Dynatronics(DYNT) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the periods ended December 31, 2021 Condensed Consolidated Balance Sheets (Unaudited) | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Cash and cash equivalents | 3,422,233 | 6,102,447 | | Total current assets | 20,514,473 | 20,905,866 | | Total assets | 37,673,738 | 39,139,995 | | Total current liabilities | 8,606,029 | 8,472,686 | | Total liabilities | 13,006,856 | 13,626,470 | | Total stockholders' equity | 24,666,882 | 25,513,525 | Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended Dec 31, 2021 ($) | Three Months Ended Dec 31, 2020 ($) | Six Months Ended Dec 31, 2021 ($) | Six Months Ended Dec 31, 2020 ($) | |:---|---:|---:|---:|---:| | Net sales | 10,529,853 | 11,967,901 | 22,830,748 | 24,100,669 | | Cost of sales | 8,449,192 | 8,626,927 | 17,085,782 | 16,857,742 | | Gross profit | 2,080,661 | 3,340,974 | 5,744,966 | 7,242,927 | | Selling, general, and administrative expenses | 3,481,529 | 3,937,839 | 7,578,196 | 8,183,465 | | Operating loss | (1,400,868) | (596,865) | (1,833,230) | (940,538) | | Net loss | (1,441,267) | (672,832) | (958,627) | (1,050,536) | | Net loss attributable to common stockholders | (1,623,420) | (906,269) | (1,327,863) | (1,478,199) | | Net loss per common share Basic and diluted | (0.09) | (0.06) | (0.08) | (0.10) | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Common Stock Amount | 33,102,691 | 32,621,471 | | Preferred Stock Amount | 7,980,788 | 7,980,788 | | Accumulated Deficit | (16,416,597) | (15,088,734) | | Total Stockholders' Equity | 24,666,882 | 25,513,525 | - Total stockholders' equity decreased from $25,513,525 as of June 30, 2021, to $24,666,882 as of December 31, 2021, primarily due to a net loss of $1,441,267 for the quarter ended December 31, 2021, partially offset by stock-based compensation and preferred stock dividends issued in common stock[18] Condensed Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity | Six Months Ended Dec 31, 2021 ($) | Six Months Ended Dec 31, 2020 ($) | |:---|---:|---:| | Net cash provided by (used in) operating activities | (2,409,692) | 2,631,676 | | Net cash used in investing activities | (98,351) | (71,646) | | Net cash used in financing activities | (172,170) | (1,266,455) | | Net change in cash and cash equivalents and restricted cash | (2,680,213) | 1,293,575 | | Cash and cash equivalents and restricted cash at end of the period | 3,573,431 | 3,609,876 | - The company experienced a significant net cash outflow from operating activities of $2,409,692 for the six months ended December 31, 2021, a reversal from a net inflow of $2,631,676 in the prior year, primarily driven by increased inventories[22] Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Presentation and Summary of Significant Accounting Policies - Dynatronics Corporation is a medical device company that designs, manufactures, and sells restorative products for physical therapy, rehabilitation, orthopedics, pain management, and athletic training[24][57] - The company's financial statements are prepared in accordance with GAAP and SEC rules, with the fiscal year ending on June 30[25][26][27] - The company qualified for the Employee Retention Credit (ERC) under the CARES Act for qualified wages through September 30, 2021, recording a total of $1,143,000 in credits during the quarter ended September 30, 2021[30] - Other receivables primarily consist of amounts due from the contract manufacturer for raw material components[31] - The company is evaluating the impact of ASU 2020-06, effective for fiscal year 2025, which simplifies accounting for convertible instruments and contracts in an entity's own equity[35] Note 2. Net Loss per Common Share - Basic and diluted net loss per common share are calculated based on weighted-average common shares outstanding[36][37] - Stock options, convertible preferred stock, and warrants were anti-dilutive and thus excluded from diluted EPS calculations for the periods presented[38] Note 3. Convertible Preferred Stock - As of December 