10-Q 1 dynt2Q10Q2021.htm PRIMARY DOCUMENT Blueprint
 

 
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 December 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)
 
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 February 5, 2021, there were 14,974,508 shares of the issuer’s common stock outstanding.
 

 
 
 
DYNATRONICS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
 
 
 
 
 
 
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PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Balance Sheets
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 Assets
 
December 31, 2020
 
 
June 30, 2020
 
     Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $3,509,240 
 $2,215,665 
Restricted cash
  100,636 
  100,636 
Trade accounts receivable, less allowance for doubtful accounts of $180,418 and $184,713 as of December 31, 2020 and June 30, 2020, respectively
  5,068,041 
  4,893,861 
Other receivables
  1,142,034 
  2,080 
Inventories, net
  6,141,106 
  8,371,842 
Assets held for sale, net
  845,858 
  - 
Prepaid expenses
  1,308,684 
  490,624 
 
    
    
          Total current assets
  18,115,599 
  16,074,708 
 
    
    
Property and equipment, net
  3,687,518 
  4,941,517 
Operating lease assets
  2,903,623 
  3,347,378 
Intangible assets, net
  5,320,799 
  5,682,991 
Goodwill
  7,116,614 
  7,116,614 
Other assets
  413,156 
  433,109 
 
    
    
          Total assets
 $37,557,309 
 $37,596,317 
 
    
    
Liabilities and Stockholders' Equity
    
    
     Current liabilities:
    
    
Accounts payable
 $4,827,363 
 $3,013,949 
Accrued payroll and benefits expense
  1,475,542 
  1,204,964 
Accrued expenses
  1,372,055 
  768,117 
Warranty reserve
  221,854 
  221,854 
Line of credit
  - 
  1,012,934 
Current portion of long-term debt
  1,749,446 
  108,713 
Current portion of finance lease liability
  333,433 
  316,103 
Current portion of deferred gain
  150,448 
  150,448 
Current portion of operating lease liability
  857,993 
  852,419 
Income tax payable
  32,145 
  29,196 
 
    
    
          Total current liabilities
  11,020,279 
  7,678,697 
 
    
    
Long-term debt, net of current portion
  1,766,977 
  3,496,222 
Finance lease liability, net of current portion
  2,415,186 
  2,597,525 
Deferred gain, net of current portion
  1,153,434 
  1,228,658 
Operating lease liability, net of current portion
  2,058,231 
  2,505,232 
Other liabilities
  199,606 
  194,102 
 
    
    
          Total liabilities
  18,613,713 
  17,700,436 
Commitments and contingencies
    
    
 
    
    
     Stockholders' equity:
    
    
Preferred stock, no par value: Authorized 50,000,000 shares; 3,351,000 shares and 3,681,000 shares issued and outstanding as of December 31, 2020 and June 30, 2020, respectively
  7,980,788 
  8,770,798 
Common stock, no par value: Authorized 100,000,000 shares; 14,719,711 shares and 13,803,855 shares issued and outstanding as of December 31, 2020 and June 30, 2020, respectively
  28,738,983 
  27,474,411 
Accumulated deficit
  (17,776,175)
  (16,349,328)
 
    
    
          Total stockholders' equity
  18,943,596 
  19,895,881 
 
    
    
          Total liabilities and stockholders' equity
 $37,557,309 
 $37,596,317 
 
    
    
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
1
 
 
 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Operations
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
December 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $11,967,901 
 $15,196,991 
 $24,100,669 
 $31,586,540 
Cost of sales
  8,626,927 
  10,611,135 
  16,857,742 
  21,846,677 
Gross profit
  3,340,974 
  4,585,856 
  7,242,927 
  9,739,863 
 
    
    
    
    
Selling, general, and administrative expenses
  3,937,839 
  4,618,100 
  8,183,465 
  9,542,792 
Operating (loss) income
  (596,865)
  (32,244)
  (940,538)
  197,071 
 
    
    
    
    
Other income (expense):
    
    
    
