The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
NOTES TO CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,”
“Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S.
GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation
S-K. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements. These financial statements should be read in conjunction
with the financial statements presented in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2021. In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that
may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended June 30, 2021.
Recently
Adopted Accounting Standards
In
December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic
740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions related to the approach for intraperiod tax allocation,
recognition of deferred tax liabilities for outside basis differences and requiring that an entity reflect the effect of an enacted change
in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments
in this update are effective for us beginning with fiscal year 2022. The adoption of the amendments have not had a material impact.
NOTE 2. DESCRIPTION OF BUSINESS
We
specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and
shavers used primarily in the orthopedic, thoracic, and maxocranial facial markets. We have patented adaptive torque-limiting software
and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary
air motors to a wide range of industries.
In August 2020, we formed a wholly
owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building
in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued
growth of our business. The condensed consolidated financial statements include the accounts of the Company and PDEX Franklin and all
significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations.
NOTE
3. REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR CORRECTION OF IMMATERIAL ERRORS
We failed to timely adopt ASU
2016-01 – Accounting for Financial Instruments – Classification and Measurement, which states in part that changes in fair
value of equity investments must be recognized in net income. We have completed an evaluation of the quantitative and qualitative impact
of this error in our historical financial statements and concluded that our historical financial statements are not materially misstated.
We concluded that our historical financial statements are not materially misstated for several reasons including the fact that the cumulative
three-year error had a negative impact to historical net income in the amount of $61,000, an amount we deem immaterial, as well as the
fact that the amounts did not contain a calculation error but rather amounts were presented on an incorrect line item within the financial
statements. We also considered the fact that this error did not impact cash or operating income for any historical period, which we believe
is important to our investors. Accordingly, the prior year financial statements have been revised to reflect the impact of ASU 2016-1.
The revised classification and reported values of our unrealized gains (losses) on marketable equity investments as accounted for under
ASU 2016-01 are included in the condensed consolidated financial statements herein. The impact to net income for the three months ended
December 31, 2020, was an increase of $1.4 million with a corresponding decrease in unrealized gain on marketable equity securities of
$1.4 million, previously presented in other comprehensive income (loss). The revision resulted in an increase to both basic and diluted
earnings per share for the three months ended December 31, 2020 of $0.36. The impact to net income for the six months ended December 31,
2020, was an increase of $1.3 million with a corresponding decrease in unrealized gain on marketable equity securities of $1.3 million,
previously presented in other comprehensive income (loss). The revision resulted in an increase to basic earnings per share of $0.33 and
diluted earnings per share of $0.32 for the six months ended December 31, 2020. As of June 30, 2021, the revision reclassified the remaining
accumulated other comprehensive loss of $215,000 to retained earnings.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventory
Inventory
is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):
Schedule of inventory
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
June 30,
2021
|
|
Raw materials/purchased components
|
|
$
|
4,331
|
|
|
$
|
3,967
|
|
Work in process
|
|
|
2,774
|
|
|
|
2,218
|
|
Sub-assemblies/finished components
|
|
|
1,836
|
|
|
|
1,738
|
|
Finished goods
|
|
|
344
|
|
|
|
514
|
|
Total inventory
|
|
$
|
9,285
|
|
|
$
|
8,437
|
|
Investments
Investments
are stated at market value and consist of the following (in thousands):
Schedule of investments
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
June 30,
2021
|
|
Marketable equity securities - short-term
|
|
$
|
1,241
|
|
|
$
|
1,295
|
|
Marketable equity securities - long-term
|
|
|
1,940
|
|
|
|
1,704
|
|
Total marketable equity securities
|
|
$
|
3,181
|
|
|
$
|
2,999
|
|
Investments
at December 31, 2021 and June 30, 2021, had an aggregate cost basis of $3,538,000 and $3,204,000,
respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature
because if we decide to sell these securities we may not be able to sell our position within one year. At December 31, 2021, the investments
included net unrealized losses of $357,000 (gross unrealized losses of $475,000 offset by gross unrealized gains of $118,000). At June
30, 2021, the investments included net unrealized losses of $215,000 (gross unrealized losses of
$386,000 offset by gross unrealized gains of $171,000).
