dynt_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2022
or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______ to _______

	Commission File Number: 0-12697

Dynatronics Corporation

(Exact name of registrant as specified in its charter)

Utah		87-0398434
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1200 Trapp Road, Eagan, Minnesota 55121

(Address of principal executive offices, Zip Code)

(801) 568-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol		Name of each exchange on which registered
Common Stock, no par value per share		DYNT		The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of November 7, 2022, there were 18,983,049 shares of the issuer’s common stock outstanding.

DYNATRONICS CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022 TABLE OF CONTENTS
		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

	Cautionary Note Regarding Forward-Looking Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16

Item 4.	Controls and Procedures	16

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 1A.	Risk Factors	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults Upon Senior Securities	17

Item 4.	Mine Safety Disclosures	17

Item 5.	Other Information	17

Item 6.	Exhibits	18

Signatures		19

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DYNATRONICS CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30, 2022			June 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	803,607		$	550,110
Restricted cash		151,207			151,207
Trade accounts receivable, less allowance for doubtful accounts of $197,710 and $248,224 as of September 30, 2022 and June 30, 2022, respectively		5,529,311			5,416,044
Other receivables		460,545			446,493
Inventories, net		11,898,002			12,071,292
Prepaid expenses		496,965			590,820

Total current assets		19,339,637			19,225,966

Property and equipment, net		2,742,380			2,911,420
Operating lease assets		1,336,208			1,565,530
Intangible assets, net		4,082,000			4,240,725
Goodwill		7,116,614			7,116,614
Other assets		365,332			373,740

Total assets	$	34,982,171		$	35,433,995

Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable	$	6,929,562		$	6,168,961
Accrued payroll and benefits expense		1,194,463			1,359,624
Accrued expense		623,831			862,438
Warranty reserve		197,156			197,156
Current portion of long-term debt		1,898			5,362
Current portion of finance lease liability		299,890			321,085
Current portion of deferred gain		150,448			150,448
Current portion of operating lease liability		754,761			846,304
Other liabilities		23,967			23,967

Total current liabilities		10,175,976			9,935,345

Finance lease liability, net of current portion		1,872,225			1,938,531
Deferred gain, net of current portion		890,150			927,762
Operating lease liability, net of current portion		585,195			727,310
Other liabilities		205,592			206,489

Total liabilities		13,729,138			13,735,437
Commitments and contingencies

Stockholders’ equity:
Preferred stock, no par value: Authorized 50,000,000 shares; 3,351,000 shares issued and outstanding as of September 30, 2022 and June 30, 2022, respectively		7,980,788			7,980,788
Common stock, no par value: Authorized 100,000,000 shares; 18,581,255 shares and 18,198,315 shares issued and outstanding as of September 30, 2022 and June 30, 2022, respectively		33,763,980			33,533,003
Accumulated deficit		(20,491,735	)		(19,815,233	)

Total stockholders’ equity		21,253,033			21,698,558

Total liabilities and stockholders’ equity	$	34,982,171		$	35,433,995

See accompanying notes to condensed consolidated financial statements.

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DYNATRONICS CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended September 30,
	2022			2021
Net sales	$	12,053,201		$	12,300,896
Cost of sales		8,410,361			8,636,590
Gross profit		3,642,840			3,664,306

Selling, general, and administrative expenses		4,117,832			4,096,622
Operating loss		(474,992	)		(432,316	)

Other income (expense):
Interest expense, net		(31,456	)		(40,100	)
Other income, net		522			955,056
Net other income (expense)		(30,934	)		914,956

Income (loss) before income taxes		(505,926	)		482,640

Income tax provision		—			—

Net income (loss)		(505,926	)		482,640

Preferred stock dividend, in common stock, issued or to be issued		(170,576	)		(187,083	)

Net income (loss) attributable to common stockholders	$	(676,502	)	$	295,557

Net income (loss) per common share:
Basic and diluted	$	(0.04	)	$	0.02

Weighted average shares outstanding:
Basic and diluted		18,537,641			17,565,211

See accompanying notes to condensed consolidated financial statements.

