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, 2021, and our other
filings with the SEC, including our quarterly and current reports that we have
filed since June 30, 2021 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 2022 refers to the year ending June 30, 2022. This report covers the three
months ended September 30, 2021. Results of operations for the three months
ended September 30, 2021 are not necessarily indicative of the results that may
be achieved for the full fiscal year ending June 30, 2022.
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, and hospitals.
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Recent Developments
Effective October 6, 2021, Dynatronics provided notice of termination for its
Master Service Agreement ("Agreement") with Millstone Medical Outsourcing, LLC
("Millstone") under which Millstone provided fulfillment and distribution
services. We will exit Millstone's facility by December 31, 2021, after which,
the Agreement will be terminated. Dynatronics agreed to pay Millstone the
contractual monthly fees up through December, 2021.
Management believes this action is consistent with our objective of improving
gross margins and profitability following the completion of previously announced
strategic actions to optimize the business by eliminating approximately 1,600
SKUs of low-margin, third-party distributed products.
Results of Operations
Net Sales
Net sales increased $168,000, or 1.4%, to $12,301,000 for the quarter ended
September 30, 2021, compared to net sales of $12,133,000 for the quarter ended
September 30, 2020. The year-over-year increase is primarily due to an increase
in customer demand compared to the prior year period in which we experienced the
impact of COVID-19 precautions and associated deferral on elective procedures
which reduced demand for our products. This was offset by a reduction in sales
of third-party distributed products which have been discontinued.
Gross Profit
Gross profit for the quarter ended September 30, 2021 decreased $238,000, or
about 6.1%, to $3,664,000, or 29.8% of net sales. By comparison, gross profit
for the quarter ended September 30, 2020 was $3,902,000, or 32.2% of net sales.
The year-over-year decrease in gross profit was primarily attributable to higher
freight and raw material costs due to the impact of COVID-19 on the global
supply chain, higher personnel costs, and changes to product mix. These items
were partially offset by the benefit of the employee retention credit under the
CARES Act, as amended, of $97,000 in the quarter ended September 30, 2021.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $149,000, or
3.5%, to $4,097,000 for the quarter ended September 30, 2021, compared to
$4,246,000 for the quarter ended September 30, 2020. Selling expenses decreased
$8,000 compared to the prior year period, due primarily to lower commission
expense and salaries for rehabilitation products sales force, partially offset
by higher marketing salaries. General and administrative ("G&A") expenses
decreased $141,000 compared to the prior-year period, driven primarily by the
benefit of the employee retention credit of $103,000.
Net Other Income (Expense)
Net other income for the quarter ended September 30, 2021, was $915,000 compared
to net other expense of $34,000 for the quarter ended September 30, 2020. The
increase in net other income is primarily due to a $943,000 employee retention
credit for funds received or receivable from the U.S. federal government under
the CARES Act.
Income (Loss) Before Income Tax
Pre-tax income for the quarter ended September 30, 2021 was $483,000 compared to
pre-tax loss of $378,000 for the quarter ended September 30, 2020. The $861,000
increase in pre-tax income was attributable to a decrease of $238,000 in gross
profit partially offset by a decrease of $149,000 in SG&A and an increase of
$949,000 in other income.
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Income Tax Provision (Benefit)
Income tax provision was $0 for both quarters ended September 30, 2021 and 2020.
See Liquidity and Capital Resources - Deferred Income Tax Assets below for more
information.
Net Income (Loss)
Net income was $483,000 for the quarter ended September 30, 2021, compared to
net loss of $378,000 for the quarter ended September 30, 2020. The reasons for
the changes in net income (loss) are the same as explained above under the
heading Net Income (Loss) Before Income Tax.
Net Income (Loss) Attributable to Common Stockholders
Net income attributable to common stockholders increased $867,000 to $296,000
for the quarter ended September 30, 2021, compared to net loss attributable to
common stockholders of $572,000 for the quarter ended September 30, 2020. The
increase in net income attributable to common stockholders for the quarter is
due primarily to a $861,000 increase in net income. On a per share basis, net
income attributable to common stockholders was $0.02 per share for the quarter
ended September 30, 2021, compared to a net loss of $0.04 per share for the
quarter ended September 30, 2020.
