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 December 31, ~~2017~~2018

☐ 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.)

7030 Park Centre Drive, Cottonwood Heights, UTUtah 84121

(Address of principal executive offices, Zip Code)

(801) 568-7000

(Registrant’s telephone number, including area code)

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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. ~~(Check one)~~

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	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 ☑

~~The number~~As of February 4, 2019, there were 8,263,546 shares ~~outstanding~~ of the registrant’s common stock ~~no par value, as of February 2, 2018 was 7,934,262.~~outstanding.

DYNATRONICS CORPORATION

FORM 10-Q

~~QUARTER~~FOR THE QUARTERLY PERIOD ENDED ~~December~~DECEMBER 31, ~~2017~~2018

TABLE OF CONTENTS

DYNATRONICS CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

Assets

December 31, 2017

June 30, 2017

     Current assets:

Cash and cash equivalents
$3,652,342
$254,705
Trade accounts receivable, less allowance for doubtful accounts of $383,356 as of December 31, 2017 and $382,333 as of June 30, 2017
  7,385,608
  5,281,348
Other receivables
  139,366
  33,388
Inventories, net
  11,605,299
  7,397,682
Prepaid expenses
  893,933
  503,800



          Total current assets
  23,676,548
  13,470,923



Property and equipment, net
  5,970,836
  4,973,477
Intangible assets, net
  7,516,028
  2,754,118
Goodwill
  7,872,863
  4,302,486
Other assets
  532,611
  562,873



          Total assets
$45,568,886
$26,063,877



Liabilities and Stockholders' Equity





     Current liabilities:


Accounts payable
$4,451,050
$2,334,563
Accrued payroll and benefits expense
  1,358,754
  1,472,773
Accrued expenses
  878,300
  656,839
Income tax payable
  9,654
  8,438
Warranty reserve
  205,850
  202,000
Line of credit
  6,742,979
  2,171,935
Current portion of long-term debt
  158,954
  151,808
Current portion of capital lease
  199,300
  193,818
Current portion of deferred gain
  150,448
  150,448
Current portion of acquisition holdback
  430,624
  294,744



          Total current liabilities
  14,585,913
  7,637,366



Long-term debt, net of current portion
  386,632
  461,806
Capital lease, net of current portion
  2,986,689
  3,087,729
Deferred gain, net of current portion
  1,604,777
  1,680,001
Acquisition holdback and earn out liability, net of current portion
  2,716,667
  750,000
Deferred rent
  138,513
  122,585



          Total liabilities
  22,419,191
  13,739,487
Commitments and contingencies





     Stockholders' equity:


Preferred stock, no par value: Authorized 50,000,000 shares; 4,889,000 shares and 3,559,000 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
  11,641,816
  8,501,295
Common stock, no par value: Authorized 100,000,000 shares; 7,864,715 shares and 4,653,165 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
  19,802,351
  11,838,022
Accumulated deficit
  (8,294,472)
  (8,014,927)



          Total stockholders' equity
  23,149,695
  12,324,390



          Total liabilities and stockholders' equity
$45,568,886
$26,063,877



See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

Assets	December 31, 2018	June 30, 2018
Current assets:
Cash and cash equivalents	$523,524	$1,696,116
Trade accounts receivable, less allowance for doubtful accounts of $191,500 as of December 31, 2018 and $370,300 as of June 30, 2018	6,930,882	7,810,846
Other receivables	2,401	52,819
Inventories, net	10,435,504	10,987,855
Prepaid expenses	531,024	778,654
Income tax receivable	96,269	95,501

Total current assets	18,519,604	21,421,791

Property and equipment, net	5,722,366	5,850,899
Intangible assets, net	6,769,566	7,131,758
Goodwill	7,116,614	7,116,614
Other assets	524,281	532,872

Total assets	$38,652,431	$42,053,934

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$3,090,874	$3,412,960
Accrued payroll and benefits expense	1,270,334	1,929,465
Accrued expenses	1,050,247	830,243
Warranty reserve	205,850	205,850
Line of credit	5,148,356	6,286,037
Current portion of long-term debt	169,213	164,003
Current portion of capital lease obligations	226,029	226,727
Current portion of deferred gain	150,448	150,448
Current portion of acquisition holdback and earn-out liability	966,667	1,379,512

Total current liabilities	12,278,018	14,585,245

Long-term debt, net of current portion	215,089	303,348
Capital lease obligations, net of current portion	2,858,955	2,972,540
Deferred gain, net of current portion	1,454,329	1,529,553
Acquisition holdback and earn-out liability, net of current portion	-	875,000
Deferred tax liabilities, net	203,949	-
Other liabilities	290,798	411,466

Total liabilities	17,301,138	20,677,152
Commitments and contingencies

Stockholders' equity:
Preferred stock, no par value: Authorized 50,000,000 shares; 4,899,000 shares and 4,899,000 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively	11,641,816	11,641,816
Common stock, no par value: Authorized 100,000,000 shares; 8,188,815 shares and 8,089,398 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively	20,714,752	20,225,107
Accumulated deficit	(11,005,275)	(10,490,141)

Total stockholders' equity	21,351,293	21,376,782

Total liabilities and stockholders' equity	$38,652,431	$42,053,934

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended

Six Months Ended

December 31

December 31,

2017

2016

2017

2016

Net sales
$18,081,333
$8,713,355
$30,879,304
$16,876,089
Cost of sales
  12,311,354
  5,640,048
  20,769,933
  11,008,094
Gross profit
  5,769,979
  3,073,307
  10,109,371
  5,867,995





Selling, general, and administrative expenses
  5,109,809
  2,851,236
  8,932,511
  5,615,594
Research and development expenses
  553,487
  309,476
  805,336
  588,360
Operating profit (loss)
  106,683
  (87,405)
  371,524
  (335,959)










Other income (expense):




   Interest expense, net
  (103,706)
  (63,408)
  (180,514)
  (122,728)
   Other income, net
  11,371
  55,494
  21,985
  77,735
Net other expense
  (92,335)
  (7,914)
  (158,529)
  (44,993)





Income (loss) before income taxes
  14,348
  (95,319)
  212,995
  (380,952)





Income tax (provision) benefit
  -

  -

  -

  -





Net income (loss)
  14,348
  (95,319)
  212,995
  (380,952)





Deemed dividend on convertible preferred stock and accretion of discount
  (1,023,786)
  (375,858)
  (1,023,786)
  (375,858)
Preferred stock dividend, cash
  (104,884)
     -
  (104,884)
  -

Convertible preferred stock dividend, in common stock
  (200,594)
  (88,792)
  (387,655)
  (177,777)





Net loss attributable to common stockholders
$(1,314,916)
$(559,969)
$(1,303,330)
$(934,587)





Basic and diluted net loss per common share
$(0.23)
$(0.19)
$(0.25)
$(0.33)





Weighted-average common shares outstanding:









Basic and diluted
  5,735,159
  2,881,111
  5,241,604
  2,861,299






See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2018	2017	2018	2017

Net sales	$15,439,966	$18,081,333	$32,505,801	$30,879,304
Cost of sales	10,760,093	12,311,354	22,278,704	20,769,933
Gross profit	4,679,873	5,769,979	10,227,097	10,109,371

Selling, general, and administrative expenses	4,772,678	5,663,296	10,269,300	9,737,847
Operating (loss) income	(92,805)	106,683	(42,203)	371,524

Other income (expense):
Interest expense, net	(141,788)	(103,706)	(262,630)	(180,514)
Other (expense) income, net	(2,288)	11,371	383,553	21,985
Net other (expense) income	(144,076)	(92,335)	120,923	(158,529)

(Loss) income before income taxes	(236,881)	14,348	78,720	212,995

Income tax provision	(203,949)	-	(203,949)	-

Net (loss) income	(440,830)	14,348	(125,229)	212,995

Deemed dividend on convertible preferred stock and accretion of discount	-	(1,023,786)	-	(1,023,786)
Preferred stock dividend, cash	-	(104,884)	-	(104,884)
Convertible preferred stock dividend, in common stock	(203,268)	(200,594)	(389,905)	(387,655)

Net loss attributable to common stockholders	$(644,098)	$(1,314,916)	$(515,134)	$(1,303,330)

Basic and diluted net loss per common share	$(0.08)	$(0.23)	$(0.06)	$(0.25)

Weighted-average common shares outstanding:
Basic and diluted	8,193,324	5,735,159	8,176,877	5,241,604

See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

December 31

2017

2016

Cash flows from operating activities:

       Net income (loss)
$212,995
$(380,952)
       Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:


             Depreciation and amortization of property and equipment
  184,010
  106,098
             Amortization of intangible assets
  254,090
  15,340
             Amortization of other assets
  40,681
  60,069
             Amortization of building capital lease
  125,967
  125,967
             Gain on sale of property and equipment
  (5,197)
  (19,252)
             Stock-based compensation expense
  117,073
  102,989
             Change in allowance for doubtful accounts receivable
  (6,978)
  48,073
             Change in allowance for inventory obsolescence
  49,739
  42,751
             Deferred gain on sale/leaseback
  (75,224)
  (75,224)
             Change in operating assets and liabilities:


                  Receivables, net
  33,546
  62,135
                  Inventories, net
  (120,175)
  (630,132)
                  Prepaid expenses
  (297,144)
  (174,016)
                  Other assets
  (10,419)
  (18,799)
                  Income tax payable
  (1,236)
  1,066
                  Accounts payable and accrued expenses
  1,175,114
  684,319



                              Net cash provided by (used in) operating activities
  1,676,842
  (49,568)