Of
the total marketable equity securities at December 31, 2021 and June 30, 2021, $1,170,000 and $1,224,000, respectively, represent an investment
in the common stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through
affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive
Officer and Chairman of Air T, Inc. Another of our Board members is employed by Air T, Inc. as its Chief of Staff. The shares were purchased
through 10b5-1 Plans, that, in accordance with our internal policies regarding the approval of related-party transactions, were approved
by our then three Board members that are not affiliated with Air T, Inc.
We invest surplus cash from time
to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors,
Raymond Cabillot and Nicholas Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive
portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment
of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that
either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage,
or other companies whose boards they sit on, such as Air T, Inc.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Land and building
Land and building consist of the
following (in thousands):
Schedule of Capital Leased Assets
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
June 30,
2021
|
|
Land
|
|
$
|
3,684
|
|
|
$
|
3,684
|
|
Building
|
|
|
2,815
|
|
|
|
2,815
|
|
Total
|
|
|
6,499
|
|
|
|
6,499
|
|
Less: accumulated depreciation
|
|
|
(109
|
)
|
|
|
(62
|
)
|
Land and building
|
|
$
|
6,390
|
|
|
$
|
6,437
|
|
On
November 6, 2020, we acquired the Franklin Property for a total purchase price of $6.5 million, of which we paid $1.3 million in cash
and the balance of $5.2 we financed through Minnesota Bank & Trust (“MBT”) (See Note 10). We substantially completed the
build-out of the property in the first quarter of this fiscal year. Currently, we are actively engaged in various verification and validation
activities so that we can move certain employees and operations into the new building. We expect that we will begin certain operations
in the new facility this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years.
Intangibles
Intangibles consist
of the following (in thousands):
Schedule of intangibles
|
|
|
|
|
|
|
|
|
|
|
December 31,
2021
|
|
|
June 30,
2021
|
|
Patent-related costs
|
|
$
|
238
|
|
|
$
|
260
|
|
Less accumulated amortization
|
|
|
(81
|
)
|
|
|
(74
|
)
|
|
|
$
|
157
|
|
|
$
|
186
|
|
Patent-related
costs consist of legal fees incurred in connection with both patent applications and a patent issuance, and will be amortized over the
estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies
the issuance of the patent. Since we do not know when, or if, our patent applications will be issued, the future amortization expense
is not predictable. During the three months ended December 31, 2021, we impaired $46,000 in previously capitalized legal fees because
although we were granted the underlying patent, in this case, we currently have no products either in development or sold that utilize
the intellectual property protected by the patent.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. WARRANTY
The
warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in
accrued expenses in the accompanying balance sheets. As of December 31, and June 30, 2021, the warranty reserve amounted to $255,000 and
$221,000, respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated statements of income.
Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs
and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes
to estimates for the three months ended December 31, 2021 and 2020, was $44,000 and $182,000, respectively, and for the six months ended
December 31, 2021 and 2020, was $68,000 and $254,000, respectively.
