NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 2019
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 balance sheets as of September 30,
2019, and June 30, 2019, condensed consolidated statements of
operations for the three months ended September 30, 2019 and 2018,
and condensed consolidated statements of stockholders' equity and
cash flows (“Financial Statements”) of Dynatronics for
the three months ended September 30, 2019 and 2018, should be read
in conjunction with the audited financial statements and notes
thereto as of and for the year ended June 30, 2019 included in the
Company’s Annual Report on Form 10-K (“Annual
Report”) filed with the U.S. Securities and Exchange
Commission (the “SEC”) on September 25, 2019. In the
opinion of management, the accompanying Financial Statements have
been prepared by the Company in accordance with United States
generally accepted accounting principles (“GAAP”) for
interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP
have been condensed or omitted. In the opinion of the Company's
management, the Financial Statements reflect all adjustments,
consisting of only normal, recurring adjustments, necessary to
fairly state our financial position, results of operations, and
cash flows. The September 30, 2019 condensed consolidated
balance sheet was derived from audited financial statements, but
does not include all GAAP disclosures. The results of operations
for the first three months of the fiscal year are not necessarily
indicative of results for the full year or any future
periods.
The preparation
of these unaudited condensed
consolidated financial
statements requires
our management to make estimates and
judgments that affect the amounts reported in the financial statements and the
accompanying notes. The
Company’s actual results may differ from these estimates
under different assumptions or conditions.
Reclassification
Certain
amounts in the prior year's condensed consolidated balance sheet
have been reclassified for comparative purposes to conform to the
presentation in the current year's condensed consolidated balance
sheet.
Recent
Accounting Pronouncements
In February 2016, the Financial Accounting
Standards Board issued ASU No. 2016-02, Leases (Topic 842,) a new
guidance on leases. This guidance replaces the prior lease
accounting guidance in its entirety. The underlying principle of
the new standard is the recognition of right-of-use ("ROU") assets
and lease liabilities by lessees for substantially all leases. The
standard also requires additional quantitative and qualitative
disclosures. The guidance is effective for interim and annual
reporting periods beginning after December 15, 2018. The standard
requires a modified retrospective approach, which includes several
optional practical expedients. Accordingly, the standard is
effective for the Company on July 1,
2019.
The Company adopted Topic 842 as of
July 1, 2019 using a modified retrospective method. Under this
method, financial results reported in periods prior to July 1, 2019
are unchanged. The Company elected the ‘package of practical
expedients’ which permits the Company to carryforward the
historical lease classification. Adoption of the standard resulted
in the recording of additional ROU assets and lease liabilities for
operating leases of $3,749,809 as of July 1, 2019. The adoption of
this guidance did not have an impact on net
income.
Note 2. Acquisitions
Bird & Cronin
As of September 30,
2019, the earn-out liability was $375,000.
On
August 19, 2019, the Company entered an agreement to
pay the earn-out in four equal monthly payments of
$125,000, beginning in
September 2019. The first payment was made on
September 4, 2019. Subsequent payments were made on
October 4, 2019 and on November 4,
2019. The final payment will be made on December 4,
2019.
Note 3. Net Income per Common Share
Net
income 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 income
per common share does not assume exercise or conversion of
securities that would have an anti-dilutive effect.
Basic net income
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 income 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 and to each share of potential common stock
outstanding during the period, unless inclusion of potential common
stock would have an anti-dilutive effect.
The reconciliations between the basic and diluted weighted-average
number of common shares outstanding for
the three months ended September 30 are as
follows:
|
|
|
|
|
Basic
weighted-average number of common shares outstanding during the
period
|
8,679,231
|
8,160,431
|
|
Weighted-average
number of dilutive potential common shares outstanding during the
period
|
-
|
240,393
|
|
Diluted
weighted-average number of common and potential common shares
outstanding during the period
|
8,679,231
|
8,400,824
|
Certain
outstanding options, warrants and convertible preferred stock for
common shares are not included in the computation of diluted net
income per common share because they were anti-dilutive, which for
the three months ended September 30, 2019, and 2018, totaled
11,887,083 and
2,776,106, respectively.
