DYNATRONICS CORP - Quarter Report: 2019 September (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 September 30, 2019

 

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)

 

 

Utah	87-0398434
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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 every Interactive Data File required to be submitted 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 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.

 

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☑
	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 November 6, 2019, there were 8,849,928 shares of the registrant’s common stock outstanding.

 

 

DYNATRONICS CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 

 

 

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets (Unaudited)	1
Condensed Consolidated Statements of Operations (Unaudited)	2
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	3
Condensed Consolidated Statements of Cash Flows (Unaudited)	4
Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Cautionary Note Regarding Forward-Looking Statements	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk	13
Item 4. Controls and Procedures	14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	14
Item 1A. Risk Factors	14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Mine Safety Disclosures	14
Item 5. Other Information	14
Item 6. Exhibits	14
Signatures	15

 

 

 

DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2019

 

 

Note 1. Presentation and Summary of Significant Accounting Policies

 

Business

Dynatronics Corporation (“Company,” “Dynatronics”) is a leading medical device company committed to providing high-quality restorative products designed to accelerate optimal health. The Company designs, manufactures, and sells a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through its distribution channels, Dynatronics markets and sells to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated balance sheets as of September 30, 2019, and June 30, 2019, condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, and condensed consolidated statements of stockholders' equity and cash flows (“Financial Statements”) of Dynatronics for the three months ended September 30, 2019 and 2018, should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended June 30, 2019 included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 25, 2019. In the opinion of management, the accompanying Financial Statements have been prepared by the Company in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of the Company's management, the Financial Statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state our financial position, results of operations, and cash flows. The September 30, 2019 condensed consolidated balance sheet was derived from audited financial statements, but does not include all GAAP disclosures. The results of operations for the first three months of the fiscal year are not necessarily indicative of results for the full year or any future periods.

 

The preparation of these unaudited condensed consolidated financial statements requires our management to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.

 

 

 

 

Note 2. Acquisitions

 

 

Note 3. Net Income per Common Share

 

Net income 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 income per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

 

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

 

 

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

 

	2019	2018
Basic weighted-average number of common shares outstanding during the period	8,679,231	8,160,431
Weighted-average number of dilutive potential common shares outstanding during the period	-	240,393
Diluted weighted-average number of common and potential common shares outstanding during the period	8,679,231	8,400,824

 

Certain outstanding options, warrants and convertible preferred stock for common shares are not included in the computation of diluted net income per common share because they were anti-dilutive, which for the three months ended September 30, 2019, and 2018, totaled 11,887,083 and 2,776,106, respectively.

 

 

Note 4. Convertible Preferred Stock and Common Stock Warrants

 

 As of September 30, 2019, the Company had issued and outstanding 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 8% Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred and Series B Preferred are convertible into a total of 3,459,000 shares of common stock. Dividends payable on these preferred shares accrue at the rate of 8% per year and are payable quarterly in stock or cash at the option of the Company. The Company generally pays the dividends on the preferred stock by issuing shares of our common stock. The formula for paying these dividends using common stock in lieu of cash can change the effective yield on the dividend to more or less than 8% depending on the market price of the common stock at the time of issuance. As of September 30, 2019, there were also issued and outstanding 1,440,000 shares of Series C Non-Voting Convertible Preferred Stock (“Series C Preferred”). The Series C Preferred shares are non-voting, do not receive dividends, and have no liquidation preferences or redemption rights. 

 

Note 5. Comprehensive Income

 

For the three months ended September 30, 2019 and 2018, comprehensive income was equal to the net income as presented in the accompanying condensed consolidated statements of operations.

 

Note 6. Inventories

 

Inventories consisted of the following:

 

	September 30, 2019	June 30, 2019
Raw materials	$5,798,849	$5,830,140
Work in process	840,147	706,128
Finished goods	4,705,477	5,129,806
Inventory obsolescence reserve	(214,491)	(138,553)
	$11,129,982	$11,527,521

 

 

Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Such assets are classified as ROU assets with a corresponding lease liability.

  

Note 8. Line of Credit

 

Borrowings on the Line of Credit were $5,076,906 and $ 6,540,639 as of September 30, 2019 and June 30, 2019, respectively. As of September 30, 2019, there was approximately $2,593,000 available to borrow.