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DYNATRONICS CORPORATION

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

	Common stock				Preferred stock				Accumulated			Total stockholders’
	Shares		Amount		Shares		Amount		deficit			equity
Balance at June 30, 2021		17,364,654	$	32,621,471		3,351,000	$	7,980,788	$	(15,088,734	)	$	25,513,525
Stock-based compensation		85,002		106,395		—		—		—			106,395
Preferred stock dividend, in common stock, issued or to be issued		154,640		187,083		—		—		(187,083	)		—
Net income		—		—		—		—		482,640			482,640
Balance at September 30, 2021		17,604,296		32,914,949		3,351,000		7,980,788		(14,793,177	)		26,102,560
Stock-based compensation		—		5,589		—		—		—			5,589
Preferred stock dividend, in common stock, issued or to be issued		128,144		182,153		—		—		(182,153	)		—
Net loss		—		—		—		—		(1,441,267	)		(1,441,267	)
Balance at December 31, 2021		17,732,440		33,102,691		3,351,000		7,980,788		(16,416,597	)		24,666,882
Stock-based compensation		30,000		36,804		—		—		—			36,804
Preferred stock dividend, in common stock, issued or to be issued		183,976		182,080		—		—		(182,080	)		—
Net loss		—		—		—		—		(1,471,550	)		(1,471,550	)
Balance at March 31, 2022		17,946,416		33,321,575		3,351,000		7,980,788		(18,070,227	)		23,232,136
Stock-based compensation		1,612		29,360		—		—		—			29,360
Preferred stock dividend, in common stock, issued or to be issued		250,287		182,068		—		—		(182,068	)		—
Net loss		—		—		—		—		(1,562,938	)		(1,562,938	)
Balance at June 30, 2022		18,198,315		33,533,003		3,351,000		7,980,788		(19,815,233	)		21,698,558
Stock-based compensation		84,506		60,401		—		—		—			60,401
Preferred stock dividend, in common stock, issued or to be issued		298,434		170,576		—		—		(170,576	)		—
Net loss		—		—		—		—		(505,926	)		(505,926	)
Balance at September 30, 2022		18,581,255	$	33,763,980		3,351,000	$	7,980,788	$	(20,491,735	)	$	21,253,033

See accompanying notes to condensed consolidated financial statements.

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DYNATRONICS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net income (loss)	$	(505,926	)	$	482,640
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		184,489			181,934
Amortization of intangible assets		158,725			176,475
Amortization of other assets		907			4,644
Stock-based compensation		60,401			106,395
Change in allowance for doubtful accounts receivable		(50,514	)		(49,635	)
Change in allowance for inventory obsolescence		12,451			(202,854	)
Amortization of deferred gain on sale/leaseback		(37,612	)		(37,612	)
Change in operating assets and liabilities:
Trade accounts receivable		(62,753	)		(402,044	)
Inventories		160,839			(459,756	)
Prepaid expenses and other receivables		79,803			(521,023	)
Other assets		7,501			(5,507	)
Accounts payable, accrued expenses, and other current liabilities		355,936			71,260

Net cash provided by (used in) operating activities		364,247			(655,083	)

Cash flows from investing activities:
Purchase of property and equipment		(19,785	)		(20,084	)

Net cash used in investing activities		(19,785	)		(20,084	)

Cash flows from financing activities:
Principal payments on long-term debt		(3,464	)		(3,202	)
Principal payments on finance lease liability		(87,501	)		(82,110	)

Net cash used in financing activities		(90,965	)		(85,312	)

Net change in cash and cash equivalents and restricted cash		253,497			(760,479	)

Cash and cash equivalents and restricted cash at beginning of the period		701,317			6,253,644

Cash and cash equivalents and restricted cash at end of the period	$	954,814		$	5,493,165

Supplemental disclosure of cash flow information:
Cash paid for interest	$	234		$	40,100
Supplemental disclosure of non-cash investing and financing activities
Preferred stock dividend, in common stock, issued or to be issued	$	170,576		$	187,083

See accompanying notes to condensed consolidated financial statements.

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DYNATRONICS CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

September 30, 2022

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 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.