Cash flows from investing activities:


       Purchase of property and equipment
  (84,494)
  (36,818)
       Net cash paid in acquisition, net of cash received - see Note 2
  (9,063,017)
  -

       Proceeds from sale of property and equipment
  10,355
  32,000



                              Net cash provided by (used in) investing activities
  (9,137,156)
  (4,818)



Cash flows from financing activities:


       Principal payments on long-term debt
  (68,028)
  (84,239)
       Principal payments on long-term capital lease
  (95,558)
  (90,373)
Payment of acquisition holdbacks
  (44,744)
  -

       Net change in line of credit
  4,571,044
  -

       Proceeds from issuance of preferred stock, net
  6,600,121
  928,554
       Preferred stock dividends paid in cash
  (104,884)
  -



                              Net cash provided by (used in) financing activities
  10,857,951
  753,942



                              Net change in cash and cash equivalents
  3,397,637
  699,556



Cash and cash equivalents at beginning of the period
  254,705
  966,183



Cash and cash equivalents at end of the period
$3,652,342
$1,665,739



Supplemental disclosure of cash flow information:


       Cash paid for interest
$172,893
$124,797
Supplemental disclosure of non-cash investing and financing activity:


       Deemed dividend on convertible preferred stock and accretion of discount
$1,023,786
$375,858
       Preferred stock dividends paid or to be paid in common stock
  387,655
  187,901
       Preferred stock issued to acquire "Bird & Cronin"
  4,000,000
  -

       Acquisition holdback
  2,147,291
  -

       Conversion of preferred stock to common stock
  7,459,600
  -

       Accrued compensation paid in common stock
  -

  26,388



See accompanying notes to condensed consolidated financial statements.

DYNATRONICS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended
	December 31,
	2018	2017
Cash flows from operating activities:
Net (loss) income	$(125,229)	$212,995
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	281,055	184,010
Amortization of intangible assets	362,192	254,090
Amortization of other assets	21,074	40,681
Amortization of capital lease assets	137,234	125,967
Loss (gain) on sale of property and equipment	1,813	(5,197)
Stock-based compensation expense	99,740	117,073
Change in allowance for doubtful accounts receivable	(178,800)	(6,978)
Change in allowance for inventory obsolescence	(35,147)	49,739
Amortization deferred gain on sale/leaseback	(75,224)	(75,224)
Deferred income taxes	203,949	-
Change in fair value of earn-out liability	(375,000)	-
Change in operating assets and liabilities:
Trade accounts receivable	1,109,182	33,546
Inventories	348,392	(120,175)
Prepaid expenses	247,630	(297,144)
Other assets	(12,483)	(10,419)
Income tax receivable	(768)	(1,236)
Accounts payable and accrued expenses	(881,881)	1,175,114

Net cash provided by operating activities	1,127,729	1,676,842

Cash flows from investing activities:
Purchase of property and equipment	(52,463)	(84,494)
Net cash paid in acquisitions	-	(9,063,017)
Proceeds from sale of property and equipment	-	10,355

Net cash used in investing activities	(52,463)	(9,137,156)

Cash flows from financing activities:
Principal payments on long-term debt	(83,049)	(68,028)
Principal payments on long-term capital lease	(114,283)	(95,558)
Payment of acquisition holdbacks	(912,845)	(44,744)
Net change in line of credit	(1,137,681)	4,571,044
Proceeds from issuance of preferred stock, net	-	6,600,121
Preferred stock dividends paid in cash	-	(104,884)

Net cash (used in) provided by financing activities	(2,247,858)	10,857,951

Net change in cash and cash equivalents	(1,172,592)	3,397,637

Cash and cash equivalents at beginning of the period	1,696,116	254,705

Cash and cash equivalents at end of the period	$523,524	$3,652,342

Supplemental disclosure of cash flow information:
Cash paid for interest	$265,251	$172,893
Supplemental disclosure of non-cash investing and financing activity:
Deemed dividend on convertible preferred stock and accretion of discount	-	1,023,786
Preferred stock dividends paid or to be paid in common stock	389,905	387,655
Inventory reclassified to demonstration equipment	239,106	-
Preferred stock issued to acquire "Bird & Cronin"	-	4,000,000
Acquisition holdback	-	2,147,291
Conversion of preferred stock to common stock	-	7,459,600

See accompanying notes to condensed consolidated financial statements.

~~DYNATRONICS~~DYNATRONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, ~~2017~~2018

~~NOTE~~Note 1. ~~PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unauditedcondensed consolidated balance sheets as of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, the condensed consolidated statements of operations for the three and six months ended December 31, 2018 and 2017, ~~and 2016,~~ and condensed consolidated statements of cash flows for the six months ended December 31, 2018 and 2017,should be read in conjunction with the audited financial statements and ~~2016, were prepared by~~notes thereto as of and for the year ended June 30, 2018 included in the Dynatronics Corporation and ~~its~~ subsidiaries ~~(collectively,~~(the “Company”) Annual Report on Form 10-K (“Annual Report”) filed with the “~~Company~~”U.S. Securities and Exchange Commission (the “SEC”) ~~without audit pursuant to~~on September 27, 2018. The accompanying financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and ~~the rules~~Article 10 of Regulation S-X. Accordingly, certain information and ~~regulations of the Securities and Exchange Commission (“SEC”). Certain information and~~footnote disclosures normally included in financial statements prepared in accordance with ~~U.S. generally accepted accounting principles (“U.S.~~ GAAP”) have been condensed or ~~omitted pursuant to such rules and regulations.~~omitted. In the opinion of the Company's management, the accompanying condensed consolidated financial statements for the periods presented reflect all ~~necessary~~ adjustments, ~~which consist~~consisting of only of normal, recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows.TheDecember 31, 2018 condensed consolidated balance sheet was derived from audited financial statements, but does not include all GAAP disclosures. The unaudited condensed consolidated financial statements for the interim periods are not necessarily indicative of results for the full year.

The preparation of these unaudited condensed consolidated financial statements requires the Company's management to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.

Research and Development Costs

Research and development ("R&D") costs are expensed as incurred. R&D expense for the three and six months ended December 31, 2018 totaled $14,453 and $25,759, respectively. R&D expense for the three and six months ended December 31, 2017 totaled $553,487 and $805,336, respectively. R&D expense is included in selling, general, and administrative expenses in the condensed consolidated statement of operations.

Reclassification

Certain amounts in the prior year's condensed consolidated statement of operations have been ~~made~~reclassified for comparative purposes to ~~present fairly~~conform to the presentation in the current year's condensed consolidated statement of operations.

Recent Accounting Pronouncements

In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders’ equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. The Company has adopted all relevant disclosure requirements, with the exception of the shareholders’ equity interim disclosures, which is allowed to be adopted in a future interim period. The Company will include a consolidated statement of shareholders’ equity with its interim financial statements beginning with the fiscal quarter ending March 31, 2019. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations, ~~and~~ cash flows. The results of operations for the three and six months ended December 31, 2017, are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2018. The Company previously filed with the SEC an Annual Report on Form 10-K (the “~~2017 Form 10-K~~”) which included audited financial statements for each of the years ended June 30, 2017 and 2016. It is suggested that the financial statements contained in this Form 10-Q be read in conjunction with the financial statements and notes thereto contained in the 2017 Form 10-K.flows or shareholders’ equity.

~~Use~~In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842,) a new guidance on leases. This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of ~~Estimates~~the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. Accordingly, the standard is effective for the Company on July 1, 2019. The Company is currently evaluating the impact that this guidance will have on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The ~~preparation of~~Company adopted this updated accounting guidance beginning July 1, 2018, using the modified retrospective method. This adoption did not have a material impact on the Company’s consolidated financial statements ~~in conformity with U.S. GAAP requires management to make estimates and assumptions that affect~~other than additional disclosures (see Note 10) as the ~~reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts~~timing of revenue ~~and expenses during~~recognition under the ~~period. Actual results could differ~~new standard is not materially different from ~~those estimates. Some~~our previous revenue recognition policy. Based on our analysis of open contracts as of July 1, 2018, the ~~more significant estimates relate to inventory, allowance for doubtful accounts, stock-based compensation and valuation allowance for deferred income taxes.~~cumulative effect of applying the new standard was not material.

~~Significant Accounting Policies~~

Note 2. Acquisitions

~~There have been no changes to the Company’s significant accounting policies as described in the 2017 Form 10-K.~~

~~NOTE 2. ACQUISITIONS~~Bird & Cronin

On October 2, 2017, the Company, ~~acquired~~through its wholly-owned subsidiary Bird & Cronin, LLC, completed the purchase of substantially all of the assets of Bird & Cronin, Inc. (“~~B&C~~”Bird & Cronin”), a manufacturer and distributor of orthopedic soft goods and specialty patient care products. The transaction is referred to as the “Acquisition”. The Acquisition will expand the Company’s sales in the orthopedic and patient care markets by leveraging the products and distribution network offered by B&C.

At the Closing of the Acquisition, the Company paid B&C cash of $9,063,017 and delivered 1,397,375 shares of its Series D Non Voting Convertible Preferred Stock (“Series D Preferred”) to B&C valued at approximately $3,533,333. The purchase price is subject to ~~customary representations, warranties, indemnities, working capital adjustment and~~ an earn-out payment ranging from $500,000 to $1,500,000, based on ~~future sales.~~ sales in fiscal year 2019. The amount recognized for the earn-out liability was $875,000 as of June 30, 2018. The ~~balance~~amount recognized for the earn-out liability was decreased by $375,000 to $500,000 as of December 31, 2018. The change in the fair value of the earn-out liability ~~at December 31, 2017~~ is ~~$1,500,000.~~ included in other income in the accompanying condensed consolidated statements of operations. The earn-out liability is combined with the acquisition holdback in the accompanying condensed consolidated balance sheets.

