UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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OR
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☐ | 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)
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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)
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Securities registered pursuant to Section 12(b) of the 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 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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒ | Smaller reporting company ☒ |
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 ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: shares of common stock, no par value, as of May 5,November 2, 2022.
PRO-DEX, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2022
TABLE OF CONTENTS
Page | |
PART I — FINANCIAL INFORMATION | |
ITEM 1. FINANCIAL STATEMENTS (Unaudited) | 1 |
Condensed Consolidated Balance Sheets as of | 1 |
Condensed Consolidated Income Statements for the Three | 2 |
Condensed Consolidated Statements of Shareholders’ Equity for the Three | 3 |
Condensed Consolidated Statements of Cash Flows for the | 4 |
Notes to Condensed Consolidated Financial Statements | 6 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26 |
ITEM 4. CONTROLS AND PROCEDURES | 26 |
PART II — OTHER INFORMATION | |
ITEM 1. LEGAL PROCEEDINGS | 27 |
ITEM 1A. RISK FACTORS | 27 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 27 |
ITEM 6. EXHIBITS | 28 |
SIGNATURES | 29 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO-DEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
March 31, 2022 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 4,761 | $ | 3,721 | $ | 2,798 | $ | 849 | ||||||||
Investments | 1,129 | 1,295 | 813 | 755 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $0 and $2 at March 31, 2022 and at June 30, 2021, respectively | 8,680 | 10,933 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $2 and $0 at September 30, 2022 and at June 30, 2022, respectively | 11,045 | 15,384 | ||||||||||||||
Deferred costs | 341 | 193 | 587 | 710 | ||||||||||||
Inventory | 11,866 | 8,437 | 15,664 | 12,678 | ||||||||||||
Prepaid expenses and other current assets | 1,322 | 434 | 928 | 790 | ||||||||||||
Total current assets | 28,099 | 25,013 | 31,835 | 31,166 | ||||||||||||
Land and building, net | 6,366 | 6,437 | 6,319 | 6,343 | ||||||||||||
Equipment and leasehold improvements, net | 4,635 | 3,845 | 4,852 | 4,833 | ||||||||||||
Right of use asset, net | 2,339 | 2,605 | 2,156 | 2,248 | ||||||||||||
Intangibles, net | 162 | 186 | 108 | 118 | ||||||||||||
Deferred income taxes, net | 463 | 463 | 764 | 797 | ||||||||||||
Investments | 1,778 | 1,704 | 1,889 | 1,779 | ||||||||||||
Other assets | 42 | 67 | 42 | 42 | ||||||||||||
Total assets | $ | 43,884 | $ | 40,320 | $ | 47,965 | $ | 47,326 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 3,533 | $ | 2,288 | $ | 3,549 | $ | 3,761 | ||||||||
Accrued expenses | 1,652 | 2,198 | ||||||||||||||
Accrued liabilities | 3,245 | 2,751 | ||||||||||||||
Income taxes payable | 731 | 544 | ||||||||||||||
Deferred revenue | 896 | 150 | 851 | 1,013 | ||||||||||||
Note payable | 1,642 | 1,236 | 3,297 | 3,285 | ||||||||||||
Total current liabilities | 7,723 | 5,872 | 11,673 | 11,354 | ||||||||||||
Lease liability, net of current portion | 2,151 | 2,432 | 1,954 | 2,054 | ||||||||||||
Income taxes payable | 1,164 | 397 | ||||||||||||||
Notes payable, net of current portion | 10,575 | 11,535 | 9,922 | 10,250 | ||||||||||||
Total non-current liabilities | 13,890 | 14,364 | 11,876 | 12,304 | ||||||||||||
Total liabilities | 21,613 | 20,236 | 23,549 | 23,658 | ||||||||||||
Shareholders’ equity: | ||||||||||||||||
Common shares; 0 par value; shares authorized; and shares issued and outstanding at March 31, 2022 and June 30, 2021, respectively | 7,690 | 7,953 | ||||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Common stock; no par value; shares authorized; and shares issued and outstanding at September 30, 2022 and June 30, 2022, respectively | 7,354 | 7,682 | ||||||||||||||
Retained earnings | 14,581 | 12,131 | 17,062 | 15,986 | ||||||||||||
Total shareholders’ equity | 22,271 | 20,084 | 24,416 | 23,668 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 43,884 | $ | 40,320 | $ | 47,965 | $ | 47,326 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1 |
PRO-DEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net sales | $ | 9,265 | $ | 11,739 | $ | 29,426 | $ | 28,594 | $ | 11,087 | $ | 9,988 | ||||||||||||
Cost of sales | 6,407 | 7,354 | 19,737 | 18,138 | 8,131 | 6,560 | ||||||||||||||||||
Gross profit | 2,858 | 4,385 | 9,689 | 10,456 | 2,956 | 3,428 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling expenses | 20 | 136 | 79 | 415 | 53 | 37 | ||||||||||||||||||
General and administrative expenses | 1,145 | 1,280 | 3,402 | 2,922 | 1,024 | 1,093 | ||||||||||||||||||
Loss on disposal of equipment | 14 | — | 14 | — | ||||||||||||||||||||
Research and development costs | 658 | 1,104 | 2,254 | 3,184 | 929 | 980 | ||||||||||||||||||
Total operating expenses | 1,837 | 2,520 | 5,749 | 6,521 | 2,006 | 2,110 | ||||||||||||||||||
Operating income | 950 | 1,318 | ||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest and dividend income | 218 | 24 | ||||||||||||||||||||||
Realized gain on sale of marketable equity investments | 6 | — | ||||||||||||||||||||||
Unrealized gain on marketable equity investments | 250 | 149 | ||||||||||||||||||||||
Interest expense | (130 | ) | (120 | ) | ||||||||||||||||||||
Total other income | 344 | 53 | ||||||||||||||||||||||
Operating income | 1,021 | 1,865 | 3,940 | 3,935 | ||||||||||||||||||||
Interest expense | (112 | ) | (102 | ) | (349 | ) | (231 | ) | ||||||||||||||||
Unrealized gain (loss) on marketable equity investments | (275 | ) | 136 | (427 | ) | 1,442 | ||||||||||||||||||
Interest and other income | — | 41 | 50 | 102 | ||||||||||||||||||||
Gain on sale of investments | — | 783 | — | 795 | ||||||||||||||||||||
Income before income taxes | 634 | 2,723 | 3,214 | 6,043 | 1,294 | 1,371 | ||||||||||||||||||
Income tax expense | (172 | ) | (592 | ) | (764 | ) | (1,004 | ) | ||||||||||||||||
Provision for income taxes | 218 | 307 | ||||||||||||||||||||||
Net income | $ | 462 | $ | 2,131 | $ | 2,450 | $ | 5,039 | $ | 1,076 | $ | 1,064 | ||||||||||||
Basic net income per share: | ||||||||||||||||||||||||
Net income | $ | 0.13 | $ | 0.56 | $ | 0.67 | $ | 1.31 | ||||||||||||||||
Diluted net income per share: | ||||||||||||||||||||||||
Net income | $ | 0.12 | $ | 0.54 | $ | 0.65 | $ | 1.26 | ||||||||||||||||
Basic and diluted net income per share: | ||||||||||||||||||||||||
Basic net income per share | $ | 0.30 | $ | 0.29 | ||||||||||||||||||||
Diluted net income per share | $ | 0.29 | $ | 0.28 | ||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 3,626 | 3,817 | 3,645 | 3,843 | 3,616,392 | 3,651,334 | ||||||||||||||||||
Diluted | 3,749 | 3,966 | 3,774 | 3,998 | 3,694,959 | 3,777,118 | ||||||||||||||||||
Common shares outstanding | 3,618 | 3,701 | 3,618 | 3,701 | 3,606,422 | 3,666,319 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2 |
PRO-DEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Common shares: | ||||||||||||||||||||||||
COMMON STOCK: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 7,886 | $ | 12,621 | $ | 7,953 | $ | 12,752 | $ | 7,682 | $ | 7,953 | ||||||||||||
Share-based compensation expense | 358 | 444 | 932 | 508 | 207 | 300 | ||||||||||||||||||
Stock option exercise | 8 | — | ||||||||||||||||||||||
Share repurchases | (584 | ) | (4,039 | ) | (1,255 | ) | (4,039 | ) | (354 | ) | (95 | ) | ||||||||||||
Shares withheld from common stock issued to pay employee payroll taxes | — | — | — | (259 | ) | |||||||||||||||||||
Exercise of stock options | — | — | — | 39 | ||||||||||||||||||||
Shares withheld from common stock issued to employees to pay employee payroll taxes | (223 | ) | — | |||||||||||||||||||||
ESPP shares issued | 30 | 33 | 60 | 58 | 34 | 30 | ||||||||||||||||||
Balance, at end of period | $ | 7,690 | $ | 9,059 | $ | 7,690 | $ | 9,059 | ||||||||||||||||
Balance, end of period | $ | 7,354 | $ | 8,188 | ||||||||||||||||||||
Retained earnings: | ||||||||||||||||||||||||
RETAINED EARNINGS: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 14,119 | $ | 9,218 | $ | 12,131 | $ | 6,310 | $ | 15,986 | $ | 12,131 | ||||||||||||
Net income | 462 | 2,131 | 2,450 | 5,039 | 1,076 | 1,064 | ||||||||||||||||||
Balance, at end of period | $ | 14,581 | $ | 11,349 | $ | 14,581 | $ | 11,349 | $ | 17,062 | $ | 13,195 | ||||||||||||
Balance, beginning of period | — | — | 20,084 | — | 23668 | — | ||||||||||||||||||
Net income | 462 | 2,131 | 2,450 | 5,039 | 1,076 | 1,064 | ||||||||||||||||||
Total shareholders’ equity | $ | 22,271 | $ | 20,408 | $ | 22,271 | $ | 20,408 | $ | 24,416 | $ | 21,383 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
PRO-DEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 2,450 | $ | 5,039 | $ | 1,076 | $ | 1,064 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 546 | 502 | 193 | 184 | ||||||||||||
Amortization of loan fees | 7 | 46 | ||||||||||||||
Share-based compensation | 932 | 508 | 207 | 300 | ||||||||||||
Unrealized (gain) loss on marketable equity investments | 427 | (1,442 | ) | (250 | ) | (149 | ) | |||||||||
Non-cash lease expense | 10 | 21 | 2 | 6 | ||||||||||||
Amortization of loan fees | 2 | 2 | ||||||||||||||
Gain on sale of investments | — | (795 | ) | (6 | ) | — | ||||||||||
Impairment of long-lived assets | 61 | — | ||||||||||||||
Bad debt expense (recovery) | (2 | ) | 3 | |||||||||||||
Deferred income taxes | 32 | — | ||||||||||||||
Bad debt expense | 2 | 5 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable and other current receivables | 2,255 | (6,769 | ) | |||||||||||||
Accounts receivable and other receivables | 4,337 | 834 | ||||||||||||||
Deferred costs | (148 | ) | (18 | ) | 123 | 9 | ||||||||||
Inventory | (3,429 | ) | (130 | ) | (2,986 | ) | (470 | ) | ||||||||