    
   Interest expense, net
  (63,630)
  (110,289)
  (103,573)
  (241,281)
   Other income, net
  (2,516)
  4,870 
  3,396 
  5,385 
Net other expense
  (66,146)
  (105,419)
  (100,177)
  (235,896)
 
    
    
    
    
Loss before income taxes
  (663,011)
  (137,663)
  (1,040,715)
  (38,825)
 
    
    
    
    
Income tax (provision) benefit
  (9,821)
  - 
  (9,821)
  - 
 
    
    
    
    
Net loss
  (672,832)
  (137,663)
  (1,050,536)
  (38,825)
 
    
    
    
    
Deemed dividend on convertible preferred stock and accretion of discount
  (51,352)
  (108,539)
  (51,352)
  (108,539)
Preferred stock dividend, in common stock, issued or to be issued
  (182,085)
  (202,249)
  (376,311)
  (369,153)
 
    
    
    
    
Net loss attributable to common stockholders
 $(906,269)
 $(448,451)
 $(1,478,199)
 $(516,517)
 
    
    
    
    
Net loss per common share
    
    
    
    
Basic and diluted
 $(0.06)
 $(0.05)
 $(0.10)
 $(0.06)
 
    
    
    
    
Weighted-average common shares outstanding:
    
    
    
    
Basic and diluted
  14,601,186 
  9,023,406 
  14,340,774 
  8,800,184 
 
    
    
    
    
 
See accompanying notes to condensed consolidated financial statements.
 
    
    
    
 
 
 
2
 
 
 
 
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 
 
    
    
    
    
    
    
Stock-based compensation
  16,940 
  50,781 
  - 
  - 
  - 
  50,781 
 
    
    
    
    
    
    
Preferred stock dividend, in common stock, issued or to be issued
  276,519 
  182,085 
  - 
  - 
  (182,085)
  - 
 
    
    
    
    
    
    
Preferred stock converted to common stock
  330,000 
  790,010 
  (330,000)
  (790,010)
  - 
  - 
 
    
    
    
    
    
    
Preferred stock beneficial conversion and accretion of discount
  - 
  - 
  - 
  51,352 
  - 
  51,352 
 
    
    
    
    
    
    
Dividend of beneficial conversion and accretion of discount
  - 
  - 
  - 
  (51,352)
  - 
  (51,352)
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (672,832)
  (672,832)
 
    
    
    
    
    
    
Balance at December 31, 2020
  14,719,711 
 $28,738,983 
  3,351,000 
 $7,980,788 
 $(17,776,175)
 $18,943,596 
 
See accompanying notes to condensed consolidated financial statements.  
    
    
    
    
    
    
 
 
3
 
 
 
 
DYNATRONICS CORPORATION
 
 
Condensed Consolidated Statements of Cash Flows
 
 
(Unaudited)
 
 
 
 
 
 
 
Six Months Ended
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:
 
 
 
 
 
 
       Net loss
 $(1,050,536)
 $(38,825)
       Adjustments to reconcile net loss to net cash provided by operating activities:
    
    
             Depreciation and amortization of property and equipment
  438,354 
  495,000 
             Amortization of intangible assets
  362,192 
  362,191 
             Amortization of other assets
  11,949 
  20,064 
             Loss on sale of property and equipment
  18,760 
  - 
             Stock-based compensation
  98,251 
  188,031 
             Change in allowance for doubtful accounts receivable
  (4,295)
  - 
             Change in allowance for inventory obsolescence
  (208,344)
  (13,532)
             Amortization deferred gain on sale/leaseback
  (75,224)
  (75,223)
             Change in operating assets and liabilities:
    
    
                  Trade accounts receivable
  (169,885)
  506,759 
                  Inventories
  1,194,758 
  157,085 
                  Prepaid expenses and other receivables
  (688,692)
  (109,644)
                  Other assets
  8,005 
  (8,725)
                  Income tax payable
  2,949 
  (14,350)
                  Accounts payable, accrued expenses, and other current liabilities
  2,693,434 
  1,447,408 
 
    
    
