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 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 (“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, 2022. 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, 2022.
Recently
Issued Accounting Pronouncements
In June 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking
approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables.
The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information,
and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to
understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal
years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. We do not believe the adoption of
this ASU will have a significant impact on our consolidated financial statements.
There are
no other recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our 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 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.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 3. 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, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Net Sales: | |
| | | |
| | | |
| | | |
| | |
Over-time revenue recognition | |
$ | 970 | | |
$ | 549 | | |
$ | 2,361 | | |
$ | 859 | |
Point-in-time revenue recognition | |
| 12,109 | | |
| 8,716 | | |
| 33,087 | | |
| 28,567 | |
Total net sales | |
$ | 13,079 | | |
$ | 9,265 | | |
$ | 35,448 | | |
$ | 29,426 | |
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. The over-time revenue recognition
model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to
the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress
based on costs incurred compared to the estimated total costs upon completion. During the three and nine months ended March 31, 2023,
we recorded $405,000 and $956,000, respectively, of revenue that had been included in deferred revenue in the prior year. During the three
and nine months ended March 31, 2022, we did not record any revenue that had been included in deferred revenue in the prior year. The
revenue recognized from the contract liabilities consisted of satisfying our performance obligations during the normal course of business.
Our entire deferred revenue balance of $57,000 at March 31, 2023, is currently expected to be recognized in the next 12-month period.
The following tables summarize
our contract assets and liability balances (in thousands):
Schedule of contract assets and liability | |
| | | |
| | | |
| | | |
| | |
| |
As
of and for the Three
Months Ended March 31, | | |
As
of and for the Nine
Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Contract assets beginning balance | |
$ | 877 | | |
$ | 424 | | |
$ | 710 | | |
$ | 193 | |
Expenses incurred during the year | |
| 362 | | |
$ | 371 | | |
$ | 1,108 | | |
$ | 732 | |
Amounts reclassified to cost of sales | |
| (935 | ) | |
| (445 | ) | |
| (1,497 | ) | |
| (556 | ) |
Amounts
allocated to discounts for standalone selling price | |
| (25 | ) | |
| (9 | ) | |
| (42 | ) | |
| (28 | ) |
Contract assets ending balance | |
$ | 279 | | |
$ | 341 | | |
$ | 279 | | |
$ | 341 | |
| |
| | | |
| | | |
| | | |
| | |
| |
As
of and for the Three
Months Ended March 31, | | |
As
of and for the Nine
Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Contract liabilities beginning balance | |
$ | 851 | | |
$ | 584 | | |
$ | 1,013 | | |
$ | 150 | |
Payments received from customers | |
| 41 | | |
$ | 861 | | |
$ | 741 | | |
$ | 1,393 | |
Amounts reclassified to revenue | |
| (835 | ) | |
| (549 | ) | |
| (1,697 | ) | |
| (647 | ) |
Contract liabilities ending balance | |
$ | 57 | | |
$ | 896 | | |
$ | 57 | | |
$ | 896 | |
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 | |
| | |
| |
| |
March
31, 2023 | | |
June 30,
2022 | |
Raw materials /purchased components | |
$ | 8,673 | | |
$ | 6,323 | |
Work in process | |
| 2,991 | | |
| 3,463 | |
Sub-assemblies/finished components | |
| 2,058 | | |
| 2,118 | |
Finished goods | |
| 1,423 | | |
| 774 | |
Total inventory | |
$ | 15,145 | | |
$ | 12,678 | |
Investments
Investments
are stated at market value and consist of the following (in thousands):
Schedule of investments | |
| | |
| |
| |
March
31, 2023 | | |
June 30,
2022 | |
Marketable equity securities - short-term | |
$ | 1,149 | | |
$ | 755 | |
Marketable equity securities - long-term | |
| 1,534 | | |
| 1,779 | |
Total marketable equity securities | |
$ | 2,683 | | |
$ | 2,534 | |
Investments
at March 31, 2023 and June 30, 2022, had an aggregate cost basis of $2,714,000 and $2,796,000,
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, 2023, the investments
included net unrealized losses of $31,000 (gross unrealized losses of $113,000 offset by gross unrealized gains of $82,000). At June 30,
2022, the investments included net unrealized losses of $262,000 (gross unrealized losses of $369,000
offset by gross unrealized gains of $107,000).
Of
the total marketable equity securities at March 31, 2023 and June 30, 2022, $1,149,000 and $755,000, 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, 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.
