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PDEX Pro-Dex Inc. (co)

Filed: 4 Feb 21, 4:00pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q


þ

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


For the quarterly period ended


DECEMBER 31, 2020

 

OR

 

¨

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


For the transition period from __________  to __________


Commission file number: 0-14942


PRO-DEX, INC.

(Exact name of registrant as specified in its charter)

———————

COLORADO

84-1261240

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)


2361 McGaw Avenue, Irvine, California 92614

(Address of principal executive offices and zip code)


(949) 769-3200

(Registrant's telephone number, including area code)

———————

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 þ  No ¨


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


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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     þ

Smaller reporting company  þ

 

Emerging growth company  ¨


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


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


Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date: 3,860,639 shares of common stock, no par value, as of February 2, 2021.

 

 





 


PRO-DEX, INC.


QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2020


TABLE OF CONTENTS



 

Page

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

1

 

 

Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2020

1

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 31, 2020 and 2019

2

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended December 31, 2020 and 2019

3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2020 and 2019

4

Notes to Condensed Consolidated Financial Statements

6

 

 

ITEM 2.

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

16

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

 

 

ITEM 4.

CONTROLS AND PROCEDURES

23

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

24

 

 

ITEM 1A.

RISK FACTORS

24

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

24

 

 

ITEM 6.

EXHIBITS

24

 

 

SIGNATURES

26










 


PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


PRO-DEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

 

 

 

December 31,
2020

 

 

June 30,
2020

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,523

 

 

$

6,421

 

Investments

 

 

2,884

 

 

 

2,560

 

Accounts receivable, net of allowance for doubtful accounts of $4 and $6 at December 31, 2020 and at June 30, 2020, respectively

 

 

4,621

 

 

 

5,155

 

Deferred costs

 

 

138

 

 

 

155

 

Inventory

 

 

9,152

 

 

 

8,238

 

Prepaid expenses and other current assets

 

 

392

 

 

 

145

 

Total current assets

 

 

22,710

 

 

 

22,674

 

Land and building, net

 

 

6,484

 

 

 

 

Equipment and leasehold improvements, net

 

 

2,704

 

 

 

2,686

 

Right of use asset, net

 

 

2,777

 

 

 

2,943

 

Intangibles, net

 

 

158

 

 

 

162

 

Deferred income taxes, net

 

 

259

 

 

 

259

 

Investments

 

 

3,238

 

 

 

2,360

 

Other assets

 

 

42

 

 

 

42

 

Total assets

 

$

38,372

 

 

$

31,126

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,470

 

 

$

1,965

 

Accrued expenses

 

 

1,785

 

 

 

2,411

 

Deferred revenue

 

 

200

 

 

 

200

 

Note payable and capital lease obligations

 

 

479

 

 

 

651

 

Total current liabilities

 

 

4,934

 

 

 

5,227

 

Lease liability, net of current portion

 

 

2,609

 

 

 

2,750

 

Income taxes payable

 

 

615

 

 

 

804

 

Notes and capital leases payable, net of current portion

 

 

8,375

 

 

 

3,283

 

Total non-current liabilities

 

 

11,599

 

 

 

6,837

 

Total liabilities

 

 

16,533

 

 

 

12,064

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares; no par value; 50,000,000 shares authorized; 3,860,639 and 3,811,137 shares issued and outstanding at December 31, 2020 and June 30, 2020, respectively

 

 

12,621

 

 

 

12,752

 

Accumulated other comprehensive income (loss)

 

 

(280

)

 

 

(1,586

)

Retained earnings

 

 

9,498

 

 

 

7,896

 

Total shareholders’ equity

 

 

21,839

 

 

 

19,062

 

Total liabilities and shareholders’ equity

 

$

38,372

 

 

$

31,126

 

 




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


1



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

8,265

 

 

$

7,961

 

 

$

16,855

 

 

$

15,201

 

Cost of sales

 

 

5,669

 

 

 

5,097

 

 

 

10,784

 

 

 

9,557

 

Gross profit

 

 

2,596

 

 

 

2,864

 

 

 

6,071

 

 

 

5,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

150

 

 

 

135

 

 

 

280

 

 

 

277

 

General and administrative expenses

 

 

936

 

 

 

664

 

 

 

1,641

 

 

 

1,327

 

Research and development costs

 

 

989

 

 

 

397

 

 

 

2,080

 

 

 

881

 

Total operating expenses

 

 

2,075

 

 

 

1,196

 

 

 

4,001

 

 

 

2,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

521

 

 

 

1,668

 

 

 

2,070

 

 

 

3,159

 

Interest expense

 

 

(75

)

 

 

(63

)

 

 

(129

)

 

 

(122

)

Interest and other income

 

 

20

 

 

 

33

 

 

 

61

 

 

 

68

 

Gain on sale of investments

 

 

 

 

 

 

 

 

12

 

 

 

 

Income from operations before income taxes

 

 

466

 

 

 

1,638

 

 

 

2,014

 

 

 

3,105

 

Income tax expense

 

 

(129

)

 

 

(389

)

 

 

(412

)

 

 

(751

)

Net income

 

$

337

 

 

$

1,249

 

 

$

1,602

 

 

$

2,354

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized income from marketable equity investments

 

 

1,413

 

 

 

705

 

 

 

1,306

 

 

 

649

 

Comprehensive income

 

$

1,750

 

 

$

1,954

 

 

$

2,908

 

 

$

3,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.09

 

 

$

0.32

 

 

$

0.42

 

 

$

0.59

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.08

 

 

$

0.31

 

 

$

0.40

 

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,861

 

 

 

3,950

 

 

 

3,856

 

 

 

3,979

 

Diluted

 

 

4,012

 

 

 

4,053

 

 

 

