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.
Of the proceeds raised from the ATM shares issued during the first quarter of fiscal 2018, $142,000 were accounted for as a reduction of prepaid expenses.
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 CONDENSED 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 (GAAP) for interim financial information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. 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 consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2018.
Recent Accounting Standards
In February 2016, the FASB issued ASU 2016-02, (Topic 842)
Leases
. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. While we are still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our leases, we expect the adoption will lead to a material increase in the assets and liabilities recorded on our consolidated balance sheet.
Recently Adopted Accounting Standards
Effective July 1, 2018, we adopted new revenue recognition guidance issued by the FASB related to contracts with customers. Under ASU 2014-09, (Topic 606)
Revenue From Contracts with Customers
, we recognize revenue from the sales of products and services by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. We utilized the modified retrospective method of adoption and there was no impact on our financial statements as a result of adopting Topic 606 for the three and six months ended December 31, 2018. We primarily sell finished products and recognize revenue at point of sale or delivery and the timing of revenue recognition has not changed with the adoption of the new guidance. However, we also perform services when we are engaged to design a product for a customer and there is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts. In order to disclose the amount of revenue related to these services, where more judgment is required, we have added NRE & Prototypes to our net sales table included under Managements Discussion and Analysis of Financial Condition and Results of Operations of this report, which had previously been reflected in Medical device and services.
Reclassifications
We have reclassified the gain on disposal of equipment in the amount of $7,000 and $15,000 for the three and six months ended December 31, 2017, respectively, to operating income (expense) from other income (expense) as prescribed by GAAP. This reclassification has no impact on our net income. We have also reclassified the tax effect of unrealized gain (loss) from marketable equity investments in the amount of $21,000 for the six months ended December 31, 2017 from a separate line item to deferred income taxes on the statement of cash flows. This reclassification has no impact on our net increase or decrease in cash, but properly reflects this change in net cash provided by or used in operating activities instead of investing activities.
6
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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.
Our Fineline Molds division (Fineline), acquired in fiscal 2015, manufactured plastic injection molding for a variety of industries. As disclosed in our Form 8-K filed with the SEC on May 30, 2018, we sold substantially all of the assets of Fineline on May 23, 2018. Management reviewed ASU 2014-08
Reporting Discontinued Operations and Disposals of Components of an Entity
and concluded that the sale of Fineline does not require treatment as a discontinued operation because it was not a material part of our operations.
NOTE 3. 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):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
June 30,
2018
|
|
Raw materials /purchased components
|
|
$
|
1,824
|
|
|
$
|
1,878
|
|
Work in process
|
|
|
1,461
|
|
|
|
974
|
|
Sub-assemblies /finished components
|
|
|
1,185
|
|
|
|
1,193
|
|
Finished goods
|
|
|
70
|
|
|
|
348
|
|
Total inventory
|
|
$
|
4,540
|
|
|
$
|
4,393
|
|
Investments
Investments are stated at market value and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
June 30,
2018
|
|
Marketable equity securities
|
|
$
|
1,842
|
|
|
$
|
2,220
|
|
Investments at December 31, 2018 and June 30, 2018 had an aggregate cost basis of $2,190,000 and $2,374,000, respectively. At December 31, 2018, the investments included net unrealized losses of $349,000 (gross unrealized losses of $421,000 offset by gross unrealized gains of $72,000). During the quarter ended December 31, 2018 we incurred unrealized losses of $548,000 and related tax benefit of $54,000 recorded in other comprehensive income. Additionally, during the quarter ended December 31, 2018, we liquidated one of our investments and recorded a realized gain in the amount of $356,000. During the six months ended December 31, 2018, we recorded unrealized losses of $196,000. At June 30, 2018, the investments included net unrealized losses of $153,000 (gross unrealized losses of $196,000 offset by gross unrealized gains of $43,000).
Of the total marketable equity securities at December 31, 2018 and June 30, 2018, $809,000 and $285,000, 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. The shares have been purchased through 10b5-1 Plans, which in accordance with our internal policies regarding the approval of related party transactions, was approved by our three Board members that are not affiliated with Air T, Inc.
