NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
December 31, 2020
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 financial statements (the
“Condensed Consolidated Financial Statements”) have
been prepared by the Company in accordance with generally accepted
accounting principles in the United States (“GAAP”) and
pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). Certain information
and footnote disclosures normally included in the financial
statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the SEC. As such,
these Condensed Consolidated Financial Statements should be read in
conjunction with the Company’s audited financial statements
and accompanying notes included in its Annual Report on Form 10-K
for the fiscal year ended June 30, 2020 (the “Annual
Report”) filed with the SEC on September 24, 2020. The
Condensed Consolidated Balance Sheet at June 30, 2020, has been
derived from the Annual Report.
The accounting policies followed by the
Company are set forth in Part II, Item 8, Note 1, Basis of
Presentation and Summary of Accounting Policies, of the Notes to
Financial Statements included in the Company’s Annual Report.
In the opinion of management, the Condensed Consolidated Financial
Statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the
Company’s financial position as of December 31, 2020 and its
results of operations and its cash flows for the periods presented.
The results of operations for the first six months of the fiscal
year are not necessarily indicative of results for the full year or
any future periods.
The Company’s
fiscal year begins on July 1 and ends on June 30 and references
made to “fiscal year 2021” and “fiscal year
2020” refer to the Company’s fiscal year ending June
30, 2021 and the fiscal year ended June 30, 2020,
respectively.
Use of Estimates
The preparation of
financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
periods presented.
The Company
evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, and adjusts those
estimates and assumptions when facts and circumstances dictate.
Actual results could differ materially from those estimates and
assumptions.
Assets Held for
Sale
Assets held for
sale include our Tennessee building and land that have met the
criteria of “held for sale” accounting, as specified by
Accounting Standards Codification 360, “Property, Plant, and
Equipment." No gain or loss
occurred as a result. The carrying amount of the land and
building is $30,287 and $815,571, respectively. The effect of
suspending depreciation on the assets held for sale is immaterial
to the results of operations. The assets held for sale are being
marketed for sale and it is the Company’s intention to
complete the sales of these assets within the upcoming
year.
Recent
Accounting Pronouncements
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (“Topic 740”):
Simplifying the Accounting for
Income Taxes, which is intended to simplify various aspects
related to accounting for income taxes. The standard is effective
for annual periods beginning after December 15, 2020 and interim
periods within, with early adoption permitted. Adoption of the
standard requires certain changes to be made prospectively, with
some changes to be made retrospectively. The Company is currently
assessing the impact of this standard on its financial condition
and results of operations.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity, which is intended to simplify the accounting for
certain financial instruments with characteristics of liabilities
and equity, including convertible instruments and contracts on an
entity’s own equity. The guidance allows for either full
retrospective adoption or modified retrospective adoption. The
guidance is effective for the Company in the first quarter of
fiscal year 2025 and early adoption is permitted. The Company is
evaluating the impact adoption of this guidance will have on its
consolidated financial statements.
Note 2. Net Loss per Common Share
Net
loss 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 loss per
common share does not assume exercise or conversion of securities
that would have an anti-dilutive effect.
Basic
net loss 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 loss per
common share is the amount of net loss 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.
All outstanding options, warrants and
convertible preferred stock for common shares are not included in
the computation of diluted net loss per common share because they
are anti-dilutive. For the three months ended December 31, 2020,
and 2019, shares underlying such options, warrants, and convertible
preferred stock totaled 10,355,870 and 11,607,954,
respectively, and for the six
months ended December 31, 2020, and 2019, totaled 10,461,107 and
11,685,597,
respectively.
Note
3. Convertible
Preferred Stock
As of December 31,
2020, the Company had issued and outstanding a total of 1,992,000
shares of Series A 8% Convertible Preferred Stock (“Series A
Preferred”) and 1,359,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred"). The Series A Preferred and
Series B Preferred are convertible into a total of 3,351,000 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 its 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. In November 2020,
the Company issued 330,000 shares of common stock upon conversion
of 230,000 shares of Series C
Non-Voting Convertible Preferred Stock and 100,000
shares of Series B Preferred.
In January 2021,
the Company paid approximately $182,000 of preferred stock
dividends with respect to the Series A Preferred and Series B
Preferred that accrued during the three months ended December 31,
2020, by issuing 224,797 shares of common
stock.
