Last10K.com

Pro Dex Inc (PDEX) SEC Filing 10-Q Quarterly report for the period ending Sunday, March 31, 2019

Pro Dex Inc

CIK: 788920 Ticker: PDEX

 


Exhibit 99.1

[pdex_ex99z1001.jpg]



Contact:  Richard L. Van Kirk, Chief Executive Officer

(949) 769-3200


For Immediate Release


PRO-DEX, INC. ANNOUNCES FISCAL 2019 SECOND QUARTER

AND SIX-MONTH RESULTS


IRVINE, CA, February 7, 2019 - PRO-DEX, INC. (NasdaqCM: PDEX) today announced financial results for its fiscal 2019 second quarter ended December 31, 2018. The Company also filed its Quarterly Report on Form 10-Q for the second quarter of fiscal year 2019 with the Securities and Exchange Commission today.


Quarter Ended December 31, 2018


Net sales for the three months ended December 31, 2018 increased $839,000, or 15%, to $6.4 million from $5.6 million for the three months ended December 31, 2017, due to increased sales of our medical device products to our largest customer.


Gross profit for the three months ended December 31, 2018 increased $532,000, or 31%, to $2.2 million from $1.7 million for the same period in fiscal 2018, due to the increase in sales described above and our ability to better absorb and maintain the level of our fixed manufacturing costs.


Operating expenses (which include selling, general and administrative, and research and development expenses) for the quarter ended December 31, 2018 decreased $311,000, or 23%, to $1.1 million compared to the prior fiscal year’s corresponding quarter, due to the prior year impairment of our Fineline goodwill and intangible assets in the amount of $229,000.


Net income for the quarter ended December 31, 2018 was $1.2 million, or $0.28 per share, compared to $345,000, or $0.08 per share, for the corresponding quarter in fiscal 2018.


Six Months Ended December 31, 2018


Net sales for the six months ended December 31, 2018 increased $2.6 million, or 24%, to $13.3 million from $10.7 million for the six months ended December 31, 2017, due primarily to increases in medical device product revenues.  We are continuing to focus both our research and development efforts and our business development efforts on our medical device product offerings and sales related to other ancillary products have decreased.


Gross profit for the six months ended December 31, 2018 increased $1.4 million, or 39%, compared to the same period in fiscal 2018.  The gross profit increase is due to increased net sales of 24%, as well as improved margins due to better absorption of our fixed manufacturing costs.


Operating expenses (which include selling, general and administrative, and research and development expenses) for the six months ended December 31, 2018 decreased 13% to $2.1 million from $2.4 million in the prior fiscal year’s corresponding period, reflecting primarily the prior year goodwill and intangible asset impairment charge as described above.


Net income for the six months ended December 31, 2018 was $2.5 million, or $0.59 per share, compared to $973,000, or $0.23 per share, for the corresponding period in fiscal 2018.





The following information was filed by Pro Dex Inc (PDEX) on Thursday, February 7, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

———————

FORM 10-Q


þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended


MARCH 31, 2019

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________  to __________


Commission file number: 0-14942


PRO-DEX, INC.

(Exact name of registrant as specified in its charter)

———————

COLORADO

84-1261240

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)


2361 McGaw Avenue, Irvine, California 92614

(Address of principal executive offices and zip code)


(949) 769-3200

(Registrant's telephone number, including area code)

———————

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ  No ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer   ¨

Accelerated filer   ¨

Non-accelerated filer     þ

Smaller reporting company  þ

 

Emerging growth company  ¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No þ


Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

PDEX

NASDAQ Capital Market


Indicate the number of shares outstanding of each of the registrant’s classes of common stock outstanding as of the latest practicable date: 4,112,663 shares of common stock, no par value, as of May 1, 2019.

 

 





 


PRO-DEX, INC.


QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2019


TABLE OF CONTENTS



 

Page

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

1

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018

1

Condensed Consolidated Statements of Operations and Comprehensive Income for the Nine Months Ended March 31, 2019 and 2018

2

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended March 31, 2019 and 2018

3

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2019 and 2018

4

Notes to Condensed Consolidated Financial Statements

6

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

 

 

ITEM 4.

CONTROLS AND PROCEDURES

23

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

25

 

 

ITEM 1A.

RISK FACTORS

25

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

25

 

 

ITEM 6.

EXHIBITS

26

 

 

SIGNATURES

27










 


PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


PRO-DEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

 

 

 

March 31,
2019

 

 

June 30,
2018

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,661

 

 

$

5,188

 

Investments

 

 

2,814

 

 

 

2,220

 

Accounts receivable, net of allowance for doubtful accounts of $0 and $14 at March 31, 2019 and at June 30, 2018, respectively

 

 

3,742

 

 

 

2,955

 

Deferred costs

 

 

267

 

 

 

32

 

Inventory

 

 

4,805

 

 

 

4,393

 

Notes receivable

 

 

65

 

 

 

1,176

 

Prepaid expenses and other current assets

 

 

707

 

 

 

269

 

Total current assets

 

 

22,061

 

 

 

16,233

 

Equipment and leasehold improvements, net

 

 

2,511

 

 

 

1,755

 

Intangibles, net

 

 

133

 

 

 

140

 

Deferred income taxes, net

 

 

652

 

 

 

1,678

 

Investments

 

 

234

 

 

 

 

Notes receivable, net of current portion

 

 

 

 

 

43

 

Other assets

 

 

40

 

 

 

68

 

Total assets

 

$

25,631

 

 

$

19,917

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,543

 

 

$

1,083

 

Accrued expenses

 

 

1,121

 

 

 

1,266

 

Deferred revenue

 

 

200

 

 

 

31

 

Note payable and capital lease obligations

 

 

622

 

 

 

35

 

Income taxes payable

 

 

265

 

 

 

123

 

Total current liabilities

 

 

3,751

 

 

 

2,538

 

Deferred rent

 

 

135

 

 

 

97

 

Notes and capital leases payable, net of current portion

 

 

4,091

 

 

 

6

 

Total non-current liabilities

 

 

4,226

 

 

 

103

 

Total liabilities

 

 

7,977

 

 

 

2,641

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares; no par value; 50,000,000 shares authorized; 4,136,191 and 4,331,089 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively

 

 

17,116

 

 

 

19,835

 

Accumulated other comprehensive loss

 

 

(316

)

 

 

(153

)

Retained earnings (accumulated deficit)

 

 

854

 

 

 

(2,406

)

Total shareholders’ equity

 

 

17,654

 

 

 

17,276

 

Total liabilities and shareholders’ equity

 

$

25,631

 

 

$

19,917

 

 




The accompanying notes are an integral part of these condensed consolidated financial statements.