A holdback of cash totaling ~~$647,291~~$647,291 and 184,560 shares of ~~Series D Preferred valued at approximately $466,667 has been~~common stock was retained for purposes of satisfying adjustments to the purchase price.

~~In connection with the Acquisition,~~On October 2, 2018, the Company ~~completed a private placement~~released to Bird & Cronin cash of ~~Series C Non Voting Convertible Preferred Stock (“Series C Preferred”)~~$162,845 and 54,572 shares of common stock ~~warrants to raise cash proceeds of $7,000,000~~ pursuant to the ~~terms and conditions of a Securities Purchase Agreement entered into September 26, 2017 (the “Private Placement”). See Note 4 for details~~holdback provisions of the ~~Private Placement.~~

~~Also in connection with the Acquisition,~~purchase agreement. In addition, the Company ~~entered into a lease with Trapp Road Limited Liability Company, a Minnesota limited liability company controlled by~~canceled 37,708 shares of common stock held back for the former owners of B&C, to occupy the facility housing the B&C operations for a term of three years at annual rental payments of $600,000, payable in monthly installments of $50,000. The lease term will automatically be extended for two additional periods of two years each, without any increase in the lease payment, subject to the Company’s right to terminate the lease or to provide notice not to extend the lease prior to the end of the term. The Company also offered employees of B&C employment with Dynatronics at Closing including the Co-Presidents of B&C, Mike Cronin and Jason Anderson, who entered into employment agreements to serve as Co-Presidentsbenefit of Bird & Cronin, ~~LLC,~~pursuant to the ~~Company’s wholly-owned subsidiary that conducts the operations acquired~~settlement of working capital adjustments as provided in the ~~Acquisition.~~purchase agreement.

The Acquisition has been accounted for under the purchase method as prescribed by applicable accounting standards. Under this method, the Company has allocated the purchase price to the assets acquired and liabilities assumed at estimated fair values. The total consideration transferred or to be transferred, totaled $15,213,959. The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition:

~~Cash and cash equivalents~~	$~~4,104~~
~~Trade accounts receivable~~	~~2,232,703~~
~~Inventories~~	~~4,137,181~~
~~Prepaid expenses~~	~~92,990~~
~~Property and equipment~~	~~1,228,000~~
~~Intangible assets~~	~~5,016,000~~
~~Goodwill~~	~~3,570,376~~
~~Warranty reserve~~	~~(5,000~~)
~~Accounts payable~~	~~(607,084~~)
~~Accrued expenses~~	~~(265,732~~)
~~Accrued payroll and benefits~~	~~(189,579~~)
~~Purchase price~~	$~~15,213,959~~

The estimates of fair value of identifiable assets acquired and liabilities assumed are preliminary, pending finalization of a valuation, and are subject to revisions that may result in adjustments to the values presented above.

Intangible assets subject to amortization relate to customer relationships of $4,313,000 with a useful life of ten years and other intangible assets of $83,000 with a useful life of five years. Intangible assets not subject to amortization relate to trade names of $620,000. The goodwill recognized from the Acquisition is estimated to be attributable, but not limited to, the acquired workforce and expected synergies that do not qualify for separate recognition. The full amount of goodwill and intangible assets are expected to be deductible for tax purposes.

As of December 31, ~~2017,~~2018, the ~~Acquisition earn out~~remaining earn-out liability and holdbacks of ~~$2,147,291 come due,~~$966,667 are payable, contingent upon the terms set forth in the purchase agreement, as follows:

~~October~~April 2, ~~2018~~2019	$~~180,624~~
~~April 1, 2019~~	466,667
August 15, 2019	~~1,500,000~~500,000
Acquisition holdback and earn-out liability	$~~2,147,291~~966,667

Hausmann

On April 3, 2017, the Company, through its wholly-owned subsidiary Hausmann Enterprises, LLC, completed the purchase of substantially all the assets of Hausmann Industries, Inc. (“Hausmann”), a manufacturer of physical therapy rehabilitation equipment.

The ~~amounts~~purchase price included a holdback of ~~B&C’s net sales~~cash totaling $1,044,744 for purposes of satisfying adjustments to the purchase price and ~~net income included in~~indemnification claims, if any. In the ~~Company's consolidated statement~~second and third fiscal quarters of ~~operations for~~2018, the ~~period from October 2, 2017 to December 31, 2017, were $5,701,507~~Company released $44,744 and ~~$455,052 respectively. Pro forma net sales and net loss~~$250,000, respectively, of the ~~combined operations had~~holdback to Hausmann. On October 3, 2018, the ~~acquisition date been July 1, 2016 are:~~Company released the remaining holdback amount totaling $750,000.

Net Sales

Net Income (loss)

Unaudited supplemental pro forma July 1, 2017 to December 31, 2017
$37,337,488
$259,644
Unaudited supplemental pro forma July 1, 2016 to June 30, 2017
$60,027,677
$(285,951)

~~2017 supplemental pro forma earnings were adjusted to exclude $70,000 of acquisition-related costs incurred in 2017.~~

~~NOTE~~Note 3. ~~NET INCOME (LOSS) PER COMMON SHARE~~Net (Loss) Income per Common Share

Net (loss) 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 (loss) income ~~(loss)~~ per common share is the amount of net (loss) income ~~(loss)~~ for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted net (loss) income ~~(loss)~~ per common share is the amount of net (loss) 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.

~~Outstanding~~

Certain outstanding options, warrants and convertible preferred stock for common shares are not included in the computation of diluted net ~~loss~~(loss) income per common share because they were anti-dilutive, which for the three months ended December 31, 2018, and 2017, totaled 11,884,803 and ~~2016, totaled~~ 13,838,859 ~~and 5,148,398,~~, respectively and for the six months ended December 31, 2018, and 2017, totaled 11,884,803and ~~2016, totaled~~ 12,114,132 ~~and 5,148,398,~~, respectively.

~~NOTE~~Note 4. ~~CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS~~Convertible Preferred Stock and Common Stock Warrants

~~During quarter ended December 31, 2017, the Company issued 25,000 shares of common stock upon conversion of 25,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred”).~~ As of December 31, ~~2017,~~2018, the Company had issued and outstanding a total of ~~3,459,000~~2,000,000 shares of Series A 8% Convertible Preferred Stock ~~(the “~~(“Series A Preferred”) and 1,459,000 shares of Series B Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred”) and Series B Preferred ~~outstanding.~~are convertible into a total of 3,459,000 shares of common stock. Dividends payable on these preferred shares accrue at the rate of 8% per year and are payable quarterly in stock or ~~cash.~~cash at the option of the Company. The Company generally pays the dividends inon the preferred stock by issuing shares of our common stock. The formula for paying this dividend inusing 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 connection with the Acquisition of B&C on October 2, 2017, the Company issued 2,800,000 shares of Series C Preferred with common stock warrants (“Series C Warrants”) and 1,581,935 shares of its Series D Preferred. The Series C Warrants have an exercise price of $2.75 per share of common stock and a term of six years. They may not be exercised unless and until shareholder approval has been obtained. Each share of Series C Preferred and Series D Preferred was convertible into one share of common stock of the Company automatically upon, but not before receipt of shareholder approval required under applicable Nasdaq Marketplace Rules. A holder of Series C Preferred was able elect to retain the Series C Preferred and not convert, subject to future beneficial ownership limitations and loss of preferential rights. At the Company’s 2017 Annual Meeting of Shareholders, held on November 29, 2017, the Company sought and obtained shareholder approval as described above. On November 29, 2017, the Company issued 1,360,000 shares of Common Stock in conversion of a portion of the Series C Preferred and 1,581,935 shares of Common Stock in conversion of all of the Series D Preferred. As of December 31 ~~2017, the Company had~~, 2018, there were also issued and outstanding 1,440,000 shares of Series C Non-Voting Convertible Preferred ~~outstanding.~~Stock (“Series C Preferred”). The Series C Preferred shares are non-voting, do not receive dividends, and have no liquidation preferences or redemption rights.

The Company determined that the Series C Preferred contain a beneficial conversion feature resulting in a deemed dividend of $829,559. Upon conversion of a portion of the Series C Preferred during the three months ended December 31, 2017, accretion of $194,227 in discounts was recognized.

~~NOTE~~Note 5. ~~COMPREHENSIVE INCOME (LOSS)~~Comprehensive (Loss) Income

For the three and six months ended December 31, 2018 and 2017, ~~and 2016,~~ comprehensive (loss) income ~~(loss)~~ was equal to the net (loss) income ~~(loss)~~ as presented in the accompanying condensed consolidated statements of operations.

~~NOTE~~Note 6. ~~INVENTORIES~~Inventories

Inventories consisted of the following:

	December 31, 2017	June 30, 2017	December 31, 2018	June 30, 2018
Raw materials	$6,332,413	$3,766,940	$5,390,658	$6,216,150
Work in process	421,861	470,721	580,397	625,830
Finished goods	5,303,501	3,562,758	4,887,693	4,604,264
Inventory obsolescence reserve	(452,476)	(402,737)	(423,244)	(458,389)
	$11,605,299	$7,397,682	$10,435,504	$10,987,855

~~NOTE~~Note 7. ~~RELATED-PARTY TRANSACTIONS~~Related-Party Transactions

The Company leases office, manufacturing and warehouse facilities in Detroit, Michigan, Hopkins, Minnesota, 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 ~~approximately~~$261,780 and $257,400 ~~and $17,700~~ for the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$365,400~~ $523,560and ~~$35,400~~$365,400 for the six months ended December 31, 2018 and 2017, ~~and 2016,~~ respectively.

