature resulting in a deemed dividend of $829,559. Upon
conversion of a portion of the Series C Preferred during the three
months ended December 31, 2017, accretion of $194,227 in discounts
was recognized.
During
quarter ended September 30 2017, the Company issued 75,000 shares
of common stock upon conversion of 75,000 shares of Series B
Convertible Preferred Stock (“Series B Preferred”).
During quarter ended December 31, 2017, the Company issued 25,000
shares of common stock upon conversion of 25,000 shares of Series B
Preferred. As of March 31, 2018, the Company had a total of
2,000,000 shares of Series A 8% Convertible Preferred Stock
(“Series A
Preferred”) and 1,459,000 shares of Series B Preferred
outstanding, convertible into a total of 3,459,000 shares of common
stock. Dividends payable on these 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 in common
stock. The formula for paying this dividend in common stock 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.
NOTE 5. COMPREHENSIVE LOSS
For the
three and nine months ended March 31, 2018 and 2017, comprehensive
loss was equal to the net loss as presented in the accompanying
condensed consolidated statements of operations.
NOTE 6. INVENTORIES
Inventories
consisted of the following:
|
|
March 31, 2018
|
June 30, 2017
|
|
Raw
materials
|
$6,458,466
|
$3,766,940
|
|
Work in
process
|
644,412
|
470,721
|
|
Finished
goods
|
5,826,774
|
3,562,758
|
|
Inventory
obsolescence reserve
|
(540,265)
|
(402,737)
|
|
|
$12,389,387
|
$7,397,682
|
6
NOTE 7. RELATED-PARTY TRANSACTIONS
The
Company leases office, manufacturing and warehouse facilities in
Detroit, Michigan, Hopkins, Minnesota, 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
approximately $259,980 and $17,700 for the three months ended March
31, 2018 and 2017, respectively, and $626,140 and $53,100 for the nine months ended March 31,
2018 and 2017, respectively.
Certain
significant shareholders, officers and directors of the Company
participated as investors in the private placements of the
Company’s Series A Preferred, Series B Preferred, and Series
C Preferred. The terms of these offerings were reviewed and
approved by disinterested members of the Company’s Board of
Directors who did not invest in the private placements and who do
not own any shares of Series A Preferred, Series B Preferred or
Series C Preferred. The affiliated investors participated in these
offerings on terms that were no more favorable than the terms
granted to unaffiliated investors.
Pursuant
to the Company’s acquisition of Hausmann in April 2017, the
Company held back approximately$1,045,000 of the purchase price. As
of March 31, 2018, and June 30, 2017, the holdback liability to
Hausmann under the purchase agreement was $750,000 and $1,045,000,
respectively. In the second and third quarters of 2018, the Company
released $45,000 and $250,000, respectively, of the holdback.
Certain principals of Hausmann are holders of the Company’s
Series B Preferred and one of the principals, David Hausmann, is an
employee of the Company.
In
connection with the Acquisition of Bird & Cronin in October
2017, the Company held back approximately $647,000 in cash plus an
earn-out payment of a minimum of $500,000 up to $1,500,000. These
obligations to Bird & Cronin, totaling approximately
$2,147,000, are liabilities on the Company’s balance sheet as
of March 31, 2018. In addition, the Company 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 March 31, 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.
NOTE 8. LINE OF CREDIT
On
September 28, 2017, the Company modified its credit agreement with
Bank of the West and entered into an Amended Credit Facility (the
“Amended Credit
Facility”) to provide asset-based financing to the
Company to be used for funding the Acquisition (see Note 2) and for
operating capital. The Amended Credit Facility provides for
revolving credit borrowings by the Company 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%. The Company paid a
commitment fee of .25% and the line is subject to an unused line
fee of .25%. The maturity date is September 30, 2019. The
Company’s obligations under the Amended Credit Facility are
secured by a first-priority security interest in substantially all
of its assets, including those of its subsidiaries. The Amended
Credit Facility includes financial covenants, such as ratios for
consolidated leverage and fixed charge coverage, and customary
affirmative and negative covenants for a credit facility of this
type, including, among others, the provision of annual, quarterly
and monthly financial statements and compliance certificates,
maintenance of property, insurance, compliance with laws and
environmental matters, restrictions on incurrence of indebtedness,
granting of liens, making investments and acquisitions, paying
dividends, entering into affiliate transactions and asset sales.
The Amended Credit Facility also contains penalties in connection
with customary events of default, including, among others, payment,
bankruptcy, representation and warranty, covenant, change in
control, judgment and events or conditions that have a Material
Adverse Effect (as defined in the Amended Credit
Facility).
As of
March 31, 2018, the Company had borrowed $6,542,690 under the
Amended Credit Facility compared to $2,171,935 as of June 30, 2017.
There was approximately $2,273,000 available to borrow under the
original loan and security agreement as of March 31,
2018.
NOTE 9. ACCRUED PAYROLL AND BENEFITS EXPENSE
As of March 31, 2018 and June 30, 2017, accrued payroll and
benefits expense was $2,019,218 and $1,472,773, respectively.
