The following discussion contains assumptions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed under the heading "Cautionary Note Regarding
Forward-Looking Statements," on page 1 of this Form 10-K, "Risk Factors" (Part
I, Item 1A of this Form 10-K) and elsewhere in this Form 10-K. These risks could
cause our actual results to differ materially from those anticipated in these
forward-looking statements.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto, which are included in Part II, Item 8 of
this report. In the following Management's Discussion and Analysis of Financial
Condition and Results of Operations, we have rounded many numbers to the nearest
one thousand dollars. These numbers should be read as approximate.
Overview
Wedesign, manufacture, and sell a broad range of restorative products for
clinical use in physical therapy, rehabilitation, orthopedics, pain management,
and athletic training. Through our distribution channels, we market and sell to
orthopedists, physical therapists, chiropractors, athletic trainers, sports
medicine practitioners, clinics, and hospitals.
Results of Operations
Fiscal Year 2022 Compared to Fiscal Year 2021
Net Sales
Net sales in fiscal year 2022 decreased $3,461,000, or 7.2%, to $44,338,000,
compared to net sales of $47,799,000 in fiscal year 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 revenue from
new products and 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 year ended June 30, 2022 decreased $2,213,000, or 17.2%, to
$10,673,000, or 24.1% of net sales. By comparison, gross profit for the year
ended June 30, 2021 was $12,886,000, or 27.0% of net sales which included the
impact of $488,000 in costs associated with exit activities as a result of
optimizing the business. The year-over-year decrease in gross profit was
primarily attributable to higher freight and raw material costs due to the
impact of COVID-19 on the global supply chain, higher personnel costs, and
changes to product mix.
Selling, General, and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses decreased $1,216,000, or
7.3%, to $15,430,000 for the year ended June 30, 2022, compared to $16,646,000
for the year ended June 30, 2021. Selling expenses decreased $462,000 compared
to the prior year period, due primarily to lower commission expense and salaries
for rehabilitation products sales force, partially offset by higher marketing
salaries. General and administrative ("G&A") expenses decreased $754,000
compared to the prior-year period. The decrease in SG&A was driven primarily by
the elimination of distributed products and our direct sales channel which has
reduced complexity and associated support costs and $513,000 in related costs
associated with the exit activities incurred in the prior-year period.
Interest Expense
Interest expense decreased approximately $68,000, or 31.4%, to $148,000 for the
year ended June 30, 2022, compared to $216,000 for the year ended June 30, 2021.
The decrease in interest expense is primarily due to lower average borrowings on
long-term debt and lower imputed interest related to finance leases. The largest
component of interest expense is imputed interest related to the sale/leaseback
of our Utah facility, which totaled $130,000 and $143,000, respectively, for the
years ended June 30, 2022 and 2021.
Gain on Extinguishment of Debt
Gain on extinguishment of debt decreased to $0 for the year ended June 30, 2022
compared to $3,518,000 for year ended June 30, 2021 due to a gain on
extinguishment of our paycheck protection program loan.
Other Income, net
Other income decreased approximately $1,538,000 to $911,000 for the year ended
June 30, 2022, compared to other income of $2,449,000 for the year ended June
30, 2021. The decrease in other income is primarily due to: (1) a $717,000 gain
on the sale of property and equipment, principally, our Tennessee property in
the prior-year period, and (2) a $783,000 decrease in employee retention credit
for funds received or receivable from the U.S. federal government under the
CARES Act.
Income (Loss) Before Income Taxes
Pre-tax loss for the year ended June 30, 2022 was $3,993,000 compared to income
of $1,991,000 for the year ended June 30, 2021. The change was primarily
attributable to a decrease of $2,213,000 in gross profit and a decrease of
$4,989,000 in net other income, partially offset by a decrease of $1,216,000 in
SG&A.
Net Income (Loss)
Net loss for the year ended June 30, 2022 was $3,993,000 compared to net income
of $2,001,000 for the year ended June 30, 2021. The reasons for the change in
net loss are the same as those given under the headings Income (Loss) Before
Income Taxes in this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A").
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Net Income (Loss) Attributable to Common Stockholders
Net loss attributable to common stockholders was $4,726,000 ($0.26 per share)
for the year ended June 30, 2022, compared to net income of $1,209,000 ($0.08
per share) for the year ended June 30, 2021. The change for the year is due
primarily to a $5,994,000 decrease in net income, partially offset by a $51,000
decrease in deemed dividends on convertible preferred stock and accretion of
discounts.
