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 has not had a material impact on our consolidated financial statements.
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 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 March 31, 2021, was an increase of $136,000 with a corresponding decrease in unrealized gain on marketable equity securities of
$136,000, 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 March 31, 2021, of $0.04. The impact to net income for the nine months ended March 31, 2021, 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 basic earnings per share of $0.37 and diluted
earnings per share of $0.36 for the nine months ended March 31, 2021. 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. NET SALES
The following table presents
the disaggregation of net sales by revenue recognition model (in thousands):
Schedule of disaggregation of net sales | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net Sales: | |
| | | |
| | | |
| | | |
| | |
Over-time revenue recognition | |
$ | 549 | | |
$ | 55 | | |
$ | 859 | | |
$ | 185 | |
Point-in-time revenue recognition | |
| 8,716 | | |
| 11,684 | | |
| 28,567 | | |
| 28,409 | |
Total net sales | |
$ | 9,265 | | |
$ | 11,739 | | |
$ | 29,426 | | |
$ | 28,594 | |
The timing of revenue recognition,
billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed
consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets),
where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. Our entire deferred revenue
balance of $896,000 at March 31, 2022, is currently expected to be recognized in the next 12-month period.
NOTE 5. 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 | |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Raw materials /purchased components | |
$ | 6,184 | | |
$ | 3,967 | |
Work in process | |
| 2,516 | | |
| 2,218 | |
Sub-assemblies/finished components | |
| 2,655 | | |
| 1,738 | |
Finished goods | |
| 511 | | |
| 514 | |
Total inventory | |
$ | 11,866 | | |
$ | 8,437 | |
Investments
Investments
are stated at market value and consist of the following (in thousands):
Schedule of investments | |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Marketable equity securities - short-term | |
$ | 1,129 | | |
$ | 1,295 | |
Marketable equity securities - long-term | |
| 1,778 | | |
| 1,704 | |
Total marketable equity securities | |
$ | 2,907 | | |
$ | 2,999 | |
Investments
at March 31, 2022 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 March 31, 2022, the investments
included net unrealized losses of $632,000 (gross unrealized losses of $646,000 offset by gross unrealized gains of $14,000). 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 March 31, 2022 and June 30, 2021, $1,058,000 and $1,244,000, 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 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.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
We invest surplus cash from
time to time through our Investment Committee, which is comprised of one management director, Mr. Van Kirk, and two non-management directors,
Mr. Cabillot and Mr. 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.
Land and building
Land and building consist of
the following (in thousands):
Schedule of Capital Leased Assets | |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Land | |
$ | 3,684 | | |
$ | 3,684 | |
Building | |
| 2,815 | | |
| 2,815 | |
Total | |
| 6,499 | | |
| 6,499 | |
Less: accumulated depreciation | |
| (133 | ) | |
| (62 | ) |
Land and building | |
$ | 6,366 | | |
$ | 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 11). 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 and we moved certain of our employees into the new building during the third quarter of 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 | |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Patent-related costs | |
$ | 247 | | |
$ | 260 | |
Less accumulated amortization | |
| (85 | ) | |
| (74 | ) |
| |
$ | 162 | | |
$ | 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.
NOTE 6. 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 March 31, 2022 and June 30, 2021, the warranty reserve amounted to
$328,000
and $221,000,
respectively. Warranty expenses are included in cost of sales in the accompanying income statements. 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 March 31, 2022 and 2021, was $102,000
and $77,000,
respectively, and for the nine months ended March 31, 2022 and 2021, was $170,000
and $330,000,
respectively.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Information regarding
the accrual for warranty costs for the three and nine months ended March 31, 2022 and 2021, are as follows (in thousands):
Schedule of Product Warranty Liability | |
| | | |
| | |
| |
As of and for the Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 255 | | |
$ | 347 | |
Accruals during the period | |
| 52 | | |
| 57 | |
Changes in estimates of prior period warranty accruals | |
| 50 | | |
| 20 | |
Warranty amortization and utilization | |
| (29 | ) | |
| (116 | ) |
Ending balance | |
$ | 328 | | |
$ | 308 | |
| |
As of and for the Nine Months Ended March 31, | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 221 | | |
$ | 213 | |
Accruals during the period | |
| 117 | | |
| 311 | |
Changes in estimates of prior period warranty accruals | |
| 53 | | |
| 19 | |
Warranty amortization and utilization | |
| (63 | ) | |
| (235 | ) |
Ending balance | |
$ | 328 | | |
$ | 308 | |
NOTE 7. NET INCOME PER SHARE
The Company calculates 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 used in the calculation of diluted income per share reflects the effects of potentially
dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.
