DYNATRONICS CORP - Quarter Report: 2020 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, 2020

☐ 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.)

1200 Trapp Road, Eagan, Minnesota 55121

(Address of principal executive offices, Zip Code)

(801) 568-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, no par value per share	DYNT	The NASDAQ Capital Market

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 ☐	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 ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of November 5, 2020, there were 14,719,711 shares of the issuer’s common stock outstanding.

DYNATRONICS CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

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	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3. Quantitative and Qualitative Disclosures About Market Risk	13

Item 4. Controls and Procedures	13

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	13

Item 1A. Risk Factors	13

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	13

Item 3. Defaults Upon Senior Securities	13

Item 4. Mine Safety Disclosures	13

Item 5. Other Information	13

Item 6. Exhibits	14

Signatures	15

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

Assets	September 30, 2020	June 30, 2020
Current assets:
Cash and cash equivalents	$2,189,954	$2,215,665
Restricted cash	100,636	100,636
Trade accounts receivable, less allowance for doubtful accounts of $218,279 and $184,713 as of September 30, 2020 and June 30, 2020, respectively	5,609,481	4,893,861
Other receivables	1,008,436	2,080
Inventories, net	6,168,574	8,371,842
Prepaid expenses	816,285	490,624

Total current assets	15,893,366	16,074,708

Property and equipment, net	4,695,602	4,941,517
Operating lease assets	3,126,778	3,347,378
Intangible assets, net	5,501,895	5,682,991
Goodwill	7,116,614	7,116,614
Other assets	419,553	433,109

Total assets	$36,753,808	$37,596,317

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$3,257,805	$3,013,949
Accrued payroll and benefits expense	1,565,038	1,204,964
Accrued expenses	1,037,340	768,117
Warranty reserve	221,854	221,854
Line of credit	-	1,012,934
Current portion of long-term debt	501,265	108,713
Current portion of finance lease liability	320,676	316,103
Current portion of deferred gain	150,448	150,448
Current portion of operating lease liability	858,146	852,419
Income tax payable	30,945	29,196

Total current liabilities	7,943,517	7,678,697

Long-term debt, net of current portion	3,060,706	3,496,222
Finance lease liability, net of current portion	2,515,374	2,597,525
Deferred gain, net of current portion	1,191,046	1,228,658
Operating lease liability, net of current portion	2,280,069	2,505,232
Other liabilities	197,449	194,102

Total liabilities	17,188,161	17,700,436
Commitments and contingencies

Stockholders' equity:
Preferred stock, no par value: Authorized 50,000,000 shares; 3,681,000 shares and 3,681,000 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively	8,770,798	8,770,798
Common stock, no par value: Authorized 100,000,000 shares; 14,096,252 shares and 13,803,855 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively	27,716,107	27,474,411
Accumulated deficit	(16,921,258)	(16,349,328)

Total stockholders' equity	19,565,647	19,895,881

Total liabilities and stockholders' equity	$36,753,808	$37,596,317

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended
	September 30,
	2020	2019

Net sales	$12,132,768	$16,389,549
Cost of sales	8,230,815	11,235,542
Gross profit	3,901,953	5,154,007

Selling, general, and administrative expenses	4,245,627	4,924,692
Operating (loss) income	(343,674)	229,315

Other expense:
Interest expense, net	(39,943)	(130,992)
Other income, net	5,913	515
Net other expense	(34,030)	(130,477)

(Loss) income before income taxes	(377,704)	98,838

Income tax (provision) benefit	-	-

Net (loss) income	(377,704)	98,838

Preferred stock dividend, in common stock, issued or to be issued	(194,226)	(166,904)

Net loss attributable to common stockholders	$(571,930)	$(68,066)

Net loss per common share
Basic and diluted	$(0.04)	$(0.01)

Weighted-average common shares outstanding:
Basic and diluted	14,080,361	8,576,961

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Consolidated Statements of Stockholders' Equity
(Unaudited)

						Total
	Common stock		Preferred stock		Accumulated	stockholders'
	Shares	Amount	Shares	Amount	deficit	equity
Balance at June 30, 2019	8,417,793	$21,320,106	4,899,000	$11,641,816	$(12,206,213)	$20,755,709

Stock-based compensation	135,244	129,793	-	-	-	129,793

Preferred stock dividend, in common stock, issued or to be issued	126,194	166,904	-	-	(166,904)	-

Net income	-	-	-	-	98,838	98,838

Balance at September 30, 2019	8,679,231	21,616,803	4,899,000	11,641,816	(12,274,279)	20,984,340

Stock-based compensation	5,446	58,238	-	-	-	58,238

Preferred stock dividend, in common stock, issued or to be issued	165,251	202,249	-	-	(202,249)	-

Preferred stock converted to common stock	760,000	1,791,320	(760,000)	(1,791,320)	-	-

Preferred stock beneficial conversion and accretion of discount	-	-	-	108,539	-	108,539

Dividend of beneficial conversion and accretion of discount	-	-	-	(108,539)	-	(108,539)

Net loss	-	-	-	-	(137,663)	(137,663)

Balance at December 31, 2019	9,609,928	23,668,610	4,139,000	9,850,496	(12,614,191)	20,904,915

Stock-based compensation	96,195	45,343	-	-	-	45,343

Preferred stock dividend, in common stock, issued or to be issued	243,652	168,356	-	-	(168,356)	-

Preferred stock converted to common stock	458,000	1,079,698	(458,000)	(1,079,698)	-	-

Preferred stock beneficial conversion and accretion of discount	-	-	-	65,219	-	65,219

Dividend of beneficial conversion and accretion of discount	-	-	-	(65,219)	-	(65,219)

Net loss	-	-	-	-	(1,091,202)	(1,091,202)

Balance at March 31, 2020	10,407,775	24,962,007	3,681,000	8,770,798	(13,873,749)	19,859,056

Stock-based compensation	-	45,342	-	-	-	45,342

Preferred stock dividend, in common stock, issued or to be issued	195,495	180,123	-	-	(180,123)	-

Issuance of common stock, net of issuance costs of $238,168	3,200,585	2,286,939	-	-	-	2,286,939

Net loss	-	-	-	-	(2,295,456)	(2,295,456)

Balance at June 30, 2020	13,803,855	27,474,411	3,681,000	8,770,798	(16,349,328)	19,895,881

Stock-based compensation	84,661	47,470	-	-	-	47,470

Preferred stock dividend, in common stock, issued or to be issued	207,736	194,226	-	-	(194,226)	-

Net loss	-	-	-	-	(377,704)	(377,704)

Balance at September 30, 2020	14,096,252	$27,716,107	3,681,000	$8,770,798	$(16,921,258)	$19,565,647

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Three Months Ended
	September 30,
	2020	2019
Cash flows from operating activities:
Net (loss) income	$(377,704)	$98,838
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	244,353	246,890
Amortization of intangible assets	181,096	181,095
Amortization of other assets	6,402	11,218
Loss on sale of property and equipment	(6,240)	-
Stock-based compensation	47,470	129,793
Change in allowance for doubtful accounts receivable	33,566	-
Change in allowance for inventory obsolescence	(76,246)	(1,740)
Amortization deferred gain on sale/leaseback	(37,612)	(37,611)
Change in operating assets and liabilities:
Trade accounts receivable	(749,186)	191,301
Inventories	1,299,498	399,279
Prepaid expenses and other receivables	(327,001)	(10,900)
Other assets	7,154	(4,268)
Income tax payable	1,749	(18,100)
Accounts payable, accrued expenses, and other current liabilities	876,500	806,846

Net cash provided by operating activities	1,123,799	1,992,641

Cash flows from investing activities:
Purchase of property and equipment	(16,034)	(65,969)

Net cash used in investing activities	(16,034)	(65,969)

Cash flows from financing activities:
Principal payments on long-term debt	(42,964)	(46,617)
Principal payments on finance lease liability	(77,578)	(72,198)
Payment of acquisition earn-out liability and holdbacks	-	(125,000)
Net change in line of credit	(1,012,934)	(1,463,733)

Net cash used in financing activities	(1,133,476)	(1,707,548)

Net change in cash and cash equivalents and restricted cash	(25,711)	219,124

Cash and cash equivalents and restricted cash at beginning of the period	2,316,301	256,030

Cash and cash equivalents and restricted cash at end of the period	$2,290,590	$475,154

Supplemental disclosure of cash flow information:
Cash paid for interest	$39,930	$141,424
Supplemental disclosure of non-cash investing and financing activities:
Preferred stock dividend, in common stock, issued or to be issued	194,227	166,904
Finance lease obligations incurred to obtain ROU assets	-	3,086

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2020

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 financial statements (the “Condensed Consolidated Financial Statements”) have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. As such, these Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (the “Annual Report”) filed with the SEC on September 24, 2020. The Condensed Consolidated Balance Sheet at June 30, 2020, has been derived from the Annual Report.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Basis of Presentation and Summary of Accounting Policies, of the Notes to Financial Statements included in the Company’s Annual Report. In the opinion of management, the Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2020 and its results of operations and its cash flows for the periods presented. 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 Company’s fiscal year begins on July 1 and ends on June 30 and references made to “fiscal year 2021” and “fiscal year 2020” refer to the Company’s fiscal year ending June 30, 2021 and the fiscal year ended June 30, 2020, respectively.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented.

The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company is currently assessing the impact of this standard on its financial condition and results of operations.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. The guidance is effective for the Company in the first quarter of fiscal year 2025 and early adoption is permitted. The Company is evaluating the impact of adoption of this guidance will have on its consolidated financial statements.

Note 2. 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 income 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.

All outstanding options, warrants and convertible preferred stock for common shares are not included in the computation of diluted net loss per common share because they are anti-dilutive, which for the three months ended September 30, 2020, and 2019, totaled 11,777,500 and 11,887,083, respectively.

Note 3. Convertible Preferred Stock

As of September 30, 2020, the Company had issued and outstanding a total of 1,992,000 shares of Series A 8% Convertible Preferred Stock (“Series A Preferred”) and 1,459,000 shares of Series B Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred and Series B Preferred are convertible into a total of 3,451,000 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 its 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, 2020, there were also issued and outstanding 230,000 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. In November 2020, the Company issued 330,000 shares of common stock upon conversion of 230,000 shares of Series C Preferred and 100,000 shares of Series B Preferred.

In October 2020, the Company paid approximately $194,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that accrued during the three months ended September 30, 2020, by issuing 276,519 shares of common stock.

Note 4. Comprehensive Income

For the three months ended September 30, 2020 and 2019, comprehensive income was equal to the net income as presented in the accompanying condensed consolidated statements of operations.

Note 5. Inventories

Inventories consisted of the following:

	September 30, 2020	June 30, 2020
Raw materials	$3,042,377	$4,798,489
Work in process	508,466	427,744
Finished goods	3,109,568	3,713,692
Inventory obsolescence reserve	(491,837)	(568,083)
	$6,168,574	$8,371,842

Note 6. Related-Party Transactions

The Company leases office, manufacturing and warehouse facilities in 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 $264,703 and $261,666 for the three months ended September 30, 2020 and 2019, respectively.

Note 7. Line of Credit

Borrowings on the Line of Credit were $0 and $1,012,934 as of September 30, 2020 and June 30, 2020, respectively. As of September 30, 2020, there was approximately $5,750,000 available to borrow.

Note 8. Revenue

As of September 30, 2020 and June 30, 2020, the rebate liability was $284,187 and $247,388, respectively. The rebate liability is included in accrued expenses in the accompanying condensed consolidated balance sheets.

As of September 30, 2020 and June 30, 2020, the allowance for sales discounts was $14,500 and $8,000, respectively. The allowance for sales discounts is included in trade accounts receivable, less allowance for doubtful accounts in the accompanying condensed consolidated balance sheets.

The following table disaggregates revenue by major product category for the three months ended September 30:

	2020	2019
Orthopedic Soft Bracing Products	$5,559,918	$6,279,026
Physical Therapy and Rehabilitation Products	6,497,230	10,037,720
Other	75,620	72,803
	$12,132,768	$16,389,549

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, including the disclosures contained in Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, 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 (the “Exchange Act”). These forward-looking statements include, but are not limited to: any projections of net sales, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements can be identified by their use of such words as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate” and similar references to future periods.

We have based our forward-looking statements on management’s current expectations and assumptions about future events and trends affecting our business and industry that are subject to risks and uncertainties. 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. These risks and uncertainties include, but are not limited to, the uncertainty regarding the impact or duration of the Novel Coronavirus Disease 2019 ("COVID-19") virus pandemic that is adversely affecting communities and businesses globally, including ours, as well as those factors described in the section “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC, as well as in our other public filings with the SEC. 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 contained in this report are made as of the date of this report and we assume no obligation to update them after the date hereof to revise or conform such statements to actual results or to changes in our opinions or expectations. 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.

The terms “we,” “us,” “Dynatronics,” or the “Company” refer collectively to Dynatronics Corporation and its wholly-owned subsidiaries, unless otherwise stated.

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, 2020, and our other filings with the SEC, including our quarterly and current reports that we have filed since June 30, 2020 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 2021 refers to the year ending June 30, 2021. This report covers the three months ended September 30, 2020. Results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2021.

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 $4,257,000, or 26.0%, to $12,133,000 for the quarter ended September 30, 2020, compared to net sales of $16,390,000 for the quarter ended September 30, 2019. The year-over-year decrease is primarily due to COVID-19 precautions and associated deferral on elective procedures which reduced demand for our products.

Gross Profit

Gross profit for the quarter ended September 30, 2020 decreased $1,252,000, or about 24.3%, to $3,902,000, or 32.2% of net sales. By comparison, gross profit for the quarter ended September 30, 2019 was $5,154,000, or 31.4% of net sales. The year-over-year decrease in gross profit was primarily attributable to lower sales which reduced gross profit. The year-over-year increase in gross margin percentage to 32.2% from 31.4% was due primarily to changes in the mix of sales between our major product categories.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses decreased $679,000, or 13.8%, to $4,246,000 for the quarter ended September 30, 2020, compared to $4,925,000 for the quarter ended September 30, 2019. Selling expenses decreased $577,000 compared to the prior year period, due primarily to lower commission expense on lower sales and decreased sales management salaries. General and administrative ("G&A") expenses decreased $102,000 compared to the prior-year period, driven primarily by a decrease in payroll and benefit costs as a result of headcount reductions.

Net (Loss) Income Before Income Tax

Pre-tax loss for the quarter ended September 30, 2020 was $378,000 compared to pre-tax income of $99,000 for the quarter ended September 30, 2019. The $477,000 decline in pre-tax income was attributable to a decrease of $1,252,000 in gross profit partially offset by a decrease of $679,000 in SG&A and a decrease of $96,000 in other expense. The decrease in other expense is primarily due to a decrease in interest expense as a result of lower average borrowings on our line of credit.

Income Tax Provision (Benefit)

Income tax provision was $0 for both quarters ended September 30, 2020 and 2019. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information.

Net (Loss) Income

Net loss was $378,000 for the quarter ended September 30, 2020, compared to net income of $99,000 for the quarter ended September 30, 2019. The reasons for the changes in net (loss) income are the same as explained above under the heading Net (Loss) Income Before Income Tax.

Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders increased $504,000 to $572,000 for the quarter ended September 30, 2020, compared to $68,000 for the quarter ended September 30, 2019. The increase in net loss attributable to common stockholders for the quarter is due primarily to a $477,000 increase in net loss. On a per share basis, net income attributable to common stockholders was $(0.04) per share for the quarter ended September 30, 2020, compared to $(0.01) per share for the quarter ended September 30, 2019.

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. As of September 30, 2020, we had $2,291,000 in cash and cash equivalents and restricted cash, compared to $2,316,000 as of June 30, 2020. During the quarter ended September 30, 2020, we had positive cash flows from operating activities.

Working capital was $7,950,000 as of September 30, 2020, compared to working capital of $8,396,000 as of June 30, 2020. The current ratio was 2.0 to 1 as of September 30, 2020 and 2.1 to 1 as of June 30, 2020. Current assets were 43.2% of total assets as of September 30, 2020, and 42.8% of total assets as of June 30, 2020.

We believe that our cash generated from operations, current capital resources including loan and equity proceeds, and available credit provide sufficient liquidity to fund operations for the next 12 months. However, the continuing effects of the COVID-19 pandemic could have an adverse effect on our liquidity and cash and we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

In March 2020, we entered into an equity distribution agreement with Canaccord Genuity LLC and Roth Capital Partners LLC, pursuant to which we arranged to offer and sell shares of our common stock in an at-the-market offering (“ATM”) under a registration statement previously filed by us on Form S-3 with the Securities and Exchange Commission. On March 13, 2020, we filed a Prospectus Supplement amending the registration statement and commenced the ATM. Under the terms of the equity distribution agreement, we may sell shares of our common stock in an aggregate amount of up to $10,000,000, with Canaccord Genuity LLC and Roth Capital Partners LLC acting as our sales agents at the market prices prevailing on The Nasdaq Capital Market at the time of the sale of such shares. We will pay Canaccord Genuity LLC and Roth Capital Partners, LLC a fixed commission rate equal to 3.0% of the gross sale price per share of common stock sold.

On April 29, 2020, we entered into a promissory note (the “Note”) with Bank of the West to evidence a loan to the Company in the amount of $3,477,412 under the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (“SBA”).

In accordance with the requirements of the CARES Act, we have used the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, mortgage interest, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA. Interest will accrue on the outstanding balance of the Note at a rate of 1.00% per annum. We intend to apply for forgiveness of all amounts due under the Note, in an amount equal to the sum of qualified expenses under the PPP incurred during the 24 weeks following initial disbursement. Notwithstanding our expected eligibility to apply for forgiveness, no assurance can be given that we will obtain forgiveness of all or any portion of amounts due under the Note.

Subject to any forgiveness granted under the PPP, the Note is scheduled to mature two years from the date of initial disbursement under the Note and is payable in monthly installments beginning 10 months after the completion of the 24 week covered period. The Note may be prepaid at any time prior to maturity without penalty. The Note contains customary provisions related to events of default, including, among others, failure to make payments, bankruptcy, breaches of representations, significant changes in ownership, and material adverse effects. The occurrence of an event of default may result in the collection of all amounts owing under the Note, and/or filing suit and obtaining judgment against us. Our obligations under the Note are not secured by any collateral or personal guarantees.

Cash and Cash Equivalents

Our cash and cash equivalents and restricted cash position decreased $25,000 to $2,291,000 as of September 30, 2020, compared to $2,316,000 as of June 30, 2020. The primary source of cash in the three months ended September 30, 2020, was approximately $1,124,000 of net cash provided by operating activities.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, increased approximately $715,000, or 14.6%, to $5,609,000 as of September 30, 2020, from $4,894,000 as of June 30, 2020. The increase was driven primarily by an increase in sales compared to the quarter ended June 30, 2020. 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 $2,203,000 or 26.3%, to $6,169,000 as of September 30, 2020, compared to $8,372,000 as of June 30, 2020. The decrease was primarily due to steps taken to right-size incoming material purchases and adjust inventory management as part of our working capital plans in response to the impacts of COVID-19. In addition, as of September 30, 2020, other receivables includes $980,000 due from our contract manufacturer for raw materials components provided for use in the production of our products. 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 $244,000 or 8.1%, to $3,258,000 as of September 30, 2020, from $3,014,000 as of June 30, 2020. The increase was driven primarily by an increase in inventory purchases and timing of payments.

Line of Credit

Our line of credit balance decreased $1,013,000 to $0 as of September 30, 2020, compared to $1,013,000 as of June 30, 2020. The decrease was driven primarily by positive cash flows from operating activities. As of September 30, 2020, there was approximately $5,750,000 available to borrow.

Debt

Long-term debt decreased approximately $43,000 to approximately $3,562,000 as of September 30, 2020, compared to approximately $3,605,000 as of June 30, 2020. Our long-term debt is primarily comprised of the PPP Note, 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 PPP Note is $3,477,412, of which, $433,000 is classified as current debt at September 30, 2020. The principal balance on the mortgage loan is approximately $52,000, all of which is classified as current portion of long-term debt at September 30, 2020, with monthly principal and interest payments of $13,000.

Finance Lease Liability

Finance lease liability as of September 30, 2020 and June 30, 2020 totaled approximately $2,836,000 and $2,914,000, respectively. Our finance lease liability consists primarily of our Utah building lease. In conjunction with the sale and leaseback of our Utah building in August 2014, we entered into a 15-year lease, classified as a finance lease, originally valued at $3,800,000. The building lease asset is amortized on a straight-line basis over 15 years at approximately $252,000 per year. Total accumulated amortization related to the leased building is approximately $1,554,000 at September 30, 2020. The sale generated a profit of $2,300,000, which is being recognized straight-line over the life of the lease at approximately $150,000 per year as an offset to amortization expense. The balance of the deferred gain as of September 30, 2020 is $1,341,000. Lease payments, currently approximately $30,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. Imputed interest for the three months ended September 30, 2020 was approximately $37,000. In addition to the Utah building, we have certain equipment leases that we have determined are finance leases.

Operating Lease Liability

Operating lease liability as of September 30, 2020 and June 30, 2020 totaled approximately $3,138,000 and $3,358,000, respectively. Our operating lease liability consists primarily of building leases for office, manufacturing, warehouse and storage space.

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, 2020 and June 30, 2020, 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, 2020.

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, 2020. No purchases have been made under this plan since September 2011.

Off-Balance Sheet Arrangements

As of September 30, 2020, 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, 2020. There have been no material changes to the critical accounting policies previously disclosed in that report.

I tem 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information presented for the year ended June 30, 2020.

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, 2020. 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, 2020.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, 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, 2020 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 and principal financial officer

32.1	Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) of principal executive officer and principal financial 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, 2020	By:	/s/ John A. Krier
		John A. Krier
		President and Chief Executive Officer (Principal Executive Officer)