DYNT Dynatronics Corp

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, 2022, and our other filings with the SEC, including our quarterly and current reports that we have filed since June 30, 2022 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 2023 refers to the year ending June 30, 2023. This report covers the three and six months ended December 31, 2022. Results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2023.

Overview

Dynatronics is a leading medical device company committed to providing high-quality restorative products designed to accelerate achieving optimal health. The Company designs, manufactures, and sells a broad range of 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, and hospitals. The Company's products are marketed under a portfolio of high-quality, well-known industry brands including Bird & Cronin®, Solaris™, Hausmann®, and PROTEAM™, among others. More information is available at www.dynatronics.com.

Results of Operations

Net Sales

Net sales increased $353,000, or 3.3%, to $10,883,000 for the quarter ended December 31, 2022, compared to net sales of $10,530,000 for the quarter ended December 31, 2021. Net sales increased $105,000, or 0.5%, to $22,936,000 for the six months ended December 31, 2022, compared to net sales of $22,831,000 for the six months ended December 31, 2021. 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.

Gross Profit

Gross profit for the quarter ended December 31, 2022 increased $981,000, or about 47.1%, to $3,062,000, or 28.1% of net sales. By comparison, gross profit for the quarter ended December 31, 2021 was $2,081,000, or 19.8% of net sales. Gross profit for the six months ended December 31, 2022 increased $960,000, or about 16.7%, to $6,705,000, or 29.2% of net sales. By comparison, gross profit for the six months ended December 31, 2021 was $5,745,000, or 25.2% of net sales. The increase in gross profit as a percentage of net sales was driven by net price realization and overall product mix. The year-over-year increase in gross profit was primarily attributable to a reduction in freight-in expenses, stabilized raw material costs, and changes in product mix. 

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $380,000, or 10.9%, to $3,862,000 for the quarter ended December 31, 2022, compared to $3,482,000 for the quarter ended December 31, 2021. Selling expenses increased $459,000 compared to the prior year period, due primarily to higher marketing program expenses and higher salaries. The increase in selling expenses was offset by a decrease in general and administrative (“G&A”) expenses of $79,000 compared to the prior-year period. The decrease in G&A was driven primarily by a reduction in professional services and salaries.

SG&A expenses increased $402,000, or 5.3%, to $7,980,000 for the six months ended December 31, 2022, compared to $7,578,000 for the six months ended December 31, 2021. Selling expenses increased $669,000 compared to the prior year period, due primarily to higher marketing program expenses and higher salaries. The increase in selling expenses was offset by a decrease in G&A expenses of $267,000 compared to the prior-year period. The decrease in G&A was driven primarily by a reduction in professional services and salaries.

Net Other Income (Expense)

Net other expense for the quarter ended December 31, 2022, was $37,000 compared to net other expense of $40,000 for the quarter ended December 31, 2021. The decrease in net other expense is primarily due to a $2,000 decrease in interest expense as a result of lower average borrowings on long-term debt. Net other expense for the six months ended December 31, 2022, was $68,000 compared to net other income of $875,000 for the six months ended December 31, 2021. The increase in net other expense 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 in the prior year.

Income Tax Provision

Income tax provision was $4,000 for the three and six months ended December 31, 2022 and $0 for the three and six months ended December 31, 2021. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information. 

Net Loss

Net loss for the quarter ended December 31, 2022 was $841,000 compared to a net loss of $1,441,000 for the quarter ended December 31, 2021. The $600,000 decrease in net loss was attributable to an increase of $981,000 in gross profit, a decrease of $3,000 in other expense, and offset by an increase of $380,000 in SG&A. Net loss was $1,347,000 for the six months ended December 31, 2022, compared to a net loss of $959,000 for the six months ended December 31, 2021. The $388,000 increase in net loss was attributable to an increase of $954,000 in other expense, increase of $401,000 in SG&A, and offset by an increase of $960,000 in gross profit.

Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders decreased $609,000 to $1,014,000 for the quarter ended December 31, 2022, compared to $1,623,000 for the quarter ended December 31, 2021. The decrease in net loss attributable to common stockholders for the quarter is due primarily to a $600,000 decrease in net loss. On a per share basis, basic and diluted net loss attributable to common stockholders was $0.27 per share for the quarter ended December 31, 2022, compared to $0.46 per share for the quarter ended December 31, 2021.

Net loss attributable to common stockholders increased $362,000 to $1,690,000 for the six months ended December 31, 2022, compared to $1,328,000 for the six months ended December 31, 2021. On a per share basis, basic and diluted net loss attributable to common stockholders was $0.45 per share for the six months ended December 31, 2022, compared to $0.38 per share for the six months ended December 31, 2021.