4,014

 

 

 

4,082

 

Common shares outstanding

 

 

3,861

 

 

 

3,884

 

 

 

3,861

 

 

 

3,884

 





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


2



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended December 31, 2020 and 2019

(Unaudited)

(In thousands)


 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

12,583

 

 

$

15,161

 

 

$

12,752

 

 

$

15,815

 

Share-based compensation expense

 

 

38

 

 

 

8

 

 

 

64

 

 

 

19

 

Share repurchases

 

 

 

 

 

(1,535

)

 

 

 

 

 

(2,215

)

Shares withheld from common stock issued to pay employee payroll taxes

 

 

 

 

 

 

 

 

(259

)

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

39

 

 

 

 

ESPP shares issued

 

 

 

 

 

 

 

 

25

 

 

 

15

 

Balance, at end of period

 

$

12,621

 

 

$

13,634

 

 

$

12,621

 

 

$

13,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,693

)

 

$

(605

)

 

$

(1,586

)

 

$

(549

)

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

 

 

1,413

 

 

 

705

 

 

 

1,306

 

 

 

649

 

Balance, at end of period

 

$

(280

)

 

$

100

 

 

$

(280

)

 

$

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

9,161

 

 

$

2,889

 

 

$

7,896

 

 

$

1,742

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

42

 

Net income

 

 

337

 

 

 

1,249

 

 

 

1,602

 

 

 

2,354

 

Balance, at end of period

 

$

9,498

 

 

$

4,138

 

 

$

9,498

 

 

$

4,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

$

21,839

 

 

$

17,872

 

 

$

21,839

 

 

$

17,872

 






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


3



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

1,602

 

 

$

2,354

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

320

 

 

 

282

 

Share-based compensation

 

 

64

 

 

 

19

 

Non-cash lease expense

 

 

15

 

 

 

22

 

Amortization of loan fees

 

 

5

 

 

 

4

 

Gain on sale of investments

 

 

(12

)

 

 

 

Deferred income taxes

 

 

 

 

 

97

 

Bad debt expense (recovery)

 

 

(2

)

 

 

17

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other current receivables

 

 

535

 

 

 

1,400

 

Deferred costs

 

 

18

 

 

 

(62

)

Inventory

 

 

(913

)

 

 

(1,569

)

Prepaid expenses and other assets

 

 

(247

)

 

 

430

 

Accounts payable and accrued expenses

 

 

(110

)

 

 

(771

)

Deferred revenue

 

 

 

 

 

145

 

Income taxes payable

 

 

(190

)

 

 

190

 

Net cash provided by operating activities

 

 

1,085

 

 

 

2,558

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

 

 

 

(1,271

)

Purchases of equipment and leasehold improvements

 

 

(316

)

 

 

(317

)

Proceeds from sale of investments

 

 

115

 

 

 

 

Purchase of land and building

 

 

(6,499

)

 

 

 

Increase in intangibles

 

 

(3

)

 

 

(23

)

Net cash used in investing activities

 

 

(6,703

)

 

 

(1,611

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

 

 

 

(2,215

)

Proceeds from exercise of options and ESPP contributions

 

 

64

 

 

 

15

 

Payment of employee payroll taxes on net issuance of common stock

 

 

(259

)

 

 

 

Proceeds from Minnesota Bank & Trust long-term debt, net of fees

 

 

5,176

 

 

 

 

Principal payments on notes payable and capital lease

 

 

(261

)

 

 

(314

)

Net cash provided by (used in) financing activities

 

 

4,720

 

 

 

(2,514

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(898

)

 

 

(1,567

)

Cash and cash equivalents, beginning of period

 

 

6,421

 

 

 

7,742

 

Cash and cash equivalents, end of period

 

$

5,523

 

 

$

6,175

 

 

 

 

 

 

 

 

 

 





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


4



 


PRO-DEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Unaudited)

(In thousands)


 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

101

 

 

$

103

 

Income taxes

 

$

754

 

 

$

13

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activity:

 

 

 

 

 

 

 

 

Cashless stock option exercise

 

$

4

 

 

$

 







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


5



 


PRO-DEX, INC.

NOTES TO CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 1. BASIS OF PRESENTATION


The accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,” “Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. 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, 2020.


Recently Adopted Accounting Standards


On July 1, 2019, we adopted ASU 2016-02 (Topic 842) “Leases,” using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of fiscal 2020. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The impact of adoption was an increase to long-term assets and total liabilities of approximately $3.3 million as of July 1, 2019.


NOTE 2. DESCRIPTION OF BUSINESS


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

 

In August 2020, we formed a wholly-owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020 in order to allow for the continued growth of our business. The consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations.

 

NOTE 3. 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):


 

 

December 31,
2020

 

 

June 30,
2020

 

Raw materials/purchased components

 

$

4,019

 

 

$

4,241

 

Work in process

 

 

2,328

 

 

 

2,339

 

Sub-assemblies/finished components

 

 

2,226

 

 

 

1,438

 

Finished goods

 

 

579

 

 

 

220

 

Total inventory

 

$

9,152

 

 

$

8,238

  


 



6



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


Investments


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


 

 

December 31,
2020

 

 

June 30,
2020

 

Marketable equity securities - short-term

 

$

2,884

 

 

$

2,560

 

Marketable equity securities - long-term

 

 

3,238

 

 

 

2,360

 

Total marketable equity securities

 

$

6,122

 

 

$

4,920

 

 

Investments at December 31, 2020 and June 30, 2020 had an aggregate cost basis of $6,380,000 and $6,483,000, respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities we may not be able to sell our position within one year. At December 31, 2020, the investments included net unrealized losses of $258,000 (gross unrealized losses of $789,000 offset by gross unrealized gains of $531,000). During the quarter ended December 31, 2020, we incurred net unrealized gains of $1,413,000. At June 30, 2020, the investments included net unrealized losses of $1,563,000 (gross unrealized losses of $1,703,000 offset by gross unrealized gains of $140,000).