Information regarding the accrual
for warranty costs for the three and six months ended December 31, 2021 and 2020, are as follows (in thousands):
Schedule of Product Warranty Liability
|
|
|
|
|
|
|
|
|
|
|
As of and for the
Three Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
232
|
|
|
$
|
190
|
|
Accruals during the period
|
|
|
33
|
|
|
|
175
|
|
Changes in estimates of prior period warranty accruals
|
|
|
11
|
|
|
|
7
|
|
Warranty amortization
|
|
|
(21
|
)
|
|
|
(25
|
)
|
Ending balance
|
|
$
|
255
|
|
|
$
|
347
|
|
|
|
As of and for the
Six Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
221
|
|
|
$
|
213
|
|
Accruals during the period
|
|
|
64
|
|
|
|
255
|
|
Changes in estimates of prior period warranty accruals
|
|
|
4
|
|
|
|
(1
|
)
|
Warranty amortization
|
|
|
(34
|
)
|
|
|
(120
|
)
|
Ending balance
|
|
$
|
255
|
|
|
$
|
347
|
|
NOTE 6. NET INCOME PER SHARE
We calculate basic net income per
share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average
number of common shares outstanding reflects the effects of potentially dilutive securities, in income generating periods, which consist
entirely of outstanding stock options and performance awards.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents reconciliations
of the numerators and denominators of the basic and diluted earnings per share computations for net income. In the tables below, income
amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):
Schedule of reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
925
|
|
|
$
|
1,750
|
|
|
$
|
1,988
|
|
|
$
|
2,908
|
|
Weighted average shares outstanding
|
|
|
3,657
|
|
|
|
3,861
|
|
|
|
3,654
|
|
|
|
3,856
|
|
Basic income per share
|
|
$
|
0.25
|
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
|
$
|
0.75
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
925
|
|
|
$
|
1,750
|
|
|
$
|
1,988
|
|
|
$
|
2,908
|
|
Weighted average shares outstanding
|
|
|
3,657
|
|
|
|
3,861
|
|
|
|
3,654
|
|
|
|
3,856
|
|
Effect of dilutive securities
|
|
|
110
|
|
|
|
151
|
|
|
|
120
|
|
|
|
158
|
|
Weighted average shares used in calculation of diluted earnings per share
|
|
|
3,767
|
|
|
|
4,012
|
|
|
|
3,774
|
|
|
|
4,014
|
|
Diluted income per share
|
|
$
|
0.25
|
|
|
$
|
0.44
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
NOTE 7. INCOME TAXES
Deferred
income taxes are provided on a liability method whereby deferred tax assets and liabilities
are recognized for temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more-likely-than-not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Significant
management judgment is required in determining our provision for income taxes and the recoverability of our
deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our
estimates of future taxable income by jurisdictions in which we operate and the period over
which our deferred tax assets would be recoverable.
We recognize accrued interest
and penalties related to unrecognized tax benefits when applicable. As of December 31, 2021, we
recognized accrued interest of $61,000 related to unrecognized tax benefits. No interest or penalties were recognized as of June 30, 2021,
since we had sufficient tax attributes available to fully offset any potential assessment of additional tax.
We are subject to U.S. federal
income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations
by the Internal Revenue Service for the years ended June 30, 2018 and later. Our state income tax returns are open to audit under the
statute of limitations for the years ended June 30, 2017 and later. We do not anticipate a significant change to the total amount of unrecognized
tax benefits within the next 12 months.
NOTE 8. SHARE-BASED COMPENSATION
Through June 2014, we had
two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and
the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively,
the “Former Stock Option Plans”). The Employee Stock Option Plan and Director’s Stock Option Plan were terminated in
June 2014 and December 2014, respectively.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In September 2016, our Board approved
the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity
Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory
stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards.
As of December 31, 2021, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive
Plan.
Former Stock Option Plans
No options
were granted under the Former Stock Option Plans during the three or six months ended December 31, 2021 and 2020.
As of December
31, 2021, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding
stock options are fully vested. As of December 31, 2021, the options outstanding had a weighted average remaining contractual life
of 0.79 years and an intrinsic value of $139,000. Following is a summary
of stock option activity under the Former Stock Option Plans for the six months ended December 31, 2021 and 2020:
Share-based Payment Arrangement, Option, Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
Outstanding at July 1,
|
|
|
31,500
|
|
|
$
|
1.81
|
|
|
|
54,000
|
|
|
$
|
1.86
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
(25,000
|
)
|
|
|
1.80
|
|
|
|
(22,500
|
)
|
|
|
1.94
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
6,500
|
|
|
$
|
1.82
|
|
|
|
31,500
|
|
|
$
|
1.81
|
|
Stock Options Exercisable at December 31,
|
|
|
6,500
|
|
|
$
|
1.82
|
|
|
|
31,500
|
|
|
$
|
1.81
|
|
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Performance Awards
In December 2017, the Compensation
Committee of our Board of Directors granted 200,000 performance awards to our employees, which upon vesting will generally be paid in
shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods
that range from 7 months to 9.5 years from the date of grant and the achievement of our common stock trading at certain pre-determined
prices. The weighted average fair value of the performance awards granted was $4.46, calculated using the weighted average fair market
value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited
awards, having the same remaining terms and conditions, to certain other employees. The weighted average fair value of the performance
awards reallocated in 2020 was $16.90, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation.