~~Certain significant shareholders, officers and directors~~Note 8. Line of the Company participated as investors in the private placements of the Company’s Series A Preferred, Series B Preferred and Series C Preferred. The terms of these offerings were reviewed and approved by disinterested members of the Company’s Board of Directors who did not invest in the private placements and who do not own any shares of Series A Preferred, Series B Preferred or Series C Preferred. The affiliated investors participated in these offerings on terms that were no more favorable than the terms granted to unaffiliated investors.Credit

~~Pursuant to the Company’s acquisition of Hausmann Industries, Inc. (“Hausmann”) in April~~On March 31, 2017, the Company ~~held back approximately$1,045,000 of the purchase price. As of December 31, 2017,~~entered into an $8,000,000, loan and June 30, 2017, the holdback liability to Hausmann under the purchase agreement was $1,000,000 and $1,045,000, respectively. Certain principals of Hausmann are holders of the Company’s Series B Preferred and one of the principals, David Hausmann, is an employee of the Company.

In connection with the Acquisition of B&C in October 2017, the Company held back approximately $647,000 in cash plus an earn-out payment of a minimum of $500,000 up to $1,500,000. These obligations to B&C, totaling approximately $2,147,000, are liabilities on the Company’s balance sheet as of December 31, 2017. In addition, the Company withheld approximately 467,000 shares of common stock to be released to B&C pursuant to the holdback provisions in the Asset Purchase Agreement. These shares are included in common stock on the Company’s balance sheet at December 31, 2017. Certain principals of B&C are holders of the Company’s common stock and two of the principals, Michael Cronin and Jason Anderson, are employees of the Company.

~~NOTE 8. LINE OF CREDIT~~

~~On September 28, 2017, the Company modified its credit~~security agreement with Bank of the West ~~and entered into an Amended Credit Facility (the “Amended Credit Facility~~”) to provide asset-based financing to the Company ~~to be used~~ for funding ~~the Acquisition (see Note 2)~~acquisitions and for ~~operating capital.~~working capital (“Line of Credit”). The ~~Amended~~Line of Credit ~~Facility provides~~provided for revolving credit borrowings by the Company in an amount up to the lesser of ~~$11,000,000~~$8,000,000 or the calculated borrowing base. The borrowing base is computed monthly and is equal to the sum of stated percentages of eligible accounts receivable and inventory, less a reserve. Amounts outstanding bear interest at LIBOR plus 2.25%.

On September 28, 2017, the Company modified the Line of Credit to provide additional capital for funding the Bird & Cronin acquisition and for operating capital. The Line of Credit, as amended, provides for revolving credit borrowings by the Company ~~paid a commitment fee~~in an amount up to the lesser of ~~.25% and~~$11,000,000 or the ~~line is subject~~calculated borrowing base. On July 13, 2018, the Company further amended the Line of Credit to ~~an unused line fee of .25%. The maturity date is September 30, 2019. The Company’s obligations under~~modify the Amended Credit Facility are secured by a first-priority security interest in substantially all of its assets, including those of its subsidiaries. The Amended Credit Facility includes financial covenants, such as ratios formaximum monthly consolidated leverage and a minimum monthly consolidated fixed charge coverage ratio. An additional modification was executed on November 9, 2018, to extend the maturity date to December 15, 2020.

Borrowings on the Line of Credit were $5,148,356and ~~customary affirmative~~$6,286,037 as of December 31, 2018 and negative covenants for a credit facility of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. The Amended Credit Facility also contains penalties in connection with customary events of default, including, among others, payment, bankruptcy, representation and warranty, covenant, change in control, judgment and events or conditions that have a Material Adverse Effect (as defined in the Amended Credit Facility).June 30, 2018, respectively. As of December 31, ~~2017, the Company had borrowed $6,742,979 under the Amended Credit Facility compared to $2,171,935 as of June 30, 2017. There~~2018, there was ~~$1,874,268~~approximately $2,233,000 available to ~~borrow under the original loan and security agreement as of December 31, 2017.~~borrow.

~~NOTE~~Note 9. ~~INCOME TAXES~~Accrued Payroll and Benefits Expense

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended. Among other items, the Act permanently reduces the federal corporate tax rate to 21% effective January 1, 2018. As the Company’s fiscal year end falls on June 30, the statutory federal corporate tax rate for fiscal 2018 will be prorated to 27.5%, with the statutory rate for fiscal 2019 and beyond at 21%.

~~As a result of the reduction in the corporate income tax rate from 35% to 21% under the Act, the Company revalued its net deferred tax assets at December 31, 2017.~~

As of December 31, ~~2017~~2018 and June 30, ~~2017, a full valuation allowance has been established against net deferred tax assets. This resulted~~2018, the accrued payroll and benefits expense balance included $390,385 and $473,146, respectively, of accrued severance expense. As of December 31, 2018 and June 30, 2018, long-term severance accrual included in ~~no reported income tax~~other liabilities was $125,000 and $258,145, respectively. Quarterly payments will be made in cash through March 31, 2020. The Company recognized $27,196 and $131,053 in severance expense ~~associated with the operating profit reported~~ during the three and six months ended December 31, ~~2017.~~

~~The final transition impacts of the Tax Act may vary from the current estimate, possibly materially, due to, among other things, further clarification~~2018, respectively. Severance expense is included in selling, general, and changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, and the completion of the Company’s consolidated financial statements as of and for the year ending June 30, 2018. In accordance with SAB 118, any necessary measurement adjustments will be recorded and disclosed within one year from the enactment date within the period the adjustments are determined.
administrative expenses.

~~NOTE~~Note 10. ~~RECENT ACCOUNTING PRONOUNCEMENTS~~

Additionally, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the Act’s impact under ASC Topic 740, Income Taxes (“ASC 740”). The guidance in SAB 118 addresses certain fact patterns where the accounting for changes in tax laws or tax rates under ASC 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Act is enacted. Under the staff guidance in SAB 118, in the financial reporting period in which the Act is enacted, the income tax effects of the Act (i.e., only for those tax effects in which the accounting under ASC 740 is incomplete) would be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period” until the accounting under ASC 740 is complete. The measurement period is limited to no more than one year beyond the enactment date under the staff's guidance. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner. For discussion of the impacts of the Tax Act, refer to Note 9.

~~In November 2017,~~On July 1, 2018, the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-14,~~Company adopted ASC 606, ~~Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and~~ Revenue from Contracts with Customers ~~(Topic 606): Amendments to SEC Paragraphs Pursuant to~~, which establishes principles for recognizing revenue and reporting information about the ~~Staff Accounting Bulletin (“SAB”) No. 116~~nature, amount, timing and ~~SEC Release No. 33-10403. This ASU amended, superseded~~uncertainty of revenue and ~~added certain SEC paragraphs in Topic 220, Topic 605 and Topic 606 to reflect~~cash flows arising from contracts with customers. The guidance was applied using the ~~August 2017 issuance of SAB 116 and SEC Release No. 33-10403.~~modified retrospective transition method. The SEC staff issued SAB 116 to align its revenue guidance with Accounting Standards Codification (“ASC”) 606. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of the adoption of this ~~update~~guidance had no material impact on ~~its~~the amount and timing of revenue recognized, therefore, no adjustments were recorded to the consolidated financial ~~statements.~~statements upon adoption. For the three and six months ended December 31, 2018, revenue recognized would not have differed materially had revenue continued to be recognized under ASC 605.

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 ~~July 2017,~~these cases, the ~~FASB issued ASU 2017-11 –~~ ~~Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives~~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 Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrumentincentives are estimated based on contractual terms or conversion option. Stakeholders asserted that accounting for freestanding and embedded instruments with down round features as liabilities subject to fair value measurement on an ongoing basis creates a significant reporting burden and unnecessary income statement volatility associated with changes in value of an entity’s own share price. That is, current accounting guidance requires changes in fair value of an instrument with a down round feature to be recognized in earnings for both increases and decreases in share price, even though an increase in share price will not cause a down round feature to be triggeredhistorical experience and a ~~decrease will cause an adjustment to~~liability is maintained for rebates and incentives that have been earned but are unpaid. As of December 31, 2018 and June 30, 2018, the ~~strike price only if~~rebate liability was $168,000 and ~~when an entity engages~~$0, respectively. The rebate liability is included in ~~a subsequent equity offering.~~accrued expenses in the accompanying condensed consolidated balance sheets.

~~Part II~~Revenue is reduced by estimates of ~~this update addresses~~potential future contractual discounts including prompt payment discounts. Provisions for contractual discounts are recorded as a reduction to revenue in the ~~difficulty of navigating Topic 480,~~ ~~Distinguishing Liabilities from Equity, because~~period sales are recognized. Estimates are made of the ~~existence~~contractual discounts that will eventually be incurred. Contractual discounts are estimated based on negotiated contracts and historical experience. As of December 31, 2018 and June 30, 2018, the ~~extensive pending content~~ allowance for sales discounts was $14,500 and $0, respectively. The allowance for sales discounts is included in trade accounts receivable, less allowance for doubtful accounts in the ~~FASB Accounting Standards Codification. This pending content is the result~~accompanying condensed consolidated balance sheets.