Liquidity and Capital Resources

We have historically financed operations through cash from operating activities, available cash reserves, and proceeds from the sale of our equity securities. As of December 31, 2022, we had $685,000 in cash and cash equivalents and restricted cash, compared to $701,000 as of June 30, 2022.

Working capital was $8,287,000 as of December 31, 2022, compared to working capital of $9,291,000 as of June 30, 2022. The current ratio was 1.9 to 1 as of December 31, 2022 and June 30, 2022. Current assets were 50.3% of total assets as of December 31, 2022, and 54.3% of total assets as of June 30, 2022.

We believe that our cash generated from operations, current capital resources, and equity proceeds provide sufficient liquidity to fund operations for the next 12 months. However, the continuing effects of the COVID-19 pandemic on the global supply chain, higher personnel costs, and changes to product mix, 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 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.

Reverse Stock Split

On November 17, 2022, the Company’s shareholders approved Articles of Amendment to the Company’s Amended and Restated Articles of Incorporation (the “Articles of Amendment”) to effect a reverse stock split at a ratio in the range of 1-for-2 to 1-for-5, with such ratio to be determined in the discretion of the Company’s board of directors and with such reverse stock split to be effected at such time and date, if at all, as determined by the Company’s board of directors in its sole discretion. Thereafter, the Company’s Board of Directors set the split ratio in the reverse stock split at 1-for-5 and approved and authorized the filing of the Articles of Amendment to effect the reverse stock split with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Articles of Amendment and reverse stock split became effective at 5:00 p.m. Eastern Standard Time on February 1, 2023. At the effective time, every five issued and outstanding shares of common stock were converted into one share of common stock, with any fractional shares resulting from the reverse stock split rounded up to the nearest whole share. The reverse stock split did not affect the Company’s authorized shares of common stock or preferred stock, which remained at 100,000,000 and 50,000,000 shares, respectively. The par value of each share of common stock remained unchanged. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted stock and warrants outstanding at February 1, 2023, which resulted in a proportional decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock and warrants, and, in the case of stock options and warrants, a proportional increase in the exercise price of all such stock options and warrants. Additionally, the reverse stock split had no impact on the number of shares of the Company’s preferred stock issued and outstanding. However, the conversion price of the outstanding preferred stock increased and the number of shares of common stock issuable upon conversion of such preferred stock decreased in proportion to the 1-for-5 split ratio.

Unless noted, all common shares and per share amounts contained in the condensed consolidated financial statements and management’s discussion and analysis have been retroactively adjusted to reflect a one-for-five reverse stock split.

Cash and Cash Equivalents

Our cash and cash equivalents and restricted cash position decreased $16,000 to $685,000 as of December 31, 2022, compared to $701,000 as of June 30, 2022. The primary use of cash for the six months ended December 31, 2022 was to pay down existing vendor payables.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, decreased approximately $185,000, or 3.4%, to $5,231,000 as of December 31, 2022, from $5,416,000 as of June 30, 2022. The decrease 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, decreased $1,325,000 or 11.0%, to $10,746,000 as of December 31, 2022, compared to $12,071,000 as of June 30, 2022. The decrease 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 decreased approximately $123,000 or 2.0%, to $6,046,000 as of December 31, 2022, from $6,169,000 as of June 30, 2022. The decrease was driven primarily by a decrease in inventory purchases and timing of payments.

Debt

Long-term debt decreased $5,118 to $244 as of December 31, 2022, compared to $5,362 as of June 30, 2022. Our long-term debt is primarily comprised of loans related to equipment.

Finance Lease Liability

Finance lease liability as of December 31, 2022 and June 30, 2022 totaled approximately $2,170,000 and $2,260,000, 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 $2,120,000 at December 31, 2022. 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 December 31, 2022, is $1,003,000. Lease payments, currently approximately $32,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. Imputed interest for the three and six months ended December 31, 2022 was approximately $30,000 and 60,000, respectively. 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 December 31, 2022 and June 30, 2022 totaled approximately $3,256,000 and $1,574,000, respectively. Our operating lease liability consists primarily of building leases for office, manufacturing, and warehouse space. The increase was primarily due to the Company’s decision to exercise its third option and extend its operating lease for an additional five years in New Jersey.

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 December 31, 2022 and June 30, 2022, 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 and six months ended December 31, 2022.

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 December 31, 2022. No purchases have been made under this plan since September 2011.

Off-Balance Sheet Arrangements

As of December 31, 2022, 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, 2022. There have been no material changes to the critical accounting policies previously disclosed in that report.