Prepaid expenses and other assets | (863 | ) | (963 | ) | (138 | ) | 284 | |||||||||
Accounts payable and accrued expenses | 673 | 792 | 273 | 177 | ||||||||||||
Deferred revenue | 746 | — | (162 | ) | 143 | |||||||||||
Income taxes payable | 767 | 403 | 187 | 312 | ||||||||||||
Net cash provided by (used in) operating activities | 4,432 | (2,803 | ) | |||||||||||||
Net cash provided by operating activities | 2,892 | 2,701 | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchases of equipment and improvements | (178 | ) | (848 | ) | ||||||||||||
Purchases of investments | (334 | ) | — | — | (14 | ) | ||||||||||
Purchases of equipment and improvements | (1,270 | ) | (872 | ) | ||||||||||||
Increase in intangibles | — | (12 | ) | |||||||||||||
Proceeds from sale of investments | — | 3,008 | 88 | — | ||||||||||||
Purchase of land and building | — | (6,499 | ) | |||||||||||||
Increase in intangibles | (32 | ) | (12 | ) | ||||||||||||
Net cash used in investing activities | (1,636 | ) | (4,375 | ) | (90 | ) | (874 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Principal payments on notes payable | (1,318 | ) | (306 | ) | ||||||||||||
Proceeds from Minnesota Bank & Trust loans, net of origination fees | 1,000 | — | ||||||||||||||
Proceeds from stock option exercises and ESPP contributions | 42 | 30 | ||||||||||||||
Payments of employee taxes on net issuance of common stock | (223 | ) | — | |||||||||||||
Repurchases of common stock | (1,255 | ) | (4,039 | ) | (354 | ) | (95 | ) | ||||||||
Proceeds from exercise of options and ESPP contributions | 60 | 97 | ||||||||||||||
Payment of employee payroll taxes on net issuance of common stock | — | (259 | ) | |||||||||||||
Proceeds from Minnesota Bank & Trust long-term debt, net of fees | — | 9,139 | ||||||||||||||
Principal payments on notes payable and finance lease | (561 | ) | (307 | ) | ||||||||||||
Net cash provided by (used in) financing activities | (1,756 | ) | 4,631 | |||||||||||||
Net cash used in financing activities | (853 | ) | (371 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,040 | (2,547 | ) | |||||||||||||
Net increase in cash and cash equivalents | 1,949 | 1,456 | ||||||||||||||
Cash and cash equivalents, beginning of period | 3,721 | 6,421 | 849 | 3,721 | ||||||||||||
Cash and cash equivalents, end of period | $ | 4,761 | $ | 3,874 | $ | 2,798 | $ | 5,177 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
PRO-DEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
(In thousands)
Nine Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 311 | $ | 190 | ||||
Income taxes | $ | 1,025 | $ | 1,382 | ||||
Non-cash investing and financing activity: | ||||||||
Cashless stock option exercise | $ | 45 | $ | 4 |
Three Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Non-cash investing and financing activity: | ||||||||
Cashless stock option exercise | $ | — | $ | 45 | ||||
Cash paid during the period for: | ||||||||
Interest | $ | 89 | $ | 121 | ||||
Income taxes, net of refunds | $ | 241 | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
PRO-DEX, INC. AND SUBSIDIAIRIESSUBSIDIARIES
NOTES TO CONSDENSEDCONDENSED 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 financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.2022. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2021.2022.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, to remove certain exceptions related to the approach for intraperiod tax allocation, recognition of deferred tax liabilities for outside basis differences and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for us beginning with fiscal year 2022. The adoption of the amendments has not had a material impact on our consolidated financial statements.
NOTE 2. DESCRIPTION OF BUSINESS
We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.
In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The condensed consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations.
NOTE 3.REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR CORRECTION OF IMMATERIAL ERRORS
We failed to timely adopt ASU 2016-01 – Accounting for Financial Instruments – Classification and Measurement, which states in part that changes in fair value of equity investments must be recognized in net income. We have completed an evaluation of the quantitative and qualitative impact of this error in our historical financial statements and concluded that our historical financial statements are not materially misstated. We concluded that our historical financial statements are not materially misstated for several reasons, including the fact that the cumulative three-year error had a negative impact to historical net income in the amount of $61,000, an amount we deem immaterial, as well as the fact that the amounts did not contain a calculation error but rather amounts were presented on an incorrect line item within the financial statements. We also considered the fact that this error did not impact cash or operating income for any historical period, which we believe is important to our investors. Accordingly, the prior year financial statements have been revised to reflect the impact of ASU 2016-1. The revised classification and reported values of our unrealized gains (losses) on marketable equity investments as accounted for under ASU 2016-01 are included in the condensed consolidated financial statements herein. The impact to net income for the three months ended March 31, 2021, was an increase of $136,000 with a corresponding decrease in unrealized gain on marketable equity securities of $136,000, previously presented in other comprehensive income (loss). The revision resulted in an increase to both basic and diluted earnings per share for the three months ended March 31, 2021, of $0.04. The impact to net income for the nine months ended March 31, 2021, was an increase of $1.4 million with a corresponding decrease in unrealized gain on marketable equity securities of $1.4 million, previously presented in other comprehensive income (loss). The revision resulted in an increase to basic earnings per share of $0.37 and diluted earnings per share of $0.36 for the nine months ended March 31, 2021. As of June 30, 2021, the revision reclassified the remaining accumulated other comprehensive loss of $215,000 to retained earnings.
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NOTE 4. NET SALES
The following table presents the disaggregation of net sales by revenue recognition model (in thousands):
Schedule of disaggregation of net sales | ||||||||||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | Three months ended September 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||
Over-time revenue recognition | $ | 549 | $ | 55 | $ | 859 | $ | 185 | $ | 907 | $ | 196 | ||||||||||||
Point-in-time revenue recognition | 8,716 | 11,684 | 28,567 | 28,409 | 10,180 | 9,792 | ||||||||||||||||||
Total net sales | $ | 9,265 | $ | 11,739 | $ | 29,426 | $ | 28,594 | $ | 11,087 | $ | 9,988 |
The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs incurred compared to the estimated total costs upon completion. During the three months ended September 30, 2022 and 2021, we recorded $551,000 and $0, respectively, of revenue that had been included in deferred revenue in the prior year. The revenue recognized from the contract liabilities consisted of satisfying our performance obligations during the normal course of business. Our entire deferred revenue balance of $896,000851,000 at March 31,September 30, 2022, is currently expected to be recognized in the next 12-month period.12-months.
6 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
The following tables summarize our contract assets and liability balances (in thousands):
Schedule of contract assets and liability | ||||||||
As of and for the Three Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Contract assets beginning balance | $ | 710 | $ | 212 | ||||
Expenses incurred during the year | 333 | 96 | ||||||
Amounts reclassified to cost of sales | (448 | ) | (111 | ) | ||||
Amounts allocated to discounts for standalone selling price | (8 | ) | (12 | ) | ||||
Contract assets ending balance | $ | 587 | $ | 185 |
As of and for the Three Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Contract liabilities beginning balance | $ | 1,013 | $ | 150 | ||||
Payments received from customers | 389 | 143 | ||||||
Amounts reclassified to revenue | (551 | ) | — | |||||
Contract liabilities ending balance | $ | 851 | $ | 293 |
NOTE 5.4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):
Schedule of inventory | ||||||||
March 31, 2022 | June 30, 2021 | |||||||
Raw materials /purchased components | $ | 6,184 | $ | 3,967 | ||||
Work in process | 2,516 | 2,218 | ||||||
Sub-assemblies/finished components | 2,655 | 1,738 | ||||||
Finished goods | 511 | 514 | ||||||
Total inventory | $ | 11,866 | $ | 8,437 |
Investments
Investments are stated at fair market value and consist of the following (in thousands):
Schedule of investments | ||||||||||||||||
March 31, 2022 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||||||||
Marketable equity securities - short-term | $ | 1,129 | $ | 1,295 | $ | 813 | $ | 755 | ||||||||
Marketable equity securities - long-term | 1,778 | 1,704 | 1,889 | 1,779 | ||||||||||||
Total marketable equity securities | $ | 2,907 | $ | 2,999 | $ | 2,702 | $ | 2,534 |
Investments at March 31,September 30, 2022 and June 30, 2021,2022 had an aggregate cost basis of $3,538,0002,714,000 and $3,204,0002,796,000, respectively. TheWe classified certain investments as long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities we may not be able to sell our position within one year. At March 31,September 30, 2022, the investments included net unrealized losses of $632,00012,000 (gross(gross unrealized losses of $646,000325,000 offset by gross unrealized gains of $14,000313,000). At June 30, 2021,2022, the investments included net unrealized losses of $215,000262,000 (gross unrealized losses of $386,000369,000 offset by gross unrealized gains of $171,000107,000).