The Company made an accounting policy election to account for shipping and handling activities as fulfillment activities. As such, shipping and handling are not considered promised services to our customers. Costs for shipping and handling of ~~the indefinite deferral~~products to customers are recorded as cost of ~~accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests.~~sales.

The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round features no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 48 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statements and disclosures. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.following table disaggregates revenue by major product category:

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.~~ The amendment in this update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. An entity should apply the amendments in this update on a prospective basis. This amendment will be effective for the Company in its fiscal year beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted this standard as of July 1, 2017.

	Three Months Ended December 31		Six Months Ended December 31
	2018	2017	2018	2017
Orthopedic Soft Goods and Medical Supplies	$ 7,425,979	$7,894,739	$15,118,094	$10,090,527
Physical Therapy and Rehabilitation Equipment	7,932,504	9,975,047	17,157,398	20,393,202
Other	81,483	211,547	230,309	395,575
	$15,439,966	$18,081,333	$32,505,801	$30,879,304

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805), Clarifying the Definition of a Business~~. The Board issued this update to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under Topic 805, there are three elements of a business—inputs, processes, and outputs (collectively referred to as a “set”) although outputs are not required as an element of a business set. The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, reducing the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update:

~~require that a business set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and~~

~~remove the evaluation of whether a market participant could replace missing elements.~~

The amendments provide a framework for evaluating whether both an input and a substantive process are present. Lastly, the amendments in this update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. This amendment will be effective for the Company in its fiscal year (including interim periods) beginning July 1, 2018. The Company is currently evaluating the impact the adoption of ASU 2017-01 will have on its consolidated financial statements and disclosures.

In ~~February 2016, the FASB issued~~ ~~ASU No. 2016-02,~~ ~~Leases (Topic 842,)~~ a new guidance on leases. This guidance replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. Accordingly, the standard is effective for the Company on July 1, 2019. ~~The Company~~ ~~is currently evaluating the impact that this guidance will have on the consolidated financial statements.~~

~~In January 2016, the FASB issued~~ ~~ASU 2016-01,~~ ~~Financial Instruments, a~~ guidance related to financial instruments - overall recognition and measurement of financial assets and financial liabilities. The guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for public companies for interim and annual periods beginning after December 15, 2017. Accordingly, the standard is effective for the Company on July 1, 2018. ~~The Company~~ ~~is currently evaluating the impact that the standard will have on the consolidated financial statements.~~

~~In May 2014, the FASB issued~~ ~~ASU 2014-09,~~ ~~Revenue from Contracts with Customer (Topic 606).~~ ~~This~~ authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt this guidance on July 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is evaluating which transition approach to use and its impact, if any, on its consolidated financial statements.

NOTE 11. SUBSEQUENT EVENTS

In January ~~2018,~~2019, the Company ~~paid~~issued 74,731 shares of common stock as payment of dividends totaling approximately ~~$201,000 of preferred stock dividends~~$203,000 with respect to the Series A Preferred and Series B Preferred that ~~were~~ accrued during the three months ended December 31, ~~2017. The Company paid the dividends by issuing 69,574 shares of common stock.~~2018.

IC~~tem 2. Management’s~~AUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following section, “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.”

~~Cautionary Statement Concerning Forward-Looking Statements~~

Information contained in this Form 10-Q, particularly in the following Discussion and Analysis of Financial Condition and Results of Operations, includes statements considered to be “forward-looking statements” within the safe harbors provided by Section 27A of the Securities Act of 1933, as amended (the “~~Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).~~ These statements refer to our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” “intends,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements regarding product development, market acceptance, financial performance, revenue and expense levels in the future and the sufficiency of existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements. 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 or to update the reasons why actual results could differ from those projected in such forward-looking statements, except as required by law.

~~Overview~~

~~Dynatronics Corporation (“Company,” “Dynatronics,” “~~we~~”) designs, manufactures~~We have based our forward-looking statements on management’s current expectations and ~~distributes advanced-technology therapeutic medical devices, therapeutic~~projections about trends affecting our business and medical treatment tables, rehabilitation equipment, custom athletic training treatment tables and equipment, institutional cabinetry, orthopedic soft goods, as well as other rehabilitation and therapy products and supplies. Through our various distribution channels, we market and sell our products to physical therapists, chiropractors, athletic trainers, sports medicine practitioners, orthopedists,industry and other ~~medical professionals, hospitals, and institutions. We operate on~~future events. Although we do not make forward-looking statements unless we believe we have a ~~fiscal year ending June 30. For example, reference to fiscal year 2018 refers to the year ending June 30, 2018.~~

~~Recent Events~~

~~On November 29, 2017,~~reasonable basis for doing so, we held our annual meeting of shareholders who approved the automatic conversion of the Series C Preferred and the Series D Preferred to common stock, subject, in the case of the Series C Preferred, to the right of the holder to elect to continue to hold the Series C Preferred and defer conversioncannot guarantee their accuracy. Forward-looking statements are subject to ~~beneficial ownership limitation provisions. These unconverted shares of Series C Preferred are non-voting~~substantial risks and are no longer entitled to certain preferences of the Series C Preferred Stock such as the accrual or receipt of dividends, liquidation preferences and redemption rights, and are treated as common shares for such purposes.

~~Business Outlook~~

~~Our strategic objective is to accelerate growth both organically and by acquisition. We acquired the assets of Hausmann Industries, Inc. (“Hausmann”) in April 2017 and we acquired the assets of Bird & Cronin, Inc. (“Bird & Cronin”) in October 2017. These acquisitions have enhanced~~uncertainties that could cause our ~~market position and improved our operating results, positioning us for positive cash flow.~~

~~The debt and equity financings completed in connection with these acquisitions strengthened our~~future business, financial position and provided operating capital. We believe our relationships with Prettybrook Partners LLC and Bank of the West provide us with strategic and financial resources that will facilitate the execution of our strategic objectives.

In the past three years we have invested in executive talent and infrastructure to organize and prepare for additional significant growth. We have added executive talent across the organization including sales, operations, finance, and information technology. The management additions have bolstered our capacity to successfully acquire and integrate additional acquisition targets and to drive improvement in operating results in our current operations.

Our acquisition strategy is focused on acquiring complementary businesses that meet our investment criteria and broaden our product offerings. We continue to evaluate a variety of acquisition opportunities. Our target is to execute on at least one acquisition in calendar 2018.

Organic growth is also an essential element of our growth plan. Each operational division has established strategic plans to stimulate growth through expansion of distribution channels, product innovation or specific initiatives with existing customer base.

As delivery of healthcare in the U.S. progresses under legislative reform, we believe there will be increasing demand for rehabilitation and physical therapy products and services. There is increasing pressure to find alternatives to the surgical suite. We believe this will lead to more demand for physical therapy services as a method for avoiding, preventing or delaying the need for surgical interventions. There are orthopedic clinics now embedding physical therapy and rehabilitation within their offering of services in order to better address patient needs in a pre-surgical as well as post-surgical environment. Third-party payers are also demanding better outcomes and structuring reimbursement conventions to reward practitioners who show identifiably improved outcomes. Physical therapy and rehabilitation has always figured prominently in the post-surgical environment to achieve the best outcomes following orthopedic surgical procedures. With the new reimbursement paradigms, the importance of physical therapy will only increase. The concept of “pre-habilitation” to avoid, prevent or delay surgical interventions, combined with traditional rehabilitation to achieve the best post-surgical outcomes provides a positive environment for growth of physical therapy and rehabilitation services and products in the future.

We also service the athletic training market. The growth of college athletics – particularly in the “Power Five” conferences – is creating a demand for the best and most impressive training facilities. We are working to tap into that demand by offering our custom designed furniture and proprietary products. The acquisition of Hausmann will particularly boost this effort as it has historically had success with its ProTeam™ line of products that address this same market.

~~In summary, based on our defined strategic initiatives we are focusing our resources in the following areas:~~

●

~~Joining resources of the acquired entities to maximize cross-selling opportunities without disrupting each entity’s current channels of distribution;~~

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~~Exploring operating synergies with acquired companies while respecting established operating paradigms at each operation;~~

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~~Seeking to improve distribution of our products through expansion of sales channels;~~

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~~Improving gross profit margins by, among other initiatives, increasing market share of manufactured products with emphasis on our high margin therapeutic modalities including state-of-the-art Dynatron~~® ~~ThermoStim probe, Dynatron Solaris~~® ~~Plus and 25 Series~~™ ~~products as well as new products from other manufacturers such as Zimmer;~~

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Maintaining our position as a technological leader and innovator in our markets through the promotion of new products introduced over the last year and seeking opportunities to introduce other new products during the current fiscal year;

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Exploring strategic business acquisitions. This will leverage and complement our competitive strengths, increase market reach and allow us to ultimately broaden our footprint in the physical medicine markets; and

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~~Attending appropriate investor conferences to better publicize our strategic plans, attract new capital to support the business development strategy and identify other acquisition targets.~~

~~Results of Operations~~

~~The following discussion and analysis of our financial~~ condition, ~~and~~ results of operations ~~for~~or performance to differ materially from our historical results or those expressed or implied in any forward-looking statement contained in this report. Some of the ~~three~~risks and ~~six months ended December 31, 2017, should be read~~uncertainties that may cause actual results to differ from those expressed or implied in ~~conjunction with~~ the ~~unaudited condensed consolidated financial~~forward-looking statements ~~and notes thereto appearing~~are described in the section “Risk Factors” included in Part I, Item 11A of ~~this report, and~~ our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2017,~~2018, filed with the SEC, as well as in our other public filings with the SEC. In addition, actual results may differ as a result of additional risks and uncertainties of which ~~includes audited financial~~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 we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of The Nasdaq Stock Market, LLC. 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.