31, 2021, Dynatronics had 1,992,000 shares of Series A 8% Convertible Preferred Stock and 1,359,000 shares of Series B Convertible Preferred Stock outstanding, convertible into a total of 3,351,000 common shares[39] - Dividends on preferred shares accrue at 8% annually and are generally paid in common stock, with $182,153 paid in January 2022 for the quarter ended December 31, 2021, by issuing 183,976 common shares[39][40] Note 4. Comprehensive Loss - For the three and six months ended December 31, 2021 and 2020, comprehensive loss was equal to the net loss[41] Note 5. Inventories | Inventory Category | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Raw materials | 5,270,792 | 3,863,212 | | Work in process | 906,871 | 784,460 | | Finished goods | 3,514,833 | 2,505,399 | | Inventory obsolescence reserve | (368,341) | (626,976) | | Total Inventories, net | 9,324,155 | 6,526,095 | - Net inventories increased by $2,798,060 (42.9%) from June 30, 2021, to December 31, 2021, primarily driven by increases in raw materials and finished goods[42][44] Note 6. Related-Party Transactions | Period | Related-Party Lease Expenses ($) | |:---|---:| | Three months ended Dec 31, 2021 | 248,952 | | Three months ended Dec 31, 2020 | 264,702 | | Six months ended Dec 31, 2021 | 497,905 | | Six months ended Dec 31, 2020 | 529,405 | - The company leases facilities from employees, shareholders, and entities controlled by shareholders, with related-party lease expenses decreasing slightly year-over-year[45] Note 7. Line of Credit - Borrowings on the line of credit were $0 as of December 31, 2021, and June 30, 2021, and remained at $0 upon its expiration on January 15, 2022[46] Note 8. Revenue | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Rebate liability | 308,297 | 219,591 | | Allowance for sales discounts | 15,176 | 9,000 | | Product Category | Three Months Ended Dec 31, 2021 ($) | Three Months Ended Dec 31, 2020 ($) | Six Months Ended Dec 31, 2021 ($) | Six Months Ended Dec 31, 2020 ($) | |:---|---:|---:|---:|---:| | Orthopedic Soft Bracing Products | 5,076,785 | 5,082,484 | 10,650,259 | 10,642,401 | | Physical Therapy and Rehabilitation Products | 5,426,025 | 6,824,049 | 12,124,380 | 13,321,279 | | Other | 27,043 | 61,368 | 56,109 | 136,989 | | Total Net Sales | 10,529,853 | 11,967,901 | 22,830,748 | 24,100,669 | - Total net sales decreased by 12.0% for the three months and 5.3% for the six months ended December 31, 2021, primarily due to a decline in Physical Therapy and Rehabilitation Products sales[48] Cautionary Note Regarding Forward-Looking Statements - The report contains forward-looking statements subject to risks and uncertainties, including the impact of COVID-19 and factors detailed in the company's Form 10-K[50][51] - The company does not guarantee the accuracy of forward-looking statements and assumes no obligation to update them after the report date[51][52][54] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance and condition, analyzing changes in sales, profit, and liquidity Overview - Dynatronics is a medical device company focused on high-quality restorative products for physical therapy, rehabilitation, pain management, and athletic training, marketed under brands like Bird & Cronin®, Solaris™, Hausmann®, Physician's Choice®, and PROTEAM™[57] Results of Operations Net Sales | Period | Net Sales ($) | |:---|---:| | Quarter ended Dec 31, 2021 | 10,530,000 | | Quarter ended Dec 31, 2020 | 11,968,000 | | Six months ended Dec 31, 2021 | 22,831,000 | | Six months ended Dec 31, 2020 | 24,101,000 | - Net sales decreased by $1,438,000 (12.0%) for the quarter and $1,270,000 (5.3%) for the six months ended December 31, 2021, primarily due to the discontinuation of third-party distributed products, partially offset by increased customer demand compared to the prior year's COVID-19 impact[58] Gross Profit | Period | Gross Profit ($) | Gross Margin (%) | |:---|---:|---:| | Quarter ended Dec 31, 2021 | 2,081,000 | 19.8% | | Quarter ended Dec 31, 2020 | 3,341,000 | 27.9% | | Six months ended