7
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Intangibles
Intangibles consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
June 30,
2018
|
|
Covenant not to compete
|
|
$
|
|
|
|
$
|
30
|
|
Patent-related costs
|
|
|
178
|
|
|
|
164
|
|
Total intangibles
|
|
$
|
178
|
|
|
$
|
194
|
|
Less accumulated amortization
|
|
|
(39
|
)
|
|
|
(54
|
)
|
|
|
$
|
139
|
|
|
$
|
140
|
|
The covenant not to compete relates to assets acquired in conjunction with a business acquisition. The covenant not to compete and related accumulated amortization were retired during the second quarter of fiscal 2019. 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.
NOTE 4. 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 consolidated balance sheets. As of December 31, 2018 and June 30, 2018, the warranty reserve amounted to $99,000 and $107,000, respectively. Warranty expenses are included in cost of sales in the accompanying consolidated statements of operations. 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, 2018 and 2017 was $16,000 and $28,000, respectively, and for the six months ended December 31, 2018 and 2017 was $30,000 and $28,000, respectively.
Information regarding the accrual for warranty costs for the three and six months ended December 31, 2018 and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of and for the
Three Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
95
|
|
|
$
|
146
|
|
Accruals during the period
|
|
|
25
|
|
|
|
32
|
|
Changes in estimates of prior period warranty accruals
|
|
|
(9
|
)
|
|
|
(4
|
)
|
Warranty amortization
|
|
|
(12
|
)
|
|
|
(24
|
)
|
Ending balance
|
|
$
|
99
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
Six Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
107
|
|
|
$
|
159
|
|
Accruals during the period
|
|
|
54
|
|
|
|
52
|
|
Changes in estimates of prior period warranty accruals
|
|
|
(24
|
)
|
|
|
(24
|
)
|
Warranty amortization
|
|
|
(38
|
)
|
|
|
(37
|
)
|
Ending balance
|
|
$
|
99
|
|
|
$
|
150
|
|
8
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. NET INCOME (LOSS) PER SHARE
The Company calculates basic net income (loss) per share by dividing net income (loss) 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.
The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss). In the tables below, income (loss) amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,179
|
|
|
$
|
345
|
|
|
$
|
2,528
|
|
|
$
|
973
|
|
Weighted average shares outstanding
|
|
|
4,195
|
|
|
|
4,359
|
|
|
|
4,263
|
|
|
|
4,255
|
|
Basic income per share
|
|
$
|
0.28
|
|
|
$
|
0.08
|
|
|
$
|
0.59
|
|
|
$
|
0.23
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,179
|
|
|
$
|
345
|
|
|
$
|
2,528
|
|
|
$
|
973
|
|
Weighted average shares outstanding
|
|
|
4,195
|
|
|
|
4,359
|
|
|
|
4,263
|
|
|
|
4,255
|
|
Effect of dilutive securities stock options
|
|
|
47
|
|
|
|
41
|
|
|
|
40
|
|
|
|
40
|
|
Weighted average shares used in calculation of diluted earnings per share
|
|
|
4,242
|
|
|
|
4,400
|
|
|
|
4,303
|
|
|
|
4,295
|
|
Diluted income per share
|
|
$
|
0.28
|
|
|
$
|
0.08
|
|
|
$
|
0.59
|
|
|
$
|
0.23
|
|
NOTE 6. INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The new legislation represented a fundamental and dramatic shift in US taxation. The new legislation contains several key tax provisions that will impact us including the reduction of the corporate tax rate to 21% effective January 1, 2018. The new legislation also includes a variety of other changes including, but not limited to, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and a reduction in the amount of executive pay that could qualify as a deduction.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses income tax accounting implications of the Tax Act. The purpose of the SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740,
Income Taxes
, in the reporting period in which the Tax Act was enacted. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. We have completed our accounting analysis as it relates to the newly enacted corporate tax rate as well as reassessing the realizability of our deferred tax assets and liabilities.
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.