Note
4. Convertible
Preferred Stock and Common Stock Warrants
As of September
30, 2019, the Company had issued and outstanding a total of
2,000,000 shares of Series A 8% Convertible Preferred Stock
(“Series A Preferred”) and 1,459,000 shares of Series B
8% Convertible Preferred Stock ("Series B Preferred"). The Series A
Preferred and Series B Preferred are convertible into a total of
3,459,000 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 our 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. As
of September
30, 2019, there were also issued and outstanding 1,440,000
shares of Series C Non-Voting Convertible Preferred Stock
(“Series C Preferred”). The Series C Preferred shares
are non-voting, do not receive dividends, and have no liquidation
preferences or redemption rights.
Note 5. Comprehensive Income
For the
three months ended September 30, 2019 and 2018, comprehensive
income was equal to the net income as presented in the accompanying
condensed consolidated statements of operations.
Note 6. Inventories
Inventories
consisted of the following:
|
|
|
|
|
Raw
materials
|
$5,798,849
|
$5,830,140
|
|
Work in
process
|
840,147
|
706,128
|
|
Finished
goods
|
4,705,477
|
5,129,806
|
|
Inventory
obsolescence reserve
|
(214,491)
|
(138,553)
|
|
|
$11,129,982
|
$11,527,521
|
Note
7. Leases
Management
determines if a contract is or contains a lease at inception or
modification of a contract. A contract is or contains a lease if
the contract conveys the right to control the use of an identified
asset for a period in exchange for consideration. Control over the
use of the identified asset means the lessee has both (a) the right
to obtain substantially all of the economic benefits from the use
of the asset and (b) the right to direct the use of the asset. Such
assets are classified as ROU assets with a corresponding lease
liability.
Finance and operating lease ROU assets and liabilities are recorded
at commencement at the present value of future minimum lease
payments over the expected lease term. As the implicit discount
rate for the present value calculation is not determinable in most
of the Company’s leases, management uses the Company’s
incremental borrowing rate based on the information available at
commencement of the lease. The expected lease terms include options
to extend the lease when it is reasonably certain the Company will
exercise such options. Lease expense for minimum lease payments is
recognized on a straight-line basis over the expected lease
term. Leases
with an expected term of 12 months or less are not accounted for on
the balance sheet and the related lease expense is recognized on a
straight-line basis over the expected lease term.
The Company has operating and finance leases for various
administrative, manufacturing, and distribution facilities and
equipment. Most
of the Company’s leases include one or more options to renew
and extend the lease term 2 years to 5 years. The exercise of lease renewal
options is typically at the Company's sole discretion, however, as
a material economic incentive to exercise the option exists, the
majority of renewals to extend the lease terms are included in the
ROU assets and lease liabilities as they are reasonably certain of
exercise. The Company’s lease agreements do not
contain any material nonlease components, residual value
guarantees, or material restrictive covenants.
