(2) Acquisition

12 Months Ended

Jun. 30, 2018

Disclosure Text Block [Abstract]

(2) Acquisition

Bird & Cronin

On October 2, 2017, the Company, through its wholly-owned subsidiary Bird & Cronin, LLC, a newly formed Utah limited liability company, completed the purchase of substantially all the assets of Bird & Cronin, Inc. (“Bird & Cronin”), a manufacturer and distributor of orthopedic soft goods and specialty patient care products. This acquisition has expanded 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.

A holdback of cash totaling $933,334 and 184,560 shares of common stock (converted from Series D Preferred) valued at approximately $466,667 was retained for purposes of satisfying adjustments to the purchase price as may be required. Pursuant to a working capital adjustment and indemnification claim provisions, the purchase price was subsequently decreased $399,169. The cash portion of the holdback was also increased by $95,347 in exchange for a reduction in retained shares of common stock for the same value. In addition, the amount recognized for the earn-out liability was subsequently decreased by $625,000 to $875,000 as of June 30, 2018. The $875,000 is combined with the acquisition holdback in the accompanying consolidated balance sheets. As part of the acquisition, the Company assumed certain liabilities and obligations of Bird & Cronin related to its ongoing business (primarily trade accounts and similar obligations in the ordinary course).

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 (see Note 14). Certain principals of Bird & Cronin are holders of the Company’s issued and outstanding common stock and two of the principals, Michael Cronin and Jason Anderson, are employees of the Company.

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 operation, to lease the facility in Eagan, Minnesota (the “Minnesota Facility”) effective as of the closing date with an initial three-year term. Annual rental payments of $600,000 are 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 with the Company to serve as Co-Presidents of the acquired business.

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 $14,472,182 (which is comprised of cash of $9,063,017, holdbacks of $1,504,512, and preferred stock of $3,904,653 net of offering costs). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition:

Cash and cash equivalent	$	454
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		2,814,128
Warranty reserve		(5,000	)
Accounts payable		(607,084	)
Accrued expenses		(247,611	)
Accrued payroll and benefits		(189,579	)
Purchase price	$	14,472,182

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 June 30, 2018, the earn-out liability and holdbacks of $1,504,512 come due, contingent upon the terms set forth in the purchase agreement, as follows:

October 2, 2018	$	162,845
April 1, 2019		466,667
August 15, 2019		875,000
Acquisition holdback	$	1,504,512

Hausmann

On April 3, 2017, the Company, through its wholly-owned subsidiary Hausmann Enterprises, LLC, a newly formed Utah limited liability company, completed the purchase of substantially all the assets of Hausmann Industries, Inc., a New Jersey corporation (“Hausmann”) for $10,000,000 in cash. This acquisition has expanded Dynatronics’ sales in the physical therapy, athletic training and other markets by leveraging the products and distribution network offered by the Hausmann.

Financing was provided by proceeds from the sale of equity securities in a private offering to accredited investors and borrowings under a loan and security agreement (see Note 14). Closing of the private placement occurred concurrently with the closing of the acquisition. At closing, the Company paid Hausmann $9,000,000 of the $10,000,000 purchase price holding back $1,000,000 for purposes of satisfying adjustments to the purchase price as may be required and indemnification claims, if any. Pursuant to a working capital adjustment provision, the purchase price was subsequently increased $160,833 to $10,160,833. The Company paid an additional $116,089 to Hausmann and held back an additional $44,744. The $44,744 is combined with the acquisition holdback in the accompanying consolidated balance sheets. As part of the acquisition, the Company assumed certain liabilities and obligations of Hausmann related to its ongoing business (primarily trade accounts and similar obligations in the ordinary course).

In connection with the acquisition, the Company sold equity securities for gross proceeds of $7,795,000 in the private placement entered into with certain accredited investors, including institutional investors (see Note 14). Certain principals of Hausmann are holders of the Company’s Series B Preferred and one of the principals, David Hausmann, is an employee of the Company.

Also in connection with the acquisition, the Company entered into an agreement with Hausmann to lease the 60,000 square-foot manufacturing and office facility in Northvale, New Jersey (the "New Jersey Facility") effective as of the closing date with an initial two-year term, annual lease payments of $360,000 for the first year, and 2% increases in each subsequent year. The lease grants the Company two options to extend the term of the lease for two years per extension term, subject to annual 2% per year increases in base rent, and a third option at the end of the second option term for an additional five-years at fair market value. The Company also offered employment to Hausmann’s employees at closing including David Hausmann, the primary stockholder of Hausmann and its former principal executive officer. Mr. Hausmann entered into an employment agreement with the Company effective at the closing to serve as the President of the acquired business.

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 purchase price was $10,160,833. 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 $44,744 and $250,000, respectively, of the holdback to the sellers. As of June 30, 2018, the Company retained a holdback of $750,000 due to be paid to the seller on October 3, 2018.

Financial Impact of Acquired Businesses

The acquired businesses purchased in fiscal year 2018 and 2017 noted above contributed revenues of $34,352,000 and $3,812,000, and a net income of $2,491,000 and $223,000, inclusive of $594,000 and $64,000 of acquired intangible amortization, to the Company for the years ended June 30, 2018 and 2017, respectively.

The unaudited pro forma financial results for the twelve months ended June 30, 2018 and 2017 combines the consolidated results of the Company, Bird & Cronin and Hausmann assuming the Bird & Cronin acquisition had been completed on July 1, 2016 and the Hausmann acquisition on July 1, 2015. The reported revenue and net loss of $64,414,910 and $1,602,256 would have been $70,870,000 and $1,556,000 for the twelve months ended June 30, 2018, respectively, on an unaudited pro forma basis. For 2017, the reported revenue and net loss of $35,758,330 and $1,866,395 would have been revenue and net income of $71,128,000 and $663,000 for the year ended June 30, 2017, respectively, on an unaudited pro forma basis.

The unaudited pro forma consolidated results are not to be considered indicative of the results if the acquisitions occurred in the periods mentioned above, or indicative of future operations or results. The unaudited supplemental pro forma earnings were adjusted to exclude $160,000 of acquisition-related costs incurred in fiscal year 2017.