9
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of December 31, 2018, we have accrued $472,000 of unrecognized tax benefits related to federal and state income tax matters. This entire balance is expected to reduce the Companys income tax expense if recognized and result in a corresponding decrease in the Companys effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at July 1, 2018
|
|
$
|
462
|
|
Additions based on tax positions related to the current year
|
|
|
10
|
|
Additions for tax positions of prior years
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
472
|
|
We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of December 31, 2018, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have 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, 2015 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2014 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
NOTE 7. 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). There was no share-based compensation expense attributable to the Former Stock Option Plans for the three and six months ended December 31, 2018 and 2017, as all outstanding options under the Former Stock Option Plans are fully vested. The Employee Stock Option Plan and Directors Stock Option Plan were terminated in June 2015 and September 2014, respectively.
In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at the November 29, 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of the Companys 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, 2018, 200,000 performance awards have been granted under the 2016 Equity Incentive Plan.
Stock Options
No options were granted during the three or six months ended December 31, 2018 and 2017.
As of December 31, 2018, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding stock options are fully vested. As of December 31, 2018, the options outstanding had a weighted average remaining contractual life of 2.5 years and an intrinsic value of $552,000. Following is a summary of stock option activity for the six months ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Number of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at July 1,
|
|
|
57,000
|
|
|
$
|
1.88
|
|
|
|
57,000
|
|
|
$
|
1.88
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(3,000
|
)
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
54,000
|
|
|
$
|
1.86
|
|
|
|
57,000
|
|
|
$
|
1.88
|
|
Stock Options Exercisable at December 31,
|
|
|
54,000
|
|
|
$
|
1.86
|
|
|
|
57,000
|
|
|
$
|
1.88
|
|
10
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Performance Awards
In December 2017, the Compensation Committee of the Board of Directors granted 200,000 performance awards to our employees, which 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 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. We recorded share-based compensation expense of $8,000 and $46,000 for the three months ended December 31, 2018 and 2017, respectively, and $16,000 and $46,000 for the six months ended December 31, 2018 and 2017, respectively, related to these performance awards. On December 31, 2018, there was approximately $83,000 of unrecognized compensation cost related to these non-vested performance awards expected to be expensed over the weighted-average period of 4.38 years.
On July 1, 2018, it was determined by the Compensation Committee of our Board of Directors that the first 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 24,727 shares of common stock and paid $101,000 of participant related payroll tax liabilities.
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 the December 3, 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, 2018 and 2017, we did not record any share-based compensation expense, due to the fact that no six-month offering period ended during either quarter. During the six months ended December 31, 2018 and 2017, 1,820 and 3,099 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $5.51 and $5.21, respectively, per share. On a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of 17,943 shares. During each of the six months ended December 31, 2018 and 2017, we recorded share-based compensation expense in the amount of $2,000, relating to the ESPP.
NOTE 8. 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, 2018 and 2017 is as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
Net sales
|
|
$
|
6,399
|
|
|
|
100
|
%
|
|
$
|
5,560
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
4,135
|
|
|
|
64
|
%
|
|
$
|
3,062
|
|
|
|
55
|
%
|
Customer 2
|
|
|
548
|
|
|
|
9
|
%
|
|
|
737
|
|
|
|
13
|
%
|
Customer 3
|
|
|
365
|
|
|
|
6
|
%
|
|
|
624
|
|
|
|
11
|
%
|
Total
|
|
$
|
5,048
|
|
|
|
79
|
%
|
|
$
|
4,423
|
|
|
|
79
|
%
|
11
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
Net sales
|
|
$
|
13,314
|
|
|
|
100
|
%
|
|
$
|
10,723
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
8,449
|
|
|
|
64
|
%
|
|
$
|
6,088
|
|
|
|
57
|
%
|
Customer 3
|
|
|
1,525
|
|
|
|
11
|
%
|
|
|
1,095
|
|
|
|
10
|
%
|
Customer 2
|
|
|
845
|
|
|
|
6
|
%
|
|
|
1,242
|
|
|
|
12
|
%
|
Total
|
|
$
|
10,819
|
|
|
|
81
|
%
|
|
$
|
8,425
|
|
|
|
79
|
%
|
Information with respect to accounts receivable from those customers whom comprised more than 10 % of our gross accounts receivable at either December 31, 2018 or June 30, 2018, is as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
June 30, 2018
|
|
Total gross accounts receivable
|
|
$
|
3,808
|
|
|
|
100
|
%
|
|
$
|
2,969
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
2,567
|
|
|
|
67
|
%
|
|
$
|
1,673
|
|
|
|
56
|
%
|
Customer 2
|
|
|
483
|
|
|
|
13
|
%
|
|
|
679
|
|
|
|
23
|
%
|
Total
|
|
$
|
3,050
|
|
|
|
80
|
%
|
|
$
|
2,352
|
|
|
|
79
|
%
|
During the three months ended December 31, 2018 we had two suppliers accounting for 10% or more of total purchases. During the three months ended December 31, 2017, we did not have any suppliers accounting for more than 10% of our purchases. During each of the six months ended December 31, 2018 and 2017, we had one supplier that accounted for more than 10% of our total purchases, respectively, although these were different suppliers in each period.
