Dynatronics(DYNT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including balance sheets, operations, equity, cash flows, and accounting notes Condensed Consolidated Balance Sheets (Unaudited) | Metric | December 31, 2022 | June 30, 2022 | Change ($) | Change (%) | | :-------------------------- | :------------------ | :---------------- | :--------- | :--------- | | Total Assets | $34,986,694 | $35,433,995 | $(447,301) | (1.3%) | | Total Liabilities | $14,548,573 | $13,735,437 | $813,136 | 5.9% | | Total Stockholders' Equity | $20,438,121 | $21,698,558 | $(1,260,437) | (5.8%) | | Inventories, net | $10,745,937 | $12,071,292 | $(1,325,355) | (11.0%) | | Trade accounts receivable, net | $5,230,843 | $5,416,044 | $(185,201) | (3.4%) | | Operating lease liability, net | $2,321,167 | $727,310 | $1,593,857 | 219.1% | Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended December 31 | Metric | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :----------- | :--------- | | Net sales | $10,882,557 | $10,529,853 | $352,704 | 3.3% | | Gross profit | $3,062,186 | $2,080,661 | $981,525 | 47.2% | | Operating loss | $(799,520) | $(1,400,868) | $601,348 | (42.9%) | | Net loss | $(840,867) | $(1,441,267) | $600,400 | (41.7%) | | Net loss per common share (Basic and diluted) | $(0.27) | $(0.46) | $0.19 | (41.3%) | Six Months Ended December 31 | Metric | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :----------- | :--------- | | Net sales | $22,935,758 | $22,830,748 | $105,010 | 0.5% | | Gross profit | $6,705,026 | $5,744,966 | $960,060 | 16.7% | | Operating loss | $(1,274,513) | $(1,833,230) | $558,717 | (30.5%) | | Net loss | $(1,346,793) | $(958,627) | $(388,166) | 40.5% | | Net loss per common share (Basic and diluted) | $(0.45) | $(0.38) | $(0.07) | 18.4% | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Stockholders' Equity Changes (June 30, 2022 to December 31, 2022) | Item | June 30, 2022 | December 31, 2022 | Change | | :-------------------------------- | :-------------- | :------------------ | :------- | | Common stock (shares) | 3,639,663 | 3,796,610 | +156,947 | | Common stock (amount) | $33,533,003 | $33,963,063 | +$430,060 | | Preferred stock (shares) | 3,351,000 | 3,351,000 | 0 | | Preferred stock (amount) | $7,980,788 | $7,980,788 | $0 | | Accumulated deficit | $(19,815,233) | $(21,505,730) | $(1,690,497) | | Total stockholders' equity | $21,698,558 | $20,438,121 | $(1,260,437) | - Stock-based compensation for the six months ended December 31, 2022, totaled $86,356[16][18] - Preferred stock dividends paid in common stock for the six months ended December 31, 2022, amounted to $343,704[16][13] Condensed Consolidated Statements of Cash Flows (Unaudited) Cash Flows for Six Months Ended December 31 | Activity | 2022 | 2021 | Change | | :--------------------------------------- | :----------- | :----------- | :----------- | | Net cash provided by (used in) operating activities | $291,662 | $(2,409,692) | $2,701,354 | | Net cash used in investing activities | $(126,465) | $(98,351) | $(28,114) | | Net cash used in financing activities | $(181,020) | $(172,170) | $(8,850) | | Net change in cash and cash equivalents and restricted cash | $(15,823) | $(2,680,213) | $2,664,390 | | Cash and cash equivalents and restricted cash at end of period | $685,494 | $3,573,431 | $(2,887,937) | - Operating lease right-of-use assets obtained in exchange for lease obligations totaled $2,148,738 for the six months ended December 31, 2022[20] Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Presentation and Summary of Significant Accounting Policies - Dynatronics Corporation is a medical device company providing high-quality restorative products for physical therapy, rehabilitation, orthopedics, pain management, and athletic training[22] - A 1-for-5 reverse stock split became effective on February 1, 2023, converting every five issued and outstanding common shares into one, with proportionate adjustments to equity-linked securities[23] - The company recorded an Employee Retention Credit totaling $1,143,000 during the quarter ended September 30, 2021, with $943,000 recognized in other income[30] - The company is evaluating ASU 2020-06, effective for fiscal year 2025, which simplifies accounting for convertible instruments and contracts in an entity's own equity[32] Note 2. Net Loss per Common Share - All outstanding options, warrants, and convertible preferred stock were anti-dilutive and thus excluded from the computation of diluted net loss per common share[36] Anti-Dilutive Securities Excluded from Diluted EPS | Period | Number of Securities | | :-------------------------------- | :------------------- | | Three months ended Dec 31, 2022 | 1,555,615 | | Three months ended Dec 31, 2021 | 1,559,900 | | Six months ended Dec 31, 2022 | 1,562,900 | | Six months ended Dec 31, 2021 | 1,551,400 | Note 3. Convertible Preferred Stock - As of December 31, 2022, the company had 1,992,000 shares of Series A 8% Convertible Preferred Stock and 1,359,000 shares of Series B Convertible Preferred Stock outstanding, totaling 3,351,000 shares convertible into common stock[37] - Dividends on preferred shares accrue at 8% per year, payable quarterly in stock or cash. In January 2023, $173,128 of preferred stock dividends for Q4 2022 were