In December 2021, the Compensation Committee reallocated an additional 5,000 previously forfeited awards, having the same remaining terms
and conditions, to another employee. During each of the three months ended December 31, 2021 and 2020, we recorded share-based compensation
expense of $21,000 related to outstanding performance awards. During each of the six months ended December 31, 2021 and 2020, we recorded
share-based compensation expense of $42,000 related to outstanding performance awards. On December 31, 2021, there was approximately $118,000
of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of
2.47 years.
On July 1, 2020, it was determined
by the Compensation Committee of our Board of Directors that the second of five tranches of 40,000 performance awards had been achieved
and participants were awarded 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding
taxes and; therefore, we issued 25,629 shares and paid $259,000 of participant-related payroll tax liabilities.
Non-Qualified Stock Options
In December 2020, the Compensation
Committee of our Board of Directors granted 310,000 non-qualified stock options to our directors and certain employees under the 2016
Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that
range from 18 months to 10.5 years from the date of grant and the achievement of our common stock trading at certain pre-determined prices.
In December 2021, the Compensation Committee reallocated 5,000 previously forfeited non-qualified stock options, having the same remaining
terms and conditions, to another employee. During the three months ended December 31, 2021 and 2020, we recorded compensation expense
of $254,000 and $18,000, respectively, related to these options. During the six months ended December 31, 2021 and 2020, we recorded compensation
expense of $527,000 and $18,000, respectively, related to these options. The weighted average fair value of the stock option awards granted
was $16.72, calculated using a Monte Carlo simulation. As of December 31, 2021, there was approximately $3.6 million of unrecognized compensation
cost related to these non-vested non-qualified stock options.
Employee Stock Purchase Plan
In September 2014, our Board approved
the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our 2014 Annual
Meeting. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods
of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a per share purchase price
that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period. The Board of
Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares
issuable pursuant to outstanding options under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP.
During the three months ended December
31, 2021 and 2020, we did not record any share-based compensation expense relating to the ESPP, due to the fact that no six-month offering
period ended during either quarter. During the six months ended December 31, 2021 and 2020, 1,130 and 1,485 shares of our common stock
were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $26.17 and $16.94,
respectively, per share. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 25,593 shares of
our common stock. During the six months ended December 31, 2021 and 2020, we recorded share-based compensation expense in the amount of
$5,000 and $4,000, respectively, relating to the ESPP.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. MAJOR CUSTOMERS AND SUPPLIERS
Information
with respect to customers that accounted for sales in excess of 10% of our total sales in
either of the three-month and the six-month periods
ended December 31, 2021 and 2020, is as follows (in thousands, except percentages):
Schedule of sales by major customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
|
|
|
Net sales
|
|
$
|
10,173
|
|
|
|
100
|
%
|
|
$
|
8,265
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
6,723
|
|
|
|
66
|
%
|
|
$
|
5,809
|
|
|
|
70
|
%
|
Customer 2
|
|
|
1,249
|
|
|
|
12
|
%
|
|
|
1,221
|
|
|
|
15
|
%
|
Customer 3
|
|
|
1,090
|
|
|
|
11
|
%
|
|
|
658
|
|
|
|
8
|
%
|
Total
|
|
$
|
9,062
|
|
|
|
89
|
%
|
|
$
|
7,688
|
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
|
|
|
Net sales
|
|
$
|
20,161
|
|
|
|
100
|
%
|
|
$
|
16,855
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
13,714
|
|
|
|
68
|
%
|
|
|
10,978
|
|
|
|
65
|
%
|
Customer 2
|
|
|
2,189
|
|
|
|
11
|
%
|
|
|
3,391
|
|
|
|
20
|
%
|
Customer 3
|
|
|
1,970
|
|
|
|
10
|
%
|
|
|
1,127
|
|
|
|
7
|
%
|
Total
|
|
$
|
17,873
|
|
|
|
89
|
%
|
|
$
|
15,496
|
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information with respect to accounts
receivable from those customers who comprised more than 10% of our gross accounts receivable at either December 31, 2021 or June 30, 2021,
is as follows (in thousands, except percentages):
Schedule of accounts receivable of major customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
|
|
June 30, 2021
|
|
Total gross accounts receivable
|
|
$
|
8,854
|
|
|
|
100
|
%
|
|
$
|
10,935
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
5,993
|
|
|
|
68
|
%
|
|
$
|
6,666
|
|
|
|
61
|
%
|
Customer 2
|
|
|
864
|
|
|
|
10
|
%
|
|
|
3,710
|
|
|
|
34
|
%
|
Total
|
|
$
|
6,857
|
|
|
|
78
|
%
|
|
$
|
10,376
|
|
|
|
95
|
%
|
During the three and six months
ended December 31, 2021, we had two suppliers accounting for 10% or more of total inventory purchases. During the three months ended December
31, 2020, we had three suppliers accounting for 10% or more of total inventory purchases, and during the six months ended December 31,
2020, we had two suppliers that accounted for more than 10% of our total inventory purchases.
NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS
Minnesota Bank & Trust
On
November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased an
approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). A portion of the purchase
price was financed by a loan from MBT to PDEX Franklin in the principal amount of approximately $5.2 million (the “Property Loan”)
pursuant to a Loan Agreement, dated as of the Closing Date, between PDEX Franklin and MBT (the “Property Loan Agreement”)
and corresponding Term Note (the “Property Note”) issued by PDEX Franklin in favor of MBT on the Closing Date. The Property
Loan is secured by the Franklin Property pursuant to a Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture
Filing in favor of MBT (the “Deed”) and by an Assignment of Leases and Rents by PDEX Franklin in favor of MBT (the “Rents
Assignment”). We paid loan origination fees to MBT on the Closing Date in the amount of $26,037.
The
Property Loan bears interest at a fixed rate of 3.55% per annum, which is subject to a 3% increase upon an event of default. Accrued interest
was paid on December 1, 2020, and both principal and interest in the amount of approximately $30,000 are due and payable on the first
day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time a balloon payment
in the amount of $3.1 million is due. Any prepayment of the Property Loan (other than monthly scheduled interest and principal payments),
is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first or second year, 3%
of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount prepaid for any prepayment
made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during the seventh or eighth year.
The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties, covenants, and events
of default that are customary for a loan of this type. The balance owed on the Property Loan at December 31, 2021 is $5,028,000.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”),
providing for a $7,525,000 amended and restated term loan (the “Term Loan A”), a $1,000,000 term loan (the “Term Loan
B”), and a $2,000,000 amended and restated revolving loan (the “Revolving Loan” and, together with the Term Loan A and
the Term Loan B, collectively, the “Loans”), evidenced by an Amended and Restated Term Note A (“Term Note A”),
a Term Note B, and an Amended and Restated Revolving Credit Note (the “Revolving Note”) made by us in favor of MBT. The Loans
are secured by substantially all of the Company’s assets pursuant to a Security Agreement entered into on September 6, 2018, between
the Company and MBT. The Term Note A had an outstanding principal balance of $3,770,331 as of the Closing Date and could be borrowed against
through May 30, 2021 (the “Commitment Period”). During the third quarter ended March 31, 2021, we borrowed an additional $3,000,000
against Term Note A for the purpose of repurchasing shares of our common stock. The Term Note B had a zero balance as of the Closing Date
and we borrowed the full $1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin
Property.
The
Term Loan A matures on November 1, 2027, and bears interest at a fixed rate of 3.84% per annum. Initial payments on the Term Loan A of
interest only were due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month
thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan
A of approximately $97,000 plus any additional accrued and unpaid interest through the date of payment. The balance owed on Term Loan
A as of December 31, 2021, is $6,259,000.
The
Term Loan B matures on November 1, 2027, and bears interest at a fixed rate of 3.84% per annum. Initial payments on the Term Loan B of
interest only were due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month
thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan B of approximately $15,000,
plus any additional accrued and unpaid interest through the date of payment. As of March 31, 2021, we had drawn fully against Term Note
B and the balance outstanding on Term Note B was $932,000 on December 31, 2021.
The
Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2023, and bears interest at an annual
rate equal to the greater of (a) 2.75% or (b) the prime rate minus 0.5% as published in the Money Rates section of the Wall Street Journal.