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 land and building | |
| | |
| |
| |
March
31, 2023 | | |
June 30,
2022 | |
Land | |
$ | 3,684 | | |
$ | 3,684 | |
Building | |
| 2,815 | | |
| 2,815 | |
Total | |
| 6,499 | | |
| 6,499 | |
Less: accumulated depreciation | |
| (226 | ) | |
| (156 | ) |
Land and building | |
$ | 6,273 | | |
$ | 6,343 | |
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
million 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. We expect that we will begin operations in the new facility during the fourth 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, 2023 | | |
June 30,
2022 | |
Patent-related costs | |
$ | 208 | | |
$ | 208 | |
Less accumulated amortization | |
| (121 | ) | |
| (90 | ) |
| |
$ | 87 | | |
$ | 118 | |
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. Future amortization
expense is expected to be $7,000 for the remainder of fiscal 2023 and $27,000 per fiscal year through fiscal 2026, at which time we expect
these costs to be fully amortized. 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 had (and continue to 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 condensed consolidated balance sheets. As of March 31, 2023 and June 30, 2022, the warranty reserve
amounted to $252,000 and $340,000, respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated
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, 2023 and 2022, was $(77,000) and $102,000, respectively,
and for the nine months ended March 31, 2023 and 2022, was $46,000 and $170,000, respectively.
Information regarding the accrual for
warranty costs for the three and nine months ended March 31, 2023 and 2022, are as follows (in thousands):
Schedule of accrual warranty costs | |
| | | |
| | |
| |
As of
and for the Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Beginning balance | |
$ | 344 | | |
$ | 255 | |
Accruals during the period | |
| 26 | | |
| 52 | |
Changes in estimates of prior period warranty accruals | |
| (103 | ) | |
| 50 | |
Warranty amortization and utilization | |
| (15 | ) | |
| (29 | ) |
Ending balance | |
$ | 252 | | |
$ | 328 | |
| |
As of
and for the Nine Months Ended March 31, | |
| |
2023 | | |
2022 | |
Beginning balance | |
$ | 340 | | |
$ | 221 | |
Accruals during the period | |
| 135 | | |
| 117 | |
Changes in estimates of prior period warranty accruals | |
| (89 | ) | |
| 53 | |
Warranty amortization and utilization | |
| (134 | ) | |
| (63 | ) |
Ending balance | |
$ | 252 | | |
$ | 328 | |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 6. 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 weighted average shares outstanding calculation of basic and diluted per share | |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended March 31, | | |
Nine
Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Basic: | |
| | |
| | |
| | |
| |
Net income | |
$ | 1,313 | | |
$ | 462 | | |
$ | 3,268 | | |
$ | 2,450 | |
Weighted average shares outstanding | |
| 3,548 | | |
| 3,626 | | |
| 3,580 | | |
| 3,645 | |
Basic income per share | |
$ | 0.37 | | |
$ | 0.13 | | |
$ | 0.91 | | |
$ | 0.67 | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 1,313 | | |
$ | 462 | | |
$ | 3,268 | | |
$ | 2,450 | |
Weighted average shares outstanding | |
| 3,548 | | |
| 3,626 | | |
| 3,580 | | |
| 3,645 | |
Effect of dilutive securities | |
| 75 | | |
| 123 | | |
| 76 | | |
| 129 | |
Weighted average shares used in calculation of diluted earnings per share | |
| 3,623 | | |
| 3,749 | | |
| 3,656 | | |
| 3,774 | |
Diluted income per share | |
$ | 0.36 | | |
$ | 0.12 | | |
$ | 0.89 | | |
$ | 0.65 | |
| |
| | | |
| | | |
| | | |
| | |
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 March 31, 2023 and 2022, we recognized accrued interest of $59,000
and $70,000, respectively, related to unrecognized tax benefits.
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, 2019 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June
30, 2019 and later. However, because of our prior net operating losses and research credit carryovers,
our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized
tax benefits within the next 12 months.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
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.
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, 2023, 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, 2023 and 2022.