paid by issuing 68,838 common shares[37][38] Note 4. Inventories Inventories, Net | Category | December 31, 2022 | June 30, 2022 | Change ($) | Change (%) | | :------------- | :------------------ | :---------------- | :--------- | :--------- | | Raw materials | $6,052,541 | $6,536,951 | $(484,410) | (7.4%) | | Work in process | $278,664 | $313,549 | $(34,885) | (11.1%) | | Finished goods | $4,718,633 | $5,599,997 | $(881,364) | (15.7%) | | Inventory reserve | $(303,901) | $(379,205) | $75,304 | (19.9%) | | Total | $10,745,937 | $12,071,292 | $(1,325,355) | (11.0%) | Note 5. Related-Party Transactions Related-Party Lease Expenses | Period | 2022 | 2021 | | :-------------------------------- | :----------- | :----------- | | Three months ended Dec 31 | $249,366 | $248,952 | | Six months ended Dec 31 | $498,732 | $497,905 | Note 6. Revenue Revenue by Major Product Category | Product Category | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Physical Therapy and Rehabilitation Products | $6,365,220 | $5,426,025 | $12,663,556 | $12,124,380 | | Orthopedic Soft Bracing Products | $4,488,550 | $5,076,785 | $10,221,389 | $10,650,259 | | Other | $28,787 | $27,043 | $50,813 | $56,109 | | Total Net Sales | $10,882,557 | $10,529,853 | $22,935,758 | $22,830,748 | - The net rebate receivable (liability) shifted from a liability of ($217,158) at June 30, 2022, to a receivable of $51,606 at December 31, 2022[41] Cautionary Note Regarding Forward-Looking Statements - The report contains forward-looking statements based on management's current expectations and assumptions, which are subject to substantial risks and uncertainties[44][45] - Risks include the impact or duration of the COVID-19 pandemic and other factors detailed in the Annual Report on Form 10-K[45] - The company assumes no obligation to update forward-looking statements after the report date[46] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition, operations, liquidity, capital resources, and reverse stock split Overview - Dynatronics is a leading medical device company providing high-quality restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training[49] - The company markets products under brands including Bird & Cronin®, Solaris™, Hausmann®, and PROTEAM™[50] Results of Operations Net Sales - Net sales increased by $353,000 (3.3%) to $10,883,000 for the quarter ended December 31, 2022, and by $105,000 (0.5%) to $22,936,000 for the six months ended December 31, 2022[51] - The increase is primarily due to higher customer demand compared to the prior year, which was impacted by COVID-19 precautions[51] Gross Profit - Gross profit increased by $981,000 (47.1%) to $3,062,000 (28.1% of net sales) for the quarter, and by $960,000 (16.7%) to $6,705,000 (29.2% of net sales) for the six months ended December 31, 2022[52] - The increase in gross profit percentage was driven by net price realization, overall product mix, reduced freight-in expenses, and stabilized raw material costs[52] Selling, General and Administrative Expenses - SG&A expenses increased by $380,000 (10.9%) to $3,862,000 for the quarter and by $402,000 (5.3%) to $7,980,000 for the six months ended December 31, 2022[53][54] - The increase was primarily due to higher marketing program expenses and salaries in selling, partially offset by a decrease in general and administrative expenses from reduced professional services and salaries[53][54] Net Other Income (Expense) - Net other expense for the quarter ended December 31, 2022, was $37,000, a slight decrease from $40,000 in the prior year, due to lower interest expense[55] - For the six months, net other expense was $68,000, compared to net other income of $875,000 in the prior year, primarily due to the absence of a $943,000 employee retention credit received in 2021[55] Income Tax Provision - Income tax provision was $4,000 for both the three and six months ended December 31, 2022, compared to $0 in the prior year periods[56] - A full valuation allowance against net deferred income tax assets resulted in no reported income tax expense associated with operating profit[73] Net Loss - Net loss decreased by $600,000 to $841,000 for the quarter ended December 31, 2022, primarily due to a $981,000 increase in gross profit, partially offset by increased SG&A[57] - Net loss increased by $388,000 to $1,347,000 for the six months ended December 31, 2022, mainly due to a $954,000 increase in other expense (absence of ERC) and increased SG&A, despite a $960,000 increase in gross profit[57][58] Net Loss Attributable to Common Stockholders - Net loss attributable to common stockholders decreased by $609,000 to $1,014,000 for the quarter ended December 31, 2022, resulting in basic and diluted EPS of $(0.27)[59] - For the six months, net loss attributable to common stockholders increased by $362,000 to $1,690,000, with basic and diluted EPS of $(0.45)[60] Liquidity and Capital Resources Overall Liquidity - Cash and cash equivalents and restricted cash decreased slightly to $685,000 as of December 31, 2022, from $701,000 as of June 30, 2022[61] - Working capital was $8,287,000 as of December 31, 2022, down from $9,291,000 as of June 30, 2022, while the current ratio remained stable at 1.9 to 1[62] - Management believes current liquidity is sufficient for