Of the total marketable equity securities at March 31,September 30, 2022 and June 30, 2021,2022, $1,058,000813,000 and $1,244,000755,000, respectively, represent an investment in the common stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. Another of our Board members is employed by Air T, Inc. as its Chief of Staff. The shares were purchased through 10b5-1 Plans, that, in accordance with our internal policies regarding the approval of related-party transactions, were approved by our then three Board members that are not affiliated with Air T, Inc.
7 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr. Van Kirk, and two non-management directors, Mr. Cabillot and Mr. Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc.
Inventory
LandInventory is stated at the lower of cost (first-in, first-out) or net realizable value and building
Land and building consistconsists of the following (in thousands):
Schedule of Capital Leased Assets | ||||||||
March 31, 2022 | June 30, 2021 | |||||||
Land | $ | 3,684 | $ | 3,684 | ||||
Building | 2,815 | 2,815 | ||||||
Total | 6,499 | 6,499 | ||||||
Less: accumulated depreciation | (133 | ) | (62 | ) | ||||
Land and building | $ | 6,366 | $ | 6,437 | ||||
On November 6, 2020, we acquired the Franklin Property for a total purchase price of $6.5 million, of which we paid $1.3 million in cash and the balance of $5.2 we financed through Minnesota Bank & Trust (“MBT”) (See Note 11). We substantially completed the build-out of the property in the first quarter of this fiscal year. Currently, we are actively engaged in various verification and validation activities and we moved certain of our employees into the new building during the third quarter of this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years.
Schedule of inventory | ||||||||
September 30, 2022 | June 30, 2022 | |||||||
Raw materials/purchased components | $ | 7,641 | $ | 6,323 | ||||
Work in process | 4,104 | 3,463 | ||||||
Sub-assemblies/finished components | 2,183 | 2,118 | ||||||
Finished goods | 1,736 | 774 | ||||||
Total inventory | $ | 15,664 | $ | 12,678 |
Intangibles
Intangibles consist of the following (in thousands):
Schedule of intangibles | ||||||||||||||||
March 31, 2022 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||||||||
Patent-related costs | $ | 247 | $ | 260 | $ | 208 | $ | 208 | ||||||||
Less accumulated amortization | (85 | ) | (74 | ) | (100 | ) | (90 | ) | ||||||||
$ | 162 | $ | 186 | $ | 108 | $ | 118 |
Patent-related costs consist of legal fees incurred in connection with both patent applications and a patent issuance, and will be amortized over the estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent. Since we do not know when, or if, our patent applications will be issued, the futureFuture amortization expense is not predictable.estimated to be $27,000 for the balance of fiscal 2023 and annually through fiscal 2026. All remaining costs are expected to be fully amortized within 3 years and nine months.
NOTE 6.5. WARRANTY
The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. As of March 31,September 30, 2022 and June 30, 2021,2022, the warranty reserve amounted to $328,000366,000 and $221,000340,000, respectively. Warranty expenses are included in cost of sales in the accompanying income statements.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, 2022 and 2021, was $102,000 and $77,000, respectively, and for the nine months ended March 31, 2022 and 2021, was $170,000 and $330,000, respectively.
8 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Information regarding the accrual for warranty costs for the three and nine months ended March 31,September 30, 2022 and 2021 are as follows (in thousands):
Schedule of Product Warranty Liability | ||||||||
As of and for the Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Beginning balance | $ | 255 | $ | 347 | ||||
Accruals during the period | 52 | 57 | ||||||
Changes in estimates of prior period warranty accruals | 50 | 20 | ||||||
Warranty amortization and utilization | (29 | ) | (116 | ) | ||||
Ending balance | $ | 328 | $ | 308 |
Schedule of accrual warranty costs | ||||||||||||||||
As of and for the Nine Months Ended March 31, | As of and for the Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Beginning balance | $ | 221 | $ | 213 | $ | 340 | $ | 221 | ||||||||
Accruals during the period | 117 | 311 | 54 | 32 | ||||||||||||
Changes in estimates of prior period warranty accruals | 53 | 19 | 14 | (8 | ) | |||||||||||
Warranty amortization and utilization | (63 | ) | (235 | ) | ||||||||||||
Warranty amortization/utilization | (42 | ) | (13 | ) | ||||||||||||
Ending balance | $ | 328 | $ | 308 | $ | 366 | $ | 232 |
The Company calculatesWe calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average number of common shares outstanding used in the calculation of dilutedDiluted income per share reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.
The following table presents reconciliations of the numerators and denominators of the basic and diluted earningsincome per share computations for net income.computations. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):
Schedule of reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss) | ||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Basic: | ||||||||||||||||
Net income | $ | 462 | $ | 2,131 | $ | 2,450 | $ | 5,039 | ||||||||
Weighted average shares outstanding | 3,626 | 3,817 | 3,645 | 3,843 | ||||||||||||
Basic income per share | $ | 0.13 | $ | 0.56 | $ | 0.67 | $ | 1.31 | ||||||||
Diluted: | ||||||||||||||||
Net income | $ | 462 | $ | 2,131 | $ | 2,450 | $ | 5,039 | ||||||||
Weighted average shares outstanding | 3,626 | 3,817 | 3,645 | 3,843 | ||||||||||||
Effect of dilutive securities | 123 | 149 | 129 | 155 | ||||||||||||
Weighted average shares used in calculation of diluted earnings per share | 3,749 | 3,966 | 3,774 | 3,998 | ||||||||||||
Diluted income per share | $ | 0.12 | $ | 0.54 | $ | 0.65 | $ | 1.26 |
Schedule of weighted average shares outstanding calculation of basic and diluted per share | ||||||||
Three Months Ended September 30, | ||||||||
2021 | 2021 | |||||||
Basic: | ||||||||
Net income | $ | 1,076 | $ | 1,064 | ||||
Weighted-average shares outstanding | 3,616 | 3,651 | ||||||
Basic earnings per share | $ | 0.30 | $ | 0.29 | ||||
Diluted: | ||||||||
Net income | $ | 1,076 | $ | 1,064 | ||||
Weighted-average shares outstanding | 3,616 | 3,651 | ||||||
Effect of dilutive securities | 79 | 126 | ||||||
Weighted-average shares used in calculation of diluted earnings per share | 3,695 | 3,777 | ||||||
Diluted earnings per share | $ | 0.29 | $ | 0.28 |
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NOTE 8.7. INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.bases. 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 or loss, with some consideration given to our estimates of future taxable income or loss by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable.
We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of March 31,September 30, 2022 and 2021, we recognized accrued interest of $70,0005,000 and $51,000, respectively, related to unrecognized tax benefits. Our effective tax rate for the three months ended September 30, 2022 and 2021, is NaN17 interest or penalties were% and 22%, respectively. The current year effective tax rate is less than the prior year rate due primarily to a tax benefit recognized as a result of June 30, 2021, since we had sufficient tax attributes availablethe common stock awarded to fully offset any potential assessment of additional tax.our employees under previously granted performance awards (see Note 8).
9 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2018,2019 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2017,2018 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Through June 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and Director’sDirectors’ Stock Option Plan were terminated in June 2014 and December 2014, respectively.
In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to March 31,September 30, 2022, performance awards and non-qualified stock options have been granted under the 2016 Equity Incentive Plan.
Former Stock Option Plans
NoThere were stock options were granted under the Former Stock Option Plans during the three or nine months ended March 31,September 30, 2022 and 2021.
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As of March 31,September 30, 2022, there was unrecognized compensation cost under theour Former Stock Option Plans as all outstanding stock options under those plans are fully vested.As of March 31,September 30, 2022, thethere were options outstanding under theour Former Stock Option Plans at a weighted-average exercise price of $ per share. These outstanding options had a weighted averageweighted-average remaining contractual life of years and an intrinsic value of $ . The following is a summary of stock option activity forDuring the nine monthsfirst quarter ended March 31,September 30, 2022 and 2021:2021, and options under our Former Stock Option Plans were exercised, at exercise prices of $ and $ per share, respectively.
Share-based Payment Arrangement, Option, Activity | ||||||||||||||||
Nine Months Ended March 31, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Number of Shares | Weighted-Average Exercise Price | Number of Shares | Weighted-Average Exercise Price | |||||||||||||
Outstanding at July 1, | 31,500 | $ | 1.81 | 54,000 | $ | 1.86 | ||||||||||
Options granted | — | — | — | — | ||||||||||||
Options exercised | (25,000 | ) | 1.80 | (22,500 | ) | 1.94 | ||||||||||
Options forfeited | — | — | — | — | ||||||||||||
Outstanding at end of period | 6,500 | $ | 1.82 | 31,500 | $ | 1.81 | ||||||||||
Stock Options Exercisable at March 31, | 6,500 | $ | 1.82 | 31,500 | $ | 1.81 |
Performance Awards
In December 2017, the Compensation Committee of our Board of Directors granted other employees. The weighted averageweighted-average fair value of the performance awards reallocated in 2020 was $ , calculated using the weighted averageweighted-average fair market value for each award, using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated an additional previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2021 was $ , calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During the three months ended March 31, 2022 and 2021, weWe recorded share-based compensation expense of $ and $, for the three months ended September 30, 2022 and 2021, respectively, related to outstanding performance awards. During the nine months ended March 31, 2022 and 2021, we recorded share-based compensation expense of $ and $, respectively, related to outstandingthese performance awards. On March 31,September 30, 2022, there was approximately $ of unrecognized compensation cost related to these non-vested performance awards, which is expected to be expensed over the weighted-average period of years.