 

Note 9. Accrued Payroll and Benefits Expense

 

As of September 30, 2019 and June 30, 2019, the accrued payroll and benefits expense balance included $167,308 and $310,903, respectively, of accrued severance expense. The Company recognized $68,750 and $103,858 in severance expense during the three months ended September 30, 2019 and 2018, respectively. Severance expense is included in selling, general, and administrative expenses.

 

Note 10.  Revenue

 

As of September 30, 2019 and June 30, 2019, the allowance for sales discounts was $14,500. The allowance for sales discounts is included in trade accounts receivable, less allowance for doubtful accounts in the accompanying condensed consolidated balance sheets.

 

 

Note 11. Subsequent Events

 

In October 2019, the Company paid approximately $167,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that accrued during the three months ended September 30, 2019, by issuing 165,251 shares of common stock.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, with a narrative from the perspective of management. You should also consider this information with the information included in our Annual Report on Form 10-K for the year ended June 30, 2019, and our other filings with the SEC, including our quarterly and current reports that we have filed since June 30, 2019 through the date of this report. In the following MD&A, we have rounded many numbers to the nearest one thousand dollars. These numbers should be read as approximate. All inter-company transactions have been eliminated. Our fiscal year ends on June 30. For example, reference to fiscal year 2020 refers to the year ending June 30, 2020. This report covers the three months ended September 30, 2019. Results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2020. 

 

Overview

 

Dynatronics designs, manufactures, and sells a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through our distribution channels, we market and sell to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.

 

 

Results of Operations

Net Sales

 

Net sales decreased $676,000, or 4.0%, to $16,390,000 for the quarter ended September 30, 2019, compared to net sales of $17,066,000 for the quarter ended September 30, 2018. The year-over-year decrease in net sales was driven by a reduction in sales of physical therapy and rehabilitation products primarily in our direct channel.

 

Gross Profit

 

Gross profit for the quarter ended September 30, 2019 decreased $393,000, or about 7.1%, to $5,154,000, or 31.4% of net sales. By comparison, gross profit for the quarter ended September 30, 2018 was $5,547,000, or 32.5% of net sales. The year-over-year decrease in gross profit was attributable to lower sales of physical therapy and rehabilitation products, which accounted for approximately $220,000 in lower gross profit, and by reduced gross margin which accounted for approximately $173,000 in lower gross profit. The year-over-year decrease in gross margin percentage to 31.4% from 32.5% was due primarily to lower sales of our physical therapy and rehabilitation equipment and to a higher portion of sales being through our dealer channels at lower pricing and lower gross margin, with a corresponding decrease in selling costs.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses decreased $572,000, or 10.4%, to $4,925,000 for the quarter ended September 30, 2019, compared to $5,497,000 for the quarter ended September 30, 2018. Selling expenses represented $302,000 of the decrease in SG&A expenses due primarily to lower commission expense on lower sales and lower sales management salaries during the quarter. General and administrative (“G&A”) expenses represented $270,000 of the decrease in SG&A expenses. The primary components of the decrease in G&A expenses included: (1) a decrease of $39,000 in severance expense; and (2) decreases totaling $231,000 in other G&A expenses.

Net Income Before Income Tax

 

Pre-tax income for the quarter ended September 30, 2019 was $99,000 compared to $316,000 for the quarter ended September 30, 2018. The $217,000 decline in pre-tax income was attributable to the impact of (1) $393,000 decrease in gross profit and (2) $396,000 decrease in other income primarily due to the $375,000 change in the fair value of the earn-out payment related to the Bird & Cronin acquisition recognized in the period ended September 30, 2018 offset by the $572,000 decrease in SG&A expenses.

 

Income Tax Provision (Benefit)

 

Income tax provision was $0 for both quarters ended September 30, 2019 and 2018. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information. 

 

Net Income

 

Net income was $99,000 for the quarter ended September 30, 2019, compared to $316,000 for the quarter ended September 30, 2018. The reasons for the changes in net income are the same as explained above under the heading Net Income Before Income Tax.

 

 

Net Income Attributable to Common Stockholders

 

Net income attributable to common stockholders decreased $197,000 to net loss of $68,000 for the quarter ended September 30, 2019, compared to net income of $129,000 for the quarter ended September 30, 2018. The decrease in net income attributable to common stockholders for the quarter is due primarily to a $217,000 decrease in net income. On a per share basis, net income attributable to common stockholders was $(0.01) per share for the quarter ended September 30, 2019, compared to $0.02 per share for the quarter ended September 30, 2018.

