Dynatronics(DYNT) - 2022 Q4 - Annual Report

Part I Business Dynatronics Corporation specializes in restorative medical devices for physical therapy, rehabilitation, and pain management, pursuing growth through organic expansion and strategic acquisitions - The company designs, manufactures, and sells restorative products for physical therapy, rehabilitation, pain management, and athletic training under brands like Bird & Cronin, Solaris, and Hausmann[20] - The business strategy targets significant growth via organic expansion and a value-driven acquisition program[23] - Sales of company-manufactured products increased significantly to 99% of total product sales in FY2022 from 79% in FY2021, indicating a strategic shift[30] - The company sells through over 300 independent dealers and a direct sales force to a diverse customer base, with no single customer accounting for 10% or more of net sales in FY2022 or FY2021[39][40] - As of June 30, 2022, the company employed 197 people, with 69 employees under a collective bargaining agreement expiring in February 2025[67] Risk Factors The company faces significant risks including reliance on third-party manufacturers, supply chain disruptions, a history of net losses, potential dilution, and NASDAQ delisting concerns - Reliance on third-party manufacturers for electrotherapy products poses risks of supply interruptions and cost overruns[69][71] - The business is exposed to supply chain disruptions, inflation, and geopolitical risks like the Russia-Ukraine conflict, potentially increasing raw material costs[73][75][77] - The company has a history of net losses in 10 of the last 11 fiscal years, indicating potential need for additional financing[84] - On February 24, 2022, NASDAQ issued a deficiency notice for failing to meet the minimum bid price, with potential delisting risk if a reverse stock split or other measures are unsuccessful[132][133] - Investors face substantial dilution risk from the potential conversion of 3.35 million preferred shares and exercise of warrants for 4.32 million common shares[122] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[142] Properties The company leases three primary facilities in Minnesota, New Jersey, and Utah, totaling approximately 181,000 square feet, which are deemed adequate for current and future operations - Leases an 85,000 sq-ft corporate headquarters in Eagan, Minnesota, with the lease extended through October 2024[143] - Leases a 60,000 sq-ft manufacturing and office facility in Northvale, New Jersey, with the lease extended through April 2023[144] - Leases a 36,000 sq-ft facility in Cottonwood Heights, Utah, under a finance lease agreement terminating in 2029[145] Legal Proceedings The company reports no pending legal proceedings of a material nature - There are no pending material legal proceedings to which the company is a party[148] Mine Safety Disclosures This item is not applicable to the company - Not applicable[149] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with no cash dividends paid on common stock, preferred dividends typically paid in shares, and no common stock transactions in FY2022 Quarterly Stock Price (Fiscal Years 2022 & 2021) | Fiscal Quarter | 2022 High | 2022 Low | 2021 High | 2021 Low | | :--- | :--- | :--- | :--- | :--- | | 1st Quarter | $1.79 | $1.07 | $1.07 | $0.63 | | 2nd Quarter | $1.62 | $0.93 | $0.93 | $0.52 | | 3rd Quarter | $1.07 | $0.66 | $2.56 | $0.80 | | 4th Quarter | $0.76 | $0.43 | $1.38 | $1.01 | - As of September 16, 2022, 18,581,255 common shares were outstanding, held by approximately 400 shareholders of record[152] - The company has never paid cash dividends on common stock, intending to retain earnings, while preferred stock dividends accrue at 8% annually and are typically paid in common shares[153][155] - No common stock shares were sold or purchased by the company during the fiscal year ended June 30, 2022[156][157] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 saw net sales decline to $44.3 million and a $4.0 million net loss, driven by discontinued products and higher costs, with cash significantly reduced to $0.55 million due to strategic inventory build-up Results of Operations FY2022 net sales decreased 7.2% to $44.3 million, gross profit fell 17.2% to $10.7 million, resulting in a $4.0 million net loss compared to FY2021's $2.0 million net income which included one-time gains Fiscal Year 2022 vs. 2021 Performance | Metric | FY 2022 | FY 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $44,338,000 | $47,799,000 | -7.2% | | Gross Profit | $10,673,000 | $12,886,000 | -17.2% | | Gross Margin | 24.1% | 27.0% | -2.9pp | | SG&A Expenses | $15,430,000 | $16,646,000 | -7.3% | | Net Income (Loss) | ($3,993,000) | $2,001,000 | -299.9% | - The decrease in net sales was primarily due to the reduction in sales of discontinued third-party distributed products[161] - The swing