On July 1, 2020,2022, it was determined by the Compensation Committee of our Board of Directors that the secondvesting of five tranches of performance awards had been achieved and participants were awardedfor shares of common stock.stock had been achieved. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued shares and paid $ of participant-related payroll tax liabilities.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Non-Qualified Stock Options
In December 2020, the Compensation Committee of our Board of Directors granted Whether anyThe vesting of these stock options vest, and the amount that does vest, is tied to
In February 2021, the Compensation Committee of our Board of Directors granted Whether anyThe vesting of these stock options vest, and the amount that does vest, is tied to the Of these 62,000 stock options, 4,250 were forfeited and the remaining 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements. We recorded compensation expense of $59,000 foragreements and the three and nine months ended March 31, 2021, related to these options.required service periods were already satisfied. The weightedweighted-average fair value of the stock option awards granted was $3.16,$ , calculated using a Monte Carlo simulation. non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan.
Employee Stock Purchase Plan
In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our 2014 Annual Meeting.. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous 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. The ESPP was approved by our shareholders at our 2014 Annual Meeting.
During the three monthsfirst quarters ended March 31,September 30, 2022 and 2021, we recorded ESPP share-based compensation expense in the amount of $ and $, respectively, and 1,446 and 1,192 shares were purchased, respectively, under the ESPP and allocated to employees based upon their contributions at discount prices of $21.1113.52 and $27.1226.17, respectively, per share. During the nine months ended March 31, 2022 and 2021, we recorded ESPP share-based compensation expense in the amount of $and $, respectively. On a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of sharesshares. During the three months ended September 30, 2022 and 2021, we recorded stock compensation expense in the amount of our common stock.$ and $ , respectively, relating to the ESPP.
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 10.9. MAJOR CUSTOMERS AND& SUPPLIERS
Information with respect to customers that accounted for sales in excess of 10%10% of our total sales in either of the three-month and the nine-month periods ended March 31,September 30, 2022 and 2021 is as follows (in thousands, except percentages):
Schedule of sales by major customers | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||||||||||||
Net sales | $ | 9,265 | 100 | % | $ | 11,739 | 100 | % | ||||||||||||||||||||||||
Total revenue | $ | 11,087 | 100 | % | $ | 9,988 | 100 | % | ||||||||||||||||||||||||
Customer concentration: | ||||||||||||||||||||||||||||||||
Customer 1 | $ | 5,007 | 54 | % | $ | 5,238 | 45 | % | $ | 7,481 | 68 | % | $ | 6,991 | 70 | % | ||||||||||||||||
Customer 2 | 2,429 | 26 | % | 4,514 | 38 | % | 2,156 | 19 | % | 879 | 9 | % | ||||||||||||||||||||
Total | $ | 7,436 | 80 | % | $ | 9,752 | 83 | % | $ | 9,637 | 87 | % | $ | 7,870 | 79 | % |
Nine Months Ended March 31, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
Net sales | $ | 29,426 | 100 | % | $ | 28,594 | 100 | % | ||||||||
Customer concentration: | ||||||||||||||||
Customer 1 | $ | 18,721 | 64 | % | $ | 16,217 | 57 | % | ||||||||
Customer 2 | 4,617 | 16 | % | 7,906 | 28 | % | ||||||||||
Total | $ | 23,338 | 80 | % | $ | 24,123 | 85 | % |
Information with respect to accounts receivable from those customers whothat comprised more than 10%10% of our gross accounts receivable at either March 31,September 30, 2022 orand June 30, 2021,2022 is as follows (in thousands, except percentages):
Schedule of accounts receivable, inventory purchases and accounts payable of major customers and suppliers | ||||||||||||||||||||||||||||||||
Schedule of accounts receivable of major customers | ||||||||||||||||||||||||||||||||
March 31, 2022 | June 30, 2021 | September 30, 2022 | June 30, 2022 | |||||||||||||||||||||||||||||
Total gross accounts receivable | $ | 8,680 | 100 | % | $ | 10,935 | 100 | % | $ | 11,047 | 100 | % | $ | 15,384 | 100 | % | ||||||||||||||||
Customer concentration: | ||||||||||||||||||||||||||||||||
Customer 1 | $ | 5,029 | 58 | % | $ | 6,666 | 61 | % | $ | 9,055 | 82 | % | $ | 11,551 | 75 | % | ||||||||||||||||
Customer 2 | 2,761 | 32 | % | 3,710 | 34 | % | 1,890 | 17 | % | 2,152 | 14 | % | ||||||||||||||||||||
Total | $ | 7,790 | 90 | % | $ | 10,376 | 95 | % | $ | 10,945 | 99 | % | $ | 13,703 | 89 | % |
During the three and nine months ended March 31,September 30, 2022 and 2021, we had three and four suppliers respectively, accountingthat each accounted for 10% or more than 10% of total inventory purchases. During the three and nine months ended March 31, 2021, we had two suppliers that accounted for more than 10% of our total inventory purchases. Amounts owed to the fiscal 2022 significant suppliers who comprised more than 10% of total account payable at March 31,September 30, 2022 totaled $970,000, $266,000 and $368,000, respectively, and at June 30, 2021, is as follows (in thousands, except percentages).2022 totaled $721,000, $430,000 and $372,000, respectively.
March 31, 2022 | June 30, 2021 | |||||||||||||||
Total accounts payable | $ | 3,533 | 100 | % | $ | 2,288 | 100 | % | ||||||||
Supplier concentration: | ||||||||||||||||
Supplier 1 | $ | 464 | 13 | % | $ | 225 | 10 | % | ||||||||
Supplier 2 | 631 | 18 | % | 206 | 9 | % | ||||||||||
Total | $ | 1,095 | 31 | % | $ | 431 | 19 | % |
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NOTE 11.10. NOTES PAYABLE AND FINANCING TRANSACTIONS
Minnesota Bank & Trust (“MBT”)
On November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of approximately $5.2$5.2 million (the “Property Loan”) pursuant to a Loan Agreement, dated as of the Closing Date, between PDEX Franklin and MBT (the “Property Loan Agreement”) and corresponding Term Note (the “Property Note”) issued by PDEX Franklin in favor of MBT on the Closing Date. The Property Loan is secured by the Franklin Property pursuant to a Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture Filing in favor of MBT (the “Deed”) and by an Assignment of Leases and Rents by PDEX Franklin in favor of MBT (the “Rents Assignment”). We paid loan origination fees to MBT on the Closing Date in the amount of $26,037.$26,037.
12 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
The Property Loan bears interest at a fixed rate of 3.55%3.55% per annum, which is subject to a 3% increase upon an event of default. Accrued interest was paidis payable monthly beginning on December 1, 2020, and both principal and interest in the amount of approximately $30,000 are due and payable on the first day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time a balloon payment in the amount of $3.1 million is due. Any prepayment of the Property Loan (other than monthly scheduled interest and principal payments), is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first or second year, 3% of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount prepaid for any prepayment made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during the seventh or eighth year. The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties, covenants, and events of default that are customary for a loan of this type. The balance owed on the Property Loan at March 31,September 30, 2022 is $4,981,000.was $4,889,000.
On the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”), providing for a $7,525,000 amended and restated term loan (the “Term Loan A”), a $1,000,000 term loan (the “Term Loan B”), and a $2,000,000 amended and restated revolving loan (the “Revolving Loan” and, together with the Term Loan A and the Term Loan B, collectively, the “Loans”), evidenced by an Amended and Restated Term Note A (“Term Note A”), a Term Note B, and an Amended and Restated Revolving Credit Note (the “Revolving Note”) made by us in favor of MBT. The Loans are secured by substantially all of the Company’s assets pursuant to a Security Agreement entered into on September 6, 2018 between the Company and MBT. The Term Note A had an outstanding principal balance of $3,770,331 as of the Closing Date and could be borrowed against through May 30, 2021 (the “Commitment Period”). During the third quarter ended March 31, 2021, we borrowed an additional $3,000,000 against Term Note A for the purpose of repurchasing shares of our common stock. The Term Note B had a zero balance as of the Closing Date and we borrowed the full $1,000,000$1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin Property.
The Term Loan A matures on November 1, 2027, and bears interest at a fixed rate of 3.84% per annum. Initial payments on the Term Loan A of interest only were due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan A of approximately $97,000 plus any additional accrued and unpaid interest through the date of payment. The balance owed on Term Loan A as of March 31,September 30, 2022, iswas $6,026,0005,556,000.
The Term Loan B matures on November 1, 2027, and bears interest at a fixed rate of 3.84% per annum. Initial payments on the Term Loan B of interest only wereare due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan B of approximately $15,000, plus any additional accrued and unpaid interest through the date of payment. As of March 31, 2021, we had drawn fully against Term Note B and the balance outstanding on Term Note B was $897,000827,000 on March 31,September 30, 2022.