Note 4. Comprehensive Income
For the
three and six months ended December 31, 2020 and 2019,
comprehensive income was equal to the net income as presented in
the accompanying condensed consolidated statements of
operations.
Note 5. Inventories
Inventories
consisted of the following:
|
|
|
|
|
Raw
materials
|
$3,518,495
|
$4,798,489
|
|
Work in
process
|
536,144
|
427,744
|
|
Finished
goods
|
2,446,206
|
3,713,692
|
|
Inventory
obsolescence reserve
|
(359,739)
|
(568,083)
|
|
|
$6,141,106
|
$8,371,842
|
Note 6. Related-Party Transactions
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 $264,702 and $261,666 for the three months
ended December 31, 2020 and 2019, respectively,
and $529,405 and $523,332 for the six months
ended December 31, 2020 and 2019,
respectively.
Note 7. Line of Credit
Borrowings
on the Line of Credit were $0 and $1,012,934 as
of December 31, 2020 and June 30, 2020, respectively. As of
December 31, 2020, there was approximately $5,367,000 available to
borrow.
Note 8. Revenue
As of
December 31, 2020 and June 30, 2020, the rebate liability was
$305,359 and $247,388,
respectively. The rebate liability is included in accrued expenses
in the
accompanying condensed consolidated balance
sheets.
As of December 31,
2020 and June 30, 2020, the
allowance for sales discounts was $14,500 and $8,000, respectively.
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 and six months ended December 31:
|
|
Three
Months Ended
December
31
|
Six
Months Ended
December
31
|
|
|
|
|
|
|
|
Orthopedic Soft
Bracing Products
|
$5,082,484
|
$5,833,972
|
$10,642,401
|
$12,112,998
|
|
Physical Therapy
and Rehabilitation Products
|
6,824,049
|
9,283,017
|
13,321,279
|
19,320,737
|
|
Other
|
61,368
|
80,002
|
136,989
|
152,805
|
|
|
$11,967,901
|
$15,196,991
|
$24,100,669
|
$31,586,540
|
Note 9. Common
Stock
The Company maintains an equity incentive plan for the benefit of
employees. Incentive and
nonqualified stock options, restricted common stock, stock
appreciation rights, and other share-based awards may be granted
under the plans including performance-based awards.
On December 10, 2020, shareholders approved a new 2020 equity
incentive plan (“2020 Equity Plan”), setting aside
1,000,000 shares of common stock. The Company can
grant awards under the 2020 Plan or under the Dynatronics 2018
Equity Incentive Award Plan (the “2018 Plan”) until the
shares of common stock available for awards and issuance under the
2018 Plan have been exhausted.
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, 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.
These risks and uncertainties include, but are not limited to, the
uncertainty regarding the impact or duration of the Novel
Coronavirus Disease 2019 ("COVID-19") virus pandemic that is
adversely affecting communities and businesses globally, including
ours, as well as those factors 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, 2020, 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, 2020, and
our other filings with the SEC, including our quarterly and current
reports that we have filed since June 30, 2020 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 2021 refers to the year ending June 30, 2021. This
report covers the three and six months ended December 31, 2020.
Results of operations for the three and six months ended December
31, 2020 are not necessarily indicative of the results that may be
achieved for the full fiscal year ending June 30,
2021.
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 $3,229,000, or 21.2%, to
$11,968,000 for the quarter ended December 31, 2020, compared
to net sales of $15,197,000 for the
quarter ended December
31, 2019. Net sales decreased
$7,486,000, or 23.7%, to $24,101,000 for the six months ended
December 31,
2020, compared to net sales of $31,587,000 for the
six months ended December 31, 2019.
The year-over-year decrease is primarily due to
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, 2020 decreased $1,245,000, or about 27.1%, to $3,341,000, or
27.9% of net sales. By comparison, gross profit for the quarter
ended December 31,
2019 was $4,586,000,
or 30.2% of net sales. Gross profit for
the six months ended December 31, 2020 decreased $2,497,000, or
about 25.6%, to $7,243,000, or 30.1% of net sales. By comparison,
gross profit for the six months ended December 31, 2019 was
$9,740,000,
or 30.8% of net sales. The year-over-year decrease in
gross profit and gross margin percentage was primarily attributable
to
lower
sales which reduced
gross profit, and changes in the mix of sales
between our major product
categories.
Selling, General and
Administrative Expenses
Selling, general
and administrative (“SG&A”) expenses decreased
$680,000, or 14.7%, to $3,938,000 for the quarter ended
December 31,
2020, compared to $4,618,000 for the quarter ended
December 31,
2019. Selling
expenses decreased $479,000 compared to the prior year period,
due
primarily to lower commission expense on lower sales and decreased
sales management salaries. General and administrative
("G&A") expenses decreased $201,000 compared to the prior-year
period, driven primarily by a decrease in payroll and benefit costs
as a result of headcount
reductions.
SG&A expenses
decreased $1,360,000, or 14.3%, to $8,183,000 for the six months
ended December 31,
2020, compared to $9,543,000 for the six months ended
December 31,
2019. Selling
expenses decreased $1,056,000 compared to the prior year period,
due
primarily to lower commission expense on lower sales and decreased
sales management salaries. G&A expenses decreased
$304,000 compared to the prior-year period, driven primarily by a
decrease in payroll and benefit costs as a result of headcount
reductions.
Net (Loss) Income Before Income
Tax
Pre-tax loss for the quarter ended
December 31,
2020 was $663,000 compared to $138,000
for the quarter ended December 31, 2019. The $525,000 increase in
pre-tax loss was attributable to a decrease of $1,245,000
in gross profit partially offset by a decrease of $680,000 in
SG&A and a decrease of $39,000 in other expense. Pre-tax loss for
the six
months ended December
31, 2020 was $1,041,000 compared to $38,000
for the six months ended December 31, 2019. The $1,003,000 increase
in pre-tax loss was attributable to a decrease of $2,497,000
in gross profit partially offset by a decrease of $1,360,000 in
SG&A and a decrease of $136,000 in other
expense. The decrease in other expense is
primarily due to a decrease in interest expense as a result of
lower
average borrowings on our line of
credit.
Income Tax Provision
(Benefit)
Income tax provision was $10,000 for the
three and six months ended December 31, 2020, respectively and $0
for the three and six months ended December 31, 2019, respectively.
See Liquidity and Capital
Resources - Deferred Income Tax Assets below for more
information.
Net (Loss)
Income
Net
loss was $673,000 for
the quarter ended December 31, 2020, compared to $138,000 for the quarter ended December
31, 2019. Net loss was
$1,051,000 for the six
months ended December 31, 2020, compared to $38,000 for the six months ended December
31, 2019. The reasons for the changes in net (loss) income
are the same as explained above under the heading Net (Loss) Income Before Income
Tax.
Net Loss Attributable to Common Stockholders
Net
loss attributable to common stockholders increased $457,000 to $906,000 for the
quarter ended December 31, 2020, compared to $448,000 for the quarter ended
December 31, 2019. The increase in net loss attributable to common
stockholders for the quarter is due primarily to a $535,000
increase in net loss. On a per share basis, net income attributable
to common stockholders was $(0.06) per share for the quarter
ended December 31, 2020, compared to $(0.05) per share for the quarter
ended December 31, 2019.
Net loss
attributable to common stockholders increased $962,000 to $1,478,000 for the six
months ended December 31, 2020, compared to $517,000 for the six months ended
December 31, 2019. The increase in net loss attributable to common
stockholders is due primarily to a $1,013,000 increase in net loss.
On a per share basis, net income attributable to common
stockholders was $(0.10) per share for the six
months ended December 31, 2020, compared to $(0.06) per share for the six months
ended December 31, 2019.
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 December 31, 2020, we had $3,610,000 in cash and
cash equivalents and restricted cash, compared to $2,316,000 as of
June 30, 2020. During the three and six ended December 31, 2020, we
had positive cash flows from operating activities.
Working capital was
$7,095,000 as of December 31, 2020, compared to working capital of
$8,396,000 as of June 30, 2020. The current ratio was 1.6 to 1 as
of December 31, 2020 and 2.1 to 1 as of June 30, 2020. Current
assets were 48.2% of total assets as of December 31, 2020, and
42.8% of total assets as of June 30, 2020.
We believe that our cash generated from
operations, current capital resources including loan 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 SEC. On March 13, 2020, we filed a
Prospectus Supplement amending the 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.
On April 29, 2020, we entered into a
promissory note (the “Note”) with Bank of the West to
evidence a loan to the Company in the amount of $3,477,412 under
the Paycheck Protection Program (the “PPP”) established
under the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”), administered by the U.S. Small Business
Administration (“SBA”).
In accordance with the requirements of the CARES Act, we have used
the proceeds from the loan exclusively for qualified expenses under
the PPP, including payroll costs, mortgage interest, rent and
utility costs, as further detailed in the CARES Act and applicable
guidance issued by the SBA. Interest will accrue on the outstanding
balance of the Note at a rate of 1.00% per annum. We intend to
apply for forgiveness of all amounts due under the Note, in an
amount equal to the sum of qualified expenses under the PPP
incurred during the 24 weeks following initial disbursement (the
"Covered Period"). Notwithstanding our expected eligibility to
apply for forgiveness, no assurance can be given that we will
obtain forgiveness of all or any portion of amounts due under the
Note.
Subject to any forgiveness
granted under the PPP, the Note is scheduled to mature two years
from the date of initial disbursement and is payable in monthly
installments beginning 10 months after completion of the 24 week
Covered Period. The Note may be prepaid at any time prior to
maturity without penalty. The Note contains customary provisions
related to events of default, including, among others, failure to
make payments, bankruptcy, breaches of representations, significant
changes in ownership, and material adverse effects. The occurrence
of an event of default may result in the collection of all amounts
owing under the Note, and/or filing suit and obtaining judgment
against us. Our obligations under the Note are not secured by any
collateral or personal guarantees.
Cash and Cash
Equivalents
Our
cash and cash equivalents and restricted cash position increased
$1,294,000 to $3,610,000
as of December 31, 2020, compared to $2,316,000 as of June 30, 2020.
The primary source of cash in the six months ended December 31,
2020, was approximately $2,632,000 of net cash provided by
operating activities.
Accounts
Receivable
Trade
accounts receivable, net of allowance for doubtful accounts,
increased approximately $174,000, or 3.6%, to $5,068,000 as of
December 31, 2020, from $4,894,000 as of June 30, 2020.
The increase was driven primarily by an increase in sales compared
to the quarter ended June 30, 2020. Trade accounts receivable
represent 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 $2,231,000 or 26.6%, to $6,141,000
as of December 31, 2020, compared to $8,372,000 as of June 30, 2020.
The
decrease was primarily due to steps taken to right-size incoming
material purchases and adjust inventory management as part of our
working capital plans in response to the impacts of
COVID-19. In addition, as of December 31, 2020, other
receivables includes $1,113,000 due from our contract manufacturer
for raw materials components provided for use in the production of
our products. 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 $1,813,000 or 60.2%, to $4,827,000
as of December 31, 2020, from $3,014,000 as of June 30, 2020. The
increase was driven primarily by an increase in
inventory purchases and timing of
payments.
Line of
Credit
Our
line of credit balance decreased $1,013,000 to $0 as of December
31, 2020, compared to $1,013,000 as of June 30, 2020.
The decrease was driven primarily by positive cash flows from
operating activities. As of December 31,
2020, there was approximately $5,400,000 available to
borrow.
Debt
Long-term debt decreased
approximately $89,000 to approximately $3,516,000 as of December
31, 2020, compared to approximately $3,605,000 as of June 30, 2020.
Our
long-term debt is primarily comprised of the PPP Note and also
includes loans related to equipment and a vehicle. The principal
balance on the PPP Note is $3,477,412, of which,
$1,736,000 is classified as current debt at December 31,
2020.
Finance Lease Liability
Finance lease liability as of December 31,
2020 and June 30, 2020 totaled approximately $2,749,000 and
$2,914,000, respectively. Our finance lease liability consists
primarily of the lease on our facility located in Cottonwood
Heights, Utah (the "Utah Building"). 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 $1,617,000 at December 31, 2020. 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, 2020 is $1,304,000. Lease
payments, currently approximately $30,000, 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, 2020 was approximately $36,000 and $73,000, respectively.
Imputed interest for the three and six months ended December 31,
2019 was approximately $40,000 and $79,000, 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, 2020 and June 30, 2020 totaled
approximately $2,916,000 and $3,358,000, respectively. Our
operating lease liability consists primarily of building leases for
office,
manufacturing, warehouse and storage
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 December 31, 2020 and June 30, 2020, 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,
2020.
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, 2020. No purchases have been made
under this plan since September 2011.
Off-Balance Sheet Arrangements
As of
December 31, 2020, 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, 2020. There have been no material
changes to the critical accounting policies previously disclosed in
that report.