As of March
31, 2023, there was no unrecognized compensation cost under the Former Stock Option Plans, as all remaining outstanding
stock options have been exercised during fiscal 2023. The following is a summary of stock
option activity for the nine months ended March 31, 2023 and 2022:
Schedule of stock option activity | |
| | | |
| | | |
| | | |
| | |
| |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
Number
of Shares | | |
Weighted-Average
Exercise Price | | |
Number
of Shares | | |
Weighted-Average
Exercise Price | |
Outstanding at July 1, | |
| 6,500 | | |
$ | 1.82 | | |
| 31,500 | | |
$ | 1.81 | |
Options granted | |
| — | | |
| — | | |
| — | | |
| — | |
Options exercised | |
| (6,500 | ) | |
| 1.82 | | |
| (25,000 | ) | |
| 1.80 | |
Options forfeited | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding at end of period | |
| — | | |
$ | — | | |
| 6,500 | | |
$ | 1.82 | |
Stock Options Exercisable at March 31, | |
| — | | |
$ | — | | |
| 6,500 | | |
$ | 1.82 | |
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, 2023 and 2022, we recorded
share-based compensation expense of $30,000 and $81,000, respectively, related to outstanding performance awards. During the nine months
ended March 31, 2023 and 2022, we recorded share-based compensation expense of $91,000 and $123,000, respectively, related to outstanding
performance awards. On March 31, 2023, there was approximately $232,000 of unrecognized compensation cost related to non-vested performance
awards expected to be expensed over the weighted-average period of 2.25 years.
On July 1, 2022, it was
determined by the Compensation Committee of our Board of Directors that the vesting of performance awards for 37,500 shares of common
stock had been achieved. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 23,641
shares and paid $223,000 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, 2023 and 2022, we recorded compensation expense of $168,000 and $271,000, respectively, related to these options.
During the nine months ended March 31, 2023 and 2022, we recorded compensation expense of $479,000 and $799,000, respectively, related
to these options. As of March 31, 2023, none of these non-qualified options have vested and there was approximately $2.5 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, 2023 and 2022, we recorded ESPP share-based compensation expense in the amount of $8,000 and $5,000, respectively, and
2,956 and 1,446 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $14.79 and
$21.11, respectively, per share. During the nine months ended March 31, 2023 and 2022, we recorded ESPP share-based compensation expense
in the amount of $14,000 and $11,000, respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a
total of 32,249 shares of our common stock.
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 nine-month periods
ended March 31, 2023 and 2022, is as follows (in thousands, except percentages):
Schedule of sales by major customers | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
Amount | | |
Percent of Total | | |
Amount | | |
Percent of Total | |
| |
| |
Net sales | |
$ | 13,079 | | |
| 100 | % | |
$ | 9,265 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 8,622 | | |
| 66 | % | |
$ | 5,007 | | |
| 54 | % |
Customer 2 | |
| 2,059 | | |
| 16 | % | |
| 2,429 | | |
| 26 | % |
Total | |
$ | 10,681 | | |
| 82 | % | |
$ | 7,436 | | |
| 80 | % |
| |
Nine
Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
Amount | | |
Percent of Total | | |
Amount | | |
Percent of Total | |
| |
| |
Net sales | |
$ | 35,448 | | |
| 100 | % | |
$ | 29,426 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 23,578 | | |
| 66 | % | |
$ | 18,721 | | |
| 63 | % |
Customer 2 | |
| 5,912 | | |
| 17 | % | |
| 4,617 | | |
| 16 | % |
Total | |
$ | 29,490 | | |
| 83 | % | |
$ | 23,338 | | |
| 79 | % |
Information with respect
to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2023 or June
30, 2022, is as follows (in thousands, except percentages):
Schedule of accounts receivable | |
| | | |
| | | |
| | | |
| | |
| |
March
31, 2023 | | |
June 30,
2022 | |
Total gross accounts receivable | |
$ | 10,567 | | |
| 100 | % | |
$ | 15,384 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 7,861 | | |
| 74 | % | |
$ | 11,551 | | |
| 75 | % |
Customer 2 | |
| 2,100 | | |
| 20 | % | |
| 2,152 | | |
| 14 | % |
Total. | |
$ | 9,961 | | |
| 94 | % | |
$ | 13,703 | | |
| 89 | % |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
During the three
and nine months ended March 31, 2023, we had two and three suppliers, respectively, accounting for 10% or more of total inventory purchases.
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. Amounts owed to the significant suppliers who comprised more than 10% of total accounts payable at either March 31,
2023 or June 30, 2022, is as follows (in thousands, except percentages).