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The Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2023, unless earlier terminated pursuant to its terms, and bears interest at an annual rate equal to the greater of (a) 2.75% or (b) the prime rate minus 0.5% as published in the Money Rates section of the Wall Street Journal. Commencing on the first day of each month after we initially borrow against the Revolving Loan and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of payment. Any principal on the Revolving Loan that is not previously prepaid shall be due and payable in full on the maturity date (or earlier termination of the Revolving Loan). No amounts have beenThe full $2,000,000 was drawn againstand outstanding on the Revolving Loan.Loan as of September 30, 2022.
Any payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5%5% of the overdue amount. Upon the occurrence and during the continuance of an event of default, the interest rate of all Loans will be increased by 3%3% and MBT may, at its option, declare the Loans immediately due and payable in full.
The Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type.
13 |
PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 12.11. COMMON STOCK
Share Repurchase Program
In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the three and nine monthsquarter ended March 31,September 30, 2022, we repurchased and shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ and $, respectively. During the three and nine months ended March 31, 2021, we repurchased shares at an aggregate cost, inclusive of fees under the Plan,plan, of $ . During the quarter ended September 30, 2021, we repurchased shares at an aggregate cost, inclusive of fees under the plan, of $ . On a cumulative basis since implementation of the share repurchase program in 2013, we have repurchased a total of shares under the share repurchase programprograms at an aggregate cost, inclusive of fees, of $ million. All repurchases under the 10b5-1 Plans were administered through an independent broker. shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor
At The Market Offering Agreement
In December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM 10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, and the ATM 10b5-1 Plan was terminated on February 11, 2021, but future sales may occur at the direction of our Board in accordance with the terms of the ATM Agreement.
NOTE 13.12. LEASES
Effective July 1, 2019, we adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date. In addition, we elected the practical expedient that allowed us to carry forward the historical lease classification of our sole operating lease for our corporate office, which includes our manufacturing and research and development facilities. Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) asset and corresponding operating lease liability each in the amount of $3.3 million.
Our operating lease ROUright-of-use asset and long-term liability are presented separately on our condensed consolidated balance sheet. The current portion of our operating lease liability as of March 31,September 30, 2022, in the amount of $370,000388,000, is presented within accrued expenses on the condensed consolidated balance sheet.
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As of March 31, 2022, the maturity of our lease liability is as follows:
Schedule of Maturities of Lease Liabilities | |||||
Operating Lease | |||||
Fiscal Year: | |||||
2022 | $ | 123 | |||
2023 | 504 | ||||
2024 | 519 | ||||
2025 | 535 | ||||
2026 | 551 | ||||
Thereafter | 710 | ||||
Total lease payments | 2,942 | ||||
Less imputed interest: | (421 | ) | |||
Total | $ | 2,521 |
As of March 31,September 30, 2022, our operating lease has a remaining lease term of five 5years and six months and an imputed interest rate of 5.53%. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2022, was $123,000 and $366,000, respectively. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2021, wasSeptember 30, 2022, excluding $120,00012,000 and $355,000, respectively.paid for common area maintenance charges.
As of September 30, 2022, the maturity of our lease liability is as follows (in thousands):
Schedule of Maturities of Lease Liabilities | |||||
Operating Lease | |||||
Fiscal Year: | |||||
2023 | $ | 381 | |||
2024 | 519 | ||||
2025 | 535 | ||||
2026 | 551 | ||||
2027 | 567 | ||||
Thereafter | 143 | ||||
Total lease payments | 2,696 | ||||
Less imputed interest | (353 | ) | |||
Total | $ | 2,343 |
NOTE 14.13. COMMITMENTS AND CONTINGENCIES
Legal Matters
On August 24, 2021, one of our customers, through its counsel, sent notice that it is seeking indemnification from us regarding a pending complaint filed by a third-party claiming patent infringement on one of the products that we manufacture for this customer. As of the date of this filing, our position is that there is no infringement and/or that the patent at issue is invalid. We have not accrued any amounts related to this claim and we intend to defend the claim, which we believe may take two years or more to resolve.
On October 12, 2021, we received a letter from an attorney representing a former employee, alleging, among other things, wrongful termination, failure to accommodate, and intentional infliction of emotional distress. The parties settled this matter upon the conclusion of a mediation hearing held on February 23, 2022.
In addition to the above matters, we arebe involved from time to time a party to variousin legal proceedings arising either in the ordinary course of our business or incidental to our business. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material andor adverse.
NOTE 15. SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of this filing. There were no subsequent events that require disclosure.
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,September 30, 2022 and 2021. 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, including uncertainties related to the COVID-19 pandemic, 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, the impact of the COVID-19 pandemic on our suppliers, customers and us, 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, 2021.2022.
We specialize in the design, development, and manufacture of autoclavable, battery-powered and electric, multi-functionpowered rotary drive surgical drivers and shaversinstruments used primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) 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 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.govand 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 theour fiscal year ending June 30, 2022,2023, 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.quarter.
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Critical Accounting Estimates and Judgments
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.U.S. GAAP. 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.
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,September 30, 2022, 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 theour fiscal year ended June 30, 2021.2022.
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 by us 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. During the first quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply their surgical handpieces to them through calendar 2025.
Simultaneously, we are working to build top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive torque-limiting software has been very well received in the CMF and thoracic markets. Additionally, we have other significant engineering projects under way described more fully below under “Results of Operations.”Operations”.
In November 2020, we purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth, including anticipated expanded capacity for the manufacture of batteries and new products. We substantially completed the build-out of the property induring fiscal 2022, we received FDA authorization to commence manufacturing activities during the first quarter of this fiscal year. Currently,2023, and we are actively engaged incurrently performing various verification and validation activities for both equipment and processes, which includes the validation of our new clean room. We expect that we moved certain employees intowill begin operations in the new building facility during the third quarter of this fiscal year.
In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, expanding our manufacturing capacity with the addition of the Franklin Property, investing in research and development activities to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting software, expansion of our manufacturing capacity through the commencement of operations at the Franklin Property, and promoting active product development proposals to new and existing customers for both orthopedic shavers and screw drivers for a multitude of surgical applications, and other medical devices, while monitoring closely the progress of all these individual endeavors. Our investments in research and development have historically increased disproportionately to our growth in revenue and we anticipate this may continue in future periods. These expenditures are being made in an effort to release new products and garner new customer relationships. While we expect revenue growth in the future, it may not be a consistent trajectory but rather periods of incremental growth that current expenditures are helping to create. However, there can be no assurance that we will be successful in any of these objectives.
COVID-19 Pandemic
We have adjusted certain policies and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time, in order to effectively manage our business during the COVID-19 pandemic including:and to keep our employees safe. These measures have changed over time and continue to change as our specific circumstances change.
While we have yet to see any significant decline in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders. We provide our largest customer with a device used primarily in elective surgeries and although this customer has not requested a reduction or delay to their planned shipments, if this pandemic continues to adversely impact the United States and other markets where our products are sold, coupled with anythe potential for recommended deferrals of elective procedures by governments and other authorities, we would expect to see a decline in demand from certain of our customers, including our principal customer.
We are focused on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers. We are supporting our customers according to their priorities and working with them to the degree that we can offer relief in the form of delayed shipments. We are focused on continuity of supply by working with our suppliers, some of whom have delivered our orders late and are quoting longer lead times.
While the COVID-19 pandemic has not materially adversely affected our financial results and business during calendar 2021,During fiscal 2022, we began to see some challenges in our supply chain in the form of delayed shipments, longer lead times, higher prices, and surcharges, much of which our suppliers indicate hashave been caused by the COVID-19 pandemic. As previously disclosed, during early calendar 2022, we saw these conditions persist and worsen such that we expected them to negatively impact our financial performance in the third quarter and possibly the fourth quarter of fiscal 2022, reflected as a reduction in net sales. While we did see a decline in our third quarter sales compared to sales during our fiscal first and second quarter, we wereWe have largely been able to largely mitigate our biggest supply chain concerns by sourcing replacement chips through alternative suppliers, albeit at much higher prices, for many of our printed circuit board assemblies. In so doing, our cost of sales increased during the second half of fiscal 2022 and thus far in fiscal 2023. We continue to implement plans and processes to mitigate these challenges that many manufacturers similarly face. Our long-term prospects remain positive, and we believe these challenges will negatively impact us only in the short-term.