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, 2022 (the “Annual Report”) filed with the SEC on September 22, 2022. The Condensed Consolidated Balance Sheet at June 30, 2022, 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 September 30, 2022 and its results of operations and its cash flows for the periods presented. 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 Company’s fiscal year begins on July 1 and ends on June 30 and references made to “fiscal year 2023” and “fiscal year 2022” refer to the Company’s fiscal year ending June 30, 2023 and the fiscal year ended June 30, 2022, 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.

Employee Retention Credit

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provided an employee retention credit which was a refundable tax credit against certain employment taxes. The Consolidated Appropriations Act extended and expanded the availability of the employee retention credit through June 30, 2021. Subsequently, the American Rescue Plan Act of 2021 extended the availability of the employee retention credit through December 31, 2021. This new legislation amended the employee retention credit to be equal to 70% of qualified wages paid to employees after December 31, 2020, and before January 1, 2022. During calendar year 2021, a maximum of $10,000 in qualified wages for each employee per qualifying calendar quarter may be counted in determining the 70% credit. Therefore, the maximum tax credit that can be claimed by an eligible employer is $7,000 per employee per qualifying calendar quarter of 2021. The Company qualifies for the employee retention credit for quarters that experience a significant decline in gross receipts, defined as quarterly gross receipts that are less than 80 percent of its gross receipts for the same calendar quarter in 2019. The Infrastructure Investment and Jobs Act retroactively ended the employee retention credit as of September 30, 2021. The Company qualified for the credit beginning on January 1, 2021 and received credits for qualified wages through September 30, 2021. During the quarter ended September 30, 2021, the Company recorded an employee retention credit totaling $1,143,000, of which, $97,000, $103,000, and $943,000 was recorded within cost of sales, selling, general, and administrative, and other income, respectively, on the Company’s condensed consolidated statements of operations.

Other Receivables

Other receivables consist of amounts due from our contract manufacturer for raw materials components provided for use in the production of our products. Payments are due from our contract manufacturer based on the usage of raw material components.

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Recent Accounting Pronouncements

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 of adoption of this guidance will have on its consolidated financial statements.

Note 2. Net Income (Loss) per Common Share

Net income (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 income (loss) per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Basic net income (loss) per common share is the amount of net income (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net income (loss) per common share is the amount of net income (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 (income) loss per common share because they are anti-dilutive, which for the three months ended September 30, 2022 and 2021, totaled 7,778,000 and 7,714,500, respectively.

Note 3. Convertible Preferred Stock

As of September 30, 2022, 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 October 2022, the Company paid $170,576 of preferred stock dividends with respect to the Series A Preferred and Series B Preferred that accrued during the three months ended September 30, 2022, by issuing 298,434 shares of common stock.

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Note 4. Inventories

Inventories consisted of the following:

	September 30, 2022			June 30, 2022
Raw materials	$	6,954,745		$	6,536,951
Work in process		527,776			313,549
Finished goods		4,807,137			5,599,997
Inventory reserve		(391,656	)		(379,205	)
	$	11,898,002		$	12,071,292

Note 5. 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 $249,366 and $248,953 for the three months ended September 30, 2022 and 2021, respectively.

Note 6. Revenue

As of September 30, 2022 and June 30, 2022, the rebate net receivable and rebate liability was $33,844 and $217,158, respectively. The rebate receivable and liability are included in accrued expenses in the accompanying condensed consolidated balance sheets. As of September 30, 2022 and June 30, 2022, the allowance for sales discounts was $12,922 and $17,632, 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 months ended September 30:

	Three Months Ended September 30,
	2022		2021
Physical Therapy and Rehabilitation Products	$	6,298,070	$	6,698,356
Orthopedic Soft Bracing Products		5,733,105		5,573,474
Other		22,026		29,066
	$	12,053,201	$	12,300,896

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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; expectations in connection with the company’s previously announced business optimization plan; 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, 2022, filed with the SEC, as well as in our other public filings with the SEC. Actual results may differ from projections as a result of these risks, 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.

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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 months ended September 30, 2022. Results of operations for the three months ended September 30, 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 decreased $248,000, or 2.0%, to $12,053,000 for the quarter ended September 30, 2022, compared to net sales of $12,301,000 for the quarter ended September 30, 2021. The year-over-year decrease is primarily due to a reduction in sales of third-party distributed products which have been discontinued. This was partially offset by 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.