Amounts owed to the fiscal 2018 significant supplier at December 31, 2018 and June 30, 2018 represented 11% and 3%, respectively, of total accounts payable.
NOTE 9. NOTES RECEIVABLE
Loan Participation note receivable short-term
On September 20, 2017 (the Closing Date), we entered into a Participation Agreement with FS Special Opportunities I, L.P., a Minnesota limited partnership (Principal), pursuant to which we paid Principal $1,150,000 in cash to purchase a 50% (Participation Percentage) undivided interest (the Participation) in Principals $2,300,000 loan (the Loan) to 414 New York LLC, a New York limited liability company (Borrower). The Participation constitutes the purchase by us of a property interest in the Loan from Principal and does not create a creditor-debtor relationship between us and Borrower. Borrower used the proceeds from the Loan to acquire a leasehold interest in certain real estate operated as a hotel in Manhattan, New York.
Pursuant to the loan agreement entered into on the Closing Date between Principal and Borrower, the Loan initially bears interest at a fixed rate of 22% per annum, with payments of all accrued and unpaid interest due monthly commencing on October 1, 2017 and on the first day of each month thereafter. If the principal balance of the Loan was not paid in full by September 30, 2018, commencing on October 1, 2018 and continuing on the first day of the next 83 months thereafter, Borrower would, in addition to the aforementioned monthly interest payments, pay installments of principal equal to 1/84
th
of the principal balance outstanding under the Loan as of September 30, 2018. During the first quarter ended September 30, 2018, however, the Principal extended interest only payments to Borrower for an additional period of up to two months and has continued to grant subsequent extensions. We have continued to classify this note receivable as short-term pursuant to representations that the Borrower has made to Principal. We believe this note will be repaid in full during our third fiscal quarter ending March 31, 2019.
12
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Raymond E. Cabillot, a director of the Company, is the managing partner of Farnam Street Capital, Inc. (Farnam) and Farnam is the founding partner of the Principal. In accordance with our internal policies regarding the approval of related party transactions, the Participation was approved by our four Board members that are not affiliated with Farnam.
Fineline note receivable
On May 23, 2018, we completed the sale of substantially all of the assets of Fineline, which was engaged in the manufacture of plastic injection molds serving customers in a variety of industries. The aggregate purchase price was $310,000, of which $30,000 was paid in cash at closing and the balance of $280,000 is to be paid to us under the terms of a five-year promissory note, which bears interest at 4% per annum and requires sixty equal monthly payments of principal and accrued interest in the amount of approximately $5,000 each, beginning February 15, 2019. We have determined that there is uncertainty regarding the collectability of this note. Therefore, during fiscal 2018 we offset the gain on the sale of the division in the amount of approximately $211,000, against the impairment of the note receivable because we believe that the fair market value of the collateral securing the note is less than the face amount of the note. As of December 31, 2018, approximately $47,000 of this note receivable is classified as current.
NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS
Minnesota Bank & Trust
On September 6, 2018, we entered into a Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (MBT), providing for a $5,000,000 term loan (the Term Loan) as well as a $2,000,000 revolving loan (the Revolving Loan and together with the Term Loan, collectively the Loans), evidenced by a Term Note A and a Revolving Credit Note made by us in favor of MBT. The Loans are secured by substantially all of our assets pursuant to a Security Agreement entered into on September 6, 2018 between us and MBT. We paid loan origination fees to MBT in the amount of $60,000.