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 June 30, 2022, we had $550,000 in cash and cash equivalents, compared to
$6,102,000 as of June 30, 2021.
Working capital was $9,291,000 as of June 30, 2022, compared to working capital
of 12,433,000 as of June 30, 2021. The current ratio was 1.9 to 1 as of June 30,
2022 and 2.5 to 1 as of June 30, 2021. Current assets were 54.3% of total assets
as of June 30, 2022, and 53.4% of total assets as of June 30, 2021.
We believe that our cash generated from operations, current capital resources,
and equity proceeds 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 the
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 future 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 and Restricted Cash
Our cash and cash equivalents and restricted cash position decreased $5,552,000
to $701,000 as of June 30, 2022, compared to $ 6,254,000 as of June 30, 2021.
Primary uses of cash included $4,884,000 net cash used in operating activities,
of which, $5,545,000 related to an increase in inventory (see Inventories
below).
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, decreased
approximately $227,000, or 4.0%, to $5,416,000 as of June 30, 2022, from
$5,643,000 as of June 30, 2021. The decrease was primarily due to an decrease in
sales in the quarter ended June 30, 2022 compared to the quarter ended June 30,
2021. Trade accounts receivable represents amounts due from our customers
including dealers and distributors, medical practitioners, clinics, hospitals,
colleges, universities and sports teams. We believe that our estimate of the
allowance for doubtful accounts is adequate based on our historical experience
and relationships with our customers. Accounts receivable are generally
collected within approximately 40 days of invoicing.
Inventories
Inventories, net of reserves, increased $5,545,000, or 85.0%, to $12,071,000 as
of June 30, 2022, compared to $ 6,526,000 as of June 30, 2021. The increase was
primarily due to steps taken to adjust inventory management in response to the
impact of COVID-19 on the global supply chain and right-size incoming material
purchases to demand. During fiscal year 2022, we recorded in cost of goods sold
$155,000 in non-cash write-offs of inventory related to discontinued product
lines, excess repair parts, product rejected for quality standards, and other
non-performing inventory, compared to inventory write-offs of $452,000 in fiscal
year 2021. We believe that our estimate of the allowance for inventory reserves
is adequate based on our historical knowledge and product sales trends.
Accounts Payable
Accounts payable increased approximately $2,431,000, or 65.1%, to $6,169,000 as
of June 30, 2022, from $ 3,738,000 as of June 30, 2021. The increase in accounts
payable was driven primarily by an increase in inventory purchases and timing of
payments.
Line of Credit
The line of credit with Bank of the West ("Line of Credit") pursuant to a loan
and security agreement, as amended (the "Loan and Security Agreement"), matured
on January 15, 2022. On the expiration date, there were no outstanding
borrowings on the Line of Credit. As amended, the Loan and Security Agreement
provided for revolving credit borrowings in an amount up to the lesser of
$11,000,000 or the calculated borrowing base. Amounts outstanding bore interest
at LIBOR plus 2.25%. The Line of Credit was subject to a quarterly unused line
fee of .25%.
Borrowings on the Line of Credit were $0 as of June 30, 2021.
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Debt
Long-term debt decreased approximately $14,000 to approximately $5,000 as of
June 30, 2022, compared to approximately $19,000 as of June 30, 2021. Our
long-term debt is primarily comprised of loans related to equipment.
On April 29, 2020, we entered into a promissory note (the "Note") with Bank of
the West to evidence a loan in the amount of $3,477,000 under the paycheck
protection program ("PPP") established under the CARES Act, administered by the
U.S. Small Business Administration ("SBA"). In accordance with the requirements
of the CARES Act, we 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 accrued on the outstanding balance of the Note at a
rate of 1.00% per annum. On June 29, 2021, we received notification from Bank of
the West that the SBA approved our forgiveness application for the entire
balance of the Note for $3,518,000, including all accrued interest thereon,
leaving the Company with a remaining Note balance of zero as of June 30, 2021.
The gain on extinguishment of $3,518,000 is included in other income on the
Consolidated Statement of Operations for the year ended June 30, 2021.
