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 are currently reviewing this ASU
and its potential 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 December 31, | | |
Six Months Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net Sales: | |
| | | |
| | | |
| | | |
| | |
Over-time revenue recognition | |
$ | 483 | | |
$ | 115 | | |
$ | 1,391 | | |
$ | 311 | |
Point-in-time revenue recognition | |
| 10,799 | | |
| 10,058 | | |
| 20,978 | | |
| 19,850 | |
Total net sales | |
$ | 11,282 | | |
$ | 10,173 | | |
$ | 22,369 | | |
$ | 20,161 | |
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 six months ended December 31, 2022,
we recorded $312,000 and $862,000, respectively, of revenue that had been included in deferred revenue in the prior year. During the three
and six months ended December 31, 2021, we recorded $98,000 of 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 $851,000 at December 31, 2022, is currently expected to be recognized in the next 12 months.
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 December 31, | | |
As of and for the Six Months Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Contract assets beginning balance | |
$ | 591 | | |
$ | 185 | | |
$ | 714 | | |
$ | 212 | |
Expenses incurred during the year | |
| 412 | | |
$ | 247 | | |
$ | 746 | | |
$ | 362 | |
Amounts reclassified to cost of sales | |
| (117 | ) | |
| — | | |
| (566 | ) | |
| (130 | ) |
Amounts allocated to discounts for standalone selling price | |
| (9 | ) | |
| (8 | ) | |
| (17 | ) | |
| (20 | ) |
Contract assets ending balance | |
$ | 877 | | |
$ | 424 | | |
$ | 877 | | |
$ | 424 | |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| |
As of and for the Three Months Ended December 31, | | |
As of and for the Six Months Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Contract liabilities beginning balance | |
$ | 851 | | |
$ | 293 | | |
$ | 1,013 | | |
$ | 150 | |
Payments received from customers | |
| 312 | | |
$ | 389 | | |
$ | 700 | | |
$ | 532 | |
Amounts reclassified to revenue | |
| (312 | ) | |
| (98 | ) | |
| (862 | ) | |
| (98 | ) |
Contract liabilities ending balance | |
$ | 851 | | |
$ | 584 | | |
$ | 851 | | |
$ | 584 | |
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventory
Inventory
is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):
Schedule of inventory | |
| | | |
| | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Raw materials/purchased components | |
$ | 8,667 | | |
$ | 6,323 | |
Work in process | |
| 2,622 | | |
| 3,463 | |
Sub-assemblies/finished components | |
| 1,880 | | |
| 2,118 | |
Finished goods | |
| 1,966 | | |
| 774 | |
Total inventory | |
$ | 15,135 | | |
$ | 12,678 | |
Investments
Investments
are stated at market value and consist of the following (in thousands):
Schedule of investments | |
| | | |
| | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Marketable equity securities - short-term | |
$ | 1,134 | | |
$ | 755 | |
Marketable equity securities - long-term | |
| 1,726 | | |
| 1,779 | |
Total marketable equity securities | |
$ | 2,860 | | |
$ | 2,534 | |
Investments
at December 31, 2022 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 December 31, 2022, the investments
included net unrealized gains of $146,000 (gross unrealized gains of $243,000 offset by gross unrealized losses of $97,000). 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 December 31, 2022 and June 30, 2022, $1,134,000 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.
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, Richard Van Kirk, and two non-management directors,
Raymond Cabillot and Nicholas Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive
portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment
of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that
either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage,
or other companies whose boards they sit on, such as Air T, Inc.