Schedule of accounts payable | |
| | | |
| | | |
| | | |
| | |
| |
March
31, 2023 | | |
June 30,
2022 | |
Total accounts payable | |
$ | 3,068 | | |
| 100 | % | |
$ | 3,761 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Supplier concentration: | |
| | | |
| | | |
| | | |
| | |
Supplier 1 | |
$ | 1,240 | | |
| 40 | % | |
$ | 721 | | |
| 19 | % |
Supplier 2 | |
| 106 | | |
| 4 | % | |
| 430 | | |
| 11 | % |
Supplier 3 | |
| 14 | | |
| — | % | |
| 372 | | |
| 10 | % |
Total. | |
$ | 1,360 | | |
| 44 | % | |
$ | 1,523 | | |
| 40 | % |
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
“Franklin Property (See Note 2). 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, 2023 is $4,794,000.
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, 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
under the Amended Credit Agreement 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, 2023, is
$5,075,000.
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. The balance owing on Term Note B was $756,000 on March 31, 2023.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
On December 29, 2022 (the “Amendment
Date”), we entered into Amendment No. 2 to Amended and Restated Credit Agreement (the “Amendment”) with MBT, which amends
the Amended Credit Agreement and provides for a supplemental line of credit in the amount of $3,000,000 (the “Supplemental Loan”).
The Supplemental Loan is evidenced by a Supplemental Revolving Credit Note (the “Supplemental Note”) made by us in favor of
MBT. The purpose of the Supplemental Loan is for financing acquisitions and repurchasing shares of our common stock. The Supplemental
Loan may be borrowed against from time to time through its maturity date of December 29, 2024, on the terms set forth in the Amended Credit
Agreement. As of March 31, 2023, no amounts have been drawn against the Supplemental Loan.
The Revolving Loan was also amended
(the “Amended Revolving Loan”) in connection with the Amendment to extend the maturity date from November 5, 2023 to December
29, 2024, to increase the Revolving Loan facility from $2,000,000 to $7,000,000, and to increase the interest rate on the Revolving Loan
(as described below), evidenced by an Amended and Restated Revolving Credit Note (the “Amended Revolving Note”) made by us
in favor of MBT. The Amended Revolving Loan may be borrowed against from time to time by us through its maturity date on the terms set
forth in the Amended Credit Agreement. As of March 31, 2023, we had drawn $1,800,000 against the Amended Revolving Loan. Loan origination
fees in the amount of $16,000 were paid to MBT in conjunction with the Amended Revolving Loan and the Supplemental Loan.
The Amended Revolving Loan and
Supplemental Loan bear interest at an annual rate equal to the greater of (a) 5.0% or (b) SOFR for a one-month period from the website
of the CME Group Benchmark Administration Limited plus 2.5% (the “Adjusted Term SOFR Rate”). Commencing on the first day of
each month after we initially borrow against the Amended Revolving Loan and/or the Supplemental Loan and each month thereafter until maturity,
we are required to pay all accrued and unpaid interest on the Amended Revolving Loan and Supplemental Loan through the date of payment.
Any principal on the Amended Revolving Loan and/or Supplemental Loan that is not previously prepaid shall be due and payable in full on
the maturity date (or earlier termination of the Amended Revolving Loan and/or Supplemental Loan).
Any
payment on the Term Loan A, the Term Loan B, the Amended Revolving Loan or the Supplemental Loan (collectively, 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 all of the Loans immediately due and payable in full.
The
Amended Credit Agreement, Amended Security Agreement, Term Note A, Term Note B, Amended Revolving Note and Supplemental Note contain representations
and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type. We believe
that we are in compliance with all of our debt covenants as of March 31, 2023, but there can be no assurance that we will remain in compliance
for the duration of the term of these loans.
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 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, 2023, we repurchased
11,576 and 86,422 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $198,000 and $1,547,000, respectively.
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 $1,256,000, respectively. On a
cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,197,168 shares under
the share repurchase program at an aggregate cost of $17.2 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
Our operating lease right-of-use
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, 2023, in the amount of $406,000, is presented within accrued expenses on the condensed consolidated balance
sheet.
As of March 31, 2023, the
maturity of our lease liability is as follows (in thousands):
Schedule of maturities of lease liabilities |
|
|
|
|
|
Operating Lease |
Fiscal Year: |
|
|
|
2023 |
|
$ |
127 |
2024 |
|
|
519 |
2025 |
|
|
535 |
2026 |
|
|
551 |
2027 |
|
|
567 |
Thereafter |
|
|
143 |
Total lease payments |
|
|
2,442 |
Less imputed interest: |
|
|
(291) |
Total |
|
$ |
2,151 |
As of March 31, 2023, the operating lease for
our Irvine, California headquarters has a remaining lease term of four 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, 2023, was $139,000 and $418,000, respectively.
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.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal Matters
We may be involved from
time to time in 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.