Of the total marketable equity securities at December 31, 2020 and June 30, 2020, $1,510,000 and $847,000, respectively, represent an investment in the common and preferred stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. The common stock was purchased through 10b5-1 Plans, and the preferred stock was purchased through the exercise of issued warrants and, in both cases, in accordance with our internal policies regarding the approval of related party transactions, the purchases were approved by our three Board members that are not affiliated with Air T, Inc.


We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr. Van Kirk, and two non-management directors, Mr. Cabillot and Mr. Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc.


Land and building

 

Land and building consist of the following (in thousands):


 

 

December 31,
2020

 

 

June 30,
2020

 

Land

 

$

3,684

 

 

$

 

Building

 

 

2,815

 

 

 

 

Total

 

 

6,499

 

 

 

 

Less: accumulated depreciation

 

 

(15

)

 

 

 

 

 

$

6,484

 

 

$

 

 

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 9). As of the date of this filing, we are continuing our build-out of the property, which we expect to complete in the fourth quarter of this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years.




7



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


Intangibles


Intangibles consist of the following (in thousands):

 

 

 

December 31,
2020

 

 

June 30,
2020

 

Patent-related costs

 

$

225

 

 

$

222

 

Less accumulated amortization

 

 

(67

)

 

 

(60

)

 

 

$

158

 

 

$

162

 


Patent-related costs consist of legal fees incurred in connection with both patent applications and a patent issuance, and will be amortized over the estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent. Since we do not know when, or if, our patent applications will be issued, the future amortization expense is not predictable.


NOTE 4. WARRANTY

 

The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. As of December 31 and June 30, 2020, the warranty reserve amounted to $347,000 and $213,000, respectively. Warranty expenses are included in cost of sales in the accompanying 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 December 31, 2020 and 2019 was $182,000 and $44,000, respectively, and for the six months ended December 31, 2020 and 2019 was $254,000 and $56,000, respectively.


Information regarding the accrual for warranty costs for the three and six months ended December 31, 2020 and 2019 are as follows (in thousands):


 

 

As of and for the
Three Months Ended
December 31,

 

 

 

2020

 

 

2019

 

Beginning balance

 

$

190

 

 

$

126

 

Accruals during the period

 

 

175

 

 

 

28

 

Changes in estimates of prior period warranty accruals

 

 

7

 

 

 

16

 

Warranty amortization

 

 

(25

)

 

 

(29

)

Ending balance

 

$

347

 

 

$

141

 

  

 

 

As of and for the
Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

Beginning balance

 

$

213

 

 

$

136

 

Accruals during the period

 

 

255

 

 

 

53

 

Changes in estimates of prior period warranty accruals

 

 

(1

)

 

 

3

 

Warranty amortization

 

 

(120

)

 

 

(51

)

Ending balance

 

$

347

 

 

$

141

 

 



8



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 5. NET INCOME PER SHARE

 

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


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


 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

337

 

 

$

1,249

 

 

$

1,602

 

 

$

2,354

 

Weighted average shares outstanding

 

 

3,861

 

 

 

3,950

 

 

 

3,856

 

 

 

3,979

 

Basic income per share

 

$

0.09

 

 

$

0.32

 

 

$

0.42

 

 

$

0.59

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

337

 

 

$

1,249

 

 

$

1,602

 

 

$

2,354

 

Weighted average shares outstanding

 

 

3,861

 

 

 

3,950

 

 

 

3,856

 

 

 

3,979

 

Effect of dilutive securities

 

 

151

 

 

 

103

 

 

 

158

 

 

 

103

 

Weighted average shares used in calculation of diluted earnings per share

 

 

4,012

 

 

 

4,053

 

 

 

4,014

 

 

 

4,082

 

Diluted income per share

 

$

0.08

 

 

$

0.31

 

 

$

0.40

 

 

$

0.58

 


NOTE 6. INCOME TAXES


Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.


Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our estimates of future taxable income by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable.


We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of December 31, 2020, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have sufficient tax attributes available to fully offset any potential assessment of additional tax.


We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2017 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2016 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.




9



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 7. SHARE-BASED COMPENSATION


Through June 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and Director’s Stock Option Plan were terminated in June 2014 and December 2014, respectively.


In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of December 31, 2020, 200,000 performance awards and 310,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan.

 

Former Stock Option Plans


No options were granted under the Former Stock Option Plans during the three or six months ended December 31, 2020 and 2019.


As of December 31, 2020, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding stock options are fully vested. As of December 31, 2020, the options outstanding had a weighted average remaining contractual life of 0.92 years and an intrinsic value of $919,000. Following is a summary of stock option activity for the six months ended December 31, 2020 and 2019:


 

 

Six Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

Number of Shares

 

 

Weighted-Average
Exercise Price

 

 

Number of Shares

 

 

Weighted-Average
Exercise Price

 

Outstanding at July 1,

 

 

54,000

 

 

$

1.86

 

 

 

54,000

 

 

$

1.86

 

Options granted

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(22,500

)

 

 

1.94

 

 

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

 

31,500

 

 

$

1.81

 

 

 

54,000

 

 

$

1.86

 

Stock Options Exercisable at  December 31,

 

 

31,500

 

 

$

1.81

 

 

 

54,000

 

 

$

1.86

 


Performance Awards


In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees, which will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. The weighted average fair value of the performance awards granted was $4.46, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain other employees. The weighted average fair value of the performance awards reallocated in 2020 was $16.90, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During the three months ended December 31, 2020 and 2019, we recorded share-based compensation expense of $21,000 and $8,000, respectively, related to outstanding performance awards. During the six months ended December 31, 2020 and 2019, we recorded share-based compensation expense of $42,000 and $16,000, respectively, related to outstanding performance awards. On December 31, 2020, there was approximately $202,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 3.49 years.