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 March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Basic: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 462 | | |
$ | 2,131 | | |
$ | 2,450 | | |
$ | 5,039 | |
Weighted average shares outstanding | |
| 3,626 | | |
| 3,817 | | |
| 3,645 | | |
| 3,843 | |
Basic income per share | |
$ | 0.13 | | |
$ | 0.56 | | |
$ | 0.67 | | |
$ | 1.31 | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 462 | | |
$ | 2,131 | | |
$ | 2,450 | | |
$ | 5,039 | |
Weighted average shares outstanding | |
| 3,626 | | |
| 3,817 | | |
| 3,645 | | |
| 3,843 | |
Effect of dilutive securities | |
| 123 | | |
| 149 | | |
| 129 | | |
| 155 | |
Weighted average shares used in calculation of diluted earnings per share | |
| 3,749 | | |
| 3,966 | | |
| 3,774 | | |
| 3,998 | |
Diluted income per share | |
$ | 0.12 | | |
$ | 0.54 | | |
$ | 0.65 | | |
$ | 1.26 | |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 8. 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 March 31, 2022, we recognized
accrued interest of $70,000 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 9. 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.
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 March 31, 2022, 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 nine months ended March 31, 2022 and 2021.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
As of March
31, 2022, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding
stock options are fully vested. As of March 31, 2022, the options outstanding under the Former Stock Option Plans had a weighted
average remaining contractual life of 0.54 years and an intrinsic value of $96,000. The following
is a summary of stock option activity for the nine months ended March 31, 2022 and 2021:
Share-based Payment Arrangement, Option, Activity | |
| | | |
| | | |
| | | |
| | |
| |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | |
| |
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 March 31, | |
| 6,500 | | |
$ | 1.82 | | |
| 31,500 | | |
$ | 1.81 | |
Performance Awards
In December 2017, the Compensation
Committee of our 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 at inception 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 17,500 previously forfeited awards, having the same remaining terms and conditions,
to other employees. The weighted average fair value of the performance awards reallocated in 2021 was $20.34, calculated using the weighted
average fair market value for each award, using a Monte Carlo simulation. During the three months ended March 31, 2022 and 2021, we recorded
share-based compensation expense of $81,000 and $21,000, respectively, related to outstanding performance awards. During the nine months
ended March 31, 2022 and 2021, we recorded share-based compensation expense of $123,000 and $63,000, respectively, related to outstanding
performance awards. On March 31, 2022, there was approximately $393,000 of unrecognized compensation cost related to non-vested performance
awards expected to be expensed over the weighted-average period of 2.22 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.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
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.
The weighted average fair value of the stock option awards granted was $16.72, calculated using a Monte Carlo simulation. 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 at a weighted average fair value of $6.69 calculated using a Monte Carlo simulation. During the three
months ended March 31, 2022 and 2021, we recorded compensation expense of $271,000 and $358,000, respectively, related to these options.
During the nine months ended March 31, 2022 and 2021, we recorded compensation expense of $799,000 and $376,000, respectively, related
to these options. As of March 31, 2022, none of these non-qualified options have vested and there was approximately $3.4 million of unrecognized
compensation cost related to these non-vested non-qualified stock options.
In February 2021, the Compensation
Committee of our Board of Directors granted 62,000 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 4 months
to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices. Of these stock options, 4,250
were forfeited and the remaining 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying
agreements. We recorded compensation expense of $59,000 for the three and nine months ended March 31, 2021, related to these options.
The weighted fair value of the stock option awards granted was $3.16, calculated using a Monte Carlo simulation.