Finance Lease Liability
Finance lease liability as of June 30, 2022 and 2021 totaled approximately
$2,260,000 and $2,596,000, respectively. Our finance lease obligations consist
primarily of a building lease. In conjunction with the sale and leaseback of our
Utah building in August 2014, we entered into a 15-year lease, classified as a
finance lease, originally valued at $3,800,000. The building lease asset is
amortized on a straight line basis over 15 years at approximately $252,000 per
year. Total accumulated amortization related to the leased building is
approximately $1,994,000 and $1,743,000 at June 30, 2022 and 2021, respectively.
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 is
$1,078,000 and $1,229,000 as of June 30, 2022 and 2021, respectively. 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 years ended June 30, 2022 and 2021 was approximately $130,000
and $143,000, respectively. In addition to the Utah building, we lease certain
equipment pursuant to arrangements which have been determined to be finance
leases. As of June 30, 2022, future minimum gross lease payments required under
the finance leases were as follows:
2023 $ 445,280
2024 384,754
2025 392,446
2026 400,292
2027 408,304
Thereafter 912,306
Total $ 2,943,382
Operating Lease Liability
Operating lease liability as of June 30, 2022 and June 30, 2021 totaled
approximately $1,574,000 and $2,470,000, respectively. Our operating lease
liability consists primarily of building leases for office, manufacturing, and
warehouse space.
Inflation
Cost inflation including increases in ocean container rates, raw material
prices, labor rates, and domestic transportation costs have impacted
profitability. Continued imbalances between supply and demand for these
resources may continue to exert upward pressure on costs. Our ability to recover
these costs increased through price increases may continue to lag the cost
increases, resulting in downward pressure on margins.
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Stock Repurchase Plan
In 2011, our Board of Directors adopted a stock repurchase plan authorizing
repurchases of shares in the open market, through block trades or otherwise.
Decisions to repurchase shares under this plan are based upon market conditions,
the level of our cash balances, general business opportunities, and other
factors. The Board may periodically approve amounts for share repurchases under
the plan. As of June 30, 2022, approximately $449,000 remained available under
this authorization for purchases under the plan. No purchases have been made
under this plan since 2011.
Critical Accounting Policies
This MD&A is based upon our Consolidated Financial Statements (see Part II, Item
8 below), which have been prepared in accordance with accounting principles
generally accepted in the U.S. ("GAAP"). The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses as well as the
disclosure of contingent assets and liabilities. We regularly review our
estimates and assumptions. The SEC has requested that all registrants address
their most critical accounting policies. The SEC has indicated that a "critical
accounting policy" is one which is both important to the representation of the
registrant's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
base our estimates on past experience and on various other assumptions our
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
will differ, and may differ materially from these estimates under different
assumptions or conditions. Additionally, changes in accounting estimates could
occur in the future from period to period. Our management has discussed the
development and selection of our most critical financial estimates with the
audit committee of our Board of Directors. The following paragraphs identify our
most critical accounting policies:
Inventories
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual cost
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out) or market. Inventory valuation reserves are maintained for
the estimated impairment of the inventory. Impairment may be a result of
slow-moving or excess inventory, product obsolescence or changes in the
valuation of the inventory. In determining the adequacy of reserves, we analyze
the following, among other things:
? Current inventory quantities on hand;
? Product acceptance in the marketplace;
? Customer demand;
? Historical sales;
? Forecast sales;
? Product obsolescence;
? Strategic marketing and production plans;
? Technological innovations; and
? Character of the inventory as a distributed item, finished manufactured
item or raw material.
Any modifications to estimates of inventory valuation reserves are reflected in
cost of goods sold within the statements of operations during the period in
which such modifications are determined necessary by management. As of June 30,
2022, and 2021, our inventory valuation reserve balance, was approximately
$379,000 and $627,000, respectively, and our inventory balance was $12,071,000
and $6,526,000, net of reserves, respectively.
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Revenue Recognition
Our sales force and distributors sell Manufactured and Distributed Products to
end users, including orthopedists, physical therapists, chiropractors, athletic
trainers, sports medicine practitioners, clinics, and hospitals. Revenue is
recognized when performance obligations under the terms of a contract with a
customer are satisfied which occurs upon the transfer of control of a product.
This occurs either upon shipment or delivery of goods, depending on whether the
contract is FOB origin or FOB destination. Revenue is measured as the amount of
consideration expected to be received in exchange for transferring products to a
customer. Contracts sometimes allow for forms of variable consideration
including rebates and incentives. In these cases, the Company estimates the
amount of consideration to which it will be entitled in exchange for
transferring products to customers utilizing the most likely amount method.
