(2) Acquisition

12 Months Ended

Jun. 30, 2017

Notes

(2) Acquisition

(2)     Acquisition

On April 3, 2017, Dynatronics, through its wholly-owned subsidiary Hausmann Enterprises, LLC, (Subsidiary) a newly formed Utah limited liability company, completed the purchase of substantially all the assets of Hausmann Industries, Inc., a New Jersey corporation (“Hausmann”) for $10 million in cash, pursuant to an asset purchase agreement dated March 21, 2017, by and between the Company and Hausmann (“Asset Purchase Agreement”). The transaction is referred to as the “Acquisition.” This acquisition will expand Dynatronics’ sales in the physical therapy, athletic training and other markets by leveraging the products and distribution network offered by the acquired company.

Financing for the Acquisition was provided by proceeds from the sale of equity securities in a private offering to accredited investors (the “Private Placement”) and borrowings under a loan and security agreement (see Note 7).  Closing of the Private Placement occurred concurrently with the closing of the Acquisition.  At the closing of the Acquisition, the Company paid Hausmann $9.0 million of the $10.0 million purchase price holding back $1.0 million for purposes of satisfying adjustments to the purchase price as may be required by the Asset Purchase Agreement and indemnification claims, if any. Pursuant to a working capital adjustment provision in the Asset Purchase Agreement, the purchase price was subsequently increased $160,833 to $10,160,833.  The Company paid an additional $116,089 to Hausmann and held back $44,744 until no later than November 15, 2017.  The $44,744 is combined with the acquisition holdback in the accompanying consolidated balance sheets.  Subject to additional adjustments or claims as provided by the Asset Purchase Agreement, 25% of the holdback amount will be released to Hausmann on January 1, 2018, and the balance will be released to Hausmann 18 months after closing. As part of the Acquisition, the Company assumed certain liabilities and obligations of Hausmann related to its ongoing business (primarily trade accounts and similar obligations in the ordinary course).

In connection with the Acquisition, the Company sold equity securities for gross proceeds of $7,795,000 in the Private Placement pursuant to the terms of a Securities Purchase Agreement dated March 21, 2017 (the "Securities Purchase Agreement") entered into with certain accredited investors, including institutional investors (the "Investors"). See Note 14 for details.

Also in connection with the Acquisition, Subsidiary entered into an agreement with Hausmann to lease the 60,000 square-foot manufacturing and office facility in Northvale, New Jersey (the "New Jersey Facility") effective as of the closing date (the "Lease") with an initial two-year term, annual lease payments of $360,000 for the first year, and 2% increases in each subsequent year. The Lease grants Subsidiary two options to extend the term of the Lease for two years per extension term, subject to annual 2% per year increases in base rent, and a third option at the end of the second option term for an additional five-years at fair market value.  The Company also offered employment to Hausmann’s employees at closing including David Hausmann, the primary stockholder of Hausmann and its former principal executive officer. Mr. Hausmann entered into an employment agreement with the Company effective at the closing to assist in the transition of the acquired business.

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 purchase price was $10,160,833.  The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition.

Cash and cash equivalents	$                  600
Trade accounts receivable	1,691,420
Inventories	2,117,430
Prepaid expenses	136,841
Property and equipment	512,950
Intangible assets	2,689,000
Goodwill	4,302,486
Warranty reserve	(50,000)
Accounts payable	(544,625)
Accrued expenses	(33,981)
Accrued payroll and benefits	(661,288)
Purchase price	$   10,160,833

As of June 30, 2017, the Company had paid $9,116,089 of the purchase price and retained holdbacks of $1,044,744 due as follows:

November 15, 2017	$          44,744
January 1, 2018	250,000
October 3, 2018	750,000
Acquisition holdback	$     1,044,744

The amounts of Hausmann’s net sales and net income included in the Company's consolidated statement of operations for the year ended June 30, 2017were $3,812,000 and $223,000, respectively.  Pro forma net sales and net loss of the combined operations had the acquisition date been July 1, 2016

		Net Sales		Net Income(loss)
Supplemental pro forma for year ended June 30, 2017		46,859,000		917,000
Supplemental pro forma for year ended June 30, 2016	$	45,378,000	$	1,129,000

2017 supplemental pro forma earnings were adjusted to exclude $90,000 of acquisition-related costs incurred in 2017 and $-0- of nonrecurring expense related to the fair value adjustment to acquisition-date inventory. 2016 supplemental pro forma earnings were adjusted to include these charges.