Leases recorded on the balance sheet consist of the
following:
|
Leases
|
Classification on the Balance Sheet
|
|
|
|
|
|
|
Assets
|
|
|
|
Operating
lease assets
|
Property
and equipment, net
|
$3,534,949
|
|
Finance
lease assets
|
Property
and equipment, net
|
$2,795,834
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Current
portion of operating lease liability
|
$897,209
|
|
Finance
|
Current
portion of finance lease liability
|
$299,421
|
|
Noncurrent
|
|
|
|
Operating
|
Operating
lease liability, net of current portion
|
$2,637,740
|
|
Finance
|
Finance
lease liability, net of current portion
|
$2,830,489
|
Other
information related to lease term and discount rate is as
follows:
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating
leases
|
|
|
Finance
leases
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating
leases
|
4.6%
|
|
Finance
leases
|
5.8%
|
The
components of lease expense are as follows:
|
|
Classification on the Statement of Operations
|
Three Months Ended
September 30, 2019
|
|
Operating lease cost:
|
|
|
|
Operating
lease cost
|
Cost
of sales
|
$70,515
|
|
Operating
lease cost
|
Selling,
general, and administrative expenses
|
187,401
|
|
Short
term lease cost
|
Selling,
general, and administrative expenses
|
15,750
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization
of finance lease assets
|
Cost
of sales
|
$35,670
|
|
Amortization
of finance lease assets
|
Selling,
general, and administrative expenses
|
48,857
|
|
Interest
on finance lease liabilities
|
Interest
expense, net
|
44,867
|
|
Total
lease cost
|
|
$403,060
|
Supplemental
cash flow information related to leases is as
follows:
|
|
Three Months Ended
September 30, 2019
|
|
ROU assets obtained in exchange for lease
liabilities:
|
|
|
Operating leases
|
$3,749,809
|
|
Finance leases
|
$3,086
|
Future minimum lease payments are summarized as
follows:
|
|
|
|
|
Year ending June 30,
|
|
|
|
2020
(excluding the three months ended September 30, 2019)
|
$486,000
|
$341,250
|
|
2021
|
190,000
|
462,286
|
|
2022
|
-
|
469,536
|
|
2023
|
-
|
443,056
|
|
2024
|
-
|
384,754
|
|
Thereafter
|
-
|
2,113,348
|
|
Total
future minimum lease payments
|
$676,000
|
$4,214,230
|
|
|
|
|
|
Imputed
interest
|
|
904,615
|
|
Deferred
rent
|
|
177,181
|
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 $261,666 and $261,780 for the three months
ended September 30, 2019 and 2018,
respectively.
Note 8. Line of Credit
The Company has a line of credit (“Line of Credit”)
available pursuant to a loan and security agreement (the
“Loan and Security Agreement”), as amended, with Bank
of the West, that matures on December 15, 2020. The
Company’s obligations under the Line of Credit are secured by
a first-priority security interest in substantially all of the
Company’s assets. The Line of Credit requires a lockbox
arrangement and contains affirmative and negative covenants,
including covenants that restrict the Company's ability to, among
other things, incur or guarantee indebtedness, incur liens, dispose
of assets, engage in mergers and consolidations, make acquisitions
or other investments, make changes in the nature of its business,
and engage in transactions with affiliates. The agreement also
contains financial covenants including a maximum monthly
consolidated leverage and a minimum monthly consolidated fixed
charge coverage ratio. As amended, the Loan and Security Agreement
provides for revolving credit borrowings in an amount up to the
lesser of $11,000,000 or the calculated borrowing base. The
borrowing base is computed monthly and is equal to the sum of
stated percentages of eligible accounts receivable and inventory,
less a reserve. Amounts outstanding bear interest at LIBOR plus
2.25% (4.6% as of June 30, 2019). The Line of Credit is
subject to an unused line fee of .25%.
On June 21, 2019, the Company entered into a Fifth Modification of
the Loan and Security Agreement (the
“Modification”). The Modification includes, among other
things, an amendment to certain provisions of the Loan and Security
Agreement, including changes to the financial covenants of
the Line of Credit, eliminates the consolidated leverage ratio
and amends the minimum consolidated fixed charge coverage ratio. As
modified, the fixed charge coverage ratio will apply only when the
excess availability amount under the Line of Credit is
less than the greater of $1,000,000 or 10% of the borrowing base.
The Modification also adjusts upward the permissible limits of
senior funded indebtedness and capital
expenditures.
Borrowings
on the Line of Credit were $5,076,906 and $ 6,540,639
as of September 30, 2019 and June 30, 2019, respectively. As of
September 30, 2019, there was approximately $2,593,000 available to
borrow.
Note 9. Accrued Payroll and Benefits Expense
As of
September 30, 2019 and June 30, 2019, the accrued payroll and benefits
expense balance included $167,308 and $310,903,
respectively, of accrued severance expense. The Company recognized
$68,750 and $103,858
in severance expense during the three months ended September 30,
2019 and 2018, respectively. Severance expense is included in
selling, general, and administrative expenses.