Rebates and incentives are estimated based on contractual terms or historical
experience and a liability is maintained for rebates and incentives that have
been earned but are unpaid. Revenue is reduced by estimates of potential future
contractual discounts including prompt payment discounts. Provisions for
contractual discounts are recorded as a reduction to revenue in the period sales
are recognized. Estimates are made of the contractual discounts that will
eventually be incurred. Contractual discounts are estimated based on negotiated
contracts and historical experience. Shipping and handling activities are
accounted for as fulfillment activities. As such, shipping and handling are not
considered promised services to our customers. Costs for shipping and handling
of products to customers are recorded as cost of sales.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $5,416,000 and $5,643,000, net of allowance for doubtful accounts of
$248,000 and $399,000 as of June 30, 2022 and 2021, respectively.
Deferred Income Taxes
A valuation allowance is required when there is significant uncertainty as to
the realizability of deferred tax assets. The realization of deferred 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 considered the following possible sources of taxable income when assessing
the realization of our deferred tax assets:
? future reversals of existing taxable temporary differences;
? future taxable income or loss, exclusive of reversing temporary
differences and carryforwards;
? tax-planning strategies; and
? taxable income in prior carryback years.
We considered both positive and negative evidence in determining the continued
need for a valuation allowance, including the following:
Positive evidence:
? Current forecasts indicate that we will generate pre-tax income and
taxable income in the future. However, there can be no assurance that our
strategic plans will result in profitability.
? A majority of our tax attributes have indefinite carryover periods.
Negative evidence:
? We have ten years of losses out of the last eleven fiscal years as of June
30, 2022.
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We place more weight on objectively verifiable evidence than on other types of
evidence and management currently believes that available negative evidence
outweighs the available positive evidence. We have therefore determined that we
do not meet the "more likely than not" threshold that deferred tax assets will
be realized. Accordingly, a valuation allowance is required. Any reversal of the
valuation allowance will favorably impact our results of operations in the
period of reversal.As of June 30, 2022 and June 30, 2021, we recorded a full
valuation allowance against our net deferred income tax assets. The anticipated
accumulated net operating loss carryforward as of June 30, 2022, is
approximately $14,826,000, which will begin to expire in 2037.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements included in Item 8 of the
Form 10-K for a description of recent accounting pronouncements.
Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations. We have no
transactions or obligations with related parties that are not disclosed,
consolidated into or reflected in our reported results of operations or
financial position. We do not guarantee any third-party debt.
Business Plan and Outlook
In April, 2021, we committed to a strategic business optimization plan to
eliminate approximately 1,600 SKUs of low-margin, third-party distributed
products and streamline physical therapy and rehabilitation product sales
exclusively to dealers. Sales of distributed products has been declining and the
maintenance of our own direct sales force has been perceived as competing with
some of our customers. These actions were taken as part of our efforts to
improve gross margins and profitability over the long-term. The elimination of
distributed products and our direct sales channel has reduced complexity and
associated support costs, while enhancing our focus on the higher margin
products we manufacture, and on our customers. On August 9, 2021, the Company
announced that the optimization initiatives announced on April 22, 2021 had been
substantially completed as planned.
This past year our focus has been on driving profitability in our business
through continued business optimization initiatives and new product launches,
while continuing to build our restorative products platform for long-term
success.
We are confident that the steps we have taken will position the Company for
success moving forward. In fiscal 2023 we are focused on executing our
strategies as follows:
? Drive sales through enhancing our partnerships with key strategic
accounts, demand generation, and continuing to deliver a superior customer
experience;
? Increase our operating profitability through disciplined product portfolio
management;
? Pursue merger and acquisition opportunities in our core markets through
pipeline management, disciplined valuation, and superior execution; and
? Bolster our communication with the investor community through investor
conferences and calls with equity research analysts and investors.
We are actively pursuing an acquisition strategy to consolidate other
manufacturers in our core markets (i.e. physical therapy, rehabilitation,
orthopedics, pain management, and athletic training). We are primarily seeking
candidates that fall into the following categories:
? Manufacturers in markets where we have a competitive advantage;
? Tuck-in manufacturers in adjacent markets; and
? Value-oriented businesses with growth potential, stable margins, and cash
flow.© Edgar Online, source Glimpses
DYNATRONICS CORPORATION 