Note 2. Acquisitions

9 Months Ended

Mar. 31, 2018

Note 2. Acquisitions

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.

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.