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

You should read the following discussion and analysis in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ~~then ended.~~ ended June 30, 2018, and our other filings, including Current Reports on Form 8-K, that we have filed with the SEC through the date of this report.We have rounded many numbers to the nearest one thousand dollars in ~~this~~the following analysis. These numbers should be read as approximate. ~~Results of operations for~~All inter-company transactions have been eliminated. Our fiscal year ends on June 30. For example, reference to fiscal year 2019 refers to the ~~second fiscal quarter~~year ending June 30, 2019. This report covers the three and six months ended December 31, ~~2017,~~2018. Results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be achieved for the full fiscal year ending June 30, 2018. This quarterly report includes the financial results of the newly acquired Bird and Cronin division. In connection with that acquisition, we filed a Current Report on Form 8-K on October 6, 2017.2019.

Overview

~~Net Sales~~Dynatronics Corporation (“Company,” “Dynatronics,” “we”) is a medical device company committed to providing high-quality restorative products designed to accelerate one to their optimal health. The Company designs, manufactures, and sells a broad range of products for clinical use in physical therapy, rehabilitation, 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.

Results of Operations

Net Sales

Net sales ~~increased $9,368,000,~~decreased $2,641,000, or ~~107.5%~~14.6%, to $15,440,000 for the quarter ended December 31, 2018, compared to net sales of $18,081,000 for the quarter ended December 31, ~~2017,~~2017. The year-over-year decrease in net sales was driven primarily by lower sales of physical therapy and rehabilitation equipment of approximately $2,613,000. The lower sales are reflective of general softness in demand in our direct sales channel, transitions in our sales force, and our product rationalization strategy.

Net sales increased $1,626,000, or 5.3%, to $32,506,000 for the six months ended December 31, 2018, compared to net sales of ~~$8,713,000~~$30,879,000 for the ~~quarter~~six months ended December 31, ~~2016.~~2017. The year-over-year increase in net sales ~~for~~included an increase of $5,974,000 attributable to the ~~quarter ended December 31, 2017 was driven by our acquisitions~~acquisition of ~~Hausmann in April 2017 and~~ Bird & Cronin ~~in October 2017, that contributed $4,368,000 and $5,698,000, respectively, in net sales in the quarter ended December 31, 2017. These increases were~~ partially offset primarily by ~~a decrease~~lower sales of physical therapy and rehabilitation equipment and other revenue of approximately ~~$699,000, or 8.0%~~$4,347,000 compared to the prior year period. The lower sales are relective of general softness in demand in our direct sales channel, transitions in our sales force, in net sales from Dynatronics’ legacy operations. Included in the quarter ended December 31, 2016 was a $517,000 non-recurring order that accounts for the majority of the $699,000 sales differential between the two comparative quarters.and our product rationalization strategy.

For the six months ended December 31, 2017, net sales increased $14,003,000, or 83.0%, to $30,879,000, compared to net sales of $16,876,000 for the corresponding period ended December 31, 2016. The year-over-year increase in net sales was attributable primarily to the acquisitions of Hausmann and Bird & Cronin. Hausmann contributed net sales of $9,040,000 in the six months ended December 31, 2017 and Bird & Cronin contributed net sales of $5,698,000 in the three months ended December 31, 2017. These increases were partially offset by a decrease of approximately $731,000, or 4.3%, in net sales from Dynatronics’ legacy operations, primarily due to the $517,000 order in the second quarter of fiscal 2017 that did not repeat in the second quarter of fiscal 2018.

Gross Profit

Gross profit for the quarter ended December 31, ~~2017 increased~~2018 decreased ~~$2,697,000,~~$1,090,000, or about ~~87.7%~~18.9%, to ~~$5,770,000,~~$4,680,000, or ~~31.9%~~30.3% of net sales. By comparison, gross profit for the quarter ended December 31, ~~2016~~2017 was ~~$3,073,000,~~$5,770,000, or ~~35.3%~~31.9% of net sales. Gross profit for the quarter ended December 31, 2018 was adversely affected primarily by: (1) lower sales which accounted for approximately $788,000 in lower gross profit, and (2) reduced gross margin percentage resulting in $302,000 lower gross profit. The year-over-year decrease in gross margin percentage to 30.3% from 31.9% was due primarily to physical therapy and rehabilitation equipment sales, which had a lower gross margin percentage in the quarter ended December 31, 2018 due to a larger portion of our products being sold through our third-party distribution partners as we have experienced lower direct sales.

Gross profit for the six months ended December 31, 2018 increased $118,000, or about 1.2%, to $10,227,000, or 31.5% of net sales. By comparison, gross profit for the six months ended December 31, 2017was $10,109,000, or 32.7% of net sales. The year-over-year increase in gross profit ~~was~~included an increase of $2,026,000 attributable to the ~~acquisitions~~acquisition of ~~Hausmann and~~ Bird & Cronin ~~that contributed $1,066,000 and $2,082,000, respectively, in gross profit in the quarter ended December 31, 2017. These increases were~~ partially offset ~~by a decrease of approximately $451,000 in Dynatronics’ legacy operations gross profit. That decrease was primarily attributable to~~by: (1) lower sales which accounted for approximately ~~$236,000~~$1,388,000 in lower gross profit, and (2) reduced gross margin percentage resulting in ~~$215,000~~$521,000 lower gross profit. The year-over-year decrease in gross margin percentage to ~~31.9%~~31.5% from ~~35.3%~~32.7% was primarily due ~~primarily~~ to ~~inclusion of Hausmann~~physical therapy and rehabilitation equipment sales, which had a lower gross margin percentage in the ~~quarter, as well as reduced gross margin in Dynatronics’ legacy operations, primarily attributable to reduced margins on freight charged to customers.~~

~~Gross profit for the~~ six months ended December 31, ~~2017 increased~~2018 ~~$4,241,000, or about 72.3%~~due to ~~$10,109,000, or 32.7%,~~a larger portion of ~~net sales, compared to gross profit~~ ~~for the six months ended December 31, 2016~~ of ~~$5,868,000, or 34.8% of net sales~~. The year-over-year increase in gross profit was driven by the acquisitions of Hausmann and Bird & Cronin that contributed $2,685,000 and $2,082,000, respectively, in gross profit in the six months ended December 31, 2017. These increases were partially offset by a decrease of approximately $525,000 gross profit in Dynatronics’ legacy operations, primarily attributable toour products being sold through our third-party distribution partners as we have experienced lower sales which accounted for approximately $171,000 lower gross profit and reduced gross margin percentage resulting in $354,000 lower gross profit. The year-over-year decrease in gross margin percentage to 32.7% from 34.8% was due primarily to the inclusion of Hausmann lower gross margin percentage as well as reduced gross margin in Dynatronics’ legacy operations, primarily attributable to reduced margins on freight charged to customers.direct sales.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”&A”) expenses ~~increased $2,259,000,~~decreased $891,000, or ~~79.2%~~15.7%, to ~~$5,110,000~~$4,773,000 for the quarter ended December 31, ~~2017,~~2018, compared to ~~$2,851,000~~$5,663,000 for the quarter ended December 31, ~~2016.~~2017. Selling expenses ~~in the current quarter~~ represented ~~$691,000~~$531,000 of the ~~$2,259,000 increase~~decrease in SG&A ~~expenses. Increases in selling~~ expenses, ~~included the addition of $858,000 of~~primarily due to lower fixed sales management salaries and expenses ~~associated with Hausmann~~ and ~~Bird & Cronin operations, partially offset by $167,000 lower selling costs in Dynatronics’ legacy operations comprised primarily of~~ reduced commissions on lower ~~sales.~~sales during the quarter. General and administrative (“G&A”&A”) expenses ~~represented $1,567,000~~increased $179,000 compared to the prior year period. The primary components of the ~~$2,259,000~~ increase ~~in SG&A expenses for the quarter ended December 31, 2017. Increases~~ in G&A expenses ~~included the addition of $1,623,000~~included: (1) $135,000 in other G&A expenses ~~from Hausmann’s~~ and ~~Bird & Cronin’s operations, partially offset by $56,000~~(2) $129,000 in ~~decreased~~increased salaries and benefits. Increased G&A ~~expenses in Dynatronics’ legacy operations. G&A expenses included approximately $100,000 in acquisition related expenses during the current quarter.~~

SG&A expenses for the six months ended December 31, 2017 increased $3,317,000, or 59.1%, to $8,933,000, compared to $5,616,000 for the six months ended December 31, 2016. Selling expenses represented $968,000 of the $3,317,000 increase in SG&A expenses. Included in selling expenses were $1,169,000 of selling expenses associated with Hausmann and Bird & Cronin operations, partially offset by $202,000 lower selling costs in Dynatronics’ legacy operations comprised primarily of lower commissions on lower sales. G&A expenses represented $2,349,000 of the $3,317,000 increase in SG&A expenses for the six months ended December 31, 2017. Included in G&A expenses were $2,263,000 from Hausmann’s operations and Bird & Cronin’s operations, and $86,000 from Dynatronics’ legacy operations. G&A expenses included $314,000 in acquisition expenses in the six months ended December 31, 2017.