Note 10. Revenue
As of September 30, 2019 and June 30, 2019,
the rebate liability was $318,449 and $287,430,
respectively. The rebate liability is included in accrued expenses
in the
accompanying condensed consolidated balance
sheets.
As of September 30, 2019 and June 30,
2019, the allowance for sales discounts was
$14,500. 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 months ended September 30:
|
|
|
|
|
Orthopedic
Soft Goods and Medical Supplies
|
$6,279,026
|
$5,872,168
|
|
Physical
Therapy and Rehabilitation Equipment
|
10,037,720
|
11,044,841
|
|
Other
|
72,803
|
148,827
|
|
|
$16,389,549
|
$17,065,836
|
Note 11. Subsequent Events
In
October 2019, the Company paid approximately $167,000 of preferred
stock dividends with respect to the Series A Preferred and Series B
Preferred that accrued during the three months ended September 30,
2019, by issuing 165,251 shares of common stock.
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 (the “Securities Act”), 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. Some of the risks and uncertainties that
may cause actual results to differ from those expressed or implied
in the forward-looking statements are 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, 2019,
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, 2019, and
our other filings with the SEC, including our quarterly and current
reports that we have filed since June 30, 2019 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 2020 refers to the year ending June 30, 2020. This
report covers the three months ended September 30, 2019. Results of
operations for the three months ended September 30, 2019 are not
necessarily indicative of the results that may be achieved for the
full fiscal year ending June 30,
2020.
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.
Results
of Operations
Net Sales
Net
sales decreased $676,000, or 4.0%, to $16,390,000 for the quarter
ended September 30,
2019, compared to net sales of $17,066,000
for the quarter ended September 30, 2018. The
year-over-year decrease in net sales was driven by a reduction in
sales of physical therapy
and rehabilitation products primarily in our direct
channel.
Gross Profit
Gross profit for the quarter ended September 30, 2019
decreased $393,000, or about
7.1%, to $5,154,000, or 31.4% of net sales. By comparison, gross
profit for the quarter ended September 30, 2018 was
$5,547,000,
or 32.5% of net sales. The year-over-year decrease in gross profit
was attributable to lower sales of
physical therapy and rehabilitation products, which accounted for
approximately $220,000 in lower gross profit, and by reduced gross
margin which accounted for approximately $173,000 in lower gross
profit. The year-over-year decrease in gross margin
percentage to 31.4% from 32.5% was due primarily to lower sales of
our physical therapy and rehabilitation equipment and to a higher
portion of sales being through our dealer channels at lower pricing
and lower gross margin, with a corresponding decrease in selling
costs.
Selling, General and Administrative Expenses
Selling, general
and administrative (“SG&A”) expenses decreased
$572,000, or 10.4%, to $4,925,000 for the quarter ended
September 30,
2019, compared to $5,497,000 for the quarter ended
September 30,
2018. Selling expenses represented
$302,000 of the decrease in SG&A expenses due primarily to
lower commission expense on lower sales and lower sales management
salaries during the quarter. General and administrative
(“G&A”) expenses represented $270,000 of the
decrease in SG&A expenses. The primary
components of the decrease in G&A expenses included: (1) a
decrease of $39,000 in severance expense; and (2) decreases
totaling $231,000 in other G&A
expenses.
Net Income Before Income Tax
Pre-tax income for
the
quarter ended September
30, 2019 was $99,000 compared to $316,000
for the quarter ended September 30, 2018. The $217,000 decline in
pre-tax income was attributable to the impact of (1) $393,000 decrease in gross profit and (2)
$396,000 decrease in other income primarily due to the $375,000
change in the fair value of the earn-out payment related to the
Bird & Cronin acquisition recognized in the period ended
September 30, 2018 offset by the $572,000 decrease in SG&A
expenses.
Income Tax Provision (Benefit)
Income
tax provision was $0 for both quarters ended September 30, 2019 and
2018. See Liquidity and Capital
Resources - Deferred Income Tax Assets below for more
information.
Net Income
Net
income was $99,000 for
the quarter ended September 30, 2019, compared to $316,000 for the quarter ended September
30, 2018. The reasons for the changes in net income are the same as
explained above under the heading Net Income Before Income
Tax.