Land and building
Land and building consist of the
following (in thousands):
Schedule of capital leased assets | |
| | | |
| | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Land | |
$ | 3,684 | | |
$ | 3,684 | |
Building | |
| 2,815 | | |
| 2,815 | |
Total | |
| 6,499 | | |
| 6,499 | |
Less: accumulated depreciation | |
| (203 | ) | |
| (156 | ) |
Land and building | |
$ | 6,296 | | |
$ | 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 the fiscal 2022. Currently, we are actively engaged in various verification and
validation activities and we moved certain employees into the new building during the third quarter of fiscal 2022. We expect that we
will begin operations in the new facility 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 | |
| | | |
| | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Patent-related costs | |
$ | 208 | | |
$ | 208 | |
Less accumulated amortization | |
| (110 | ) | |
| (90 | ) |
| |
$ | 98 | | |
$ | 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. Future amortization expense is expected to be $21,000 for the remainder of fiscal 2023 and $42,000 per fiscal
year through October 2025, 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 December 31, 2022 and June 30, 2022, the warranty reserve
amounted to $344,000 and $340,000, respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated
statements of income. Changes in estimates to previously established warranty accruals result from current period updates to assumptions
regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new
product sales and changes to estimates for the three months ended December 31, 2022 and 2021 was $56,000 and $44,000, respectively, and
for the six months ended December 31, 2022 and 2021 was $123,000 and $68,000, respectively.
Information regarding the accrual
for warranty costs for the three and six months ended December 31, 2022 and 2021, are as follows (in thousands):
Schedule of accrual warranty costs | |
| | | |
| | | |
| | | |
| | |
| |
As of and for the Three Months Ended December 31, | | |
As of and for the Six Months Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Beginning balance | |
$ | 365 | | |
$ | 232 | | |
$ | 340 | | |
$ | 221 | |
Accruals during the period | |
| 55 | | |
| 33 | | |
| 109 | | |
| 64 | |
Changes in estimates of prior period warranty accruals | |
| 1 | | |
| 11 | | |
| 14 | | |
| 4 | |
Warranty amortization | |
| (77 | ) | |
| (21 | ) | |
| (119 | ) | |
| (34 | ) |
Ending balance | |
$ | 344 | | |
$ | 255 | | |
$ | 344 | | |
$ | 255 | |
NOTE 6. NET INCOME PER SHARE
We calculate basic net income per
share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average
number of common shares outstanding reflects the effects of potentially dilutive securities, in income generating periods, which consist
entirely of outstanding stock options and performance awards.
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, net income
amounts represent the numerator, and weighted average shares outstanding 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 December 31, | | |
Six Months Ended December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Basic: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 879 | | |
$ | 925 | | |
$ | 1,955 | | |
$ | 1,988 | |
Weighted average shares outstanding | |
| 3,574 | | |
| 3,657 | | |
| 3,595 | | |
| 3,654 | |
Basic income per share | |
$ | 0.25 | | |
$ | 0.25 | | |
$ | 0.54 | | |
$ | 0.54 | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 879 | | |
$ | 925 | | |
$ | 1,955 | | |
$ | 1,988 | |
Weighted average shares outstanding | |
| 3,574 | | |
| 3,657 | | |
| 3,595 | | |
| 3,654 | |
Effect of dilutive securities | |
| 78 | | |
| 110 | | |
| 77 | | |
| 120 | |
Weighted average shares used in calculation of diluted earnings per share | |
| 3,652 | | |
| 3,767 | | |
| 3,672 | | |
| 3,774 | |
Diluted income per share | |
$ | 0.24 | | |
$ | 0.25 | | |
$ | 0.53 | | |
$ | 0.53 | |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 7. INCOME TAXES
Deferred
income taxes are provided on a liability method whereby deferred tax assets and liabilities
are recognized for temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more-likely-than-not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Significant
management judgment is required in determining our provision for income taxes and the recoverability of our
deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our
estimates of future taxable income by jurisdictions in which we operate and the period over
which our deferred tax assets would be recoverable.
We recognize accrued interest and
penalties related to unrecognized tax benefits when applicable. As of December 31, 2022 and 2021,
we recognized accrued interest of $54,000 and $61,000, 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.