DescriptionResults of Business Operations
The following tables set forth results from continuing operations for the three months ended September 30, 2022 and 2021 (in thousands, except percentages):
Three Months Ended September 30, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Dollars in thousands | ||||||||||||||||
% of Net Sales | % of Net Sales | |||||||||||||||
Net sales | $ | 11,087 | 100 | % | $ | 9,988 | 100 | % | ||||||||
Cost of sales | 8,131 | 73 | % | 6,560 | 66 | % | ||||||||||
Gross profit | 2,956 | 27 | % | 3,428 | 34 | % | ||||||||||
Selling expenses | 53 | — | 37 | — | ||||||||||||
General and administrative expenses | 1,024 | 9 | % | 1,093 | 11 | % | ||||||||||
Research and development costs | 929 | 8 | % | 980 | 10 | % | ||||||||||
2,006 | 18 | % | 2,110 | 21 | % | |||||||||||
Operating income | 950 | 9 | % | 1,318 | 13 | % | ||||||||||
Other income, net | 344 | 3 | % | 53 | 1 | % | ||||||||||
Income before income taxes | 1,294 | 12 | % | 1,371 | 14 | % | ||||||||||
Provision for income taxes | 218 | 2 | % | 307 | 3 | % | ||||||||||
Net income | $ | 1,076 | 10 | % | $ | 1,064 | 11 | % |
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Revenue
The majority of our revenue is derived from designing, developing, and manufacturing surgical devicesdevices. We continue to sell our rotary air motors for theindustrial and scientific applications, but our focus remains in medical device industry.devices. The proportion of total sales by type is as follows (in thousands, except percentages):
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
% of Revenue | % of Revenue | % of Revenue | % of Revenue | |||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||
Medical device products | $ | 6,527 | 70 | % | $ | 10,645 | 91 | % | $ | 23,199 | 79 | % | $ | 23,757 | 83 | % | ||||||||||||||||
Industrial and scientific | 321 | 4 | % | 208 | 2 | % | 775 | 3 | % | 593 | 2 | % | ||||||||||||||||||||
Dental and component | 203 | 2 | % | 24 | — | 348 | 1 | % | 98 | 1 | % | |||||||||||||||||||||
NRE & Proto-type | 549 | 6 | % | 55 | — | 859 | 3 | % | 185 | — | ||||||||||||||||||||||
Repairs and other | 1,665 | 18 | % | 807 | 7 | % | 4,245 | 14 | % | 3,961 | 14 | % | ||||||||||||||||||||
$ | 9,265 | 100 | % | $ | 11,739 | 100 | % | $ | 29,426 | 100 | % | $ | 28,594 | 100 | % |
Three Months Ended September 30, | Increase (Decrease) From | |||||||||||||||||||
2022 | 2021 | 2021 To 2022 | ||||||||||||||||||
Dollars in thousands | ||||||||||||||||||||
% of Net Sales | % of Net Sales | |||||||||||||||||||
Net sales: | ||||||||||||||||||||
Medical device | $ | 7,887 | 71 | % | $ | 8,284 | 83 | % | (5 | %) | ||||||||||
Industrial and scientific | 224 | 2 | % | 216 | 2 | % | 4 | % | ||||||||||||
Dental and component | 103 | 1 | % | 62 | 1 | % | 66 | % | ||||||||||||
NRE & proto-types | 907 | 8 | % | 196 | 2 | % | 363 | % | ||||||||||||
Repairs | 2,252 | 20 | % | 1,459 | 14 | % | 54 | % | ||||||||||||
Discounts and other | (286 | ) | (2 | %) | (229 | ) | (2 | %) | 25 | % | ||||||||||
$ | 11,087 | 100 | % | $ | 9,988 | 100 | % | 11 | % |
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 are our industrial products.facility. Details of our medical device sales by type is as follows (in thousands, except percentages):
Three Months Ended September 30, | Increase (Decrease) From | |||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | 2022 | 2021 | 2021 To 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | Dollars in thousands | ||||||||||||||||||||||||||||||||||||||||||||||||
% of Total | % of Total | % of Total | % of Total | % of Med Device Sales | % of Med Device Sales | |||||||||||||||||||||||||||||||||||||||||||||||
Medical device sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Orthopedic | $ | 3,233 | 50 | % | $ | 4,534 | 43 | % | $ | 14,270 | 62 | % | $ | 12,664 | 53 | % | $ | 5,635 | 72 | % | $ | 5,706 | 69 | % | (1 | %) | ||||||||||||||||||||||||||
CMF | 2,093 | 32 | % | 2,066 | 19 | % | 7,084 | 30 | % | 4,661 | 20 | % | 2,083 | 26 | % | 2,387 | 29 | % | (13 | %) | ||||||||||||||||||||||||||||||||
Thoracic | 1,201 | 18 | % | 4,045 | 38 | % | 1,845 | 8 | % | 6,432 | 27 | % | 169 | 2 | % | 191 | 2 | % | (12 | %) | ||||||||||||||||||||||||||||||||
Total | $ | 6,527 | 100 | % | $ | 10,645 | 100 | % | $ | 23,199 | 100 | % | $ | 23,757 | 100 | % | ||||||||||||||||||||||||||||||||||||
$ | 7,887 | 100 | % | $ | 8,284 | 100 | % | (5 | %) |
Sales of ourOur medical device productsrevenue decreased $4.1$0.4 million, or 39%5%, and $558,000, or 2%, respectively, forin the three and nine months ended March 31, 2022, respectively,first quarter of fiscal 2023 compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer, included in orthopedic sales above, decreased $1.5 million and increased $1.2 million, respectively, for the three and nine months ended March 31, 2022 compared to the corresponding periodsperiod of the prior fiscal year. In the third quarter of this fiscal year there was a delayThe declines in shipping due to the releasemedical device sales across all of our largest customer’s next generation device, which disruption we do not expectproduct lines seems to recur. Additionally, recurring revenue from distributors of CMF drivers increased $27,000 and $2.4 million, respectively, for the three and nine months ended March 31, 2022, compared to the corresponding periodsreflect a general softening of the prior fiscal year in part due to the launch of a new driver to our existing largest customer during the third quarter of the prior fiscal year. Our thoracic sales revenue decreased $2.8 million and $4.6 million, respectively, for the three and nine months ended March 31, 2022, respectively, compared to the corresponding periods of the prior fiscal year, due primarily as a result of our customer filling the near-term requirements of its distribution network.markets.
Sales of our compact pneumatic air motors reported as industrial and scientific sales above, increased $113,000,$8,000, or 54%4%, and $182,000, or 31%, respectively, forin the three and nine months ended March 31, 2022,first quarter of fiscal 2023 compared to the corresponding periodsperiod of the prior fiscal year. The revenue increase relates to a continued interest in these legacy products but is not due to any substantive marketing efforts.
Sales of our dental products and components increased $179,000, or 746%, and $250,000, or 255%, respectively, for$41,000 in the three and nine months ended March 31, 2022,first quarter of fiscal 2023 compared to the corresponding periodsquarter of the prior fiscal year. TheWe believe this increase was primarily relatedis temporary due to sales of components to our largest customer of component inventory used in their legacy design which we do not expectboard assembly houses due to recur. We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory. As previously discussed, in January 2018, we sent notification to our dental product customers that we were discontinuing the manufacture of these products. The cessation of our dental line of products did not have a material impact on our financial position or results of operationsrecent chip shortages experienced globally. Our non-recurring engineering (“NRE”) and reflected a conscious decision to increase capacity for our medical device products.
Repairproto-type revenue increased $858,000, or 106%, and $284,000, or 7%, for$711,000 in the three and nine months ended March 31, 2022, respectively,first quarter of fiscal 2023 compared to the corresponding periodsperiod of the prior fiscal year, due to an increase in billable contracts. Our NRE and proto-type revenue is typically a small percentage of our total revenue and can vary significantly from quarter to quarter.
Repair revenue increased by $793,000 in the first quarter of fiscal 2023 compared to the corresponding period of the prior fiscal year, due to an increased number of repairs of the orthopedic handpiece we sell to our largest customer. This increase was expected as we have been asked to upgrade handpieces to the next generation, which design was released to manufacture in the third quarter of fiscal 2022.
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Discounts and other increased by $57,000 in the first quarter of fiscal 2023 compared to the corresponding period of the prior fiscal year, due to volume rebates related to the orthopedic handpiece we sell to our largest customer which they negotiated in conjunction with our contract extension through 2025.
At March 31,September 30, 2022, we had a backlog of approximately $21.2$26.6 million, of which $7.9$18.6 million is scheduled to be delivered inscheduled for delivery during the fourth quarterremainder of fiscal 2022 and the balance is scheduled to be delivered next fiscal year. 2023. 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. Wemayexperience 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 September 30, | Increase (Decrease) From | |||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | 2022 | 2021 | 2021 To 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | Dollars in thousands | ||||||||||||||||||||||||||||||||||||||||||||||||
% of Total | % of Total | % of Total | % of Total | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Product cost | $ | 5,465 | 85 | % | $ | 7,000 | 95 | % | $ | 18,436 | 94 | % | $ | 17,120 | 94 | % | ||||||||||||||||||||||||||||||||||||
Under(over)-absorption of manufacturing costs | 528 | 8 | % | 118 | 2 | % | 631 | 3 | % | 470 | 3 | % | ||||||||||||||||||||||||||||||||||||||||
Product costs | $ | 7,611 | 69 | % | $ | 6,632 | 66 | % | 15 | % | ||||||||||||||||||||||||||||||||||||||||||
Under-(over) absorption of manufacturing costs | 362 | 3 | % | (146 | ) | (1 | %) | 348 | % | |||||||||||||||||||||||||||||||||||||||||||
Inventory and warranty charges | 414 | 7 | % | 236 | 3 | % | 670 | 3 | % | 548 | 3 | % | 158 | 1 | % | 74 | 1 | % | 114 | % | ||||||||||||||||||||||||||||||||
Total cost of sales | $ | 6,407 | 100 | % | $ | 7,354 | 100 | % | $ | 19,737 | 100 | % | $ | 18,138 | 100 | % | $ | 8,131 | 73 | % | $ | 6,560 | 66 | % | 24 | % | ||||||||||||||||||||||||||
Gross profit and gross margin | $ | 2,956 | 27 | % | $ | 3,428 | 34 | % | (14 | %) |
Three Months Ended March 31, | Nine Months Ended March 31, | Year over Year ppt Change | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | Three Months | Nine Months | |||||||||||||||||||
Gross margin | 31 | % | 37 | % | 33 | % | 37 | % | (6 | ) | (4 | ) |
Cost of sales for the three monthsthree-month period ended March 31,September 30, 2022 decreased $947,000,increased by $1.6 million, or 13%24%, compared to the corresponding period of the prior fiscal year. The decreaseAlthough some of the increase in total costscost of sales was caused byis consistent with the 21% decrease11% increase in revenue for the same period. Under-absorptionperiod, approximately $450,000 of manufacturingthe increase relates to the repairs performed to upgrade the orthopedic handpieces we sell our largest customer to the newest release at no additional cost. We continue to negotiate in good faith with our customer for additional remuneration for these refurbished and repaired handpieces. Product costs increased by $410,000 for$979,000, or 15%, during the three months ended March 31, 2022, compared to the corresponding period of the prior fiscal year due in part to our inability absorb our fixed costs, which were not reduced in the third quarter, in anticipation of future revenue growth. Costs relating to inventory and warranty charges increased $178,000 for the third quarter ended March 31, 2022 compared to the third quarter of the prior fiscal year, largely due to sourcing components for our printed circuit board assemblies at prices higher than usual. As previously disclosed, our supply chain has incurred many disruptions that suppliers indicate have been caused by the COVID-19 pandemic.