~~Research and Development Expenses~~

~~Research and development expenses for the quarter ended December 31, 2017 increased $244,000, or 78.8%, to $553,000 from approximately $309,000~~expense in the quarter ended December 31, ~~2016.~~2018 was partially offset by a $85,000 decrease in acquisition expenses compared to the prior year period. Research and development (“R&D”) expenses for the ~~six months~~quarter ended December 31, 2018 decreased $539,000, or 97.4%, to $14,000 from $553,000 in the quarter ended December 31, 2017 ~~increased $217,000, or 36.9%,~~. The decrease is primarily due to ~~$805,000 from approximately $588,000 in~~ the ~~six months ended December 31, 2016. The increases in both the quarter~~ re-purposing of our engineering resources to operational improvements and ~~six months ended December 31, 2017 were driven by~~ $325,000 in costs incurred on a project which was abandoned during the quarter ended December 31, 2017 ~~offset by a reduction in other R&D expenses of approximately $81,000 and $108,000 for the quarter and six months, respectively, ended December 31, 2017.~~.

~~Net Income (Loss) Before Income Tax~~

Pre-tax income for the quarter ended December 31, 2017 was approximately $14,000, compared to a pre-tax loss of $95,000 for the quarter ended December 31, 2016. The $109,000 improvement in pre-tax income for the quarter was primarily attributable to $2,697,000 higher gross profit, offset by $2,259,000 increased SG&A expenses ~~and $244,000 higher research and development expenses. Pre-tax income~~increased $531,000, or 5.5%, to $10,269,000 for the six months ended December 31, ~~2017 was approximately $213,000,~~2018, compared to $9,738,000 for the six months ended December 31, 2017. Selling expenses decreased $331,000 compared to the prior year period which included an increase of $497,000 associated with the acquired Bird & Cronin operations, offset by $828,000 in lower selling costs due primarily to lower fixed sales management salaries and expenses and reduced commissions on lower sales during the six months ended December 31, 2018. G&A expenses increased $1,642,000 compared to the prior year period. The primary components of the increase in G&A expenses included: (1) $1,231,000 added by the acquired Bird & Cronin operations; (2) $124,000 in severance expense; (3) $257,000 in other G&A expenses; and (4) $323,000 in increased salaries and benefits. Increased G&A expense in the six months ended December 31, 2018 was partially offset by a $293,000 decrease in acquisition expenses compared to the prior year period. R&D expenses for the six months ended December 31, 2018 decreased $780,000, or 96.8%, to $26,000 from $805,000 in the six months ended December 31, 2017. The decrease is primarily due to the re-purposing of our engineering resources to operational improvements and $325,000 in costs incurred on a project which was abandoned during the six months ended December 31, 2017.

Net (Loss) Income Before Income Tax (Provision) Benefit

Pre-tax loss for the quarter ended December 31, 2018 was $237,000 compared to pre-tax ~~loss~~income of ~~$381,000~~$14,000 for the quarter ended December 31, 2017. The $251,000 decline in pre-tax income was primarily attributable to the impact of (1) $1,090,000 decline in gross profit; and (2) $38,000 in higher interest expense due to an increase in the average balance of our line of credit and higher interest rates partially offset by $891,000 in decreased SG&A expenses. Pre-tax income for the six months ended December 31, 2018 was $79,000 compared to $213,000 for the six months ended December 31, ~~2016.~~2017. The ~~$594,000 improvement~~$134,000 decrease in pre-tax income ~~for the six months~~ was ~~primarily~~ attributable to ~~$4,241,000 higher gross profit, offset by $3,317,000~~the impact of (1) $531,000 in increased SG&A ~~expenses~~expense; and ~~$217,000~~(2) $82,000 in increased interest expense due to an increase in the average balance of our line of credit and higher ~~research~~interest rates partially offset by (1) $118,000 improvement in gross profit; and ~~development expenses. These changes~~(2) $375,000 increase in ~~both~~other income due to the ~~quarter~~change in the fair value of the earn-out payment related to the Bird & Cronin acquisition.

Income Tax (Provision) Benefit

Income tax provision was $204,000 for three and six months ended December 31, ~~2017 were primarily attributable~~2018, respectively. This compares to components of Hausmann’s and Bird & Cronin’s results of operations offset by the $325,000 in costs related to the abandoned project in the second fiscal quarter and transaction related costs of $100,000 and $314,000 in the quarter and six months ended December 31, 2017, respectively.

~~Income Tax Provision (Benefit)~~

~~Income~~income tax provision ~~was~~of $0 for both the quarter and six months ended December 31, ~~2017, respectively. This compares to income tax provision of $0~~2017. See Liquidity and Capital Resources - Deferred Income Taxes below for the quarter and six months ended December 31, 2016, respectively. We decreased the valuation allowance on our net deferred income tax assets equal to the one-time revaluation of our net deferred tax assets at the lower tax rate. more information.

Net (Loss) Income ~~(Loss)~~

Net ~~income~~loss was ~~$14,000~~$441,000 for the quarter ended December 31, ~~2017,~~2018, compared to a net ~~loss~~income of ~~$95,000~~$14,000 for the quarter ended December 31, ~~2016.~~2017. Net loss was $125,000 for the six months ended December 31, 2018, compared to net income ~~was~~of $213,000 for the six months ended December 31, ~~2017, compared to a net loss of $381,000~~2017. The reasons for the ~~six months ended December 31, 2016. The changes~~change in net (loss) income ~~(loss)~~ are the same as ~~explained above for~~those given under the heading Net (Loss) Income ~~(Loss)~~ Before Income Tax and Income Tax (Provision) Benefit.

Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders ~~was $1,314,916 ($0.23 per share)~~decreased $671,000 to $644,000 for the quarter ended December 31, ~~2017,~~2018, compared to ~~$560,000 ($0.19 per share)~~net loss attributable to common stockholders of $1,315,000 for the quarter ended December 31, ~~2016.~~2017. The ~~$755,000 year-over-year increase~~decrease in net loss attributable to common stockholders for the quarter is due ~~to approximately $217,000 of additional~~primarily to: (1) a $102,000 decrease in preferred stock ~~dividends associated with 390,000 shares of Series A Preferred Stock issued~~dividends; and (2) a $1,024,000 decrease in December 2016, 1,559,000 shares of Series B Preferred issued in April 2017, and 2,800,000 of Series C Preferred shares and 1,581,935 shares of Series D Preferred Shares issued in October 2017. The increase was also attributable to approximately $454,000 in additional deemed dividends and ~~approximately $194,000 in~~ accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin Acquisition in comparison to deemed dividends associated with Series A Preferred in December 2016. These increases were partially offset by ~~$109,000~~a $455,000 increase in ~~higher~~ net ~~income in~~loss. On a per share basis, net loss attributable to common stockholders was $0.08 per share for the quarter ended December 31, ~~2017,~~2018, compared to $0.23 per share for the ~~same~~ quarter ~~of the prior year.~~

ended December 31, 2017. Net loss attributable to common stockholders ~~increased $368,000~~decreased $788,000 to ~~$1,303,330 ($0.25 per share)~~$515,000 for the six months ended December 31, ~~2017,~~2018, compared to ~~$935,000 ($0.33 per share)~~net loss attributable to common stockholders of $1,303,000 for the six months ended December 31, ~~2016.~~2017. The decrease in net loss attributable to common stockholders for the six months is due primarily to: (1) a $103,000 decrease in preferred stock dividends; and (2) a $1,024,000 decrease in deemed dividends and accretion of discounts partially offset by a $338,000 increase in net loss. On a per share basis, net loss attributable to ~~approximately $594,000 in higher net income in~~common stockholders was $0.06 per share for the six months ended December 31, ~~2017,~~2018, compared to $0.25 per share for the same period of the prior year, partially offset by $315,000 of additional preferred stock dividends associated with issuance of the same preferred shares described in the previous paragraph as well as an increase of approximately $454,000 in additional deemed dividends and approximately $194,000 in accretion of discounts associated with the Series C Preferred shares and warrants issued in connection with the Bird & Cronin Acquisition~~in comparison to deemed dividends associated with Series A Preferred in~~six months ended December ~~2016~~.31, 2017.

The deemed dividends reflect the difference between the underlying common share value of the issued preferred shares as if converted, based on the closing price of the Company’s common stock on the date of the issuance, less an amount of the purchase price assigned to the preferred shares in an allocation of the purchase price between the preferred shares and the common stock warrants that were issued with the preferred shares.

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 ~~sales~~proceeds from the sale of our equity securities. During the quarter and six months ended December 31, 2018, we had positive cash flows from operating activities. We ~~expect~~believe that our existing revenue stream, cash flows from operating activities, current capital resources, and borrowing availability under the line of credit provide sufficient liquidity to ~~obtain capital for future acquisitions using borrowings and proceeds from debt and equity offerings.~~ fund operations through at least February 13, 2020.

Working capital was ~~$9,091,000~~$6,242,000 as of December 31, ~~2017,~~2018, compared to working capital of ~~$5,834,000~~$6,837,000 as of June 30, ~~2017.~~2018. The current ratio was ~~1.6~~1.5 to 1 as of December 31, ~~2017~~2018 and ~~1.8 to~~1.5 to 1 as of June 30, ~~2017.~~2018.

Cash and Cash Equivalents

Our cash and cash equivalents position ~~increased $3,397,000~~decreased $1,173,000 to ~~$3,652,000 as~~$524,000 as of December 31, ~~2017,~~2018, compared to ~~$255,000~~$1,696,000 as of June 30, ~~2017.~~2018. The primary source of cash in the six months ended December 31, ~~2017,~~2018, was approximately ~~$1,677,000~~$1,128,000 of net cash provided by operating ~~activities,~~activities. The primary use of cash in the six months ended December 31, 2018 was approximately $1,138,000 in net ~~borrowings of $4,571,000 under our~~payments on the line of credit and ~~net proceeds~~$913,000 in payments of ~~approximately $6,600,000 from sale of our Series C Preferred and warrants in connection with the Acquisition of Bird & Cronin.~~acquisition holdbacks.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, ~~increased~~decreased approximately ~~$2,104,000,~~$880,000, or ~~39.8%~~11.3%, to ~~$7,385,000~~ $6,931,000as of December 31, ~~2017,~~2018, from ~~$5,281,000~~$7,811,000 as of June 30, ~~2017. The increase was primarily due to the addition of the Bird & Cronin that added $1,819,000 in~~2018. Trade accounts receivable ~~as of December 31, 2017.~~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 3040 days of invoicing.