Net Income Attributable to Common Stockholders
Net
income attributable to common stockholders decreased $197,000 to net loss of $68,000
for the quarter ended September 30, 2019, compared to net income of
$129,000 for the
quarter ended September 30, 2018. The decrease in net income
attributable to common stockholders for the quarter is due
primarily to a $217,000 decrease in net income. On a per share
basis, net income attributable to common stockholders was
$(0.01) per share for
the quarter ended September 30, 2019, compared to $0.02 per share for the quarter
ended September 30, 2018.
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. During the quarter ended September 30, 2019, we had
positive cash flows from operating activities. We believe that our
cash generated from operations, current capital resources, and
available credit provide sufficient liquidity to fund operations
for the next 12 months.
Working
capital was $5,172,000
as of September 30, 2019, compared to working capital of
$5,638,000 as of June
30, 2019. The current ratio was 1.4 to 1 as of September 30, 2019
and 1.4 to 1 as of
June 30, 2019.
Cash and Cash Equivalents
Our
cash and cash equivalents and restricted cash position increased
$219,000 to $475,000
as of September 30, 2019, compared to $256,000 as of June 30, 2019. The
primary source of cash in the three months ended September 30,
2019, was approximately $1,993,000 of net cash provided by
operating activities.
Accounts Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
decreased approximately $195,000, or 2.6%, to $7,300,000 as
of September 30, 2019, from $7,495,000 as of June 30, 2019.
The decrease was driven primarily by a decrease in the time to
collect receivables. 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, decreased $398,000
or 3.4%, to $11,130,000 as of September 30, 2019, compared
to $11,528,000 as of
June 30, 2019. Inventory levels fluctuate based on timing of large
inventory purchases from domestic and overseas suppliers as well as
variations in sales and production activities. 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 $933,000 or 23.4%, to $4,923,000
as of September 30, 2019, from $3,990,000 as of June 30, 2019. The
increase was driven primarily by the timing of international
purchases and an increase in the average time to pay suppliers.
Line of Credit
Our
line of credit balance decreased $1,464,000 to $5,077,000 as of
September 30, 2019, compared to $6,541,000 as of June 30, 2019.
The decrease was driven primarily by positive cash flows from
operating activities. As of September 30,
2019, there was approximately $2,593,000 available to
borrow.
Debt
Long-term
debt decreased approximately $47,000 to approximately $257,000 as
of September 30, 2019, compared to approximately $303,000 as of
June 30, 2019. Our long-term debt is primarily comprised of
the mortgage loan on our office and manufacturing facility in
Tennessee maturing in 2021, and also includes loans related to
equipment and a vehicle. The principal balance on the mortgage loan
is approximately $203,000, of which $52,000 is classified as
long-term debt, with monthly principal and interest payments of
$13,000.
Finance Lease Liability
Finance lease
liability as of September 30, 2019 and June 30, 2019 totaled
approximately $3,130,000 and $3,199,000, 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 $1,302,000 at September 30, 2019. 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, 2019 is $1,492,000. Lease
payments, currently approximately $27,000, 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,
2019 was approximately $40,000. 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 September 30, 2019 and June 30, 2019 totaled
approximately $3,535,000 and $0, respectively. The operating
lease liability was recorded upon the adoption of ASU No.
2016-02, Leases. Our operating lease liability consists primarily
of building leases for office,
manufacturing, warehouse and storage
space.
Acquisition Earn-Out
Liability
Acquisition
earn-out liability decreased $125,000 or 25.08%, to $375,000 as of September 30,
2019, from $500,000 as of
June 30, 2019. The decrease is due to a $125,000 payment made in
the quarter ended September 30,
2019.
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, 2019 and June 30, 2019, 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,
2019.
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, 2019. No purchases have been made
under this plan since September 2011.
Off-Balance Sheet Arrangements
As of
September 30, 2019, 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, 2019. There have been no material
changes to the critical accounting policies previously disclosed in
that report.