Gross profit decreased by approximately $1.5 million, or 35%, for the three months ended March 31, 2022, compared to the corresponding period of the prior fiscal year, consistent with the overall decrease in revenue. Gross margin as a percentage of sales decreased by approximately 6 percentage points compared to the corresponding period of the prior fiscal year due primarily to reduced sales, increased under-absorption of manufacturing costs as a result of decreased sales and the increases in inventory and warranty charges, which relates mostly to component inventory write-downs to net realizable value as many of these component price increases cannot be passed on to our customers, many of whom have price protections in place under long-term contracts.
Cost of sales for the nine months ended March 31, 2022 increased by $1.6 million, or 9%, compared to the corresponding period of the prior fiscal year, consistent with the increased revenue of 3% for the same period, the reasons for which are discussed above. Additionally, total cost of sales reflects a $161,000 increase in under-absorbed manufacturing costs due to actual production hours being less than planned. Inventory and warranty charges increased by approximately $122,000, or 22%, for the nine months ended March 31,September 30, 2022, compared to the corresponding period of the prior fiscal year, due to componentboth higher material costs, predominantly related to the repairs discussed above, and higher costs in our machine shop, materials, assembly and quality departments. During the first quarter of fiscal 2023 we experienced $362,000 of under-absorbed manufacturing costs compared to an over-absorption of $146,000 in the first quarter of fiscal 2022, primarily due to the growth of indirect costs outpacing actual production hours. Costs related to inventory write-downsand warranty charges increased $84,000 in the first quarter of fiscal 2023 compared to net realizable value.the corresponding quarter of fiscal 2022, due primarily to upgraded repairs we perform on orthopedic handpieces we sell to our largest customer that are still under-warranty at no additional cost.
Gross profit decreased by $767,000,approximately $472,000, or 7%14%, for the ninethree months ended March 31,September 30, 2022 compared to the corresponding period of the prior fiscal year, and gross margin as a percentage of sales decreased by seven percentage points between such periods, primarily as a result of the increase in cost of saleshigher component costs and additional repair costs described above. Gross margin for the nine months ended March 31, 2022, decreased by 4 percentage points compared to the corresponding period of the prior fiscal year.
Operating Expenses
Operating Costs and Expenses(in thousands except % change)
Three Months Ended September 30, | Increase (Decrease) From | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | Year over Year % Change | 2022 | 2021 | 2021 To 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | Three Months | Nine Months | Dollars in thousands | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
% of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selling expenses | $ | 20 | — | $ | 136 | 1 | % | $ | 79 | — | $ | 415 | 2 | % | (85 | %) | (81 | %) | $ | 53 | 1 | % | $ | 37 | — | 43 | % | |||||||||||||||||||||||||||||||||
General and administrative expenses | 1,145 | 12 | % | 1,280 | 11 | % | 3,402 | 12 | % | 2,922 | 10 | % | (11 | %) | 16 | % | 1,024 | 9 | % | 1,093 | 11 | % | (6 | %) | ||||||||||||||||||||||||||||||||||||
Research and development costs | 658 | 7 | % | 1,104 | 10 | % | 2,254 | 8 | % | 3,184 | 11 | % | (40 | %) | (29 | %) | 929 | 8 | % | 980 | 10 | % | (5 | %) | ||||||||||||||||||||||||||||||||||||
$ | 1,823 | 20 | % | $ | 2,520 | 22 | % | $ | 5,735 | 20 | % | $ | 6,521 | 23 | % | (28 | %) | (12 | %) | $ | 2,006 | 18 | % | $ | 2,110 | 21 | % | (5 | %) |
Selling expenses consist of salaries and other personnel-related expenses for ourin support of business development, department, as well as trade show attendance, advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three and nine months ended March 31,September 30, 2022 decreased $116,000,increased $16,000, or 85%43%, and $336,000, or 81%, respectively, compared to the corresponding periods of fiscal 2021.year-earlier period. The decreaseincrease is primarily due to decreased personnel and related expenses due to combining our Director of Business Development position with our Director of Engineering position in the first quarter of fiscal 2022.sales commissions.
General and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance, and human resourceresources 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 decreased $135,000 and increased $480,000, respectively, duringby $69,000, or 6%, for the three and nine months ended March 31,September 30, 2022, when compared to the corresponding periodsperiod of the prior fiscal year. The decrease in general and administrative expenses for the three months ended March 31, 2022, compared to the corresponding period of fiscal 2021 relatestotal G&A was primarily related to reduced non-cash compensation expense because 62,000related to the non-qualified stock options granted in February 2021 vested in June 2021 and therefore compensation expense for those awards ceased in fiscal 2021. The increase in general and administrative expenses for the nine months ended March 31, 2022, compared to the corresponding period of fiscal 2021 relate primarily to higher non-cash stock-based compensation expense related to the remaining awards granted in the prior and current fiscal year.
Research and development costs generally consist of salaries, employer-paid benefits,compensation and other personnel- relatedpersonnel-related costs of our engineering and support personnel, as well as allocated facility and information technology costs,related 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 decreased $51,000, or 5%, for the three and nine monthsquarter ended March 31,September 30, 2022, decreased $446,000 and $930,000, respectively, compared to the corresponding periods of the prior fiscal year. These decreases areyear period. The decrease is due primarily due to increased spending on billable development projects. When our engineers are engaged in a billable project as opposed to an increase in the amount of $108,000 in salaries and personnel costs offset by $179,000 in reduced internal engineering project costs get shifted to cost of sales instead of research and development.spending.
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. Many of our product development efforts are undertaken only upon completion of an analysis of the size of the market, our ability to differentiate our product from our competitors’, as well as an analysis of our specific sales prospects with new and/or existing customers. The researchResearch and development costs represent between 36% and 49%46% of total operating expenses for all periods presented and are expected to increase inremain relatively flat the futureremainder of this fiscal year as we continue to invest in the business. work on customer funded NRE projects.
The amount spent on projects under development, along with the current estimated commercial launch date and estimated recurring annual revenue, is summarized below (in thousands):
Three and Nine Months Ended March 31, 2022 | Three and Nine Months Ended March 31, 2021 | Market Launch (1) | Est Annual Revenue (2) | For the Three Months Ended September 30, | Market | Est. Annual | ||||||||||||||||||||||||||||||||||
Total Research & Development costs: | $ | 658 | $ | 2,254 | $ | 1,104 | $ | 3,184 | ||||||||||||||||||||||||||||||||
2022 | 2021 | Launch(1) | Revenue(2) | |||||||||||||||||||||||||||||||||||||
Total Research & Development costs: | $ | 929 | $ | 980 | ||||||||||||||||||||||||||||||||||||
Products in development: | ||||||||||||||||||||||||||||||||||||||||
ENT Shaver | 15 | 278 | 192 | 450 | Q4 2022 | $ | 1,000 | $ | 43 | $ | 232 | Q4 2023 | $ | 1,000 | ||||||||||||||||||||||||||
Vital Ventilator | 7 | 115 | 26 | 91 | Q1 2023 | $ | 1,500 | |||||||||||||||||||||||||||||||||
CMF Driver | — | — | 263 | 731 | (3 | ) | $ | 1,000 | ||||||||||||||||||||||||||||||||
Sustaining & Other | 636 | 1,861 | 623 | 1,912 | 886 | 748 | ||||||||||||||||||||||||||||||||||
Total | $ | 658 | $ | 2,254 | $ | 1,104 | $ | 3,184 | ||||||||||||||||||||||||||||||||
Total. | $ | 929 | $ | 980 |
(1) | Represents the calendar quarter of expected market launch. |
(2) | The products in development include risks that they could be abandoned in the future prior to completion, they could fail to become commercialized, or the actual annual revenue realized may be less than the amount estimated. |
As we introduce new products into the market, we expect to see an increase in sustaining and other engineering expenses. Typical examples of sustaining engineering activities include, but are not limited to, end-of- life component replacement, especially in electronic components found in our printed circuit board assemblies, analysis of customer complaint data to improve process and design, replacement and enhancement of tooling and fixtures used in ourthe machine shop, assembly operations, and inspection areas to improve efficiency and through-put. Additionally, these costs include development projects that may be in their infancy and may or may not result in a full-fledged product development effort.effort or projects that are later abandoned. For instance, in prior filings we included expenses related to the VITAL ventilator product, which we have removed from the table above because we did not spend any resources on this project in the first quarter of fiscal 2023 and we do not expect to in the foreseeable future.
Other Income (Expense), net
Interest & Other Incomeand dividend income
InterestThe interest and dividend income forrecorded during the three and nine monthsquarters ended March 31,September 30, 2022 and 2021, includesconsists primarily of interest and dividends from our investments and money market accountsaccounts. One of the investments in our portfolio paid a $204,000 cash dividend in the first quarter of fiscal 2023, and investment portfolio.no such dividend was paid during the prior fiscal year.