1



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

6,854

 

 

$

5,494

 

 

$

20,168

 

 

$

16,217

 

Cost of sales

 

 

4,591

 

 

 

3,518

 

 

 

12,930

 

 

 

10,663

 

Gross profit

 

 

2,263

 

 

 

1,976

 

 

 

7,238

 

 

 

5,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

122

 

 

 

83

 

 

 

252

 

 

 

257

 

General and administrative expenses

 

 

641

 

 

 

701

 

 

 

1,838

 

 

 

1,781

 

Impairment of goodwill and long-lived assets

 

 

 

 

 

 

 

 

 

 

 

230

 

Gain from disposal of equipment

 

 

 

 

 

 

 

 

(7

)

 

 

(16

)

Research and development costs

 

 

603

 

 

 

560

 

 

 

1,337

 

 

 

1,445

 

Total operating expenses

 

 

1,366

 

 

 

1,344

 

 

 

3,420

 

 

 

3,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

897

 

 

 

632

 

 

 

3,818

 

 

 

1,857

 

Interest expense

 

 

(67

)

 

 

(2

)

 

 

(156

)

 

 

(6

)

Gain on sale of investments

 

 

 

 

 

 

 

 

356

 

 

 

 

Interest and other income

 

 

93

 

 

 

73

 

 

 

261

 

 

 

166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

923

 

 

 

703

 

 

 

4,279

 

 

 

2,017

 

Income tax expense

 

 

(191

)

 

 

(223

)

 

 

(1,019

)

 

 

(564

)

Net income

 

$

732

 

 

$

480

 

 

$

3,260

 

 

$

1,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) from marketable equity investments, net of income taxes

 

 

33

 

 

 

60

 

 

 

(163

)

 

 

(64

)

Comprehensive income

 

$

765

 

 

$

540

 

 

$

3,097

 

 

$

1,389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.18

 

 

$

0.11

 

 

$

0.77

 

 

$

0.34

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.17

 

 

$

0.11

 

 

$

0.75

 

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,143

 

 

 

4,363

 

 

 

4,224

 

 

 

4,290

 

Diluted

 

 

4,257

 

 

 

4,403

 

 

 

4,338

 

 

 

4,330

 

Common shares outstanding

 

 

4,136

 

 

 

4,361

 

 

 

4,136

 

 

 

4,361

 





The accompanying notes are an integral part of these condensed consolidated financial statements.


2



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended March 31, 2019 and 2018

(Unaudited)

(In thousands, except share data)


 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

17,209

 

 

$

19,889

 

 

$

19,835

 

 

$

17,704

 

Share-based compensation expense

 

 

10

 

 

 

142

 

 

 

28

 

 

 

191

 

Shares issued under ATM(1)

 

 

 

 

 

 

 

 

 

 

 

2,120

 

Share repurchases

 

 

(115

)

 

 

(18

)

 

 

(2,675

)

 

 

(18

)

Shares withheld from common stock issued to pay employee payroll taxes

 

 

 

 

 

 

 

 

(101

)

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

7

 

 

 

 

 

ESPP shares issued

 

 

12

 

 

 

21

 

 

 

22

 

 

 

37

 

Balance, at end of period

 

$

17,116

 

 

$

20,034

 

 

$

17,116

 

 

$

20,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(349

)

 

$

(91

)

 

$

(153

)

 

$

33

 

Net change in unrealized gain (loss) from marketable securities, net of taxes

 

 

33

 

 

 

60

 

 

 

(163

)

 

 

(64

)

Balance, at end of period

 

$

(316

)

 

$

(31

)

 

$

(316

)

 

$

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings/(accumulated deficit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

122

 

 

$

(3,054

)

 

$

(2,406

)

 

$

(4,027

)

Net income

 

 

732

 

 

 

480

 

 

 

3,260

 

 

 

1,453

 

Balance, at end of period

 

$

854

 

 

$

(2,574

)

 

$

854

 

 

$

(2,574

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

$

17,654

 

 

$

17,429

 

 

$

17,654

 

 

$

17,429

 


(1)

Of the proceeds raised from the ATM shares issued during the first quarter of fiscal 2018, $142,000 were accounted for as a reduction of prepaid expenses.





The accompanying notes are an integral part of these condensed consolidated financial statements.


3



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

3,260

 

 

$

1,453

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

309

 

 

 

472

 

Amortization of loan fees

 

 

5

 

 

 

 

Gain on disposal of equipment

 

 

(7

)

 

 

(16

)

Gain on sale of investments

 

 

(356

)

 

 

 

Share-based compensation

 

 

28

 

 

 

191

 

Impairment of goodwill and long-lived assets

 

 

 

 

 

230

 

Deferred income taxes

 

 

1,026

 

 

 

224

 

Bad debt recovery

 

 

(14

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(773

)

 

 

103

 

Deferred costs

 

 

(235

)

 

 

12

 

Assets held for sale

 

 

 

 

 

(84

)

Inventory

 

 

(412

)

 

 

(298

)

Prepaid expenses and other assets

 

 

(410

)

 

 

21

 

Accounts payable, accrued expenses and deferred rent

 

 

353

 

 

 

(576

)

Deferred revenue

 

 

169

 

 

 

57

 

Income taxes payable

 

 

142

 

 

 

 

Net cash provided by operating activities

 

 

3,085

 

 

 

1,789

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(2,562

)

 

 

(806

)

Purchases of equipment and leasehold improvements

 

 

(1,048

)

 

 

(820

)

Proceeds from dividend reclassified as return of principal

 

 

23

 

 

 

 

Increase in notes receivable

 

 

 

 

 

(1,500

)

Proceeds from collection of notes receivable

 

 

1,154

 

 

 

 

Proceeds from sale of investments

 

 

1,905

 

 

 

 

Proceeds from sale of equipment

 

 

7

 

 

 

30

 

Increase in intangibles

 

 

(11

)

 

 

(11

)

Net cash used in investing activities

 

 

(532

)

 

 

(3,107

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(2,675

)

 

 

(18

)

Proceeds from shares issued under ATM, net of commissions and fees

 

 

 

 

 

2,262

 

Proceeds from exercise of options and ESPP contributions

 

 

29

 

 

 

38

 

Borrowings from Minnesota Bank & Trust, net of loan origination fees

 

 

4,940

 

 

 

 

Payments of employee payroll taxes on net issuance of common stock

 

 

(101

)

 

 

 

Principal payments on notes payable and capital lease

 

 

(273

)

 

 

(70

)

Net cash provided by financing activities

 

 

1,920

 

 

 

2,212

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

4,473

 

 

 

894

 

Cash and cash equivalents, beginning of period

 

 

5,188

 

 

 

4,205

 

Cash and cash equivalents, end of period

 

$

9,661

 

 

$

5,099

 

 

 

 

 

 

 

 

 

 





The accompanying notes are an integral part of these condensed consolidated financial statements.


4



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Unaudited)

(In thousands)


 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

134

 

 

$

6

 

Income taxes

 

$

315

 

 

$

287

 







The accompanying notes are an integral part of these condensed consolidated financial statements.


5



 


PRO-DEX, INC.

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 with 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 consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2018.


Recent Accounting Standards


In February 2016, the FASB issued ASU 2016-02, (Topic 842) “Leases”. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. While we are still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our leases, we expect the adoption will lead to a material increase in the assets and liabilities recorded on our consolidated balance sheet.


Recently Adopted Accounting Standards

 

Effective July 1, 2018, we adopted new revenue recognition guidance issued by the FASB related to contracts with customers. Under ASU 2014-09, (Topic 606) “Revenue From Contracts with Customers,” we recognize revenue from the sales of products and services by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. We utilized the modified retrospective method of adoption and there was no impact on our financial statements as a result of adopting Topic 606 for the three and nine months ended March 31, 2019. We primarily sell finished products and recognize revenue at point of sale or delivery and the timing of revenue recognition has not changed with the adoption of the new guidance. However, we also perform services when we are engaged to design a product for a customer and there is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts. In order to disclose the amount of revenue related to these services, where more judgment is required, we have added “NRE & Prototypes” to our net sales table included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, which in our prior reports had been reflected in “Medical device and services”.


Reclassifications


We have reclassified the gain on disposal of equipment in the amount of $16,000 for the nine months ended March 31, 2018, to operating income (expense) from other income (expense) as prescribed by U.S. GAAP. This reclassification has no impact on our net income. We have also reclassified the tax effect of unrealized losses from marketable equity investments in the amount of $21,000 for the nine months ended March 31, 2018 from a separate line item to deferred income taxes on the statement of cash flows. This reclassification has no impact on our net increase or decrease in cash.






6



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 2. DESCRIPTION OF BUSINESS


We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic and maxocranial facial markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.

 

Our Fineline Molds division (“Fineline”), acquired in fiscal 2015, manufactured plastic injection molding for a variety of industries. As disclosed in our Form 8-K filed with the SEC on May 30, 2018, we sold substantially all of the assets of Fineline on May 23, 2018. Management reviewed ASU 2014-08 Reporting Discontinued Operations and Disposals of Components of an Entity and concluded that the sale of Fineline does not require treatment as a discontinued operation because it was not a material part of our operations.


NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS


Inventory


Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):


 

 

March 31,
2019

 

 

June 30,
2018

 

Raw materials /purchased components

 

$

2,099

 

 

$

1,878

 

Work in process

 

 

1,431

 

 

 

974

 

Sub-assemblies /finished components

 

 

1,157

 

 

 

1,193

 

Finished goods

 

 

118

 

 

 

348

 

Total inventory

 

$

4,805

 

 

$

4,393

 

 

Investments


Investments are stated at market value and consist of the following (in thousands):


 

 

March 31,
2019

 

 

June 30,
2018

 

Marketable equity securities – short-term

 

$

2,814

 

 

$

2,220

 

Marketable equity securities – long-term

 

 

234

 

 

 

 

Total Marketable equity securities

 

$

3,048

 

 

$

2,220

 

 

Investments at March 31, 2019 and June 30, 2018 had an aggregate cost basis of $3,364,000 and $2,373,000, respectively. The long-term investments include an equity security purchased during the third quarter of fiscal 2019 that is thinly traded and therefore we classified the asset as long term in nature because even if we decide to sell the stock we may not be able to sell our position within one year. At March 31, 2019, the investments included gross unrealized losses of $316,000 and no unrealized gains. At June 30, 2018, the investments included net unrealized losses of $153,000 (gross unrealized losses of $196,000 offset by gross unrealized gains of $43,000).


Of the total short-term marketable equity securities at March 31, 2019 and June 30, 2018, $997,000 and $285,000, respectively, represent an investment in the common stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. The shares have been purchased through 10b5-1 Plans, which in accordance with our internal policies regarding the approval of related party transactions, was approved by our three Board members that are not affiliated with Air T, Inc.




7



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


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.


Intangibles


Intangibles consist of the following (in thousands):

 

 

 

March 31,
2019

 

 

June 30,
2018

 

Covenant not to compete

 

 

 

 

 

30

 

Patent-related costs

 

 

175

 

 

 

164

 

Total intangibles

 

$

175

 

 

$

194

 

Less accumulated amortization

 

 

(42

)

 

 

(54

)

 

 

$

133

 

 

$

140

 


The covenant not to compete relates to assets acquired in conjunction with a business acquisition. The covenant not to compete and related accumulated amortization were retired during the second quarter of fiscal 2019. Patent-related costs consist of legal fees incurred in connection with both patent applications and a patent issuance, and will be amortized over the estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent. Since we do not know when, or if, our patent applications will be issued, the future amortization expense is not predictable.


NOTE 4. WARRANTY


The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying consolidated balance sheets. As of March 31, 2019 and June 30, 2018, the warranty reserve amounted to $136,000 and $107,000, respectively. Warranty expenses are included in cost of sales in the accompanying consolidated statements of operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates, and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 2019 and 2018 was $52,000 and $8,000, respectively, and for the nine months ended March 31, 2019 and 2018 was $82,000 and $36,000, respectively.


Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2019 and 2018 are as follows (in thousands):


 

 

As of and for the
Three Months Ended
March 31,

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

99

 

 

$

150

 

Accruals during the period

 

 

39

 

 

 

24

 

Changes in estimates of prior period warranty accruals

 

 

13

 

 

 

(16

)

Warranty amortization

 

 

(15

)

 

 

(21

)

Ending balance

 

$

136

 

 

$

137

 

 



















8



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


 

 

 

As of and for the
Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

107

 

 

$

159

 

Accruals during the period

 

 

93

 

 

 

76

 

Changes in estimates of prior period warranty accruals

 

 

(11

)

 

 

(40

)

Warranty amortization

 

 

(53

)

 

 

(58

)

Ending balance

 

$

136

 

 

$

137

 

 

NOTE 5. NET INCOME (LOSS) PER SHARE

 

We calculate basic net income (loss) per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The weighted-average number of common shares outstanding reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.


The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss). In the tables below, income (loss) amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):


 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

732

 

 

$

480

 

 

$

3,260

 

 

$

1,453

 

Weighted average shares outstanding

 

 

4,143

 

 

 

4,363

 

 

 

4,224

 

 

 

4,290

 

Basic income per share

 

$

0.18

 

 

$

0.11

 

 

$

0.77

 

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

732

 

 

$

480

 

 

$

3,260

 

 

$

1,453

 

Weighted average shares outstanding

 

 

4,143

 

 

 

4,363

 

 

 

4,224

 

 

 

4,290

 

Effect of dilutive securities – stock options & performance awards

 

 

114

 

 

 

40

 

 

 

114

 

 

 

40

 

Weighted average shares outstanding used in calculation of diluted earnings per share

 

 

4,257

 

 

 

4,403

 

 

 

4,338

 

 

 

4,330

 

Diluted income per share

 

$

0.17

 

 

$

0.11

 

 

$

0.75

 

 

$

0.34

 


NOTE 6. 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.




9



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


As of March 31, 2019, we have accrued $479,000 of unrecognized tax benefits related to federal and state income tax matters. This entire balance is expected to reduce the Company’s income tax expense if recognized and result in a corresponding decrease in the Company’s effective tax rate.


A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


 

 

March 31,

 

 

 

2019

 

 

2018

 

Unrecognized tax benefits:

 

 

 

 

 

 

 

 

Beginning balance

 

$

462

 

 

$

446

 

Additions based on tax positions related to the current year

 

 

17

 

 

 

12

 

Additions for tax positions of prior years

 

 

 

 

 

 

Ending balance

 

$

479

 

 

$

458

 

 

We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of March 31, 2019, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have sufficient tax attributes available to fully offset any potential assessment of additional tax.


We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2016 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2015 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.


On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The new legislation represented a fundamental and dramatic shift in US taxation. The new legislation contains several key tax provisions that have impacted us including the reduction of the corporate tax rate to 21% effective January 1, 2018. The new legislation also included a variety of other changes including, but not limited to, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and a reduction in the amount of executive pay that could qualify as a deduction.