10



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


On July 1, 2020, it was determined by the Compensation Committee of our Board of Directors that the second of five tranches of 40,000 performance awards had been achieved and participants were awarded 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding taxes and, therefore, we issued 25,629 shares and paid $259,000 of participant-related payroll tax liabilities.


Non-Qualified Stock Options


In December 2020, the Compensation Committee of our Board of Directors granted 310,000 stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 18 months to 10.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. We recorded compensation expense of $18,000 for the three and six months ended December 31, 2020, related to these options. The weighted average fair value of the stock option awards granted was calculated using a Monte Carlo simulation.


Employee Stock Purchase Plan


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


During the three months ended December 31, 2020 and 2019, we did not record any share-based compensation expense relating to the ESPP, due to the fact that no six-month offering period ended during either quarter. During the six months ended December 31, 2020 and 2019, 1,485 and 1,292 shares of our common stock were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $16.94 and $11.76, respectively, per share. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 23,271 shares of our common stock. During the six months ended December 31, 2020 and 2019, we recorded share-based compensation expense in the amount of $4,000 and $3,000, respectively, relating to the ESPP.


NOTE 8. MAJOR CUSTOMERS AND SUPPLIERS


Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the six-month periods ended December 31, 2020 and 2019 is as follows (in thousands, except percentages):

  

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

Amount

 

 

Percent of
Total

 

 

Amount

 

 

Percent of
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

8,265

 

 

 

100

%

 

$

7,961

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

5,809

 

 

 

70

%

 

$

5,655

 

 

 

71

%

Customer 2

 

 

1,221

 

 

 

15

%

 

 

697

 

 

 

9

%

Customer 3

 

 

658

 

 

 

8

%

 

 

797

 

 

 

10

%

Total

 

$

7,688

 

 

 

93

%

 

$

7,149

 

 

 

90

%

 

 




11



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 



 

 

Six Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

Amount

 

 

Percent of
Total

 

 

Amount

 

 

Percent of
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

16,855

 

 

 

100

%

 

$

15,201

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

 

10,978

 

 

 

65

%

 

 

11,067

 

 

 

73

%

Customer 2

 

 

3,391

 

 

 

20

%

 

 

1,121

 

 

 

7

%

Customer 3

 

 

1,127

 

 

 

7

%

 

 

1,340

 

 

 

9

%

Total

 

$

15,496

 

 

 

92

%

 

$

13,528

 

 

 

89

%

 

Information with respect to accounts receivable from those customers who comprised more than 10 % of our gross accounts receivable at either December 31, 2020 or June 30, 2020, is as follows (in thousands, except percentages):


 

 

December 31, 2020

 

 

June 30, 2020

 

Total gross accounts receivable

 

$

4,625

 

 

 

100

%

 

$

5,161

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer concentration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

2,616

 

 

 

57

%

 

$

2,205

 

 

 

42

%

Customer 2

 

 

1,385

 

 

 

30

%

 

 

1,593

 

 

 

31

%

Customer 3

 

 

309

 

 

 

6

%

 

 

972

 

 

 

19

%

Total

 

$

4,310

 

 

 

93

%

 

$

4,770

 

 

 

92

%

  

During the three months ended December 31, 2020, we had three suppliers accounting for 10% or more of total inventory purchases, and during the six months ended December 31, 2020, we had two suppliers that accounted for more than 10% of our total inventory purchases. During the three and six months ended December 31, 2019, we had two suppliers that accounted for more than 10% of our total inventory purchases. Amounts owed to the fiscal 2021 two most significant suppliers at December 31, 2020 totaled $656,000 and $345,000, respectively, and at June 30, 2020 totaled $161,000 and $245,000, respectively.


NOTE 9. NOTES PAYABLE AND FINANCING TRANSACTIONS

 

Minnesota Bank & Trust

 

On November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased the Franklin Property. A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of $5,207,472 (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.

 



12



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


The Property Loan bears interest at a fixed rate of 3.55% per annum, which is subject to a 3% increase upon an event of default. Accrued interest is 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.

 

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 may be borrowed against through May 30, 2021 (the “Commitment Period”). The Term Note B has a zero balance as of the Closing Date and may be borrowed against through the Commitment Period. We plan to draw against the Term Note B during the Commitment Period for the purpose of making improvements to the Franklin property described in Note 3.

 

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 are 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 $109,168.18 (if the outstanding principal balance on June 1, 2021 is the full $7,525,000) and proportionately reduced if the principal balance is less than that amount plus any additional accrued and unpaid interest through the date of payment. As of the date of this filing, we have not borrowed any additional amounts against Term Loan A. The balance owed on Term Loan A as of December 31, 2020 is $3.7 million.

 

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 are 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 $14,507.40, (if the outstanding principal balance on June 1, 2021 is the full $1,000,000) and proportionately reduced if the principal balance is less than that amount plus any additional accrued and unpaid interest through the date of payment. As of December 31, 2020, we had not made any draws against Term Note B.

 

The Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2021, unless earlier terminated pursuant to its terms, and bears interest at an annual rate equal to the greater of (a) 3.25% or (b) the prime rate as published in the Money Rates section of the Wall Street Journal. Commencing on the first day of each month after we initially borrow against the Revolving Loan and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of payment. Any principal on the Revolving Loan that is not previously prepaid shall be due and payable in full on the maturity date (or earlier termination of the Revolving Loan). No amounts have been drawn against the Revolving Loan.


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


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




13



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


NOTE 10. COMMON STOCK


Share Repurchase Program


In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized by the Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the three and six months ended December 31, 2020, we did not repurchase any shares under the repurchase program. During the three and six months ended December 31, 2019, we repurchased 106,897 and 156,685 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $1,535,000 and $2,215,000, respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 819,325 shares under the share repurchase program at an aggregate cost, inclusive of fees, of $8.5 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.


At The Market Offering Agreement


In December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM 10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, but future sales may occur pursuant to the parameters of the ATM 10b5-1 Plan or otherwise at the direction of our Board in accordance with the terms of the ATM Agreement.


NOTE 11. 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 which 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 of $3.3 million.


Our operating lease ROU asset and long-term liability are presented separately on our condensed consolidated balance sheet. The current portion of our operating lease liability as of December 31, 2020, in the amount of $328,000, is presented within accrued expenses on the condensed consolidated balance sheet.


As of December 31, 2020, the maturity of our lease liability is as follows:

 

 

 

Operating Lease

 

Fiscal Year:

 

 

 

 

2021

 

$

239

 

2022

 

 

489

 

2023

 

 

504

 

2024

 

 

519

 

2025

 

 

535

 

Thereafter

 

 

1,261

 

Total lease payments

 

 

3,547

 

Less imputed interest:

 

 

(610

)

Total

 

$

2,937

 




14



PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 


As of December 31, 2020, our operating lease has a remaining lease term of six years and nine months and an imputed interest rate of 5.53%. Cash paid for amounts included in the lease liability for the three and six months ended December 31, 2020 totaled $120,000 and $236,000, respectively, and for December 31, 2019 totaled $116,000 and $229,000, respectively.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES


Legal Matters


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

 

 

  




 



15



 


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


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


COMPANY OVERVIEW


The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” or “us”) for the three-month and six-month periods ended December 31, 2020 and 2019. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. This report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein.


Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities, and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales in markets characterized by rapid technological evolution, 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, 2020.


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 (“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.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.


Basis of Presentation


The condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2021 or any other interim period during such fiscal year. Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.


Critical Accounting Estimates and Judgments


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




16



 


An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that there have been no significant changes during the three and six months ended December 31, 2020 to the items that we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.


Business Strategy and Future Plans


Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and electric, multi-function surgical drivers and shavers. We continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customers. 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 market and we have continued investment in this area with research and development focused on applying this technology most recently to thoracic surgical applications, and we launched our first thoracic driver in the third quarter of fiscal 2020. Additionally, we have other significant engineering projects under way described more fully in results of operations.

 

Additionally, as previously disclosed, on November 6, 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 or Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth. Currently, we are continuing with our build-out of the property and have yet to transition any of our employees into the facility. We anticipate that upon completion of initial improvements, we will be able to execute on Phase I of our plan, which includes, among other things, the installation of a clean room to enable us to expand our capacity for the manufacture of batteries and new products. We expect that we will begin operations in the new facility some time during the fourth quarter of this fiscal year.

 

In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, expand our manufacturing capacity through the build-out of the Franklin Property, and promoting active product development proposals to new and existing customers for orthopedic shavers, 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 increased disproportionately to our growth in revenue and we anticipate this to continue in the near term. 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 are continuing our business operations under the California exemption for “essential critical infrastructure sectors” based on our determination that we fall within the Healthcare and Public Health Sector exemption.

 

As we continue to operate, 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, including:

 

 

·

Non-essential employees that are able to work remotely are doing so;

 

·

Increased frequency of disinfectant cleanings, especially for high-touch surfaces;

 

·

Curtailed business travel;

 

·

Multiple, staggered work shifts have been implemented in order to achieve effective social distancing;

 

·

Provided training, education and appropriate personal protective equipment;

 

·

Implemented quarterly, now monthly, company-wide COVID-19 testing; and

 

·

Daily temperature screenings and personal affidavits of wellness.



17



 


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 the 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.

 

While the COVID-19 pandemic has not materially adversely affected our financial results and business operations thus far, economic and health conditions in the United States and across much of the globe have changed rapidly since the end of our fiscal 2021 second quarter, and we cannot predict the full impact of the COVID-19 pandemic on our business.

 

Description of Business Operations


Revenue


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


 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

% of Revenue

 

 

 

 

 

% of Revenue

 

 

 

 

 

% of Revenue

 

 

 

 

 

% of Revenue

 

Net Sales:

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

Medical device products

 

6,391

 

 

  

77

%

 

$

6,122

 

 

  

77

%

 

$

13,131

 

 

  

78

%

 

$

11,491

 

 

  

76

%

Industrial and scientific

 

 

221

 

 

 

2

%

 

 

182

 

 

 

2

%

 

 

385

 

 

 

2

%

 

 

345

 

 

 

2

%

Dental and component

 

 

11

 

 

 

 

 

 

23

 

 

 

 

 

 

74

 

 

 

 

 

 

94

 

 

 

 

NRE & Prototype

 

 

120

 

 

 

2

%

 

 

114

 

 

 

2

%

 

 

130

 

 

 

1

%

 

 

267

 

 

 

2

%

Repairs and other

 

 

1,522

 

 

 

19

%

 

 

1,520

 

 

 

19

%

 

 

3,135

 

 

 

19

%

 

 

3,004

 

 

 

20

%

 

 

$

8,265

 

 

 

100

%

 

$

7,961

 

 

 

100

%

 

$

16,855

 

 

 

100

%

 

$

15,201

 

 

 

100

%

 

Certain of our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements. All of our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility, as are our industrial products. Details of our medical device sales by type is as follows (in thousands, except percentages):


 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

Medical device sales:

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

Orthopedic

 

$

4,413

 

 

  

69

%

 

$

4,277

 

 

  

70

%

 

$

8,102

 

 

  

62

%

 

$

8,601

 

 

  

75

%

CMF

 

 

1,117

 

 

 

18

%

 

 

1,845

 

 

 

30

%

 

 

2,642

 

 

 

20

%

 

 

2,890

 

 

 

25

%

Thoracic

 

 

861

 

 

 

13

%

 

 

 

 

 

 

 

 

2,387

 

 

 

18

%

 

 

 

 

 

 

Total

 

$

6,391

 

 

 

100

%

 

$

6,122

 

 

 

100

%

 

$

13,131

 

 

 

100

%

 

$

11,491

 

 

 

100

%

 

Sales of our medical device products increased $0.3 million, or 4%, for the three months ended December 31, 2020 and increased $1.6 million, or 14%, for the six months ended December 31, 2020 compared to the corresponding periods of the prior fiscal year. The majority, or $2.4 million, of our increase in medical device sales for the six months ended December 31, 2020 relates to sales of our first thoracic driver as well as related accessories that were not sold during the corresponding period of the prior fiscal year. Offsetting this increase, revenue to two of our legacy medical device customers decreased approximately $524,000 and $352,000, respectively, for the six months ended December 31, 2020 compared to the corresponding period of the prior fiscal year.




18



 


Sales of our compact pneumatic air motors, reported as Industrial and scientific sales above, increased $39,000, or 21%, and $40,000, or 12% for the three and six months ended December 31, 2020 compared to the corresponding periods 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 continued to decline for the three and six months ended December 31, 2020 compared to the corresponding periods of the prior fiscal year and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.


Repair revenue remained flat and increased $131,000 for the three and six months ended December 31, 2020, respectively, compared to the corresponding periods of the prior fiscal year due almost exclusively to repairs of handpieces for our largest customer. Typically, upon initial product launch, repair revenue is minimal as most repairs are typically covered under warranty, but as the products mature in the marketplace and after a certain number of routine duty cycles in the operating room, repairs generally increase. We expect repair revenue for the remaining quarters of fiscal 2021 to decrease to some degree based upon a downward trend we have seen in repair units of the orthopedic handpiece we sell to our largest customer, coupled with price concessions that went into effect on January 1, 2021.


At December 2020, we had a backlog of approximately $16.6 million, of which $15.9 million is scheduled to be delivered in the third and fourth quarters of fiscal 2021 and the balance is scheduled to be delivered next fiscal year. Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts. We may experience variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches and customer planned inventory builds. However, we do not typically experience seasonal fluctuations in our shipments and revenues.


Cost of Sales and Gross Margin
(in thousands except percentages)

 

 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

 

 

 

 

% of Total

 

Cost of sales:

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

Product cost

 

$

5,188

 

 

 

91

%

 

$

5,027

 

 

 

99

%

 

$

10,120

 

 

 

94

%

 

$

9,497

 

 

 

99

%

Under(over)-absorption of manufacturing costs

  

  

275

  

  

  

5

%

  

  

14

  

  

  

 

  

  

352

  

  

  

3

%

  

  

1

  

  

  

 

Inventory and warranty charges

 

 

206

 

 

 

4

%

 

 

56

 

 

 

1

%

 

 

312

 

 

 

3

%

 

 

59

 

 

 

1

%

Total cost of sales

 

$

5,669

 

 

 

100

%

 

$

5,097

 

 

 

100

%

 

$

10,784

 

 

 

100

%

 

$

9,557

 

 

 

100

%

 

 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

Year over Year
ppt Change

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Three Months

 

 

Six Months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

31

%

 

 

36

%

 

 

36

%

 

 

37

%

 

 

(5

)

 

 

(1

)

 

Cost of sales for the three months ended December 31, 2020 increased $572,000 or 11% compared to the corresponding period of the prior fiscal year. While revenue increased 4% during this same period, the increase in total cost of sales is primarily related to increased under-absorption of manufacturing costs and inventory and warranty charges. Under-absorption of manufacturing costs increased by $261,000 for the three months ended December 31, 2020 compared to the corresponding period of the prior fiscal year due in part to COVID-19 related payroll costs. We have incurred paid absences in our machine shop, assembly and quality operations that reduce our ability to absorb our fixed costs because total production hours are reduced. Costs relating to inventory and warranty charges increased by $150,000 for the second quarter ended December 31, 2020 compared to the second quarter of the prior fiscal year due to higher warranty accruals for two significant products.


Gross profit decreased by $268,000, or 9%, for the three months ended December 31, 2020 compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in under-absorption of manufacturing costs and inventory and warranty charges discussed above. Gross margin as a percentage of sales decreased by approximately 5 percentage points compared to the corresponding period of the prior fiscal year due primarily to the increased cost of sales, which are higher than the corresponding increase in revenue for the reasons described above.



19



 


Cost of sales for the six months ended December 31, 2020 increased by $1.2 million, or 13%, compared to the corresponding period of the prior fiscal year, consistent with the increased revenue of 11% for the same period, the reasons for which are discussed above. Additionally, total cost of sales reflects a $351,000 increase in under-absorbed manufacturing costs and a $253,000 increase in inventory and warranty charges due to reduced production hours resulting in part from paid absences related to COVID-19 and additional warranty accruals for several isolated warranty issues.

 

Gross profit increased by $427,000, or 8%, for the six months ended December 31, 2020 compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in thoracic driver and accessory sales discussed above. Gross margin for the six months ended December 31, 2020 decreased to 36% compared to 37% for the corresponding period of the prior fiscal year.


Operating Expenses

 

Operating Costs and Expenses
(in thousands except % change)


 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

Year over Year
% Change

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Three
Months

 

 

Six
Months

 

 

 

 

 

 

% of
Net
Sales

 

 

 

 

 

% of
Net
Sales

 

 

 

 

 

% of
Net
Sales

 

 

 

 

 

% of
Net
Sales

 

 

 

 

 

 

 

Operating expenses:

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

  

 

           

  

  

 

           

 

Selling expenses

 

$

150

 

 

 

2

%

 

$

135

 

 

 

2

%

 

$

280

 

 

 

2

%

 

$

277

 

 

 

2

%

 

 

11

%

 

 

1

%

General and administrative expenses

  

  

936

  

  

  

11

%

  

  

664

  

  

  

8

%

  

  

1,641

  

  

  

12

%

  

  

1,327

  

  

  

9

%

  

  

41

%

  

  

24

%

Research and development costs

 

 

989

 

 

 

12

%

 

 

397

 

 

 

5

%

 

 

2,080

 

 

 

10

%

 

 

881

 

 

 

6

%

 

 

149

%

 

 

136

%

 

 

$

2,075

 

 

 

25

%

 

$

1,196

 

 

 

15

%

 

$

4,001

 

 

 

24

%

 

$

2,485

 

 

 

16

%

 

 

74

%

 

 

61

%

 

Selling expenses consist of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three and six months ended December 31, 2020 increased $15,000, or 11%, and $3,000, or 1%, compared to the corresponding periods of fiscal 2020. These increases relate primarily to personnel-related expenses and consulting expenses offset by reduced travel expenses due to the COVID-19 pandemic.


General and administrative expenses (“G&A”) consists of salaries and other personnel-related expenses of our accounting, finance and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and other costs and expenses attributable to being a public company. G&A increased $272,000 and $314,000, respectively, during the three and six months ended December 31, 2020 when compared to the corresponding periods of the prior fiscal year. The increases relate primarily to relocation and operating expenses of the Franklin Property, increased legal fees related to intellectual property matters and our debt refinancing in combination with our Property Loan, increased personnel-related expenses including bonus accruals, as well as higher insurance expense, and stock compensation expense.


Research and development costs generally consist of salaries, employer paid benefits, and other personnel related costs of our engineering and support personnel, as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products. Research and development costs for the three and six months ended December 31, 2020 increased $592,000 and $1.2 million, respectively, compared to the corresponding periods of the prior fiscal year. These increases are primarily due to increased personnel-related expense and increased spending on internal development projects.




20



 


Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products. The research and development costs represent between 33% and 52% of total operating expenses for all periods presented and are expected to increase in the future as we continue to invest in our business. The amount spent on projects under development is summarized below (in thousands):

 

 

 

Three and Six Months ended
December 31, 2020

 

 

Three and Six Months ended
December 31, 2019

 

 

Est
Market
Launch(1)

 

 

Est
Annual
Revenue

 

Total Research & Development costs:

 

$

989

 

 

$

2,080

 

 

$

397

 

 

$

881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products in development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ENT Shaver

 

 

76

 

 

 

258

 

 

 

66

 

 

 

155

 

 

 

Q4 2021

 

 

$

1,000

 

Vital Ventilator

 

 

8

 

 

 

65

 

 

 

 

 

 

 

 

 

Q1 2022

 

 

$

1,500

 

CMF Driver

 

 

279

 

 

 

468

 

 

 

29

 

 

 

46

 

 

 

Q3 2021

 

 

$

1,000

 

Sustaining & Other

 

 

626

 

 

 

1,289

 

 

 

302

 

 

 

680

 

 

 

 

 

 

 

 

 

Total

 

$

989

 

 

$

2,080

 

 

$

397

 

 

$

881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recently completed products:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer CMF Driver (2)

 

$

 

 

$

 

 

$

81

 

 

$

181

 

 

 

06

/20

 

$

2,500

 

———————

(1)

Represents the calendar quarter of expected market launch.

(2)

Costs incurred related to customer contracts are included in costs of sales and deferred costs and are not included in research and development costs. This project was completed in the prior fiscal year and the product initially shipped in the fourth quarter of fiscal 2020.

 

We are nearing completion of an additional round of verification and validation of a new CMF driver, which we will be selling to our existing largest customer under a distribution agreement that we executed in the first quarter of fiscal 2021. Additionally, as previously disclosed, we anticipate the release to manufacture of a new ENT Shaver in the fall of 2021 and our Director of Business Development is working with a promising medical device distributor to potentially commercialize this product.


Interest & Other Income


Interest income for the three and six months ended December 31, 2020 and 2019 includes interest and dividends from our money market accounts and investment portfolio. During the three and six months ended December 31, 2019, we also recorded $8,500 and $17,000, respectively, of miscellaneous income related to cash collected related to note receivable extensions granted on a note we previously wrote off.


Interest Expense


Interest expense consists primarily of interest expense related to the notes payable described more fully in Note 9 to the condensed consolidated financial statements contained elsewhere in this report.

 

Gain on Sale of Investments


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 six months ended December 31, 2020 and 2019 is slightly less than our combined expected federal and applicable state corporate income tax rates due to federal and state research credits, as well as a tax benefit recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal 2021 as described more fully in Note 7 to the condensed consolidated financial statements contained elsewhere in this report.



21



 


Liquidity and Capital Resources


Cash and cash equivalents at December 31, 2020 decreased $0.9 million to $5.5 million as compared to $6.4 million at June 30, 2020. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.