Commencing on the first day of each month after we initially borrow against the Revolving Loan and each month thereafter until maturity,
we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of payment. Any principal on the Revolving
Loan that is not previously prepaid shall be due and payable in full on the maturity date (or earlier termination of the Revolving Loan).
No amounts have been drawn against the Revolving Loan.
Any
payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5% of the overdue amount.
Upon the occurrence and during the continuance of an event of default, the interest rate of all Loans will be increased by 3% and MBT
may, at its option, declare the Loans immediately due and payable in full.
The
Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note contain representations and warranties, affirmative,
negative and financial covenants, and events of default that are customary for loans of this type.
NOTE 11. COMMON STOCK
Share Repurchase Program
In December 2019, our Board approved
a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized
by the Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board approved the
adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities
Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the three and six months ended December 31,
2021, we repurchased 24,336 and 27,952 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $577,000 and $672,000,
respectively. During the three and six months ended December 31, 2020, we did not repurchase any shares under the repurchase program.
On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,063,448 shares under
the share repurchase program at an aggregate cost, inclusive of fees, of $14.7 million. All repurchases under the 10b5-1 Plans were administered
through an independent broker.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At The Market Offering Agreement
In
December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement
allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings
as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions,
including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged
stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM
10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, but future sales may
occur pursuant to the parameters of the ATM 10b5-1 Plan or otherwise at the direction of our Board in accordance with the terms of the
ATM Agreement.
NOTE 12. LEASES
Effective July 1, 2019, we adopted
the new lease accounting standard ASU 2016-02 using the modified retrospective method of applying the new standard at the adoption date.
In addition, we elected the practical expedient that allowed us to carry forward the historical lease classification of our sole operating
lease for our corporate office, which includes our manufacturing and research and development facilities. Adoption of this standard resulted
in the recording of net operating lease right-of-use (“ROU”) asset and corresponding operating lease liability of $3.3 million.
Our operating lease ROU asset and
long-term liability are presented separately on our condensed consolidated balance sheet. The current portion of our operating lease liability
as of December 31, 2021, in the amount of $361,000, is presented within accrued expenses on the condensed consolidated balance sheet.
As of December 31, 2021, the maturity
of our lease liability is as follows:
Schedule of Maturities of Lease Liabilities
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
Fiscal Year:
|
|
|
|
|
|
2022
|
|
|
$
|
246
|
|
2023
|
|
|
|
504
|
|
2024
|
|
|
|
519
|
|
2025
|
|
|
|
535
|
|
2026
|
|
|
|
551
|
|
Thereafter
|
|
|
|
710
|
|
Total lease payments
|
|
|
|
3,065
|
|
Less imputed interest:
|
|
|
|
(456
|
)
|
Total
|
|
|
$
|
2,609
|
|
As of December 31, 2021, our
operating lease has a remaining lease term of five 5 years and nine months and an imputed interest rate of 5.53%.
Cash paid for amounts included in the lease liability for the three and six months ended December 31, 2021, totaled $123,000 and
$243,000, respectively, and for December 31, 2020, totaled $120,000 and $236,000, respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal
Matters
On August 24, 2021, one of our customers,
through its counsel, sent notice that it is seeking indemnification from us regarding a pending complaint filed by a third-party claiming
patent infringement on one of the products that we manufacture for this customer. As of the date of this filing, our position is that
there is no infringement and/or that the patent at issue is invalid. We have not accrued any amounts related to this claim and we intend
to defend the claim, which we believe may take two years or more to resolve.
PRO-DEX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 12, 2021, we received
a letter from an attorney representing a former employee, alleging, among other things, wrongful termination, failure to accommodate,
and intentional infliction of emotional distress. The parties are scheduled for a mediation hearing on February 23, 2022. If the dispute
does not settle at mediation, we intend to contest all of the claims against us.
In addition to the above matters,
we are from time to time a party to various legal proceedings arising either in the ordinary course of our business or incidental to our
business. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and
adverse.
NOTE 14. SUBSEQUENT EVENTS
We have evaluated subsequent events
through the date of this filing. There were no subsequent events that require disclosure.