NOTE 7. SHARE-BASED COMPENSATION


Through June 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). There was no share-based compensation expense attributable to the Former Stock Option Plans for the three and nine months ended March 31, 2019 and 2018, as all outstanding options under the Former Stock Option Plans are fully vested. The Employee Stock Option Plan and Director’s Stock Option Plan were terminated in June 2015 and September 2014, respectively.


In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at the November 29, 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of the Company’s 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, 2019, 200,000 performance awards have been granted under the 2016 Equity Incentive Plan.

 



10



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


Stock Options


No options were granted during the three or nine months ended March 31, 2019 and 2018.


As of March 31, 2019, there was no unrecognized compensation cost under the Former Stock Option Plans as all outstanding stock options are fully vested. As of March 31, 2019, the options had a weighted average contractual life of 2.3 years and an intrinsic value of $552,000. Following is a summary of stock option activity for the nine months ended March 31, 2019 and 2018:


 

 

2019

 

 

2018

 

 

 

Number of Shares

 

 

Weighted-Average
Exercise Price

 

 

Number of Shares

 

 

Weighted-Average
Exercise Price

 

Outstanding at July 1,

 

 

57,000

 

 

$

1.88

 

 

 

57,000

 

 

$

1.88

 

Options granted

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(3,000

)

 

 

2.14

 

 

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

 

54,000

 

 

$

1.86

 

 

 

57,000

 

 

$

1.88

 

Stock Options Exercisable at March 31,

 

 

54,000

 

 

$

1.86

 

 

 

57,000

 

 

$

1.88

 

 

Performance Awards

 

In December 2017, the Compensation Committee of the Board of Directors granted 200,000 performance awards to our employees, which upon vesting will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years 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. We recorded share-based compensation expense of $8,000 and $138,000 for the three months ended March 31, 2019 and 2018, respectively, and $24,000 and $184,000 for the nine months ended March 31, 2019 and 2018, respectively, related to these performance awards. On March 31, 2019, there was approximately $75,000 of unrecognized compensation cost related to these non-vested performance awards expected to be expensed over the weighted-average period of 4.13 years.


On July 1, 2018, it was determined by the Compensation Committee of our Board of Directors that the first of five tranches of 40,000 performance awards had been achieved and participants were awarded an aggregate of 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 24,727 shares of common stock and paid $101,000 of participant-related payroll tax liabilities.


Employee Stock Purchase Plan


In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at the December 3, 2014 Annual Meeting. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period. The Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP.


During the three months ended March 31, 2019 and 2018, we recorded share-based compensation expense in the amount of $2,000 and $4,000, respectively and 923 and 3,634 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $12.96 and $5.93, respectively, per share. On a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of 18,866 shares. During the nine months ended March 31, 2019 and 2018, we recorded share-based compensation expense in the amount of $4,000 and $7,000, respectively, relating to the ESPP.



11



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 8. MAJOR CUSTOMERS AND SUPPLIERS


Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the nine-month periods ended March 31, 2019 and 2018, is as follows (in thousands, except percentages):


 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Amount

 

 

Percent of Total

 

 

Amount

 

 

Percent of Total

 

Net sales 

 

$

6,854

 

 

 

100

%

 

$

5,494

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

4,116

 

 

 

60

%

 

$

2,960

 

 

 

54

%

Customer 2

 

 

1,077

 

 

 

16

%

 

 

534

 

 

 

10

%

Customer 3

 

 

905

 

 

 

13

%

 

 

324

 

 

 

6

%

Customer 4

 

 

192

 

 

 

3

%

 

 

535

 

 

 

10

%

Total

 

$

6,290

 

 

 

92

%

 

$

4,353

 

 

 

80

%


 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Amount

 

 

Percent of Total

 

 

Amount

 

 

Percent of Total

 

Net sales 

 

$

20,168

 

 

 

100

%

 

$

16,217

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

12,566

 

 

 

62

%

 

$

9,048

 

 

 

56

%

Customer 2

 

 

2,601

 

 

 

13

%

 

 

1,629

 

 

 

10

%

Customer 3

 

 

1,751

 

 

 

9

%

 

 

1,566

 

 

 

10

%

Total

 

$

16,918

 

 

 

84

%

 

$

12,243

 

 

 

76

%

 

Information with respect to accounts receivable from those customers whom comprised more than 10% of our gross accounts receivable at either March 31, 2019 or June 30, 2018, is as follows (in thousands, except percentages):


 

 

March 31, 2019

 

 

June 30, 2018

 

Total gross accounts receivable

 

$

3,742

 

 

 

100

%

 

$

2,969

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

1,887

 

 

 

50

%

 

$

1,673

 

 

 

56

%

Customer 2

 

 

872

 

 

 

23

%

 

 

679

 

 

 

23

%

Customer 3

 

 

459

 

 

 

12

%

 

 

279

 

 

 

9

%

Total.

 

$

3,218

 

 

 

85

%

 

$

2,631

 

 

 

88

%

 

We had one supplier that accounted for more than 10% of our purchases in either of the three-month and nine-month periods ended March 31, 2019 and 2018. Our purchases from this supplier ranged from 9% to 16% for the three and nine months ended March 31, 2019 and 2018.


Accounts payable due to that supplier represented 18% and 17% of total accounts payable as of March 31, 2019 and June 30, 2018, respectively.




12



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 9. NOTES RECEIVABLE

 

Loan Participation note receivable – short-term

 

On September 20, 2017 (the “Closing Date”), we entered into a Participation Agreement with FS Special Opportunities I, L.P., a Minnesota limited partnership (“Principal”), pursuant to which we paid Principal $1,150,000 in cash to purchase a 50% (“Participation Percentage”) undivided interest (the “Participation”) in Principal’s $2,300,000 loan (the “Loan”) to 414 New York LLC, a New York limited liability company (“Borrower”). The Participation constituted the purchase by us of a property interest in the Loan from Principal and did not create a creditor-debtor relationship between us and Borrower. Borrower used the proceeds from the Loan to acquire a leasehold interest in certain real estate operated as a hotel in Manhattan, New York.

 

Pursuant to the loan agreement entered into on the Closing Date between Principal and Borrower, the Loan initially bore interest at a fixed rate of 22% per annum, with payments of all accrued and unpaid interest due monthly commencing on October 1, 2017 and on the first day of each month thereafter. If the principal balance of the Loan was not paid in full by September 30, 2018, commencing on October 1, 2018 and continuing on the first day of the next 83 months thereafter, Borrower would, in addition to the aforementioned monthly interest payments, pay installments of principal equal to 1/84th of the principal balance outstanding under the Loan as of September 30, 2018. During the first quarter ended September 30, 2018, however, the Principal extended interest only payments to Borrower for an additional period of up to two months and continued to grant subsequent extensions. During the third quarter ended March 31, 2019 the Borrower repaid the loan in full. Additionally, we received payments in the amount of $35,000 representing the value of warrants issued to us in conjunction with the loan extensions.

 

Raymond E. Cabillot, a director of the Company, is the managing partner of Farnam Street Capital, Inc. (“Farnam”) and Farnam is the founding partner of the Principal. In accordance with our internal policies regarding the approval of related party transactions, the Participation was approved by our four Board members that are not affiliated with Farnam.

 

Fineline note receivable

 

On May 23, 2018, we completed the sale of substantially all of the assets of Fineline, which was engaged in the manufacture of plastic injection molds serving customers in a variety of industries. The aggregate purchase price was $310,000, of which $30,000 was paid in cash at closing and the balance of $280,000 was to be paid to us under the terms of a five-year promissory note, which bore interest at 4% per annum and required sixty equal monthly payments of principal and accrued interest in the amount of approximately $5,000 each, beginning February 15, 2019. We determined that there was uncertainty regarding the collectability of this note. Therefore, during fiscal 2018 we offset the gain on the sale of the division in the amount of approximately $211,000, against the impairment of the note receivable because we believed that the fair market value of the collateral securing the note was less than the face amount of the note. As of March 31, 2019, the loan is in default. The loan balance in the amount of $65,000 has been classified as a current asset as we expect to recover the value of the note through the sale of the underlying collateral during the fourth fiscal quarter of 2019.

 

NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS

 

Minnesota Bank & Trust


On September 6, 2018, we entered into a Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”), providing for a $5,000,000 term loan (the “Term Loan”) as well as a $2,000,000 revolving loan (the “Revolving Loan” and together with the Term Loan, collectively the “Loans”), evidenced by a Term Note A and a Revolving Credit Note made by us in favor of MBT. The Loans are secured by substantially all of our assets pursuant to a Security Agreement entered into on September 6, 2018 between us and MBT. We paid loan origination fees to MBT in the amount of $60,000.




13



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


The Term Loan matures on October 1, 2025 and bears interest at a fixed rate of 5.53% per annum. An initial payment of interest only in the amount of $18,433 was paid on October 1, 2018. Commencing November 1, 2018 and continuing on the first day of each subsequent month thereafter until the maturity date, we are required to make payments of principal and interest on the Term Loan of approximately $72,000, plus any additional accrued and unpaid interest through the date of payment. The balance owed on the Term Loan at March 31, 2019 is $4.7 million, which amount is net of unamortized loan fees. The Revolving Loan matures on September 6, 2019 unless earlier terminated pursuant to its terms and bears interest at the greater of (a) 4.5% or (b) the difference of the prime rate as published in the Money Rates section of the Wall Street Journal minus 0.50%. Commencing on the first day of each month after we initially borrow against the Revolving Loan, which we have yet to do, and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of payment. Any principal on the Revolving Loan that is not previously prepaid shall be due and payable on the maturity date (or earlier termination of the Revolving Loan).


Any payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5% of the overdue amount. Upon the occurrence and during the continuance of an event of default, the interest rate of both Loans will be increased by 3% and MBT may, at its option, declare the Loans immediately due and payable in full.


The Credit Agreement and Security Agreement contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type.


Farmers & Merchants Bank of Long Beach

 

On April 19, 2017, we entered into a Business Loan Agreement, dated effective March 28, 2017, with Farmers & Merchants Bank of Long Beach (“FMB”), providing for a $500,000 revolving loan facility. The loan was secured by substantially all of our assets and bore interest at prime plus 2 percent. The loan had an original maturity of March 28, 2018, which was subsequently extended to March 28, 2019. We did not at any time borrow funds under this facility. This loan was terminated by us on September 4, 2018 in conjunction with the MBT Loans described above.


Jules & Associates


On July 21, 2016, we entered a master equipment lease agreement with Jules and Associates, Inc. to lease a specific machine used in our inspection process. The cost of the equipment was approximately $106,000 and the lease provides for 36 monthly payments in the amount of $3,121, as well as interim rent in the amount of $7,388. The lease was subsequently assigned to Hitachi Capital America Corporation. The balance owed on the lease as of March 31, 2019 is approximately $15,000.


NOTE 11. COMMON STOCK


Share Repurchase Program


In September 2013, our Board approved a share repurchase program authorizing us to repurchase up to 750,000 shares of our common stock. In accordance with, and as part of, this share repurchase program, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the three and nine months ended March 31, 2019 we repurchased 7,914 and 225,368 shares, respectively at an aggregate cost, inclusive of fees under the plan, of $115,000 and $2,675,000, respectively. During the three and nine ended March 31, 2018, we repurchased 2,636 shares at an aggregate cost of $18,000, inclusive of fees. All repurchases under the 10b5-1 Plans have been administered through an independent broker.


On a cumulative basis, we have repurchased a total of 491,351 shares under the share repurchase program at an aggregate cost of $3.8 million.




14



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


At The Market Offering Agreement


In February 2017, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock pursuant to specific parameters defined by us as well as those defined by the SEC and the ATM Agreement. During the three months ended March 31, 2018, we did not sell any common stock under the ATM. During the nine months ended March 31, 2018, we sold 332,189 shares of common stock under the ATM at average prices of $7.02 per share, resulting in proceeds to us of $2.2 million, net of commissions and fees. From the inception of the ATM in February 2017 through March 31, 2018 we have sold 340,465 shares of common stock for net proceeds of $2,311,000 net of commissions and fees paid to Ascendiant totaling $72,000. The ATM allows for quick and agile sales of our common stock to interested investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities that may present themselves from time to time. In December 2017, the Board suspended the ATM indefinitely. The Board has the discretion to reactivate the ATM prior to February 16, 2020, the expiration of the ATM Agreement, unless earlier terminated by Ascendiant or us.


NOTE 12. COMMITMENTS AND CONTINGENCIES


Legal Matters

 

We are from time to time a party to various legal proceedings incidental to our business. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.







15



 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.


COMPANY OVERVIEW


The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” or “us”) for the three-month and nine-month periods ended March 31, 2019 and 2018. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. This report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein.


Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales in markets characterized by rapid technological evolution, consolidation within our target marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities. Many other economic, competitive, governmental and technological factors could impact our ability to achieve our goals. You are urged to review the risks, uncertainties and other cautionary language described in this report, as well as in our other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including, but not limited to, the risks, uncertainties and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2018.


We specialize in the design, development and manufacture of powered rotary drive surgical instruments used primarily in the orthopedic, spine, and maxocranial facial markets. Our Fineline Molds division, acquired in fiscal 2015, and sold in May 2018, manufactured plastic injection molding for a variety of industries. Our products are found in hospitals and medical engineering labs around the world.


Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet address is www.pro-dex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.


Basis of Presentation


The condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2019 or any other interim period during such fiscal year. Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.


Critical Accounting Estimates and Judgments


Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.



16



 


An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that there have been no significant changes during the three and nine months ended March 31, 2019 to the items that we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, except as noted below, whereby we have expanded our fair value measurements policy to include the thinly traded security we purchased during the third quarter ended March, 31, 2019.


Investments: Investments consist of marketable equity securities of publicly held companies. All of our short-term investments are classified within Level 1 of the valuation hierarchy. The long-term investment consists of thinly traded Over-the-Counter securities and are classified within Level 2 of the valuation hierarchy. The fair value of the long-term investments is based on an independent valuation.


Business Strategy and Future Plans


Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and electric, multi-function surgical drivers and shavers. We continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customers.

 

Our patented adaptive torque-limiting software has been very well received in the CMF market and we have continued investment in this area with research and development focused on applying this technology to thoracic surgical applications. We began development of a Pro-Dex branded thoracic driver in late fiscal 2017, in which we invested $622,000 during fiscal 2018 and $956,000 life-to-date through March 31, 2019. In early fiscal 2019, we entered a development contract with a current significant customer to private-label this driver for their unique specifications. We currently anticipate sales to this existing customer will increase during fiscal 2020 as we add this product to their existing CMF driver and ancillary products that we currently supply. During the third quarter ended March 31, 2019, we received a purchase commitment in the form of a Material Procurement Authorization from this customer for the thoracic driver, batteries, related attachments and accessories, in the amount of $3.4 million. Although this amount is not yet in our existing backlog as of March 31, 2019, we are hoping to deliver some of this order in our fourth quarter of fiscal 2019.

 

Additionally, we currently plan to engage a small group of independent medical device representatives in targeted locations throughout the United States to begin to sell not only the Pro-Dex branded thoracic driver but future Pro-Dex branded devices directly to hospitals, medical groups and out-patient surgical centers. This will enable us to diversify our customer concentration and slowly penetrate the end-user market.


In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, and promoting new sales channels for both orthopedic shavers and screw drivers for a multitude of surgical applications, while monitoring closely the progress of all these individual endeavors. However, there can be no assurance that we will be successful in any of these objectives.




17



 


Description of Business Operations


Revenue


The majority of our revenue is derived from designing, developing and manufacturing surgical devices for the medical device industry. The proportion of total sales by type is as follows (in thousands, except percentages):


 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

Revenue:

  

                

  

  

                

 

  

                

  

  

                

 

  

                

  

  

                

 

  

                

  

  

                

 

Medical devices

 

$

6,297

 

 

 

92

%

 

$

4,663

 

 

 

85

%

 

$

18,602

 

 

 

92

%

 

$

14,414

 

 

 

89

%

Industrial and scientific

 

 

205

 

 

 

3

%

 

 

354

 

 

 

6

%

 

 

689

 

 

 

3

%

 

 

656

 

 

 

4

%

Dental and component

 

 

101

 

 

 

1

%

 

 

245

 

 

 

5

%

 

 

340

 

 

 

2

%

 

 

487

 

 

 

3

%

NRE & Prototypes

 

 

24

 

 

 

 

 

 

89

 

 

 

2

%

 

 

156

 

 

 

1

%

 

 

135

 

 

 

1

%

Injection molds

 

 

 

 

 

 

 

 

69

 

 

 

1

%

 

 

 

 

 

 

 

 

293

 

 

 

2

%

Contract services (ESD)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

Repairs and other

 

 

227

 

 

 

3

%

 

 

74

 

 

 

1

%

 

 

381

 

 

 

2

%

 

 

222

 

 

 

1

%

 

 

$

6,854

 

 

 

100

%

 

$

5,494

 

 

 

100

%

 

$

20,168

 

 

 

100

%

 

$

16,217

 

 

 

100

%

 

Certain of our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements. All of our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility, as were our dental products, which we have ceased manufacturing. During the prior fiscal year, we manufactured plastic injection molds in our San Dimas, California facility, a revenue stream generated from our acquisition of Fineline during the third quarter of fiscal 2015, which we subsequently sold during the fourth quarter of fiscal 2018.


Sales of our medical device products increased $1.6 million for the three months ended March 31, 2019 and increased $4.2 million for the nine months ended March 31, 2019 compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer increased $1.2 million and $3.5 million, respectively, for the three and nine months ended March 31, 2019 compared the corresponding periods of the prior fiscal year, due to an increase in shipments of a surgical handpiece designed to be used in orthopedic surgery applications.


Sales of our industrial and scientific products, which consists primarily of our compact pneumatic air motors, decreased $149,000 or 42 percent for the three months ended March 31, 2019 and remained relatively flat for the nine months ended March 31, 2019 compared to the corresponding period of the prior year. The revenue decline is driven by market fluctuations and minimal sales efforts.


Our dental and component revenue are generated from sales to many distributors and end-users. In January 2018, we sent notification to our dental product customers that we were discontinuing the manufacture of these products. Sales of our dental products and components have declined as we are no longer manufacturing this line of products, but rather are simply selling remaining component inventory. The cessation of our dental line of products is not expected to have a material impact on our financial position or results of operations.

 

Our repair revenue has increased approximately $153,000 or 207 percent and $159,000 or 72 percent for the three and nine months ended March 31, 2019 compared to the corresponding periods of the prior fiscal year, due largely to repairs of the orthopedic device we sell to our largest customer. Typically, upon initial product launch repair revenue is minimal as most repairs are typically covered under warranty, but as the products mature in the marketplace and after a certain number of routine duty cycles in the operating room, repairs generally increase. We expect a steady increase in repairs for the foreseeable future.




18



 


At March 31, 2019, we had a backlog of approximately $19.7 million, of which $6.6 million is scheduled to be delivered in fiscal 2019 and the balance is scheduled to be delivered next fiscal year. Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts. Additionally, during the third quarter of fiscal 2019, we received a purchase commitment from a customer for thoracic drivers, batteries, related attachments and accessories in the total amount of $3.4 million, which we anticipate delivering partially during the fourth quarter of fiscal 2019. We may experience variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches and customer planned inventory builds. However, we do not typically experience seasonal fluctuations in our shipments and revenues.

 

Cost of Sales and Gross Margin

  (in thousands except percentages)

 

 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

% of
Total

 

 

 

 

 

% of
Total

 

 

 

 

 

% of
Total

 

 

 

 

 

% of
Total

 

Cost of sales:

  

                

  

  

                

 

  

                

  

  

                

 

  

                

  

  

                

 

  

                

  

  

                

 

Product cost

 

$

4,538

 

 

 

99

%

 

$

3,443

 

 

 

98

%

 

$

12,608

 

 

 

97

%

 

$

10,197

 

 

 

96

%

Under(over)-absorption of manufacturing costs

 

 

(13

)

 

 

 

 

 

42

 

 

 

1

%

 

 

82

 

 

 

1

%

 

 

304

 

 

 

3

%

Inventory and warranty charges

 

 

66

 

 

 

1

%

 

 

33

 

 

 

1

%

 

 

240

 

 

 

2

%

 

 

162

 

 

 

1

%

Total cost of sales

 

$

4,591

 

 

 

100

%

 

$

3,518

 

 

 

100

%

 

$

12,930

 

 

 

100

%

 

$

10,663

 

 

 

100

%

 

 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

Year over Year
ppt Change

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Three Months

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

33

%

 

 

36

%

 

 

36

%

 

 

34

%

 

 

(3

)

 

 

2

 

 

Cost of sales for the three months ended March 31, 2019 increased $1.1 million or 31 percent compared to the corresponding period of the prior fiscal year. The increase in total costs of sales is consistent with the 25 percent increase in revenue for the same period. Under-absorption of manufacturing costs remained fairly constant for the three months ended March 31, 2019 compared to the corresponding period of the prior fiscal year due primarily to similar standard labor and overhead rates and manufacturing volumes. Costs relating to inventory and warranty charges increased by $33,000 for the third quarter ended March 31, 2019 compared to the third quarter of the prior fiscal year.


Gross profit increased by approximately $287,000 or 15 percent for the three months ended March 31, 2019 compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in revenue discussed above. Gross margin as a percentage of sales for the three months ended March 31, 2019 decreased by approximately 3 percentage points compared to the corresponding period of the prior year due primarily to contractual price concessions.

 

Cost of sales for the nine months ended March 31, 2019 increased by $2.3 million or 21 percent compared to the corresponding period of the prior fiscal year, consistent with the increase in revenue of 24 percent for the same period. Cost of sales reflects a $222,000 decrease in under-absorbed manufacturing costs as we are under-absorbed by only $82,000 for the nine months ended March 31, 2019, because our adjusted standard labor and over-head rates based upon planned production hours are nearer to actual in the current fiscal year versus the prior fiscal year. Finally, the inventory and warranty charges increased $78,000 during the nine months ended March 31, 2019 compared to the corresponding period of the prior fiscal year, due primarily to an accrual in the amount of $63,000 for a previously announced product recall related to legacy batteries. During the first quarter ended September 2018, we identified all the product lots impacted by the recall and accrued for the cost of replacing 100% of the affected batteries.

 

Gross profit increased $1.7 million or 30 percent for the nine months ended March 31, 2019 compared to the corresponding period of the prior year, primarily as a result of increasing sales volumes allowing us to better absorb our fixed manufacturing costs. Gross margin for the nine months ended March 31, 2019 increased by approximately 2 percentage points, compared to the corresponding period of the prior year.




19



 


Operating Expenses

 

Operating Costs and Expenses
 (in thousands except % change)


 

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

Year over Year % Change

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Three
Months

 

 

Nine
Months

 

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

 

 

 

 

% of
Revenue

 

 

 

 

 

 

 

Operating expenses:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

$

122

 

 

 

2

%

 

$

83

 

 

 

2

%

 

$

252

 

 

 

1

%

 

$

257

 

 

 

2

%

 

 

47

%

 

 

(2

%)

General and administrative expenses

 

 

641

 

 

 

9

%

 

 

701

 

 

 

13

%

 

 

1,838

 

 

 

9

%

 

 

1,781

 

 

 

11

%

 

 

(9

%)

 

 

3

%

Impairment of goodwill and long-lived intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230

 

 

 

1

%

 

 

 

 

 

(100

%)

Research and development costs

 

 

603

 

 

 

9

%

 

 

560

 

 

 

10

%

 

 

1,337

 

 

 

7

%

 

 

1,445

 

 

 

9

%

 

 

8

%

 

 

(8

%)

 

 

$

1,366

 

 

 

20

%

 

$

1,344

 

 

 

25

%

 

$

3,427

 

 

 

17

%

 

$

3,713

 

 

 

23

%

 

 

2

%

 

 

(8

%)

 

Selling expenses consist of salaries and other personnel-related expenses for our business development departments, as well as advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three months ended March 31, 2019 increased $39,000 or 47 percent compared to the corresponding period of fiscal 2018 mostly due to increased bonuses and travel. Although the selling expenses for the nine months ended March 31, 2019 remained relatively flat compared to the corresponding period of the prior fiscal year, the Fineline division (which we sold in the fourth quarter of fiscal 2018) contributed $104,000 to the prior year expenses. Those expenses have been offset by increased payroll and related expenses in the amount of $56,000 as well as recruiting expense of $40,000 in the current fiscal year.


General and administrative expenses (“G&A”) consists of salaries and other personnel-related expenses of our accounting, finance and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and other costs and expenses attributable to being a public company. G&A increased $57,000 during the nine months ended March 31, 2019 when compared to the corresponding period of the prior fiscal year. The increase in total G&A expenses is related to increased compensation expense, primarily of our named executive officers.


The prior year impairment of goodwill and intangible assets relates to Fineline’s goodwill, tradename and customer list, which was impaired during the second quarter of fiscal 2018 in conjunction with an impairment analysis.


Research and development costs generally consist of salaries, employer paid benefits, and other personnel related costs of our engineering and support personnel, as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products. Research and development costs for the three and nine months ended March 31, 2019 increased $43,000 and decreased $108,000, respectively, compared to the corresponding periods of the prior fiscal year. We expect to increase expenditures in research and development as we continue recruitment efforts for engineers and continue to internally develop Pro-Dex branded surgical devices.

 



20



 


Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products. Research and development costs represent between 39% and 44% of total operating expenses for all periods presented, and are expected to increase in the future as we continue to invest in product development. The amount spent on projects under development is summarized below (in thousands):

  

 

 

Three and Nine Months ended
March 31, 2019

 

 

Three and Nine Months ended
March 31, 2018

 

 

Market
Launch

 

 

Est Annual
Revenue

 

Total Research & Development costs:

 

$

603

 

 

$

1,337

 

 

$

560

 

 

$

1,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products in development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thoracic Driver

 

$

119

 

 

$

226

 

 

$

227

 

 

$

545

 

 

 

06/19

 

 

$

4,000

 

Arthroscopic Shaver.

 

 

160

 

 

 

221

 

 

 

 

 

 

 

 

 

12/19

 

 

$

600

 

Arthroscopic Attachment

 

 

1

 

 

 

17

 

 

 

6

 

 

 

6

 

 

 

09/19

 

 

$

150

 

CMF Driver

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

12/19

 

 

$

350

 

Sustaining & Other

 

 

323

 

 

 

870

 

 

 

327

 

 

 

894

 

 

 

 

 

 

 

 

 

Total.

 

$

603

 

 

$

1,337

 

 

$

560

 

 

$

1,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer CMF Driver (1)

 

$

63

 

 

$

289

 

 

 

 

 

$

 

 

 

09/19

 

 

$

2,500

 

 

(1)

Costs incurred related to customer contracts are included in costs of sales and deferred costs and are not included in research and development costs.


Interest Expense


Interest expense consists primarily of interest expense related to the Term Loan from Minnesota Bank & Trust described more fully in Note 10 to the Condensed Consolidated Financial Statements contained elsewhere in this report and capital lease obligations for leased equipment.


Interest & Other Income


Interest & other income for the three and nine months ended March 31, 2019 includes $54,000 and $183,000, respectively, of interest earned on the loan Participation described more fully in Note 9 to the Condensed Consolidated Financial Statements contained elsewhere in this report as well as $35,000 of other income related to the cash received representing the value of warrants issued to us in conjunction with the loan extensions under the Participation. The remaining interest income of $4,000 and $43,000 earned during the three and nine months ended March 31, 2019, respectively, represents earnings on our marketable securities portfolio and money market balances.


Income Tax Expense


The effective tax rate for the three and nine months ended March 31, 2019 is slightly less than our combined federal and applicable state corporate income tax rates due to federal and state research credits and the new foreign-derived intangible income deduction. The effective tax rates for the three and nine months ended March 31, 2018 represent a blended rate for the rates in existence before and after the new tax legislation was adopted (See Note 6 of Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.)




21



 


Liquidity and Capital Resources


Cash and cash equivalents at March 31, 2019 increased $4.5 million to $9.7 million as compared to $5.2 million at June 30, 2018. The following table includes a summary of our condensed consolidated statements of cash flows contained elsewhere in this report.


 

 

As of and For the Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

 

 

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

3,085

 

 

$

1,789

 

Investing activities

 

$

(532

)

 

$

(3,107

)

Financing activities

 

$

1,920

 

 

$

2,212

 

 

 

 

 

 

 

 

 

 

Cash and Working Capital:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,661

 

 

$

5,099

 

Working Capital

 

$

18,310

 

 

$

12,926

 

 

Operating Activities


Net cash provided by operating activities was $3.1 million for the nine months ended March 31, 2019 primarily due net income of $3.3 million and non-cash depreciation and amortization totaling $309,000. Uses of cash arose from an increase in accounts receivable of $773,000 as well as an increase in deferred costs related to the development of a CMF driver for one of our existing customers in the amount of $235,000. Offsetting these uses of cash was a decrease in deferred taxes in the amount of $1.0 million.


Net cash provided by operating activities was $1.8 million for the nine months ended March 31, 2018 primarily due to income from continuing operations of $1.5 million and non-cash depreciation and amortization and stock-based compensation totaling $472,000 and $191,000, respectively, and a non-cash impairment of goodwill and intangible assets of $230,000, as well as non-cash deferred tax expense of $224,000. Uses of cash arose from an increase in inventory of $298,000 and a decrease in accounts payable, accrued liabilities and deferred rent, in the amount of $576,000.


Investing Activities


Net cash used in investing activities for the nine months ended March 31, 2019 was $532,000 and related to investments in marketable equity securities of publicly traded companies in the amount of $2.6 million as well as capital expenditures primarily for manufacturing equipment in the amount of $1.0 million offset by the sale of one of the securities in our portfolio of common stock of publicly traded companies in the amount of $1.9 million and the collection of $1.2 million on the loan Participation described in Note 9 to the Condensed Consolidated Financial Statements contained elsewhere in this report.


Net cash used in investing activities for the nine months ended March 31, 2018 was $3.1 million and related primarily to the $1,150,000 loan Participation described in Note 9 to the Condensed Consolidated Financial Statements contained elsewhere in this report and an additional $350,000 investment made in a medical device start-up. In addition, we invested $820,000 in equipment and $806,000 in marketable equity securities during the nine months ended March 31, 2018.


Financing Activities


Net cash provided by financing activities for the nine months ended March 31, 2019 included $5.0 million in a term loan from Minnesota Bank and Trust more fully described in Note 10 to the Condensed Consolidated Financial Statements contained elsewhere in this report, offset by $273,000 of principal payments on the MBT term loan and an equipment lease as well as $2.7 million related to the repurchase of 225,368 shares of our common stock pursuant to our share repurchase program.


We generated $2.2 million in cash from financing activities during the nine months ended March 31, 2018 through sales of our common stock under our ATM program more fully described in Note 11 to the Condensed Consolidated Financial Statements contained elsewhere in this report.




22



 


Financing Facilities & Liquidity Requirements for the next twelve months


As of March 31, 2019, our working capital was $18.3 million. We currently believe that our existing cash and cash equivalent balances together with our accounts receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. We may also borrow against our $2.0 million Revolving Loan with Minnesota Bank & Trust (See Note 10 to Condensed Consolidated Financial Statements contained elsewhere in this report).

 

We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability. As we execute on our current strategy, however, we may require debt and/or equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes. In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject to extensive variability. We believe that if we need to raise additional capital to fund our operations we can do so by selling additional shares of our common stock through our ATM.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) conducted an evaluation of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.


In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of March 31, 2019, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that:


 

(1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;


 

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and


 

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.


Based on that evaluation as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective.


 



23



 


Internal Control over Financial Reporting


During the three months ended March 31, 2019, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


Inherent Limitations on the Effectiveness of Controls


In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





24



 


PART II OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


See Note 12 of Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.


ITEM 1A. RISK FACTORS


Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2018 as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended March 31, 2019. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements included elsewhere in this report and in Item 2, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report. The risks and uncertainties disclosed in our Form 10-K, our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect our business, financial condition and results of operations in the future.


There have been no material changes to the risk factors as disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2018, except as provided in any amendments thereto and those set forth below.


During the third quarter of fiscal 2019, we purchased common stock in a company that is thinly traded on the Over-the-Counter market and we may be unable to liquidate the investment in a timely manner at full value and it may require an independent valuation to determine if it is subject to an “other-than-temporary” impairment charge.

 

We invest a significant portion of our excess capital in marketable securities, including equity securities of publicly traded companies. At March 31, 2019, the fair value of these marketable securities was approximately $3.0 million. During the third quarter of fiscal 2019, we purchased $234,000 in common stock of a public company that is listed on the Over-the-Counter market and is thinly traded. As such, we recorded this investment as long-term in nature, as we may not be able to liquidate the investment in a timely manner even if we wish to sell it. Further, since this company’s stock is infrequently traded, the fair market value of the stock may require an independent valuation and may be subject to a discount which will be treated as an “other-than-temporary” impairment.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Repurchases by the Company of its common stock during the quarter ended March 31, 2019 were as follows:


Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January 1, 2019 to January 31, 2019

 

 

 

 

266,563

February 1, 2019 to February 28, 2019

 

 

 

 

266,563

March 1, 2019 to March 31, 2019

 

7,914

 

$14.55

 

7,914

 

258,649


All repurchases were made pursuant to the Company’s previously announced repurchase program.




25



 


ITEM 6. EXHIBITS


Exhibit

 

Description

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 





26



 


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

PRO-DEX, INC.

 

 

 

Dated: May 9, 2019

By:

/s/ Richard L. Van Kirk

 

 

Richard L. Van Kirk

 

 

Chief Executive Officer

(Principal Executive Officer)



Dated: May 9, 2019

By:

/s/ Alisha K. Charlton

 

 

Alisha K. Charlton

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer)







27



 


EXHIBIT INDEX


Exhibit

 

Description

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 






28


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Inside Pro Dex Inc's 10-Q Quarterly Report:

Financial Statements, Disclosures and Schedules

Inside this 10-Q Quarterly Report

Document And Entity Information
Condensed Consolidated Balance Sheets (Parenthetical)
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Basis Of Presentation (Details)
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Composition Of Certain Financial Statement Items (Tables)
Description Of Business
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Income Taxes (Narrative) (Details)
Income Taxes (Reconciliation Of Beginning And Ending Unrecognized Tax Benefits) (Details)
Income Taxes (Tables)
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Major Customers And Suppliers (Narrative) (Details)
Major Customers And Suppliers (Sales) (Details)
Major Customers And Suppliers (Tables)
Net Income (Loss) Per Share
Net Income (Loss) Per Share (Details)
Net Income (Loss) Per Share (Tables)
Notes Payable And Financing Transactions
Notes Payable And Financing Transactions (Details)
Notes Receivable
Notes Receivable (Details)
Share-Based Compensation
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Share-Based Compensation (Summary Of Stock Option Activity) (Details)
Share-Based Compensation (Tables)
Warranty
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Ticker: PDEX
CIK: 788920
Form Type: 10-Q Quarterly Report
Accession Number: 0001553350-19-000497
Submitted to the SEC: Thu May 09 2019 12:01:39 PM EST
Accepted by the SEC: Thu May 09 2019
Period: Sunday, March 31, 2019
Industry: Surgical And Medical Instruments And Apparatus

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