 

 

As of and For the Six Months Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

1,085

 

 

$

2,558

 

Investing activities

 

$

(6,703

)

 

$

(1,611

)

Financing activities

 

$

4,720

 

 

$

(2,514

)

 

 

 

 

 

 

 

 

 

Cash and Working Capital:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,523

 

 

$

6,175

 

Working Capital

 

$

17,776

 

 

$

16,939

 

 

Operating Activities


Net cash provided by operating activities was $1.1 million for the six months ended December 31, 2020 primarily due to net income of $1.6 million and non-cash depreciation and amortization of $320,000 offset by an increase in inventory of $913,000, reflecting purchases for existing demand as well as long-lead time parts for products in development.


Net cash provided by operating activities was $2.6 million for the six months ended December 31, 2019 primarily due to net income of $2.4 million and non-cash depreciation and amortization of $282,000. Although we experienced an influx of cash in the amount of $1.4 million in collections from receivables during the six months ended December 31, 2019, our inventory increased by $1.6 million primarily related to the thoracic driver that we launched in the third quarter of fiscal 2020.


Investing Activities


During the second quarter ended December 31, 2020, we closed on our acquisition of the Franklin Property. We are currently investing in the build-out of the necessary improvements and expect to transfer some of our employees from our corporate headquarters to this new facility in the fourth quarter of fiscal 2021. In addition to our acquisition of the Franklin Property, we also invested $316,000 in machinery and equipment during the six months ended December 31, 2020.


Net cash used in investing activities for the six months ended December 31, 2019 was $1.6 million and related to an investment in marketable securities of $1.3 million and machinery and equipment of $317,000.


Financing Activities


Net cash provided by financing activities for the six months ended December 31, 2020 included proceeds of $5.2 million from a Property Loan with MBT, offset by $261,000 of principal payments on our term loan with MBT more fully described in Note 9 to the condensed consolidated financial statements contained elsewhere in this report, as well as payment of $259,000 of employee payroll taxes related to the award of 40,000 shares of common stock to employees under previously granted performance awards.


Net cash used in financing activities for the six months ended December 31, 2019 totaled $2.5 million and related primarily to the $2.2 million repurchase of 156,685 shares of our common stock pursuant to our share repurchase program as well as $314,000 of principal payments on our term loan from MBT.


Financing Facilities & Liquidity Requirements for the Next Twelve Months


As of December 31, 2020, our working capital was $17.8 million. We currently believe that our existing cash and cash equivalent balances together with our accounts receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. We may also borrow against our $2.0 million Revolving Loan with MBT (See Note 9 to condensed consolidated financial statements contained elsewhere in this report).

     



22



 


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


Investment Strategy


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. The Investment Committee approved each of the investments comprising the $6.1 million of marketable public equity securities that we held at December 31, 2020.

 

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 (our principal financial officer) have concluded based on their evaluation as of December 31, 2020 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 company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer and principal accounting officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting


During the three months ended December 31, 2020, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-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.





23



 


PART II OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


See Note 12 of Notes to condensed financial statements contained elsewhere in this report.


ITEM 1A. RISK FACTORS


Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2020 as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended December 31, 2020. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed 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.” The risks and uncertainties disclosed in our Form 10-K, our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect our business, financial condition and results of operations in the future.


There have been no material changes to the risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.


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


None.


ITEM 6. EXHIBITS


Exhibit

 

Description

10.1

  

Loan Agreement dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 12, 2020).

10.2

 

Term Note dated November 6, 2020 made by PDEX Franklin LLC in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed November 12, 2020).

10.3

 

Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture Filing dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed November 12, 2020).

10.4

 

Assignment of Leases and Rents dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed November 12, 2020).

10.5

 

Amended and Restated Credit Agreement dated November 6, 2020 by and between Pro-Dex, Inc. and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K filed November 12, 2020).

10.6

 

Amended and Restated Term Note A dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K filed November 12, 2020).

10.7

 

Term Note B dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.7 to the Company’s Form 8-K filed November 12, 2020).

10.8

 

Amended and Restated Revolving Credit Agreement dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.8 to the Company’s Form 8-K filed November 12, 2020).

10.9

 

Form of Stock Option Agreement for Directors and Employees of Pro-Dex, Inc. – 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 11, 2020).

10.10

 

At the Market Offering dated December 31, 2020, by and between Pro-Dex, Inc. and Ascendiant Capital Markets, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 31, 2020).

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



24



 





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

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 





25



 


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: February 4, 2021

By:

/s/ Richard L. Van Kirk

 

 

Richard L. Van Kirk

 

 

Chief Executive Officer

(principal executive officer)



Date: February 4, 2021

By:

/s/ Alisha K. Charlton

 

 

Alisha K. Charlton

 

 

Chief Financial Officer

(principal financial officer and principal accounting officer)







26



 


EXHIBIT INDEX


Exhibit

 

Description

10.1

  

Loan Agreement dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 12, 2020).

10.2

 

Term Note dated November 6, 2020 made by PDEX Franklin LLC in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed November 12, 2020).

10.3

 

Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture Filing dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed November 12, 2020).

10.4

 

Assignment of Leases and Rents dated November 6, 2020 by and between PDEX Franklin LLC and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed November 12, 2020).

10.5

 

Amended and Restated Credit Agreement dated November 6, 2020 by and between Pro-Dex, Inc. and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K filed November 12, 2020).

10.6

 

Amended and Restated Term Note A dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K filed November 12, 2020).

10.7

 

Term Note B dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.7 to the Company’s Form 8-K filed November 12, 2020).

10.8

 

Amended and Restated Revolving Credit Agreement dated November 6, 2020 made by Pro-Dex, Inc. in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.8 to the Company’s Form 8-K filed November 12, 2020).

10.9

 

Form of Stock Option Agreement for Directors and Employees of Pro-Dex, Inc. – 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 11, 2020).

10.10

 

At the Market Offering dated December 31, 2020, by and between Pro-Dex, Inc. and Ascendiant Capital Markets, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 31, 2020).

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

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 






27