Inventories

Inventories, net of reserves, ~~increased $4,207,000~~decreased $552,000 or ~~56.9%~~5.0%, to ~~$11,605,000~~$10,436,000 as of December 31, ~~2017,~~2018, compared to ~~$7,398,000~~$10,988,000 as of June 30, ~~2017. The increase was driven by the addition of the Bird & Cronin subsidiary that had $4,707,000 of net inventory as of December 31, 2017.~~2018. Inventory levels fluctuate based on timing of large inventory purchases from domestic and overseas suppliers as well as variations in sales and production activities. We believe that our allowance for inventory obsolescence is adequate based on our analysis of inventory, sales trends, and historical experience.

Accounts Payable

Accounts payable ~~increased~~decreased approximately ~~$2,116,000~~$322,000 or ~~90.6%~~9.4%, to ~~$4,451,000~~$3,091,000 as of December 31, ~~2017~~2018, from ~~$2,335,000~~$3,413,000 as of June 30, ~~2017.~~ 2018. The ~~increase~~decrease in accounts payable was driven primarily by a decrease in the ~~addition~~volume of ~~the Bird & Cronin subsidiary that had $1,346,000 of accounts payable at December 31, 2017. The increase was also attributable to an increase in days payable from approximately 27 to 34.~~

purchases.

Line of Credit

Our line of credit balance ~~increased $4,571,000~~decreased $1,138,000 to ~~$6,743,000~~$5,148,000 as of December 31, ~~2017,~~2018, compared to ~~$2,172,000~~$6,286,000 as of June 30, ~~2017. We drew $5,000,000 on September 29, 2017~~2018. The decrease was driven primarily by a decrease in ~~anticipation of closing the Acquisition of Bird & Cronin on October 2, 2017.~~our cash balance by approximately $1,173,000.

Debt

Long-term debt, excluding current installments, decreased ~~$75,000~~$88,000 to ~~$387,000~~$215,000 as of December 31, ~~2017,~~2018, compared to ~~$462,000~~$303,000 as of June 30, ~~2017.~~2018. Our long-term debt is primarily comprised of the mortgage loan on our office and manufacturing facility in Tennessee and also includes loans related to equipment and a vehicle. ~~The principal balance on the mortgage loan was approximately $445,000 of which $310,000 is classified as long-term debt, with monthly principal and interest payments of $13,278 through January 2021.~~

In conjunction with the sale and leaseback of our corporate headquarters in August 2014, we entered into a $3,800,000 lease for a 15-year term with an investor group. That sale generated a profit of $2,300,000 which was deferred and is being recognized monthly over the life of the lease at $13,000 per month, or approximately $150,000 per year. The building lease ~~that we treated~~is recorded as a capital lease ~~valued at $3,800,000. We are amortizing~~with the ~~capital lease asset~~related amortization being recorded on a straight line basis over 15 years at approximately ~~$21,000~~$252,000 per month, or $63,000 per quarter. Accumulated amortization of the capital lease asset was approximately $861,000 at December 31, 2017. The building sale resulted in a profit of $2,300,000 that is treated as a deferred gain that is amortized as an offset to amortization expense over the life of the lease at $12,500 per month, or approximately $37,500 per quarter. The balance of the deferred gain at December 31, 2017 was approximately $1,755,000.year. Lease payments, currently approximately ~~$29,000,~~$27,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. ~~The balance of~~Total accumulated amortization related to the ~~capital lease liability was~~leased building is approximately ~~$3,186,000~~$1,113,000 at December 31, ~~2017.~~2018. Imputed interest for the quarter ended December 31, ~~2017,~~2018, was approximately ~~$45,000.~~$42,000.

Deferred Income ~~Tax Assets~~Taxes

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, ~~2017~~2018 and June 30, ~~2017,~~2018, we recorded a full valuation allowance against our net deferred income tax assets. ~~This resulted in no reported income~~As a result of a temporary book to tax ~~expense~~difference associated with the ~~operating profit reported during~~amortization of goodwill for tax purposes, income tax expense is $204,000 for the three and six months ended December 31, ~~2017.~~

~~Inflation~~

~~Our revenues~~2018 and ~~net income have not been unusually affected by inflation or price increases for raw materials and parts from vendors.~~the balance of a related deferred tax liability is $204,000 as of December 31, 2018.

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, ~~2017.~~2018. No purchases have been made under this plan since September 28, 2011.

Off-Balance Sheet Arrangements

As of December 31, ~~2017,~~2018, 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 ~~Annual Report on~~ Form 10-K for the year ended June 30, ~~2017.~~2018. There have been no material changes to the critical accounting policies previously disclosed in that report.

I~~tem~~tem 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk

There have been no material changes tofrom the information ~~from that~~ presented ~~in our Annual Report on Form 10-K~~ for the year ended June 30, ~~2017.~~2018.

Item 4.4. Controls and Procedures

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 under the Exchange Act is recorded, processed, summarized, and reported within the time periods that are specified in the ~~Securities and Exchange Commission’s (“SEC~~”)SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial 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.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, ~~2017.~~2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, ~~2017.~~2018.

Changes in Internal Control over Financial Reporting

On October 2, 2017 we acquired the assets of Bird & Cronin. We have established oversight, procedures, and controls over financial reporting to accurately consolidate the financial statements of Bird & Cronin and to properly reflect acquisition-related accounting and disclosures. We are continuing to evaluate the design of internal controls over financial reporting for the Bird & Cronin subsidiary.

~~Except as described above, there~~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 December 31, ~~2017~~2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PARTPART II. OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

~~3.1(a)~~	~~Amended and Restated Articles of Incorporation of Dynatronics Corporation, incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-3 filed January 27, 2017~~

~~3.1(b)~~	Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Dynatronics Corporation, incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed April 4, 2017

~~3.1(c)~~	Certificate of Designation of Rights and Preferences of Series C Non-Voting Convertible Preferred Stock as filed with the Utah Division of Corporations and Commercial Code September 29, 2017, incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed October 6, 2017

~~3.1(d)~~	Certificate of Designation of Rights and Preferences of Series D Non-Voting Convertible Preferred Stock as filed with the Utah Division of Corporations and Commercial Code September 29, 2017, incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed October 6, 2017

~~10.1~~	Asset Purchase Agreement, dated September 26, 2017, by and between Dynatronics Corporation and Bird & Cronin, Inc., incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed September 27, 2017)

~~10.2~~	Lease Agreement, dated October 2, 2017, by and between Dynatronics Corporation and Trapp Road Limited Liability Company, incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed October 6, 2017

~~10.3~~	Securities Purchase Agreement dated September 26, 2017, by and between Dynatronics Corporation and each of the Investors signatory thereto, incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed September 27, 2017

~~10.4~~	Form of Registration Rights Agreement to be entered into by and between Dynatronics Corporation and each Investor signatory thereto, incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed September 27, 2017

~~10.5~~	Form of Registration Rights Agreement to be entered into by and between Dynatronics Corporation and Bird & Cronin, Inc., incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed September 27, 2017

~~10.6~~	Modification Agreement, dated October 2, 2017 among Dynatronics Corporation, Hausmann Enterprises, LLC and Bird & Cronin, LLC as Borrowers and Bank of the West, incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed October 6, 2017

11	~~Computation of Net Income per Share (included in Notes to Consolidated Financial Statements)~~

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

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

32.1	~~Certifications under Section~~Certificate pursuant to section 18 U.S.C. Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 ~~(18~~of principal executive officer

32.2	Certificate pursuant to section 18 U.S.C. ~~Section 1350)~~Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 of principal financial officer and principal accounting officer

101.INS	XBRL Instance Document

101.CAL	XBRL Taxonomy Extension Schema Document

101.SCH	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

SIGNATURES

Pursuant to the requirements 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: February 13, ~~2018~~ 2019	By:	/s/ ~~Kelvyn H. Cullimore, Jr.~~Christopher R. von Jako, Ph.D.
		~~Kelvyn H. Cullimore, Jr.~~Christopher R. von Jako, Ph.D.
		~~President and~~ Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)



Date: February 13, ~~2018~~ 2019	By:	/s/ David A. Wirthlin
		David A. Wirthlin
		Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting Officer)

1914

	Page ~~Number~~
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets (Unaudited)	1

Condensed Consolidated ~~Statement~~Statements of Operations (Unaudited)	2

Condensed Consolidated Statements of Cash Flows (Unaudited)	3

Notes to Condensed Consolidated Financial Statements (Unaudited)	4

Cautionary Note Regarding Forward-Looking Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	11 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk	17 12

Item 4. Controls and Procedures	17 13


PART II. OTHER INFORMATION

Item 6. Exhibits	18 13

Signatures	19 14

	Net Sales	Net Income (loss)
Unaudited supplemental pro forma July 1, 2017 to December 31, 2017	$37,337,488	$259,644
Unaudited supplemental pro forma July 1, 2016 to June 30, 2017	$60,027,677	$(285,951)