The Term Loan matures on October 1, 2025 and bears interest at a fixed rate of 5.53% per annum. An initial payment of interest only in the amount of $18,433 was paid on October 1, 2018. Commencing November 1, 2018 and continuing on the first day of each subsequent month thereafter until the maturity date, we are required to make payments of principal and interest on the Term Loan of approximately $72,000, plus any additional accrued and unpaid interest through the date of payment. The balance owed on the Term Loan at December 31, 2018 is $4.9 million. The Revolving Loan matures on September 6, 2019 unless earlier terminated pursuant to its terms and bears interest at the greater of (a) 4.5% or (b) the difference of the prime rate as published in the Money Rates section of the Wall Street Journal minus 0.50%. Commencing on the first day of each month after we initially borrow against the Revolving Loan, which we have yet to do, 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 on the maturity date (or earlier termination of 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 both Loans will be increased by 3% and MBT may, at its option, declare the Loans immediately due and payable in full.
The Credit Agreement and Security Agreement contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type.
Farmers & Merchants Bank of Long Beach
On April 19, 2017, we entered into a Business Loan Agreement, dated effective March 28, 2017, with Farmers & Merchants Bank of Long Beach (FMB), providing for a $500,000 revolving loan facility. The loan was secured by substantially all of our assets and bore interest at prime plus 2 percent. The loan had an original maturity of March 28, 2018, which was subsequently extended to March 28, 2019. We did not at any time borrow funds under this facility. This loan was terminated by us on September 4, 2018 in conjunction with the MBT Loans described above.
13
PRO-DEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Jules & Associates
On July 21, 2016, we entered a master equipment lease agreement with Jules and Associates, Inc. to lease a specific machine used in our inspection process. The cost of the equipment was approximately $106,000 and the lease provides for 36 monthly payments in the amount of $3,121, as well as interim rent in the amount of $7,388. The lease was subsequently assigned to Hitachi Capital America Corporation. The balance owed on the lease as of December 31, 2018 is approximately $24,000.
NOTE 11. COMMON STOCK
Share Repurchase Program
In September 2013, our Board approved a share repurchase program authorizing us to repurchase up to 750,000 shares of our common stock. In accordance with, and as part of, this share repurchase program, 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, 2018, we repurchased 109,366 and 217,454 shares, respectively at an aggregate cost, inclusive of fees under the plan, of $1,445,000 and $2,560,000, respectively. The 10b5-1 Plans used to make the fiscal 2019 purchases have terminated in accordance with their terms as the aggregate purchase price of shares under the plan was achieved. On a cumulative basis, since the 2013 Board approval, we have repurchased a total of 483,487 shares under the share repurchase program at an aggregate cost of $3.7 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.
At The Market Offering Agreement
In February 2017, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (Ascendiant). The ATM Agreement allows us to sell shares of our common stock pursuant to specific parameters defined by us as well as those defined by the SEC and the ATM Agreement. During the three and six months ended December 31, 2017, we sold 12,189 and 332,189 shares of common stock, respectively, under the ATM at average prices of $7.84 and $7.02 per share, respectively, resulting in proceeds to us of $93,000 and $2.2 million, respectively, net of commissions and fees. From the inception of the ATM in February 2017 through December 31, 2017 we sold 340,465 shares of common stock for gross proceeds of $2,311,000 net of commissions and fees paid to Ascendiant totaling $72,000. The ATM allows for quick and agile sales of our common stock to interested investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities that may present themselves from time to time. In December 2017, the Board suspended the ATM indefinitely. The Board has the discretion to reactivate the ATM prior to February 16, 2020, the expiration of the ATM Agreement, unless earlier terminated by Ascendiant or us.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal Matters
We are from time to time a party to various legal proceedings 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 13. SUBSEQUENT EVENT
On February 4, 2019, one of our customers, whom entered into a development contract with us in early fiscal 2019, executed a material procurement authorization in the amount of $3.4 million to support production orders for the private-labeled thoracic driver and related accessories, which we expect to ship in calendar 2019.
14