Dec 31, 2021 | 5,745,000 | 25.2% | | Six months ended Dec 31, 2020 | 7,243,000 | 30.1% | - Gross profit decreased by $1,260,000 (37.7%) for the quarter and $1,498,000 (20.7%) for the six months ended December 31, 2021, mainly due to higher freight and raw material costs, increased personnel costs, and changes in product mix, partially offset by a $97,000 employee retention credit[60] Selling, General and Administrative Expenses | Period | SG&A Expenses ($) | |:---|---:| | Quarter ended Dec 31, 2021 | 3,482,000 | | Quarter ended Dec 31, 2020 | 3,938,000 | | Six months ended Dec 31, 2021 | 7,578,000 | | Six months ended Dec 31, 2020 | 8,183,000 | - SG&A expenses decreased by $456,000 (11.6%) for the quarter and $605,000 (7.4%) for the six months ended December 31, 2021, primarily due to lower commission expense, reduced salaries for the rehabilitation products sales force, and decreased support costs from the elimination of distributed products and direct sales channels[61][62][63] Net Other Income (Expense) | Period | Net Other Income (Expense) ($) | |:---|---:| | Quarter ended Dec 31, 2021 | (40,000) | | Quarter ended Dec 31, 2020 | (66,000) | | Six months ended Dec 31, 2021 | 875,000 | | Six months ended Dec 31, 2020 | (100,000) | - Net other income for the six months ended December 31, 2021, significantly increased to $875,000 from a net other expense of $100,000 in the prior year, primarily due to a $943,000 employee retention credit[64] Loss Before Income Tax | Period | Loss Before Income Tax ($) | |:---|---:| | Quarter ended Dec 31, 2021 | (1,441,000) | | Quarter ended Dec 31, 2020 | (663,000) | | Six months ended Dec 31, 2021 | (959,000) | | Six months ended Dec 31, 2020 | (1,041,000) | - Pre-tax loss increased by $768,000 for the quarter ended December 31, 2021, due to decreased gross profit, partially offset by lower SG&A and other expenses[65] - For the six months, pre-tax loss decreased by $82,000, driven by increased other income offsetting decreased gross profit[65] Income Tax Provision - Income tax provision was $0 for the three and six months ended December 31, 2021, compared to $10,000 for the prior year periods, due to a full valuation allowance against net deferred income tax assets[67][85] Net Loss | Period | Net Loss ($) | |:---|---:| | Quarter ended Dec 31, 2021 | (1,441,000) | | Quarter ended Dec 31, 2020 | (673,000) | | Six months ended Dec 31, 2021 | (959,000) | | Six months ended Dec 31, 2020 | (1,051,000) | - Net loss increased for the quarter but decreased for the six months ended December 31, 2021, consistent with the changes in loss before income tax[68] Net Loss Attributable to Common Stockholders | Period | Net Loss Attributable to Common Stockholders ($) | Net Loss Per Common Share ($) | |:---|---:|---:| | Quarter ended Dec 31, 2021 | (1,623,000) | (0.09) | | Quarter ended Dec 31, 2020 | (906,000) | (0.06) | | Six months ended Dec 31, 2021 | (1,328,000) | (0.08) | | Six months ended Dec 31, 2020 | (1,478,000) | (0.10) | - Net loss attributable to common stockholders increased by $717,000 for the quarter but decreased by $150,000 for the six months ended December 31, 2021[69] Liquidity and Capital Resources - The company's liquidity is historically financed through operating activities, cash reserves, a line of credit, and equity sales[70] - Management believes current resources are sufficient for the next 12 months, but acknowledges potential adverse effects from the COVID-19 pandemic[72] - The company has an at-the-market (ATM) offering program, with a replacement registration statement filed in May 2021, allowing for potential future sales of up to $2,677,997 in common stock[73] | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Cash & Restricted Cash | 3,573,000 | 6,254,000 | | Working Capital | 11,908,000 | 12,433,000 | | Current Ratio | 2.4 to 1 | 2.5 to 1 | Cash and Cash Equivalents - Cash and cash equivalents and restricted cash decreased by $2,681,000 to $3,573,000 as of December 31, 2021, with the primary use of cash being for inventories[75] Accounts