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Gross Profit

Gross profit for the quarter ended September 30, 2022 decreased $21,000, or about 0.6%, to $3,643,000, or 30.2% of net sales. By comparison, gross profit for the quarter ended September 30, 2021 was $3,664,000, or 29.8% 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 decrease in gross profit was primarily attributable to a reduction in sales related to third-party distributed products that have been discontinued offset by net price realization and product mix.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $21,000, or 0.5%, to $4,118,000 for the quarter ended September 30, 2022, compared to $4,097,000 for the quarter ended September 30, 2021. Selling expenses increased $209,000 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 $188,000 compared to the prior-year period. The decrease in G&A is driven primarily by a reduction in professional services and salaries.

Net Other Income (Expense)

Net other expense for the quarter ended September 30, 2022, was $31,000 compared to net other income of $915,000 for the quarter ended September 30, 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.

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Income Tax Provision

Income tax provision was $0 for both quarters ended September 30, 2022 and 2021. See Liquidity and Capital Resources - Deferred Income Tax Assets below for more information.

Net Income (Loss)

Net loss for the quarter ended September 30, 2022 was $506,000 compared to pre-tax income of $483,000 for the quarter ended September 30, 2021. The $989,000 increase in pre-tax loss was attributable to a decrease of $946,000 in other income (expense), a decrease of $21,000 in gross profit, and an increase of $21,000 in SG&A.

Net Income (Loss) Attributable to Common Stockholders

Net loss attributable to common stockholders increased $973,000 to $677,000 for the quarter ended September 30, 2022, compared to net income attributable to common stockholders of $296,000 for the quarter ended September 30, 2021. The increase in net loss attributable to common stockholders for the quarter is due primarily to a $989,000 increase in net loss. On a per share basis, net loss attributable to common stockholders was $0.04 per share for the quarter ended September 30, 2022, compared to net income attributable to common stockholders of $0.02 per share for the quarter ended September 30, 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 September 30, 2022, we had $955,000 in cash and cash equivalents and restricted cash, compared to $701,000 as of June 30, 2022.

Working capital was $9,164,000 as of September 30, 2022, compared to working capital of $9,291,000 as of June 30, 2022. The current ratio was 1.9 to 1 as of September 30, 2022 and June 30, 2022. Current assets were 55.3% of total assets as of September 30, 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 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 increased $254,000 to $955,000 as of September 30, 2022, compared to $701,000 as of June 30, 2022. The primary source of cash for the three months ended September 30, 2022, was $364,000 of cash provided by operating activities.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, increased approximately $113,000, or 2.1%, to $5,529,000 as of September 30, 2022, from $5,416,000 as of June 30, 2022. 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, decreased $173,000 or 1.4%, to $11,898,000 as of September 30, 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 increased approximately $761,000 or 12.3%, to $6,930,000 as of September 30, 2022, from $6,169,000 as of June 30, 2022. The increase was driven primarily by an increase in inventory purchases and timing of payments.

Debt

Long-term debt decreased approximately $3,000 to approximately $2,000 as of September 30, 2022, compared to approximately $5,000 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 September 30, 2022 and June 30, 2022 totaled approximately $2,172,000 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 $2,057,000 at September 30, 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 September 30, 2022, is $1,041,000. 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 months ended September 30, 2022 was approximately $30,000. 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, 2022 and June 30, 2022 totaled approximately $1,340,000 and $1,574,000, 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, 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 months ended September 30, 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 September 30, 2022. No purchases have been made under this plan since September 2011.

Off-Balance Sheet Arrangements

As of September 30, 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information presented for the year ended June 30, 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our reports filed under the Securities Exchange Act of 1934, or Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of September 30, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2022, our disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is (a) recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms and is (b) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A.

The risk factors described in our Annual Report on Form 10-K for the year ended June 30, 2022 have not materially changed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits

31.1		Certification under Rule 13a-14(a)/15d-14(a) of principal executive officer and principal financial officer

32.1		Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) of principal executive officer and principal financial officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DYNATRONICS CORPORATION

Date: November 10, 2022	By:	/s/ John A. Krier
		John A. Krier
		President, Chief Executive Officer, and Chief Financial Officer
		(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)

SEC Form 10-Q filed by Dynatronics Corporation