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 Directors’ 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 December 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 six months ended December 31, 2022 and 2021.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
The last
remaining stock options outstanding under the Former Stock Option Plans were exercised during the six months ended December 31,
2022. As such, as of December 31, 2022, there was no unrecognized compensation cost under the
Former Stock Option Plans as there are no options outstanding. The following is a summary
of stock option activity under the Former Stock Option Plans for the six months ended December 31, 2022 and 2021:
Schedule of stock option activity | |
| | | |
| | | |
| | | |
| | |
| |
Six Months Ended December 31, | |
| |
2022 | | |
2021 | |
| |
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 December 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 under our 2016 Equity Incentive Plan, 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 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 December 31,
2022, and 2021, we recorded share-based compensation expense of $30,000 and $21,000, respectively, related to outstanding performance
awards. During the six months ended December 31, 2022 and 2021, we recorded share-based compensation expense of $60,000 and $42,000, respectively,
related to outstanding performance awards. On December 31, 2022, there was approximately $262,000 of unrecognized compensation cost related
to non-vested performance awards, which is expected to be expensed over the weighted-average period of 2.50 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. The vesting of these stock options is tied to the completion of service periods that range from 18 months to 10.5
years from the date of grant and the achievement of our common stock trading at certain pre-determined prices. In December 2021, the Compensation
Committee reallocated 5,000 previously forfeited non-qualified stock options, having the same remaining terms and conditions, to another
employee. During the three months ended December 31, 2022 and 2021, we recorded compensation expense of $140,000 and $254,000, respectively,
related to these options. During the six months ended December 31, 2022 and 2021, we recorded compensation expense of $312,000 and $527,000,
respectively, related to these options. The weighted average fair value of the stock option awards granted was $16.72, calculated using
a Monte Carlo simulation. As of December 31, 2022, none of these stock options had vested and there was approximately $2.7 million of
unrecognized compensation cost related to these stock options.
In February 2021, the Compensation
Committee of our Board of Directors granted 62,000 non-qualified stock options to our directors and certain employees under the 2016 Equity
Incentive Plan. The vesting of these stock options 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 62,000 stock options, 57,750 vested
on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements and the required service periods
were already satisfied. The weighted-average 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”). 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, aggregating 704,715 shares,
be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting.
During the three months ended December
31, 2022 and 2021, we did not record any share-based compensation expense relating to the ESPP, due to the fact that no six-month offering
period ended during either quarter. During the six months ended December 31, 2022 and 2021, 2,503 and 1,130 shares of our common stock
were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $13.52 and $26.17,
respectively, per share. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 29,542 shares of
our common stock. During the six months ended December 31, 2022 and 2021, we recorded share-based compensation expense in the amount of
$6,000 and $5,000, respectively, relating to the ESPP.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 9. MAJOR CUSTOMERS AND SUPPLIERS
Information
with respect to customers that accounted for sales in excess of 10% of our total sales in
either of the three-month and the six-month periods
ended December 31, 2022 and 2021, is as follows (in thousands, except percentages):
Schedule of sales by major customers | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent of Total | | |
Amount | | |
Percent of Total | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 11,282 | | |
| 100 | % | |
$ | 10,173 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 7,475 | | |
| 66 | % | |
$ | 6,723 | | |
| 66 | % |
Customer 2 | |
| 1,697 | | |
| 15 | % | |
| 1,249 | | |
| 12 | % |
Customer 3 | |
| 1,400 | | |
| 12 | % | |
| 1,090 | | |
| 11 | % |
Total | |
$ | 10,572 | | |
| 93 | % | |
$ | 9,062 | | |
| 89 | % |
| |
Six Months Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent of Total | | |
Amount | | |
Percent of Total | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 22,369 | | |
| 100 | % | |
$ | 20,161 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 14,957 | | |
| 67 | % | |
$ | 13,714 | | |
| 68 | % |
Customer 2 | |
| 3,852 | | |
| 17 | % | |
| 2,189 | | |
| 11 | % |
Customer 3 | |
| 2,317 | | |
| 10 | % | |
| 1,970 | | |
| 10 | % |
Total | |
$ | 21,126 | | |
| 94 | % | |
$ | 17,873 | | |
| 89 | % |
Information with respect to accounts
receivable from those customers who comprised more than 10% of our gross accounts receivable at either December 31, 2022 or June 30, 2022,
is as follows (in thousands, except percentages):
Schedule of accounts receivable of major customers | |
| | | |
| | | |
| | | |
| | |
| |
December 31, 2022 | | |
June 30, 2022 | |
Total gross accounts receivable | |
$ | 12,197 | | |
| 100 | % | |
$ | 15,384 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Customer concentration: | |
| | | |
| | | |
| | | |
| | |
Customer 1 | |
$ | 9,028 | | |
| 74 | % | |
$ | 11,551 | | |
| 75 | % |
Customer 2 | |
| 2,213 | | |
| 18 | % | |
| 2,152 | | |
| 14 | % |
Total | |
$ | 11,241 | | |
| 92 | % | |
$ | 13,703 | | |
| 89 | % |
During the three months ended December
31, 2022, we had four suppliers accounting for 10% or more of total inventory purchases, and during the six months ended December 31,
2022, we had three suppliers that accounted for more than 10% of our total inventory purchases. During the three and six months ended
December 31, 2021, we had two suppliers accounting for 10% or more of total inventory purchases.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 10. NOTES PAYABLE
AND FINANCING TRANSACTIONS
Minnesota Bank & Trust
On
November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased an
approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). A portion of the purchase
price was financed by a loan from MBT to PDEX Franklin in the principal amount of approximately $5.2 million (the “Property Loan”)
pursuant to a Loan Agreement, dated as of the Closing Date, between PDEX Franklin and MBT (the “Property Loan Agreement”)
and corresponding Term Note (the “Property Note”) issued by PDEX Franklin in favor of MBT on the Closing Date. The Property
Loan is secured by the Franklin Property pursuant to a Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture
Filing in favor of MBT (the “Deed”) and by an Assignment of Leases and Rents by PDEX Franklin in favor of MBT (the “Rents
Assignment”). We paid loan origination fees to MBT on the Closing Date in the amount of $26,037.
The
Property Loan bears interest at a fixed rate of 3.55% per annum, which is subject to a 3% increase upon an event of default. Accrued interest
was paid on December 1, 2020, and both principal and interest in the amount of approximately $30,000 are due and payable on the first
day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time a balloon payment
in the amount of $3.1 million is due. Any prepayment of the Property Loan (other than monthly scheduled interest and principal payments),
is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first or second year, 3%
of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount prepaid for any prepayment
made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during the seventh or eighth year.
The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties, covenants, and events
of default that are customary for a loan of this type. The balance owed on the Property Loan at December 31, 2022 is $4,842,000.
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 December 31, 2022, is $5,317,000.
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 $792,000 on December
31, 2022.
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 December 31, 2022, 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 of the 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 December 31, 2022, we had drawn $1,800,000 against the Amended Revolving Loan. Loan origination
fees in the amount of $16,000 are payable to MBT in conjunction with the 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 December 31, 2022, 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 one 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 six months ended December 31, 2022, we repurchased 53,993 and 74,846 shares,
respectively, at an aggregate cost, inclusive of fees under the Plan, of $995,000 and
$1.3 million,
respectively. During the three and six months ended December 31, 2021, we repurchased 24,336 and 27,952 shares,
respectively, at an aggregate cost, inclusive of fees under the Plan, of $577,000 and
$672,000,
respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,185,582 shares
under the share repurchase program at an aggregate cost, inclusive of fees, of $17.0 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 December 31, 2022, in the amount of $397,000, is presented within accrued expenses on the condensed consolidated
balance sheet.
As of December 31, 2022, our
operating lease has a remaining lease term of four
years and nine months and an imputed interest rate of 5.53%.
Cash paid for amounts included in the lease liability for the three and six months ended December 31, 2022 totaled $127,000 and
$250,000, respectively, and for December
31, 2021 totaled $123,000 and
$243,000, respectively.
As of December 31, 2022, the maturity
of our lease liability is as follows:
Schedule of Maturities of Lease Liabilities |
|
|
|
|
|
Operating Lease |
Fiscal Year: |
|
|
|
2023 |
|
$ |
254 |
2024 |
|
|
519 |
2025 |
|
|
535 |
2026 |
|
|
551 |
2027 |
|
|
567 |
Thereafter |
|
|
142 |
Total lease payments |
|
|
2,568 |
Less imputed interest: |
|
|
(321) |
Total |
|
$ |
2,247 |
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.