Interest ExpenseUnrealized gain on marketable equity investments
Interest expense consists primarilyThe unrealized gain on marketable securities for the quarters ended September 30, 2022 and 2021, relates to our portfolio of interest expense related to the notes payableinvestments described more fully in Note 114 to the condensed consolidated financial statements contained elsewhere in this report.
Unrealized gain (loss) on marketable equity investmentsInterest expense
The unrealized gain (loss) on marketable equity investmentsinterest expense recorded during the quarters ended September 30, 2022 and 2021, relates to our investment portfolioMinnesota Bank and Trust (“MBT”) loans described more fully described in Note 510 to the condensed consolidated financial statements contained elsewhere in this report.
Gain on Sale of Investments
During the quarter ended March 31, 2021, we sold several of the stocks in our portfolio of equity investments receiving proceeds of $2.9 million and recording a gain on the sale in the amount of $783,000. During the quarter ended September 30, 2020, we liquidated two of the stocks in our portfolio of equity investments, receiving proceeds of $115,000 and recording a gain on the sale in the amount of $12,000.
Income Tax Expense
The effective tax rate for the three and nine months ended March 31,September 30, 2022 and 2021, is slightly less than our combined expected federal17% and applicable state corporate income tax rates due to federal and state research credits.22%, respectively. The current year effective tax rate for the three and nine months ended March 31, 2021, is less than our combined expected federal and applicable state corporate income tax ratesthe prior year rate due primarily to federal and state research credits, as well as a tax benefit recognized as a result of the common stock awarded to our employees under previously granted performance awards in the first quarter of fiscal 2021 as described more fully in Note 98 to the condensed consolidated financial statements contained elsewhere in this report, as well as unrealized gains on our marketable equity investments.report.
Liquidity and Capital Resources
Cash and cash equivalents at March 31,September 30, 2022 increased $1.0$1.9 million to $4.8$2.8 million as compared to $3.7$0.9 million at June 30, 2021.2022. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.
As of and For the Nine Months Ended March 31, | As of and For the Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 4,432 | $ | (2,803 | ) | $ | 2,892 | $ | 2,701 | |||||||
Investing activities | $ | (1,636 | ) | $ | (4,375 | ) | $ | (90 | ) | $ | (874 | ) | ||||
Financing activities | $ | (1,756 | ) | $ | 4,631 | $ | (853 | ) | $ | (371 | ) | |||||
Cash and Working Capital: | ||||||||||||||||
Cash and working capital: | ||||||||||||||||
Cash and cash equivalents | $ | 4,761 | $ | 3,874 | $ | 2,798 | $ | 5,177 | ||||||||
Working capital | $ | 20,376 | $ | 20,091 | $ | 20,162 | $ | 19,806 |
Operating Activities
Net cash provided by operating activities was $4.4 millionduring the three months ended September 30, 2022 totaled $2.9 million. The primary sources of cash arose from (a) our net income for the nine months ended March 31, 2022, primarily due to net incomequarter of $2.4$1.1 million, as well as non-cash share-based compensation and non-cash depreciation and amortization of $546,000, share-based compensation$207,000 and $193,000, respectively, (b) a decrease of $932,000$4.3 million in accounts receivable due to more timely collection of receivables from our largest customer, and unrealized losses on marketable securities in the amount of $427,000 as well as(c) an increase in accounts payable and accrued expenses of $673,000, deferred revenue of $746,000 and a decrease in accounts receivable in the amount of $2.3 million. Offsetting these sources$273,000. Uses of cash ourarose primarily from an increase in inventory increased by $3.4of $3.0 million primarily duerelated to replenishmentbuilding up inventory in anticipation of sub-assembliesour transfer of assembly and long-lead time parts.repairs to the Franklin Property.
Net cash used inprovided by operating activities was $2.8 millionduring the three months ended September 30, 2021 totaled $2.7 million. The primary sources of cash arose from (a) our net income for the nine months ended March 31, 2021, primarily due to net incomequarter of $5.0$1.1 million, as well as non-cash share-based compensation and non-cash depreciation and amortization of $502,000$300,000 and share-based compensation$184,000, respectively, (b) a decrease of $508,000 offset by an unrealized gain on marketable securities$834,000 in the amountaccounts receivable, and (c) a decrease in prepaid expenses and other current assets of $1.4 million and$284,000. Uses of cash arose primarily from an increase in accounts receivable in the amountinventory of $6.8 million due$470,000 primarily related to our largest customer changing their payment terms from net 30 to net 90 in conjunction with a contract extension. Additionally, our net income included $795,000timing of realized gains from the salesvarious components and advance procurement of stock in our marketable securities portfolio.long-lead time items.
Investing Activities
Net cash used in investing activities for the ninethree months ended March 31,September 30, 2022 was $1.6 million$90,000 and related primarily to purchasesthe purchase of equipment and improvements primarily forat the Franklin Property in the amount of $1.3 million and investments in$178,000 offset by the sale of marketable equity securities of publicly traded companies in the amount of $334,000.$88,000.
Net cash used in investing activities for the ninethree months ended March 31,September 30, 2021 was $4.4 million$874,000 and related primarilyalmost exclusively to the purchase of manufacturing equipment and improvements at the Franklin Property acquired during the second quarter of fiscal 2021 for a purchase price of $6.5 million as well as expenditures related to machinery and equipment totaling $872,000. Offsetting these uses of cash, we sold some of our marketable securities during the nine months ended March 31, 2021 for $3.0 million.Property.
22 |
Financing Activities
Net cash used in financing activities for the ninethree months ended March 31,September 30, 2022 totaled $1.8 million and related primarilyincluded net principal payments of $318,000 on our existing loans from MBT more fully described in Note 10 to the $1.3 millioncondensed consolidated financial statements contained elsewhere in this report, the repurchase of 52,718 shares$354,000 of our common stock pursuant to our share repurchase program, as well as $561,000 of principal payments on our term loan from Minnesota Bank and Trust (“MBT”) more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.
Net cash provided by financing activities for the nine months ended March 31, 2021, totaled $4.6 million and included $9.1 million in various loans from MBT more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report, offset by $4.0 million related to the repurchase of 161,291 shares of our common stock pursuant to our share repurchase program, $307,000 of principal payments on our loans with MBT, as well as payment of $259,000$223,000 of employee payroll taxes related to the award of 40,00037,500 shares of common stock to employees under previously granted performance awards.
Net cash used in financing activities for the three months ended September 30, 2021 included the repurchase of $95,000 of common stock pursuant to our share repurchase program, as well as principal payments of $306,000 on our loans from MBT.
Financing Facilities & Liquidity Requirements for the next twelve monthsNext Twelve Months
As of March 31,September 30, 2022, our working capital was $20.4$20.2 million. We currently believe that our existing cash and cash equivalent balances together with our accountsaccount 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 liquidate some or all of our investment portfolio or borrow against our $2.0 million Revolving Loan with MBT (see Note 11 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 sellingsell additional shares of our common stock under theour previously disclosed ATM Agreement.
Investment Strategy
We invest surplus cash from time to time through our Investment Committee,Agreement, 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. The Investment Committee approved each of the investments comprising the $2.9 million of marketable public equity securities held at March 31, 2022.currently suspended.
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 (our principal executive officer) and Chief Financial Officer (the(our principal executivefinancial officer and principalfinancial officer, respectively) conducted an accounting officer) have concluded based on their evaluation as of the design and operation ofSeptember 30, 2022, that 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”)). are effective. 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 Companycompany 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 officer and principal financial officers,officer and principal accounting officer, 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, 2022, 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:
Based on that evaluation as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective.
Internal Control Overover Financial Reporting
During the three months ended March 31,September 30, 2022, 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.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 14 of Notes13 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” Factors,” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2021,2022, 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,September 30, 2022. 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 Part I, Item 2, of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report.Operations.” 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 reportAnnual Report on Form 10-K for the fiscal year ended June 30, 2021, except as provided in any amendments thereto.2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchases by usthe Company of ourits common stock during the quarter ended March 31,September 30, 2022 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, 2022 to January 31, 2022 | 12,132 | $24.77 | 12,132 | 750,519 | ||||
February 1, 2022 to February 28, 2022 | 12,634 | $22.45 | 12,634 | 737,885 | ||||
March 1, 2022 to March 31, 2022 | – | – | – | 737,885 |
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 | ||||
July 1, 2022 to July 31, 2022 | 4,662 | $15.88 | 4,662 | 710,691 | ||||
August 1, 2021 to August 31, 2021 | 3,424 | $16.56 | 3,424 | 707,267 | ||||
September 1, 2021 to September 30, 2021 | 12,767 | $17.50 | 12,767 | 694,500 | ||||
Total | 20,853 | $16.98 | 20,853 | 694,500 |
All repurchases were made pursuant to ourthe Company’s previously announced repurchase programs.program. For information concerning the Company’s repurchase program, please see the discussion under the caption “Share Repurchase Program” in Note 11 to the condensed consolidated financial statements included elsewhere in this report.
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 | Certifications of Principal Executive Officer and 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 | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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. | ||
Date: | By: | /s/ Richard L. Van Kirk |
Richard L. Van Kirk | ||
Chief Executive Officer (principal executive officer) |
Date: | By: | /s/ Alisha K. Charlton |
Alisha K. Charlton | ||
Chief Financial Officer (principal financial officer and principal accounting officer) |
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 | Certifications of Principal Executive Officer and 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 | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |