DYNATRONICS CORP - Quarter Report: 2020 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, 2020

 

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.)

1200 Trapp Road, Eagan, Minnesota 55121

(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 ☐	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 May 6, 2020, there were 13,803,855 shares of the issuer’s common stock outstanding.

 

 

DYNATRONICS CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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	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	15
Item 3. Defaults Upon Senior Securities	15
Item 4. Mine Safety Disclosures	15
Item 5. Other Information	15
Item 6. Exhibits	15
Signatures	16

 

 

 

 

DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 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, 2019 (the “Annual Report”) filed with the SEC on September 25, 2019. The Condensed Consolidated Balance Sheet at June 30, 2019, 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 March 31, 2020 and its results of operations and its cash flows for the periods presented. The results of operations for the first nine 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 2020” and “fiscal year 2019” refer to the Company’s fiscal year ending June 30, 2020 and the fiscal year ended June 30, 2019, respectively.

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.

 

 

 

 

Note 2. Acquisitions

 

 

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 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 March 31, 2020, and 2019, totaled 10,946,022 and 11,744,083, respectively, and for the nine months ended March 31, 2020, and 2019, totaled 11,452,544 and 11,744,083, respectively.

 

Note 4. Convertible Preferred Stock and Common Stock Warrants

 

As of March 31, 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 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 March 31, 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. During the quarter ended December 31, 2019, the Company issued 760,000 shares of common stock upon conversion of 760,000 shares of Series C Preferred. During the quarter ended March 31, 2020, the Company issued 450,000 and 8,000 shares of common stock upon conversion of 450,000 and 8,000 shares of Series C Preferred and Series A Preferred, respectively.

 

In April 2020, the Company paid approximately $202,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that accrued during the three months ended March 31, 2020, by issuing 195,490 shares of common stock. 

 

In April 2020, the Company sold 3,200,585 shares of common stock, no par value per share, in the ATM offering.  The Company incurred offering costs totaling $238,169, inclusive of commission fees at a fixed rate of 3.0%, legal, accounting, and filing fees. Net proceeds from the shares sold totaled $2,286,939. The proceeds will be used to strengthen the Company's working capital position.  

 

Note 6. Comprehensive Income

 

For the three and nine months ended March 31, 2020 and 2019, comprehensive loss was equal to the net loss as presented in the accompanying Condensed Consolidated Statements of Operations.

 

Note 7. Inventories

 

Inventories consisted of the following:

 

	March 31, 2020	June 30, 2019
Raw materials	$5,765,534	$5,830,140
Work in process	553,470	706,128
Finished goods	5,160,985	5,129,806
Inventory obsolescence reserve	(157,102)	(138,553)
	$11,322,887	$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 9. Line of Credit

 

Borrowings on the Line of Credit were $6,368,559 and $ 6,540,639 as of March 31, 2020 and June 30, 2019, respectively. As of March 31, 2020, there was approximately $1,000,000 available to borrow.

 

Note 11. Accrued Payroll and Benefits Expense

 

As of March 31, 2020 and June 30, 2019, the accrued payroll and benefits expense balance included $294,662 and $310,903, respectively, of accrued severance expense. The Company recognized $311,701 and $54,778 in severance expense during the three months ended March 31, 2020 and 2019, respectively, and $464,787 and $185,831 in severance expense during the nine months ended March 31, 2020 and 2019, respectively. The severance expense was incurred in connection with reductions of the Company's workforce to better align its resources with the needs of the business and cost-reduction initiatives. Severance expense is included in selling, general, and administrative expenses.

 

Note 12.  Revenue

 

As of March 31, 2020 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.

 

 

	Three Months Ended March 31		Nine Months Ended March 31
	2020	2019	2020	2019
Orthopedic Soft Bracing Products	$   5,303,246	$5,510,461	$17,416,245	$17,182,340
Physical Therapy and Rehabilitation Products	8,342,162	8,973,207	27,662,899	29,576,820
Other	60,911	67,851	213,716	298,160
	$13,706,319	$14,551,519	$45,292,860	$47,057,320

 

 

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 and nine months ended March 31, 2020. Results of operations for the three and nine months ended March 31, 2020 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.

 

Impact of COVID-19 on Our Business

The pandemic caused by an outbreak of COVID-19 has resulted, and is likely to continue to result, in significant national and global economic disruption. Various policies and initiatives have been implemented around the world to reduce the spread of COVID-19, including work-from-home requirements or requests, shelter-in-place requirements, social distancing requirements, travel restrictions or bans in and to certain countries, bans or limitations on medical procedures and elective surgeries, closure of retail centers, restaurants and other business establishments, and the cancellation of major sporting and entertainment events. The response to and economic impact of COVID-19 adversely affected our business during the quarter ended March 31, 2020 and may continue to have an adverse effect in the fourth quarter ending June 30, 2020 and into the first half of fiscal year 2021.