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. Our 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
March 31, 2022 and 2021, we recorded ESPP share-based compensation expense in the amount of $5,000 and $6,000, respectively, and 1,446
and 1,192 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $21.11 and $27.12,
respectively, per share. During the nine months ended March 31, 2022 and 2021, we recorded ESPP share-based compensation expense in the
amount of $11,000 and $10,000, respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a total
of 27,039 shares of our common stock.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 10. 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 nine-month periods
ended March 31, 2022 and 2021, is as follows (in thousands, except percentages):
Schedule of sales by major customers | |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended March 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent
of Total | | |
Amount | | |
Percent
of Total | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 9,265 | | |
| 100 | % | |
$ | 11,739 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 5,007 | | |
| 54 | % | |
$ | 5,238 | | |
| 45 | % |
Customer 2 | |
| 2,429 | | |
| 26 | % | |
| 4,514 | | |
| 38 | % |
Total | |
$ | 7,436 | | |
| 80 | % | |
$ | 9,752 | | |
| 83 | % |
| |
Nine
Months Ended March 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent
of Total | | |
Amount | | |
Percent
of Total | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 29,426 | | |
| 100 | % | |
$ | 28,594 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 18,721 | | |
| 64 | % | |
$ | 16,217 | | |
| 57 | % |
Customer 2 | |
| 4,617 | | |
| 16 | % | |
| 7,906 | | |
| 28 | % |
Total | |
$ | 23,338 | | |
| 80 | % | |
$ | 24,123 | | |
| 85 | % |
Information with respect to
accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2022 or June
30, 2021, is as follows (in thousands, except percentages):
Schedule of accounts receivable, inventory purchases and accounts payable of major customers and suppliers | |
| | | |
| | | |
| | | |
| | |
| |
March
31, 2022 | | |
June 30,
2021 | |
Total gross accounts receivable | |
$ | 8,680 | | |
| 100 | % | |
$ | 10,935 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 5,029 | | |
| 58 | % | |
$ | 6,666 | | |
| 61 | % |
Customer 2 | |
| 2,761 | | |
| 32 | % | |
| 3,710 | | |
| 34 | % |
Total | |
$ | 7,790 | | |
| 90 | % | |
$ | 10,376 | | |
| 95 | % |
During the three and nine
months ended March 31, 2022, we had three and four suppliers, respectively, accounting for 10% or more of total inventory purchases. During
the three and nine months ended March 31, 2021, we had two suppliers that accounted for more than 10% of our total inventory purchases.
Amounts owed to the significant suppliers who comprised more than 10% of total account payable at March 31, 2022 and June 30, 2021, is
as follows (in thousands, except percentages).
| |
March
31, 2022 | | |
June 30,
2021 | |
Total accounts payable | |
$ | 3,533 | | |
| 100 | % | |
$ | 2,288 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Supplier concentration: | |
| | | |
| | | |
| | | |
| | |
Supplier 1 | |
$ | 464 | | |
| 13 | % | |
$ | 225 | | |
| 10 | % |
Supplier 2 | |
| 631 | | |
| 18 | % | |
| 206 | | |
| 9 | % |
Total | |
$ | 1,095 | | |
| 31 | % | |
$ | 431 | | |
| 19 | % |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 11. 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 March 31, 2022, is $4,981,000.
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 March 31, 2022, is $6,026,000.
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 $897,000 on March 31, 2022.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
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 12. 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 our 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 nine months ended March 31, 2022, we repurchased 24,766 and 52,718 shares, respectively, at an aggregate cost, inclusive of fees under
the Plan, of $584,000 and $1,255,000, respectively. During the three and nine months ended March 31, 2021, we repurchased 161,291 shares
at an aggregate cost, inclusive of fees under the Plan, of $4,039,000. On a cumulative basis, since implementation of the share
repurchase program in 2013, we have repurchased a total of 1,088,214 shares under the share repurchase program at an aggregate cost of
$15.3 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.
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, and the ATM 10b5-1
Plan was terminated on February 11, 2021, but future sales may occur at the direction of our Board in accordance with the terms of the
ATM Agreement.
NOTE 13. LEASES
Effective July 1, 2019, we adopted
the new lease accounting standard 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 each in the amount
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 March 31, 2022, in the amount of $370,000, is presented within accrued expenses on the condensed consolidated balance
sheet.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
As of March 31, 2022, the maturity
of our lease liability is as follows:
Schedule of Maturities of Lease Liabilities | | |
| | |
| | |
Operating Lease | |
Fiscal Year: | | |
| | |
2022 | | |
$ | 123 | |
2023 | | |
| 504 | |
2024 | | |
| 519 | |
2025 | | |
| 535 | |
2026 | | |
| 551 | |
Thereafter | | |
| 710 | |
Total lease payments | | |
| 2,942 | |
Less imputed interest: | | |
| (421 | ) |
Total | | |
$ | 2,521 | |
As of March 31, 2022, our
operating lease has a remaining lease term of five 5 years and six months and an imputed interest rate of 5.53%. Cash paid for
amounts included in the lease liability for the three and nine months ended March 31, 2022, was $123,000 and $366,000, respectively.
Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2021, was $120,000 and $355,000,
respectively.
NOTE 14. 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.
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 settled this matter upon the conclusion of a mediation hearing held on February
23, 2022.
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 15. SUBSEQUENT EVENTS
We have evaluated subsequent
events through the date of this filing. There were no subsequent events that require disclosure.