Liquidity and Capital Resources

 

We have historically financed operations through cash from operating activities, available cash reserves, borrowings under a line of credit facility (see, Line of Credit, below) and proceeds from the sale of our equity securities. During the quarter ended September 30, 2019, we had positive cash flows from operating activities. We believe that our cash generated from operations, current capital resources, and available credit provide sufficient liquidity to fund operations for the next 12 months.

 

Working capital was $5,172,000 as of September 30, 2019, compared to working capital of $5,638,000 as of June 30, 2019. The current ratio was 1.4 to 1 as of September 30, 2019 and 1.4 to 1 as of June 30, 2019.

 

Cash and Cash Equivalents

 

Our cash and cash equivalents and restricted cash position increased $219,000 to $475,000 as of September 30, 2019, compared to $256,000 as of June 30, 2019. The primary source of cash in the three months ended September 30, 2019, was approximately $1,993,000 of net cash provided by operating activities.

 

Accounts Receivable

 

Trade accounts receivable, net of allowance for doubtful accounts, decreased approximately $195,000, or 2.6%, to $7,300,000 as of September 30, 2019, from $7,495,000 as of June 30, 2019. The decrease was driven primarily by a decrease in the time to collect receivables. Trade accounts receivable represents amounts due from our customers including dealers and distributors that purchase our products for redistribution, medical practitioners, clinics, hospitals, colleges, universities and sports teams. We believe that our estimate of the allowance for doubtful accounts is adequate based on our historical experience and relationships with our customers. Accounts receivable are generally collected within approximately 40 days of invoicing.

 

Inventories

 

Inventories, net of reserves, decreased $398,000 or 3.4%, to $11,130,000 as of September 30, 2019, compared to $11,528,000 as of June 30, 2019. 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 $933,000 or 23.4%, to $4,923,000 as of September 30, 2019, from $3,990,000 as of June 30, 2019. The increase was driven primarily by the timing of international purchases and an increase in the average time to pay suppliers.

 

Line of Credit

 

Our line of credit balance decreased $1,464,000 to $5,077,000 as of September 30, 2019, compared to $6,541,000 as of June 30, 2019. The decrease was driven primarily by positive cash flows from operating activities. As of September 30, 2019, there was approximately $2,593,000 available to borrow.

 

 

Debt

 

  Long-term debt decreased approximately $47,000 to approximately $257,000 as of September 30, 2019, compared to approximately $303,000 as of June 30, 2019. Our long-term debt is primarily comprised of the mortgage loan on our office and manufacturing facility in Tennessee maturing in 2021, and also includes loans related to equipment and a vehicle. The principal balance on the mortgage loan is approximately $203,000, of which $52,000 is classified as long-term debt, with monthly principal and interest payments of $13,000.

 

 

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 September 30, 2019 and June 30, 2019, we recorded a full valuation allowance against our net deferred income tax assets. This resulted in no reported income tax expense associated with the operating profit reported during the three months ended September 30, 2019.

 

Stock Repurchase Plans

 

We have a stock repurchase plan available to us at the discretion of the Board of Directors. Approximately $449,000 remained of this authorization as of September 30, 2019. No purchases have been made under this plan since September 2011.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019, 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, 2019. There have been no material changes to the critical accounting policies previously disclosed in that report.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes from the information presented for the year ended June 30, 2019.

 

 

Item 4. Controls and Procedures

 

Evaluation of 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 September 30, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

None.

Item 1A.

The risk factors described in our Annual Report on Form 10-K for the year ended June 30, 2019 have not materially changed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

 

Item 6. Exhibits

 

(a) Exhibits

 

 

31.1	Certification under Rule 13a-14(a)/15d-14(a) of principal executive officer
31.2	Certification under Rule 13a-14(a)/15d-14(a) of principal financial officer and principal accounting officer
32.1	Certificate pursuant to section 18 U.S.C. Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 of principal executive officer
32.2	Certificate pursuant to section 18 U.S.C. Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 of principal financial officer and principal accounting officer
101.INS	XBRL Instance Document
101.CAL	XBRL Taxonomy Extension Schema Document
101.SCH	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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.

 

	DYNATRONICS CORPORATION
Date: November 12, 2019	By:	/s/ Brian D. Baker
		Brian D. Baker
		President and Chief Executive Officer (Principal Executive Officer)

 

Date: November 12, 2019	By:	/s/ David A. Wirthlin
		David A. Wirthlin
		Chief Financial Officer (Principal Financial and Accounting Officer)