to a net loss in FY2022 was largely due to the absence of a $3.5 million gain from PPP loan extinguishment and a $0.7 million gain from property sale, which benefited FY2021[167][168][169] Liquidity and Capital Resources As of June 30, 2022, cash and equivalents decreased to $0.55 million from $6.1 million, and working capital declined to $9.3 million, largely due to an 85% increase in inventory to $12.1 million to mitigate supply chain disruptions Key Balance Sheet Items (as of June 30) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $550 | $6,102 | | Inventories, net | $12,071 | $6,526 | | Total Assets | $35,434 | $39,140 | | Liabilities & Equity | | | | Total Liabilities | $13,735 | $13,626 | | Total Stockholders' Equity | $21,699 | $25,514 | - Inventories increased by $5.5 million (85.0%) as the company adjusted inventory management due to global supply chain impacts[181] - The company's line of credit matured on January 15, 2022, with no outstanding borrowings at expiration[183] - An at-the-market (ATM) offering agreement allows the company to sell common stock, through which it raised $3.5 million in net proceeds in February 2021[176][177] Business Plan and Outlook Following a 2021 business optimization, the company's FY2023 focus is on driving profitability through strategic account partnerships, disciplined product management, M&A, and improved investor communication - In April 2021, the company initiated a business optimization plan, largely completed by August 2021, to eliminate 1,600 low-margin SKUs and focus sales exclusively through dealers[208] - Fiscal 2023 strategic priorities include driving sales through key accounts, increasing operating profitability, pursuing M&A, and bolstering investor communication[209] - The company is actively pursuing an acquisition strategy targeting manufacturers in physical therapy, rehabilitation, orthopedics, and adjacent markets[210] Quantitative and Qualitative Disclosures about Market Risk This item is not applicable to the company - Not Applicable[211] Financial Statements and Supplementary Data Audited consolidated financial statements for FY2022 and FY2021 are presented, showing a $4.0 million net loss in FY2022, total assets at $35.4 million, and cash at $0.7 million, with a Critical Audit Matter identified for goodwill and intangible asset valuation Consolidated Balance Sheet Data (as of June 30) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $550 | $6,102 | | Inventories, net | $12,071 | $6,526 | | Total Assets | $35,434 | $39,140 | | Liabilities & Equity | | | | Total Liabilities | $13,735 | $13,626 | | Total Stockholders' Equity | $21,699 | $25,514 | Consolidated Statement of Operations Data (for the year ended June 30) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $44,338 | $47,799 | | Gross profit | $10,673 | $12,886 | | Operating loss | ($4,756) | ($3,760) | | Net income (loss) | ($3,993) | $2,001 | Consolidated Statement of Cash Flows Data (for the year ended June 30) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,884) | $383 | | Net cash (used in) provided by investing activities | ($318) | $1,531 | | Net cash (used in) provided by financing activities | ($350) | $2,023 | | Net change in cash | ($5,552) | $3,937 | - The independent auditor, Tanner LLC, identified the estimation of goodwill and intangible asset fair value as a Critical Audit Matter due to significant subjective judgments[221][222] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[326] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of June 30, 2022, with no material changes during the fiscal year - As of June 30, 2022, principal executive and financial officers concluded the company's disclosure controls and procedures were effective[328] - Management concluded that internal control over financial reporting was effective as of June 30, 2022, based on the COSO 2013 framework[330] Other Information There is no other information to report - None[333] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[334] Part III Directors, Executive Officers, and Corporate Governance The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[336] Executive Compensation The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[337] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[338] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[339] Principal Accounting Fees and Services The information required for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[340] Part IV Exhibits, Financial Statement Schedules This section lists financial statements from Item 8 and provides an index of exhibits filed or incorporated by reference, with financial statement schedules omitted as not required - This section provides an index to the financial statements located in Item 8 and a list of exhibits filed with the report[342][346] Form 10-K Summary No Form 10-K summary is provided - None[351]