Included in the balance as of March 31, 2018 and 2017 was $577,788
and $200,000, respectively, of accrued severance expense for
Company personnel including one executive officer.
As of March 31, 2018 and June 30,
2017, long-term severance accrual included in other liabilities was
$262,020 and $0, respectively. Payments will be made in cash
over a two year period. The Company recognized $839,807 in
severance expense during the three and nine months ended March 31,
2018 related to the termination of Company personnel including one executive
officer. The Company recognized $2,304 in severance expense
during the three and nine months ended March 31, 2017. Severance
expense is included in selling, general, and administrative
expenses.
On May
7, 2018, the Company implemented a reduction of its workforce by 10
employees to better align its resources with the needs of its
business and focus on improving profitability. The Company expects
that it will incur severance expense of approximately $140,000,
which will be recorded during the fourth fiscal quarter of
2018.
7
NOTE 10. INCOME TAXES
On
December 22, 2017, the U.S. government enacted comprehensive tax
reform legislation commonly referred to as the Tax Cuts and Jobs
Act (“Tax
Act”). The Tax Act provides for significant changes to
the U.S. Internal Revenue Code of 1986, as amended. Among other
items, the Tax Act permanently reduces the federal corporate tax
rate to 21% effective January 1, 2018. As the Company’s
fiscal year end falls on June 30, the statutory federal corporate
tax rate for fiscal 2018 will be prorated to 27.5%, with the
statutory rate for fiscal 2019 and beyond at 21%.
As a
result of the reduction in the corporate income tax rate from 35%
to 21% under the Act, the Company revalued its net deferred tax
assets at December 31, 2017. As of March 31, 2018 and June 30,
2017, a full valuation allowance has been established against net
deferred 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, 2018.
The
final transition impacts of the Tax Act may vary from the current
estimate, possibly materially, due to, among other things, further
clarification and changes in interpretations of the Tax Act, any
legislative action to address questions that arise because of the
Tax Act, any changes in accounting standards for income taxes or
related interpretations in response to the Tax Act, and the
completion of the Company’s consolidated financial statements
as of and for the year ending June 30, 2018. In accordance with SAB
118, any necessary measurement adjustments will be recorded and
disclosed within one year from the enactment date within the period
the adjustments are determined.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
On December 22, 2017, the U.S. government enacted comprehensive tax
reform legislation commonly referred to as the Tax Cuts and Jobs
Act. The Tax Act provides for significant changes to the U.S.
Internal Revenue Code of 1986, as amended. Among other items, the
Tax Act permanently reduces the federal corporate tax rate to 21%
effective January 1, 2018.
Additionally, the SEC released Staff Accounting Bulletin No. 118
(“SAB
118”) which
provides guidance on accounting for the Act’s impact under
ASC Topic 740, Income Taxes (“ASC
740”). The
guidance in SAB 118 addresses certain fact patterns where the
accounting for changes in tax laws or tax rates under ASC 740 is
incomplete upon issuance of an entity's financial statements for
the reporting period in which the Act is enacted. Under the staff
guidance in SAB 118, in the financial reporting period in which the
Act is enacted, the income tax effects of the Act (i.e., only for
those tax effects in which the accounting under ASC 740 is
incomplete) would be reported as a provisional amount based on a
reasonable estimate (to the extent a reasonable estimate can be
determined), which would be subject to adjustment during a
“measurement period” until the accounting under ASC 740
is complete. The measurement period is limited to no more than one
year beyond the enactment date under the staff's guidance. SAB 118
also describes supplemental disclosures that should accompany the
provisional amounts, including the reasons for the incomplete
accounting, the additional information or analysis that is needed,
and other information relevant to why the registrant was not able
to complete the accounting required under ASC 740 in a timely
manner. For discussion of the impacts of the Tax Act, refer to Note
10.
In November 2017, the Financial Accounting Standards Board
(“FASB”)
issued Accounting Standards Update (“ASU”) 2017-14, Income Statement –
Reporting Comprehensive Income (Topic 220), Revenue Recognition
(Topic 605), and Revenue from Contracts with Customers (Topic 606):
Amendments to SEC Paragraphs Pursuant to the Staff Accounting
Bulletin (“SAB”) No. 116 and SEC Release No.
33-10403. This ASU amended,
superseded and added certain SEC paragraphs in Topic 220, Topic 605
and Topic 606 to reflect the August 2017 issuance of SAB 116 and
SEC Release No. 33-10403. The SEC staff issued SAB 116 to align its
revenue guidance with Accounting Standards Codification
(“ASC”) 606. For public business entities, this update
is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. Early
application is permitted. The Company is currently evaluating the
impact of the adoption of this update on its consolidated financial
statements.
In July
2017, the FASB issued ASU 2017-11 – Earnings per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Non-controlling Interests with a Scope Exception. Part I of
this update addresses the complexity of accounting for certain
financial instruments with down round features. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option.
Stakeholders asserted that accounting for freestanding and embedded
instruments with down round features as liabilities subject to fair
value measurement on an ongoing basis creates a significant
reporting burden and unnecessary income statement volatility
associated with changes in value of an entity’s own share
price. That is, current accounting guidance requires changes in
fair value of an instrument with a down round feature to be
recognized in earnings for both increases and decreases in share
price, even though an increase in share price will not cause a down
round feature to be triggered and a decrease will cause an
adjustment to the strike price only if and when an entity engages
in a subsequent equity offering.
Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from
Equity, because of the existence of the extensive pending
content in the FASB Accounting Standards Codification.
This pending content is the result of the indefinite deferral of
accounting requirements about mandatorily redeemable financial
instruments of certain nonpublic entities and certain mandatorily
redeemable non-controlling interests.
8
The
amendments in Part I of this update change the classification
analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining
whether certain financial instruments should be classified as
liabilities or equity instruments, a down round features no longer
precludes equity classification when assessing whether the
instrument is indexed to an entity’s own stock. The
amendments in Part II of this update re-characterize the indefinite
deferral of certain provisions of Topic 48 that now are presented
as pending content in the Codification, to a scope exception. Those
amendments do not have an accounting effect. The Company is
currently evaluating the impact the adoption of this update will
have on its consolidated financial statements and disclosures. This
amendment is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018.
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic
350), Simplifying the Test for Goodwill Impairment. The
amendment in this update simplifies how an entity is required to
test goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. An entity should apply the amendments in
this update on a prospective basis. This amendment will be
effective for the Company in its fiscal year beginning July 1,
2020. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company has early adopted this standard as of July 1, 2017. The
Company does not believe the adoption of this standard will have a
material impact on its financial reporting.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying
the Definition of a Business. The Board issued this update
to clarify the definition of a business with the objective of
assisting entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. Under Topic 805, there are three elements of a
business—inputs, processes, and outputs (collectively
referred to as a “set”) although outputs are not
required as an element of a business set. The amendments in this
update provide a screen to determine when a set is not a business.
The screen requires that when substantially all of the fair value
of the gross assets acquired (or disposed of) is concentrated in a
single identifiable asset or a group of similar identifiable
assets, the set is not a business, reducing the number of
transactions that need to be further evaluated. If the screen is
not met, the amendments in this update:
|
1.
|
require
that a business set must include, at a minimum, an input and a
substantive process that together significantly contribute to the
ability to create output, and
|
|
2.
|
remove
the evaluation of whether a market participant could replace
missing elements.
|
The
amendments provide a framework for evaluating whether both an input
and a substantive process are present. Lastly, the amendments in
this update narrow the definition of the term output so that the
term is consistent with how outputs are described in Topic 606.
This amendment will be effective for the Company in its fiscal year
(including interim periods) beginning July 1, 2018. The Company is
currently evaluating the impact the adoption of ASU 2017-01 will
have on its consolidated financial statements and
disclosures.
In
February 2016, the 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments, a guidance related to financial
instruments - overall recognition and measurement of financial
assets and financial liabilities. The guidance enhances the
reporting model for financial instruments, which includes
amendments to address aspects of recognition, measurement,
presentation and disclosure. The update to the standard is
effective for public companies for interim and annual periods
beginning after December 15, 2017. Accordingly, the standard is
effective for the Company on July 1, 2018. The Company
is currently evaluating the
impact that the standard will have on the consolidated financial
statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customer (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. Accordingly, the Company will adopt this
guidance on July 1, 2018. Companies may use either a full
retrospective or a modified retrospective approach to adopt this
guidance. The Company is evaluating which transition approach to
use and its impact, if any, on its consolidated financial
statements.
NOTE 12. SUBSEQUENT EVENTS
In
April 2018, the Company paid approximately $191,000 of preferred
stock dividends with respect to the Series A Preferred and Series B
Preferred that were accrued during the three months ended March 31,
2018. The Company paid the dividends by issuing 65,709 shares of
common stock.
9
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Information
contained in this Form 10-Q, particularly in the following
Discussion and Analysis of Financial Condition and Results of
Operations, includes statements considered to be
“forward-looking statements” within the safe harbors
provided by 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 (“Exchange Act”). These
statements refer to our expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of words or phrases such
as “believes,” “expects,”
“anticipates,” “should,”
“plans,” “estimates,”
“intends,” and “potential,” among others.
Forward-looking statements include, but are not limited to,
statements regarding product development, market acceptance,
financial performance, revenue and expense levels in the future and
the sufficiency of existing assets to fund future operations and
capital spending needs. Actual results could differ materially from
the anticipated results or other expectations expressed in such
forward-looking statements. 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 or to update the reasons why
actual results could differ from those projected in such
forward-looking statements, except as required by law.
We have
based our forward-looking statements on management’s current
expectations and projections about trends affecting our business
and industry and other future events. 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.
Some of the risks and uncertainties that may cause actual results
to differ from those expressed or implied in the forward-looking
statements are described in “Risk Factors” included in
Part I, Item 1A of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2017, filed with the Securities and Exchange
Commission, or the SEC, or the Form 10-K, as well as in our other
public filings with the SEC. In addition, 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 we
make speak only as of the date on which they are made. We expressly
disclaim any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to
actual results or to changes in our opinions or expectations,
except as required by applicable law or the rules of The Nasdaq
Stock Market, LLC. 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.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Overview
Dynatronics
Corporation (“Company,”
“Dynatronics,”
“we”)
designs, manufactures and distributes advanced-technology
therapeutic medical devices, therapeutic and medical treatment
tables, rehabilitation equipment, custom athletic training
treatment tables and equipment, institutional cabinetry, orthopedic
soft goods, as well as other rehabilitation and therapy products
and supplies. Through our various distribution channels, we market
and sell our products to physical therapists, chiropractors,
athletic trainers, sports medicine practitioners, orthopedists, and
other medical professionals, hospitals, and institutions. We
operate on a fiscal year ending June 30. For example, reference to
fiscal year 2018 refers to the year ending June 30,
2018.
Recent Events
On February 19,
2018, our Board of Directors (“Board”) voted to separate
the role of Chairman of the Board from the role of Chief Executive
Officer and appointed Erin Enright as Chairman of the Board. Ms.
Enright has been a director of our Company and member of the Board
since June 2015. The Board also acted to implement a succession
plan for our senior management and appointed a special Board
committee to commence a search to identify a successor for Mr.
Cullimore as our CEO. The directors who are committee members are
Ms. Enright, who is chair of the committee, Scott Klosterman and
Brian Larkin. The committee intends to complete its search, if
practicable, prior to June 30, 2018, the end of our current fiscal
year. After appointment of a new CEO, Mr. Cullimore will continue
to serve as a non-employee director and member of the
Board.
Mr.
Cullimore is continuing to serve as CEO until his successor is
appointed and qualified. He had also previously served as President
of the Company. That position will not be filled due to a
realignment of the legacy Dynatronics modality and therapy products
operations completed in our third fiscal quarter. We announced in a
press release on February 21, 2018, that we had formed a new
Therapy Products Division (“TPD”) consisting of our
Utah and Tennessee operations. This division will continue to
develop, design, manufacture, and distribute innovative modalities
and other products that have distinguished us in the industry for
many years. We hired Brian D. Baker as President of the TPD
division in February 2018. With this new alignment, we are now
organized in three divisions, Hausmann, Bird & Cronin, and TPD,
with the Presidents of each division reporting directly to the CEO,
who now reports to the Chairman of the Board.
10
In
connection with the termination of Mr. Cullimore’s employment
upon the naming of a successor CEO (“Separation Date”), we and
Mr. Cullimore will enter into a Separation and Release Agreement
(“Separation
Agreement”). The Separation Agreement includes a
customary release by Mr. Cullimore of certain claims against us
that are or may be held by Mr. Cullimore and entitles him to
compensation pursuant to certain provision of his employment
agreement dated May 1, 2015, including (i) a severance payment
equal to $200,000, which represents 12 months of Mr.
Cullimore’s base salary in effect immediately prior to the
Separation Date, to be paid 50% on the 30th day following the
Separation Date and 50% in equal installments over the following
six months; (ii) payment of additional severance in the total
amount of $500,000, payable in quarterly installments over a
two-year period following the Separation Date, (iii) full
acceleration of vesting of Mr. Cullimore’s previously granted
and unvested restricted stock awards totaling 72,000 shares, (iv)
earned but unpaid bonuses, if any, with respect to the fiscal year
in which termination occurs, (v) transfer to him of the corporate
vehicle used by him at the Separation Date, and (vi) accrued and
unpaid salary through the Separation Date. As a result of Mr.
Cullimore’s anticipated departure, we recorded a charge of
approximately $900,000 in the third fiscal quarter ended March 31,
2018, to accrue the anticipated severance payments and related
expenses incurred under his employment agreement. This includes a
non-cash compensation expense of $140,000 in connection with the
acceleration of the vesting of the restricted stock awards. The
Company also paid withholding and related employer tax expense of
approximately $87,000 in cash during the quarter, which was settled
by withholding shares of stock from the awards having an equivalent
value and resulted in the delivery to Mr. Cullimore of
approximately 40,000 net shares of common stock.
On May
7, 2018, we implemented a reduction of our workforce by 10
employees to better align our resources with the needs of our
business and to focus on improving profitability. We expect to
incur a severance charge of approximately $140,000 in our fourth
quarter of fiscal 2018.
Business Outlook
Our
strategic objective is to accelerate growth both organically and by
acquisition. We acquired the assets of Hausmann Industries, Inc.
(“Hausmann”) in April 2017
and we acquired the assets of Bird & Cronin, Inc.
(“Bird &
Cronin”) in October 2017. We believe that these
acquisitions have enhanced our market position and improved our
operating results, positioning us for positive cash
flow.
The
debt and equity financings completed in connection with these
acquisitions strengthened our financial position and provided
operating capital. We believe our relationships with Prettybrook
Partners LLC and Bank of the West provide us with strategic and
financial resources that we expect will facilitate the execution of
our strategic objectives.
In the
past three years we have invested in executive talent and
infrastructure to organize and prepare for additional significant
growth. We have added executive talent across the organization
including sales, operations, finance, and information technology.
The management additions have bolstered our capacity to
successfully acquire and integrate additional acquisition targets
and to drive improvement in operating results in our current
operations.
Our
acquisition strategy is focused on acquiring complementary
businesses that meet our investment criteria and broaden our
product offerings. We continue to evaluate a variety of acquisition
opportunities.
Organic
growth is also an essential element of our strategic plan. Each
division has established strategic plans to stimulate growth
through expansion of distribution channels, product innovation or
specific initiatives with existing customer base. While organic
growth is an essential element of our strategic plan, so is working
to improve operating profitability. Our strategic plan for organic
growth will be tempered by our emphasis to improve operating
profits division by division.
As
delivery of healthcare in the United States progresses under
legislative reform, we believe there will be increasing demand for
rehabilitation and physical therapy products and services. There is
increasing pressure to find alternatives to the surgical suite. We
believe this will lead to more demand for physical therapy services
as a method for avoiding, preventing or delaying the need for
surgical interventions. There are orthopedic clinics now embedding
physical therapy and rehabilitation within their offering of
services in order to better address patient needs in a pre-surgical
as well as post-surgical environment. Third-party payers are also
demanding better outcomes and structuring reimbursement conventions
to reward practitioners who show identifiably improved outcomes.
Physical therapy and rehabilitation has always figured prominently
in the post-surgical environment to achieve the best outcomes
following orthopedic surgical procedures. With the new
reimbursement paradigms, the importance of physical therapy should
increase. The concept of “pre-habilitation” to avoid,
prevent or delay surgical interventions, combined with traditional
rehabilitation to achieve the best post-surgical outcomes provides
a positive environment for growth of physical therapy and
rehabilitation services and products in the future.
We also
service the athletic training market. The growth of college
athletics – particularly in the “Power Five”
conferences – is creating a demand for the best and most
impressive training facilities. We are working to tap into that
demand by offering our custom designed furniture and proprietary
products. The acquisition of Hausmann boosts this effort as its
ProTeam™ line of products addresses this same
market.
11
In
summary, based on our defined strategic initiatives we are focusing
our resources in the following areas:
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Joining
resources of the acquired entities to maximize cross-selling
opportunities without disrupting each entity’s current
channels of distribution;
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Exploring
operating synergies with acquired companies while respecting
established operating paradigms at each operation;
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Seeking
to improve distribution of our products through expansion of sales
channels;
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Working
to rationalize unprofitable product lines and improve operating
profits on profitable product lines;
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Improving
gross profit margins by, among other initiatives, increasing market
share of manufactured products with emphasis on our high margin
products;
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Maintaining
our position as a leader and innovator in our markets through the
promotion of new products;
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Exploring
strategic business acquisitions to leverage and complement our
competitive strengths, increase market reach, and allow us to
ultimately broaden our footprint in the physical medicine markets;
and
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Attending
appropriate investor conferences to better publicize our strategic
plans, attract new capital to support the business development
strategy and identify other acquisition targets.
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Results of Operations
The
following discussion and analysis of our financial condition and
results of operations for the three and nine months ended
March 31, 2018,
should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto appearing in
Part I, Item 1 of this report, and our Form 10-K for the fiscal
year ended June 30, 2017, which includes audited consolidated
financial statements for the year then ended. We have rounded many
numbers to the nearest thousand dollars in this analysis. These
numbers should be read as approximate. All inter-company
transactions have been eliminated. Results of operations for the
third fiscal quarter and nine months ended March 31, 2018, are not
necessarily indicative of the results that may be achieved for the
full fiscal year ending June 30, 2018. This quarterly report
includes the financial results of the newly acquired Bird &
Cronin division. In connection with that acquisition, we filed a
Current Report on Form 8-K on October 6, 2017, which includes
additional information about the transaction and about the business
of Bird & Cronin.
Net Sales
Net
sales increased $8,918,000, or 115.6%, to $16,634,000 for the
quarter ended March 31,
2018, compared to net sales of $7,716,000 for the quarter
ended March 31,
2017. The year-over-year increase in net sales for the
quarter ended March 31,
2018 was driven by our acquisitions of Hausmann in April
2017 and Bird & Cronin in October 2017, that together
contributed a combined $9,690,000 in net sales in the quarter ended
March 31, 2018. These increases were partially offset by a decline
of approximately $772,000, or 9.5%, in net sales at TPD, primarily
due to a lower volume of therapeutic modality and distributed
supplies sales.
For the
nine months ended March
31, 2018, net sales increased $22,921,000, or 93.2%, to
$47,513,000, compared to net sales of $24,592,000 for the
corresponding period ended March 31, 2017. The
year-over-year increase in net sales was attributable primarily to
the acquisitions of Hausmann and Bird & Cronin, which
contributed a combined $24,428,000 in net sales in the nine months
ended March 31,
2018. These increases were partially offset by a decline of
approximately $1,506,000, or 6.1%, in net sales at TPD, primarily
due to a lower volume of distributed capital and distributed
supplies sales.
Gross Profit
Gross profit for the quarter ended March 31, 2018 increased $2,590,000, or about 95.9%, to
$5,292,000, or 31.8% of net sales. By
comparison, gross profit for the quarter ended March 31, 2017 was $2,702,000, or 35.0% of net
sales. The year-over-year
increase in gross profit was attributable to the acquisitions of
Hausmann and Bird & Cronin that contributed a combined
$3,117,000 in gross profit in the quarter ended March 31, 2018. These
increases were partially offset by a decrease of approximately
$527,000 in gross profit from TPD, primarily attributable to lower
sales which accounted for approximately $296,000 in lower gross
profit and reduced gross margin percentage resulting in $231,000
lower gross profit. The year-over-year decrease in gross margin
percentage to 31.8% from 35.0% was due primarily to inclusion of
Hausmann sales, which had a lower gross margin percentage in the
quarter, as well as reduced gross margin at TPD, primarily
attributable to reduced margins on freight charged to customers and
a write-down of inventory due to obsolescence.
Gross profit for the nine months ended
March 31, 2018
increased $6,831,000, or about
79.7% to $15,401,000, or 32.4%, of net sales, compared to gross profit for the nine
months ended March 31,
2017 of $8,570,000, or
34.9% of net sales. The year-over-year increase in gross
profit was driven by the acquisitions of Hausmann and Bird &
Cronin that contributed a combined $7,883,000 in gross profit in
the nine months ended March 31, 2018. These
increases were partially offset by a decrease of approximately
$1,052,000 in gross profit at TPD, primarily attributable to lower
sales which accounted for approximately $477,000 in lower gross
profit and reduced gross margin percentage resulting in $575,000
lower gross profit. The year-over-year decrease in gross margin
percentage to 32.4% from 34.9% was due primarily to the inclusion
of Hausmann sales, which had a lower gross margin percentage as
well as reduced gross margin at TPD, primarily attributable to
reduced margins on freight charged to customers and a write-down of
inventory due to obsolescence.
12
Selling, General and Administrative Expenses
Selling, general
and administrative (“SG&A”) expenses
increased $3,060,000, or 97.0%, to $6,213,000 for the quarter ended
March 31, 2018,
compared to $3,153,000 for the quarter ended March 31, 2017. Selling
expenses in the quarter included $917,000 of expenses associated
with Hausmann and Bird & Cronin operations. This increase in
selling expenses compared to the prior year period was partially
offset by $167,000 in lower selling costs at TPD due primarily to
lower commissions on lower sales at the division during the
quarter. This resulted in selling expenses in the current quarter
accounting for $750,000 of the $3,060,000 increase in SG&A
expenses. General and administrative (“G&A”) expenses
represented $2,310,000 of the $3,060,000 increase in SG&A
expenses for the quarter ended March 31, 2018. Increases in
G&A expenses included $1,672,000 from operations at Hausmann
and Bird & Cronin, $840,000 in severance expense, and $140,000
in stock-based compensation, partially offset by $342,000 in
decreased G&A expenses primarily attributable to a reduction in
acquisition expenses compared to the prior year
period.
SG&A expenses
for the nine months ended March 31, 2018 increased
$6,377,000, or 72.7%, to $15,146,000, compared to $8,769,000 for
the nine months ended March 31, 2017. Selling expenses included $2,087,000
of selling expenses associated with Hausmann and Bird & Cronin
operations. This increase in selling expenses compared to the prior
year period was partially offset by $370,000 lower selling costs at
TPD due primarily to lower commissions on lower sales at the
division during the fiscal year. This resulted in selling expenses in
the current quarter accounting for $1,718,000 of the $6,377,000
increase in SG&A expenses. G&A expenses represented
$4,659,000 of the $6,377,000 increase in SG&A expenses for the
nine months ended March
31, 2018. Increases in G&A expenses included $3,935,000
from operations at Hausmann and Bird & Cronin, $840,000 in
severance expense and $140,000 in stock based compensation,
partially offset by $256,000 in decreased G&A expenses
primarily attributable to a reduction in acquisition expenses
compared to the prior year period.
Research and Development Expenses
Research and
development (“R&D”) expenses for
the quarter ended March
31, 2018 increased $11,000, or 5.1%, to $242,000 from
approximately $231,000 in the quarter ended March 31, 2017. R&D
expenses for the nine months ended March 31, 2018 increased
$229,000, or 27.9%, to $1,048,000 from approximately $819,000 in
the nine months ended March 31, 2017. The increase
in the nine months ended March 31, 2018 was driven by
$325,000 in costs incurred on a project which was abandoned during
the quarter ended December 31, 2017, offset by a reduction in other
R&D expenses of approximately $96,000 for the nine months ended
March 31,
2018.
Net Loss Before Income Tax
Pre-tax
loss for the quarter ended March 31, 2018 was
approximately $1,277,000, compared to a pre-tax loss of $755,000
for the quarter ended March 31, 2017. The $522,000
increase in pre-tax loss for the quarter was primarily attributable
to $2,590,000 higher gross profit, offset by $3,060,000 increased
SG&A expenses and $11,000 higher research and development
expenses. Pre-tax loss for the nine months ended March 31, 2018 was
approximately $1,064,000, compared to a pre-tax loss of $1,136,000
for the nine months ended March 31, 2017. The $72,000
improvement in pre-tax loss for the nine months was primarily
attributable to $6,831,000 higher gross profit, offset by
$6,377,000 in increased SG&A expenses and $229,000 higher
research and development expenses. These changes in both the
quarter and nine months ended March 31, 2018 compared to the prior
year were primarily attributable to the addition of the
operations of Hausmann and Bird & Cronin during the nine months
ended March 31, 2018, as well as the impact of (i) R&D costs of
$325,000 related to the project abandoned in the second quarter of
fiscal year 2018, (ii) severance expense of $840,000 in the third
quarter of fiscal year 2018, (iii) stock-based compensation expense
of $140,000 in the third quarter of fiscal year 2018, and (iv)
transaction-related costs of $314,000 in the nine months ended
March 31,
2018.
Income Tax Provision (Benefit)
On
December 22, 2017, the U.S. government enacted comprehensive tax
reform legislation commonly referred to as the Tax Cuts and Jobs
Act (“Tax
Act”). The Tax Act makes significant changes to the
U.S. Internal Revenue Code of 1986, as amended. Among other items,
the Tax Act permanently reduces the federal corporate tax rate to
21% effective January 1, 2018. As our fiscal year end falls on June
30, the statutory federal corporate tax rate for fiscal 2018 will
be prorated to 27.5%, with the statutory rate for fiscal 2019 and
beyond at 21%.
Income
tax provision was $0 for both the quarter and nine months ended
March 31, 2018, respectively. This compares to income tax provision
of $0 for the quarter and nine months ended March 31, 2017,
respectively. As a consequence of the Tax Act, we decreased the
valuation allowance on our net deferred income tax assets equal to
the one-time revaluation of our net deferred tax assets at the
lower tax rate.
Net Loss
Net
loss was $1,277,000 for the quarter ended March 31, 2018, compared
to a net loss of $755,000 for the quarter ended March 31, 2017. Net
loss was $1,064,000 for the nine months ended March 31, 2018,
compared to a net loss of $1,136,000 for the nine months ended
March 31, 2017. The reasons for the changes in net loss are the
same as those for pre-tax losses above under the heading
Net Loss Before Income
Tax.
13
Net Loss Attributable to Common Stockholders
Net
loss attributable to common stockholders increased $619,000 to
$1,468,000 for the quarter ended March 31, 2018, compared to
$849,000 for the quarter ended March 31, 2017. The $619,000
year-over-year increase in net loss attributable to common
stockholders for the quarter is due to approximately $97,000 of
additional preferred stock dividends associated with 390,000 shares
of Series A Preferred issued in December 2016 and 1,559,000 shares
of Series B Preferred issued in April 2017. The increase was also
attributable to a $522,000 increase in net loss in the quarter
ended March 31, 2018, compared to the same quarter of the prior
year. On a per share basis, net loss attributable to common
stockholders was $0.18 per share for the quarter ended March 31,
2018, compared to $0.28 per share for the quarter ended March 31,
2017.
Net
loss attributable to common stockholders increased $988,000 to
$2,771,000 ($0.45 per share) for the nine months ended March 31,
2018, compared to $1,783,000 ($0.61 per share) for the nine months
ended March 31, 2017. The increase in net loss attributable to
common stockholders is due to a reduction in net loss of
approximately $71,000 in the nine months ended March 31, 2018,
compared to the same period of the prior year, offset by $411,000
of additional preferred stock dividends associated with 390,000
shares of Series A Preferred issued in December 2016, 1,559,000
shares of Series B Preferred issued in April 2017 and 2,800,000
shares of Series C Preferred and 1,581,935 shares of Series D
Preferred issued in October 2017. The increase was also
attributable to an increase of approximately $454,000 in additional
deemed dividends and approximately $194,000 in accretion of
discounts associated with the Series C Preferred shares and
associated common stock purchase warrants issued in connection with
the Bird & Cronin Acquisition in comparison to deemed
dividends associated with Series A Preferred in December
2016.
The
deemed dividends reflect the difference between the underlying
common stock value of the issued preferred shares as if converted,
based on the closing price of our common stock on the date of the
issuance, less the amount of the purchase price assigned to the
preferred shares in an allocation of the purchase price between the
preferred shares and the common stock warrants that were issued
with the preferred shares.
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 the proceeds from the sales of our equity
securities. We expect to obtain capital for future acquisitions
using borrowings and proceeds from debt and equity offerings.
Working capital was $8,391,000 as of March 31, 2018, compared to
working capital of $5,834,000 as of June 30, 2017. The current
ratio was 1.6 to 1 as of March 31, 2018 and 1.8 to 1 as of June 30,
2017.
Cash and Cash Equivalents
Our
cash and cash equivalents position increased $1,243,000 to
$1,497,000 as of March 31, 2018, compared to $255,000 as of June
30, 2017. The primary sources of cash in the nine months ended
March 31, 2018, were (i) net proceeds of approximately $6,600,000
from the sale of our Series C Preferred and warrants in connection
with the acquisition of Bird & Cronin, (ii) net borrowings of
$4,371,000 under our line of credit, and (iii) approximately
$105,000 of net cash provided by operating activities.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
increased approximately $1,836,000, or 34.8%, to $7,117,000 as of
March 31, 2018, from $5,281,000 as of June 30, 2017. The increase
was primarily due to the acquisition of Bird & Cronin that
added $2,064,000 in accounts receivable as of March 31, 2018. 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 30 days of invoicing.
Inventories
Inventories, net of
reserves, increased $4,992,000 or 67.5%, to $12,389,000 as of March
31, 2018, compared to $7,398,000 as of June 30, 2017. The increase
was driven by the acquisition of Bird & Cronin, which added
approximately $4,853,000 of net inventory as of March 31, 2018.
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 $986,000 or 42.2%, to $3,320,000 as of
March 31, 2018, from $2,335,000 as of June 30, 2017. The increase
was driven primarily by the acquisition of Bird & Cronin, which
added approximately $860,000 of accounts payable at March 31,
2018.
Line of Credit
Our
line of credit balance increased $4,371,000 to $6,543,000 as of
March 31, 2018, compared to $2,172,000 as of June 30, 2017. The
increase was driven primarily by the use of approximately
$2,350,000 for the acquisition of Bird & Cronin on October 2,
2017 and an increase in our cash balance by approximately
$1,243,000 with the remaining increase being used to fund working
capital requirements.
14
Debt
Long-term debt,
excluding current installments, decreased $116,000 to $345,000 as
of March 31, 2018, compared to $462,000 as of June 30, 2017. Our
long-term debt is primarily comprised of the mortgage loan on our
office and manufacturing facility in Tennessee and also includes
loans related to equipment and a vehicle. The principal balance on
the mortgage loan was approximately $412,000 of which $275,000 is
classified as long-term debt, with monthly principal and interest
payments of $13,278 through January 2021.
In
conjunction with the sale and leaseback of our corporate
headquarters in August 2014, we entered into a 15-year building
lease that we treated as a capital lease valued at $3,800,000. We
are amortizing the capital lease asset on a straight line basis
over 15 years at approximately $21,000 per month, or $63,000 per
quarter. Accumulated amortization of the capital lease asset was
approximately $924,000 at March 31, 2018. The building sale
resulted in a profit of $2,300,000 that is treated as a deferred
gain that is amortized as an offset to amortization expense over
the life of the lease at $12,500 per month, or approximately
$37,500 per quarter. The balance of the deferred gain at March 31,
2018 was approximately $1,718,000. Lease payments, currently
approximately $29,000, are payable monthly and increase
approximately 2% per year over the life of the lease. The balance
of the capital lease liability was approximately $3,137,000 at
March 31, 2018. Imputed interest for the quarter ended March 31,
2018, was approximately $44,000.
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, 2018 and June 30, 2017, 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,
2018.
Inflation
Our
revenues and net loss have not been unusually affected by inflation
or price increases for raw materials and parts from
vendors.
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, 2018. No purchases have been made
under this plan since September 28, 2011.
Off-Balance Sheet Arrangements
As of
March 31, 2018, 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, 2017. There have been no material
changes to the critical accounting policies previously disclosed in
that report.
15
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
There
have been no material changes to information from that presented in
our Form 10-K for the year ended June 30, 2017.
Item 4. Controls and Procedures
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, 2018. 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, 2018.
Changes in Internal Control over Financial Reporting
On
October 2, 2017 we acquired the assets of Bird & Cronin. We
have established oversight, procedures, and controls over financial
reporting to accurately consolidate the financial statements of
Bird & Cronin and to properly reflect acquisition-related
accounting and disclosures. We are continuing to evaluate the
design of internal controls over financial reporting for the Bird
& Cronin subsidiary.
Except
as described above, there were no changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during the quarter ended March 31, 2018 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
16
PART II. OTHER INFORMATION
Item 6. Exhibits
(a)
Exhibits
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3.1(a)
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3.1(b)
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3.1(c)
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3.1(d)
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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
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10.6
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Computation of
Net Income per Share (included in Notes to Consolidated Financial
Statements)
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31.1
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31.2
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32.1
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101.INS
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XBRL
Instance Document
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101.CAL
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XBRL
Taxonomy Extension Schema Document
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101.SCH
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XBRL
Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document
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17
SIGNATURES
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.
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DYNATRONICS
CORPORATION
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Date:
May15, 2018
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By:
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/s/
Kelvyn H. Cullimore, Jr.
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Kelvyn
H. Cullimore, Jr.
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President
and Chief Executive Officer
(Principal
Executive Officer)
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Date:
May 15, 2018
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By:
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/s/
David A. Wirthlin
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David
A. Wirthlin
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Chief
Financial Officer(Principal Financial and Accounting
Officer)
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