Receivable - Trade accounts receivable, net, decreased by approximately $51,000 (0.9%) to $5,592,000 as of December 31, 2021, primarily due to timing of collections[76] Inventories - Inventories, net, increased by $2,798,000 (42.9%) to $9,324,000 as of December 31, 2021, reflecting adjustments to inventory management in response to global supply chain impacts and demand[77] Accounts Payable - Accounts payable increased by approximately $944,000 (25.3%) to $4,682,000 as of December 31, 2021, driven by increased inventory purchases and payment timing[78] Line of Credit - The company had no outstanding borrowings on its line of credit as of December 31, 2021, and June 30, 2021, and at its expiration on January 15, 2022[79] Debt - Long-term debt decreased by approximately $7,000 to $12,000 as of December 31, 2021, primarily consisting of equipment loans[80] Finance Lease Liability | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Finance Lease Liability | 2,431,000 | 2,596,000 | - The finance lease liability primarily relates to the Utah building lease, a 15-year finance lease from an August 2014 sale-leaseback, with a deferred gain of $1,153,000 as of December 31, 2021, recognized over the lease term[81][82] Operating Lease Liability | Metric | Dec 31, 2021 ($) | Jun 30, 2021 ($) | |:---|---:|---:| | Operating Lease Liability | 2,028,000 | 2,470,000 | - Operating lease liability primarily consists of building leases for office, manufacturing, and warehouse space[84] Deferred Income Tax Assets - A full valuation allowance was recorded against net deferred income tax assets as of December 31, 2021, and June 30, 2021, due to uncertainty regarding their realizability, resulting in no income tax expense for the periods presented[85] Stock Repurchase Plans - Approximately $449,000 remained authorized under the stock repurchase plan as of December 31, 2021, with no purchases made since September 2011[86] Off-Balance Sheet Arrangements - As of December 31, 2021, the company had no off-balance sheet arrangements[87] Critical Accounting Policies - There have been no material changes to the critical accounting policies previously disclosed in the company's Form 10-K for the year ended June 30, 2021[88] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures remain materially unchanged from the previous annual report for the year ended June 30, 2021 - No material changes in quantitative and qualitative disclosures about market risk from the information presented for the year ended June 30, 2021[90] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls Evaluation of Disclosure Controls and Procedures - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[91][93] Changes in Internal Control over Financial Reporting - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2021[94] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no outstanding legal proceedings during the period - No legal proceedings to report[95] Item 1A. Risk Factors Risk factors remain materially consistent with those disclosed in the Annual Report on Form 10-K - The risk factors described in the Annual Report on Form 10-K for the year ended June 30, 2021, have not materially changed[97] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities and use of proceeds to report[98] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - No defaults upon senior securities to report[99] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - No mine safety disclosures to report[100] Item 5. Other Information The company has no other material information to report for the period - No other information to report[101] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including officer certifications and XBRL data - Exhibits include certifications from principal executive and financial officers (31.1, 31.2, 32.1, 32.2) and various XBRL taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[102][103] Signatures - The report was signed on February 10, 2022, by John A. Krier, President and Chief Executive Officer of Dynatronics Corporation[104][105]