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
September 30, 2021, we had $5,493,000 in cash and cash equivalents and
restricted cash, compared to $6,254,000 as of June 30, 2021.
Working capital was $13,221,000 as of September 30, 2021, compared to working
capital of $12,433,000 as of June 30, 2021. The current ratio was 2.5 to 1 as of
September 30, 2021 and June 30, 2021. Current assets were 55.2% of total assets
as of September 30, 2021, and 53.4% of total assets as of June 30, 2021.
We believe that our cash generated from operations, current capital resources
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
Securities and Exchange Commission. On March 13, 2020, we filed a Prospectus
Supplement amending the registration statement (as amended, the "Original
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.
In April 2020, we sold an aggregate of 3,200,585 shares of common stock under
the equity distribution agreement in the ATM. We incurred offering costs
totaling $238,000, inclusive of commissions paid to the sales agents at a fixed
rate of 3.0%, together with legal, accounting and filing fees. Net proceeds from
the sale of the shares totaled $2,287,000. Proceeds were used to strengthen our
liquidity and working capital position. In February 2021, we sold an aggregate
of 2,230,600 shares of common stock under the equity distribution agreement in
the ATM. Offering costs were incurred totaling $138,000, inclusive of
commissions paid to the sales agents at a fixed rate of 3.0%, together with
legal, accounting and filing fees. Net proceeds from the sale of the shares
totaled $3,462,000. Proceeds were used to strengthen our liquidity and working
capital position. In May 2021, we filed a registration statement on Form S-3
together with a Prospectus Supplement, for the purpose of replacing the Original
Registration Statement, which expired after three years, pursuant to applicable
SEC rules. The replacement registration statement provides for potential futures
sales in conjunction with a prospectus supplement for up to $2,677,997 in common
stock in the ATM.
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Cash and Cash Equivalents
Our cash and cash equivalents and restricted cash position decreased $760,000 to
$5,342,000 as of September 30, 2021, compared to $6,102,000 as of June 30, 2021.
The primary use of cash in the three months ended September 30, 2021, was for
inventories.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
approximately $452,000, or 8.0%, to $6,095,000 as of September 30, 2021, from
$5,643,000 as of June 30, 2021. The increase was driven primarily by differences
in the timing of collections around the end date of each respective quarter.
Trade accounts receivable represents 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, increased $663,000 or 10.2%, to $7,189,000 as of
September 30, 2021, compared to $6,526,000 as of June 30, 2021. The increase was
primarily due to steps taken to adjust inventory management in response to the
impact of COVID-19 on the global supply chain and right-size incoming material
purchases to demand. 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 $642,000 or 17.2%, to $4,380,000 as of
September 30, 2021, from $3,738,000 as of June 30, 2021. The increase was driven
primarily by an increase in inventory purchases and timing of payments.
Line of Credit
Our line of credit was $0 as of September 30, 2021 and June 30, 2021. As of
September 30, 2021, there was approximately $5,200,000 available to borrow.
Debt
Long-term debt decreased approximately $3,000 to approximately $16,000 as of
September 30, 2021, compared to approximately $19,000 as of June 30, 2021. Our
long-term debt is primarily comprised of loans related to equipment.
Finance Lease Liability
Finance lease liability as of September 30, 2021 and June 30, 2021 totaled
approximately $2,514,000 and $2,596,000, respectively. Our finance lease
liability consists primarily of our Utah building lease. 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 $1,805,000 at September 30, 2021. 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 September 30, 2021
is $1,191,000. Lease payments, currently approximately $31,000, are payable
monthly and increase annually by approximately 2% per year over the life of the
lease. Imputed interest for the three months ended September 30, 2021 was
approximately $34,000. In addition to the Utah building, we have certain
equipment leases that we have determined are finance leases.
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Operating Lease Liability
Operating lease liability as of September 30, 2021 and June 30, 2021 totaled
approximately $2,250,000 and $2,470,000, respectively. Our operating lease
liability consists primarily of building leases for office, manufacturing, and
warehouse 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 September 30, 2021 and June 30, 2021, 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 months ended September 30, 2021.
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
September 30, 2021. No purchases have been made under this plan since September
2011.
Off-Balance Sheet Arrangements
As of September 30, 2021, 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, 2021. There
have been no material changes to the critical accounting policies previously
disclosed in that report.
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