                              Net cash provided by operating activities
  2,631,676 
  2,916,239 
 
    
    
Cash flows from investing activities:
    
    
       Purchase of property and equipment
  (71,646)
  (183,731)
 
    
    
                              Net cash used in investing activities
  (71,646)
  (183,731)
 
    
    
Cash flows from financing activities:
    
    
       Principal payments on long-term debt
  (88,512)
  (89,231)
       Principal payments on finance lease liability
  (165,009)
  (145,779)
       Payment of acquisition earn-out liability and holdbacks
  - 
  (500,000)
       Net change in line of credit
  (1,012,934)
  (1,721,533)
 
    
    
                              Net cash used in financing activities
  (1,266,455)
  (2,456,543)
 
    
    
                              Net change in cash and cash equivalents and restricted cash
  1,293,575 
  275,965 
 
    
    
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
 $3,609,876 
 $531,995 
 
    
    
Supplemental disclosure of cash flow information:
    
    
       Cash paid for interest
 $85,560 
 $256,262 
Supplemental disclosure of non-cash investing and financing activities:
    
    
       Deemed dividend on convertible preferred stock and accretion of discount
  51,352 
  108,539 
       Preferred stock dividend, in common stock, issued or to be issued
  376,311 
  369,153 
       Conversion of preferred stock to common stock
  790,010 
  1,791,320 
       Finance lease obligations incurred to obtain ROU assets
  - 
  3,086 
       Operating lease obligations incurred to obtain ROU assets
  - 
  3,749,809 
 
    
    
See accompanying notes to condensed consolidated financial statements.
    
    
 
 
4
 
 
DYNATRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 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, 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 December 31, 2020 and its results of operations and its cash flows for the periods presented. The results of operations for the first six 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.
 
Assets Held for Sale
Assets held for sale include our Tennessee building and land that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification 360, “Property, Plant, and Equipment." No gain or loss occurred as a result. The carrying amount of the land and building is $30,287 and $815,571, respectively.  The effect of suspending depreciation on the assets held for sale is immaterial to the results of operations. The assets held for sale are being marketed for sale and it is the Company’s intention to complete the sales of these assets within the upcoming year.
 
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 adoption of this guidance will have on its consolidated financial statements. 
 
 5
 
 
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. For the three months ended December 31, 2020, and 2019, shares underlying such options, warrants, and convertible preferred stock totaled 10,355,870 and 11,607,954, respectively, and for the six months ended December 31, 2020, and 2019, totaled 10,461,107 and 11,685,597, respectively.
 
Note 3. Convertible Preferred Stock
 
As of December 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 1,359,000 shares of Series B Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred and Series B Preferred are convertible into a total of 3,351,000 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. In November 2020, the Company issued 330,000 shares of common stock upon conversion of 230,000 shares of  Series C Non-Voting Convertible Preferred Stock and 100,000 shares of Series B Preferred.
 
In January 2021, the Company paid approximately $182,000 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that accrued during the three months ended December 31, 2020, by issuing 224,797 shares of common stock. 
  
Note 4. Comprehensive Income
 
For the three and six months ended December 31, 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:
 
 
 
December 31, 2020
 
 
June 30, 2020
 
Raw materials
 $3,518,495  
 $4,798,489 
Work in process
  536,144  
  427,744 
Finished goods
  2,446,206  
  3,713,692 
Inventory obsolescence reserve
  (359,739)
  (568,083)
 
 $6,141,106  
 $8,371,842  
 
 6
 
 
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 $264,702 and $261,666 for the three months ended December 31, 2020 and 2019, respectively, and $529,405 and $523,332 for the six months ended December 31, 2020 and 2019, respectively.

Note 7. Line of Credit
 
Borrowings on the Line of Credit were $0 and $1,012,934 as of December 31, 2020 and June 30, 2020, respectively. As of December 31, 2020, there was approximately $5,367,000 available to borrow.
  
Note 8.  Revenue
 
As of December 31, 2020 and June 30, 2020, the rebate liability was $305,359 and $247,388, respectively. The rebate liability is included in accrued expenses in the accompanying condensed consolidated balance sheets.
 
As of December 31, 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 and six months ended December 31:
  
 
 
Three Months Ended
December 31
 
 
Six Months Ended
December 31  
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
Orthopedic Soft Bracing Products
 $5,082,484 
 $5,833,972 
 $10,642,401 
 $12,112,998 
Physical Therapy and Rehabilitation Products
  6,824,049 
  9,283,017 
  13,321,279 
  19,320,737 
Other
  61,368 
  80,002 
  136,989 
  152,805 
 
 $11,967,901 
 $15,196,991 
 $24,100,669 
 $31,586,540 
 
Note 9.  Common Stock
 
The Company maintains an equity incentive plan for the benefit of employees. Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other share-based awards may be granted under the plans including performance-based awards. On December 10, 2020, shareholders approved a new 2020 equity incentive plan (“2020 Equity Plan”), setting aside 1,000,000 shares of common stock. The Company can grant awards under the 2020 Plan or under the Dynatronics 2018 Equity Incentive Award Plan (the “2018 Plan”) until the shares of common stock available for awards and issuance under the 2018 Plan have been exhausted.
 
 7
 
 
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, 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 and six months ended December 31, 2020. Results of operations for the three and six months ended December 31, 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.
 
 8
 
 
Results of Operations

 Net Sales
 
Net sales decreased $3,229,000, or 21.2%, to $11,968,000 for the quarter ended December 31, 2020, compared to net sales of $15,197,000 for the quarter ended December 31, 2019. Net sales decreased $7,486,000, or 23.7%, to $24,101,000 for the six months ended December 31, 2020, compared to net sales of $31,587,000 for the six months ended December 31, 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 December 31, 2020 decreased $1,245,000, or about 27.1%, to $3,341,000, or 27.9% of net sales. By comparison, gross profit for the quarter ended December 31, 2019 was $4,586,000, or 30.2% of net sales. Gross profit for the six months ended December 31, 2020 decreased $2,497,000, or about 25.6%, to $7,243,000, or 30.1% of net sales. By comparison, gross profit for the six months ended December 31, 2019 was $9,740,000, or 30.8% of net sales. The year-over-year decrease in gross profit and gross margin percentage was primarily attributable to lower sales which reduced gross profit, and changes in the mix of sales between our major product categories.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (“SG&A”) expenses decreased $680,000, or 14.7%, to $3,938,000 for the quarter ended December 31, 2020, compared to $4,618,000 for the quarter ended December 31, 2019. Selling expenses decreased $479,000 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 $201,000 compared to the prior-year period, driven primarily by a decrease in payroll and benefit costs as a result of headcount reductions.

SG&A expenses decreased $1,360,000, or 14.3%, to $8,183,000 for the six months ended December 31, 2020, compared to $9,543,000 for the six months ended December 31, 2019. Selling expenses decreased $1,056,000 compared to the prior year period, due primarily to lower commission expense on lower sales and decreased sales management salaries. G&A expenses decreased $304,000 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 December 31, 2020 was $663,000 compared to $138,000 for the quarter ended December 31, 2019. The $525,000 increase in pre-tax loss was attributable to a decrease of $1,245,000 in gross profit partially offset by a decrease of $680,000 in SG&A and a decrease of $39,000 in other expense. Pre-tax loss for the six months ended December 31, 2020 was $1,041,000 compared to $38,000 for the six months ended December 31, 2019. The $1,003,000 increase in pre-tax loss was attributable to a decrease of $2,497,000 in gross profit partially offset by a decrease of $1,360,000 in SG&A and a decrease of $136,000 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 $10,000 for the three and six months ended December 31, 2020, respectively and $0 for the three and six months ended December 31, 2019, respectively. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information. 
 
Net (Loss) Income
 
Net loss was $673,000 for the quarter ended December 31, 2020, compared to $138,000 for the quarter ended December 31, 2019. Net loss was $1,051,000 for the six months ended December 31, 2020, compared to $38,000 for the six months ended December 31, 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.
 
 9
 
 
Net Loss Attributable to Common Stockholders
 
Net loss attributable to common stockholders increased $457,000 to $906,000 for the quarter ended December 31, 2020, compared to $448,000 for the quarter ended December 31, 2019. The increase in net loss attributable to common stockholders for the quarter is due primarily to a $535,000 increase in net loss. On a per share basis, net income attributable to common stockholders was $(0.06) per share for the quarter ended December 31, 2020, compared to $(0.05) per share for the quarter ended December 31, 2019.
 
Net loss attributable to common stockholders increased $962,000 to $1,478,000 for the six months ended December 31, 2020, compared to $517,000 for the six months ended December 31, 2019. The increase in net loss attributable to common stockholders is due primarily to a $1,013,000 increase in net loss. On a per share basis, net income attributable to common stockholders was $(0.10) per share for the six months ended December 31, 2020, compared to $(0.06) per share for the six months ended December 31, 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 December 31, 2020, we had $3,610,000 in cash and cash equivalents and restricted cash, compared to $2,316,000 as of June 30, 2020. During the three and six ended December 31, 2020, we had positive cash flows from operating activities.
 
Working capital was $7,095,000 as of December 31, 2020, compared to working capital of $8,396,000 as of June 30, 2020. The current ratio was 1.6 to 1 as of December 31, 2020 and 2.1 to 1 as of June 30, 2020. Current assets were 48.2% of total assets as of December 31, 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 SEC. 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 (the "Covered Period"). 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 and is payable in monthly installments beginning 10 months after 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.
 
 10
 
  
Cash and Cash Equivalents
 
Our cash and cash equivalents and restricted cash position increased $1,294,000 to $3,610,000 as of December 31, 2020, compared to $2,316,000 as of June 30, 2020. The primary source of cash in the six months ended December 31, 2020, was approximately $2,632,000 of net cash provided by operating activities.
 
Accounts Receivable
 
Trade accounts receivable, net of allowance for doubtful accounts, increased approximately $174,000, or 3.6%, to $5,068,000 as of December 31, 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 represent 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 $2,231,000 or 26.6%, to $6,141,000 as of December 31, 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 December 31, 2020, other receivables includes $1,113,000 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 $1,813,000 or 60.2%, to $4,827,000 as of December 31, 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 December 31, 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 December 31, 2020, there was approximately $5,400,000 available to borrow.
 
 11
 
 
Debt
 
  Long-term debt decreased approximately $89,000 to approximately $3,516,000 as of December 31, 2020, compared to approximately $3,605,000 as of June 30, 2020. Our long-term debt is primarily comprised of the PPP Note and also includes loans related to equipment and a vehicle. The principal balance on the PPP Note is $3,477,412, of which, $1,736,000 is classified as current debt at December 31, 2020. 
 
Finance Lease Liability
 
Finance lease liability as of December 31, 2020 and June 30, 2020 totaled approximately $2,749,000 and $2,914,000, respectively. Our finance lease liability consists primarily of the lease on our facility located in Cottonwood Heights, Utah (the "Utah Building"). 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 $1,617,000 at December 31, 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 December 31, 2020 is $1,304,000. 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 and six months ended December 31, 2020 was approximately $36,000 and $73,000, respectively. Imputed interest for the three and six months ended December 31, 2019 was approximately $40,000 and $79,000, respectively. 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 December 31, 2020 and June 30, 2020 totaled approximately $2,916,000 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 December 31, 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 and six months ended December 31, 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 December 31, 2020. No purchases have been made under this plan since September 2011.
 
Off-Balance Sheet Arrangements
 
As of December 31, 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.
 
 12
 
 
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, 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 December 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 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.
 
 13
 
 
 
Item 6. Exhibits
 
(a) Exhibits
 
 
 
 
31.2
Certification under Rule 13a-14(a)/15d-14(a) of principal financial officer
 
 

 
Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) of 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
 
 14
 
 
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: February 11, 2021
By:
/s/ John A. Krier
 
 
 
John A. Krier
 
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
  15