the next 12 months, but acknowledges potential adverse effects from the COVID-19 pandemic on the global supply chain and higher personnel costs[63] Equity Distribution Agreement - The company has an at-the-market (ATM) offering program to sell common stock up to an aggregate amount of $10,000,000[64] - A replacement registration statement filed in May 2021 provides for potential future sales of up to $2,677,997 in common stock under the ATM[65] Reverse Stock Split - A 1-for-5 reverse stock split became effective on February 1, 2023, converting every five issued and outstanding common shares into one[66] - The split resulted in proportionate adjustments to the exercise price and/or number of shares for stock options, restricted stock, and warrants, and increased the conversion price of preferred stock[66] - The reverse stock split did not affect the company's authorized shares of common or preferred stock, or the number of preferred shares outstanding[66] Cash and Cash Equivalents - Cash and cash equivalents and restricted cash decreased by $16,000 to $685,000 as of December 31, 2022, from $701,000 as of June 30, 2022[67] - The primary use of cash for the six months ended December 31, 2022, was to pay down existing vendor payables[67] Accounts Receivable - Trade accounts receivable, net, decreased by approximately $185,000 (3.4%) to $5,231,000 as of December 31, 2022, primarily due to differences in the timing of collections[68] Inventories - Inventories, net, decreased by $1,325,000 (11.0%) to $10,746,000 as of December 31, 2022, reflecting adjustments to inventory management in response to global supply chain impacts and demand[69] Accounts Payable - Accounts payable decreased by approximately $123,000 (2.0%) to $6,046,000 as of December 31, 2022, mainly due to a decrease in inventory purchases and timing of payments[70] Debt - Long-term debt decreased by $5,118 to $244 as of December 31, 2022, primarily consisting of loans related to equipment[71] Finance Lease Liability - Finance lease liability totaled approximately $2,170,000 as of December 31, 2022, primarily related to the Utah building lease[72] - A deferred gain of $1,003,000 from the sale and leaseback of the Utah building is being recognized at approximately $150,000 per year[72] Operating Lease Liability - Operating lease liability increased significantly to approximately $3,256,000 as of December 31, 2022, from $1,574,000 as of June 30, 2022[72] - The increase was primarily due to the company exercising its third option to extend its New Jersey operating lease for an additional five years[72] Deferred Income Tax Assets - The company recorded a full valuation allowance against its net deferred income tax assets due to uncertainty regarding their realizability, resulting in no reported income tax expense for the periods presented[73] Stock Repurchase Plans - Approximately $449,000 remained authorized under the stock repurchase plan as of December 31, 2022, with no purchases made since September 2011[74] Off-Balance Sheet Arrangements - As of December 31, 2022, the company had no off-balance sheet arrangements[75] Critical Accounting Policies - There have been no material changes to the critical accounting policies previously disclosed in the company's Annual Report on Form 10-K for the year ended June 30, 2022[76] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures from the prior Annual Report on Form 10-K - No material changes from the information presented for the year ended June 30, 2022[78] Item 4. Controls and Procedures Management concluded disclosure controls were effective; no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022[80] Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[81] PART II. OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings were reported - No legal proceedings were reported[83] Item 1A. Risk Factors No material changes to risk factors from the prior Annual Report on Form 10-K - The risk factors described in the Annual Report on Form 10-K for the year ended June 30, 2022, have not materially changed[84] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - No unregistered sales of equity securities and use of proceeds were reported[85] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[86] Item 4. Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures were reported[87] Item 5. Other Information No other information requiring disclosure was reported - No other information requiring disclosure was reported[88] Item 6. Exhibits Lists exhibits filed as part of Form 10-Q, including amendments, certifications, and XBRL documents Exhibits Filed | Exhibit No. | Description | | :---------- | :---------- | | 3.1 | Articles of Amendment to Amended and Restated Articles of Incorporation | | 4.1 | Specimen Stock Certificate | | 31.1 | Certification under Rule 13a-14(a)/15d-14(a) of principal executive officer | | 31.2 | Certification under Rule 13a-14(a)/15d-14(a) of principal financial officer | | 32.1 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | Inline XBRL Instance Document | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover Page Interactive Data File | Signatures - The report was signed by John A. Krier, President, Chief Executive Officer, and Chief Financial Officer, on February 9, 2023[93]