UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
o
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended June 30, 2014
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 000-14942
PRO-DEX, INC.
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of
incorporation or organization)
2361 McGaw Avenue,
Irvine, California
(Address of principal executive offices)
84-1261240
(I.R.S. Employer
Identification No.)
92614
(Zip Code)
Registrant’s telephone number, including area code: (949) 769-3200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on which registered
NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Securities registered pursuant to Section 12(g) of the Act: None
___________________
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated filer o Non-accelerated filer (do not check if a smaller reporting company) o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of December 31, 2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing sales price on the Nasdaq Capital
Market was approximately $5.5 million. For the purpose of this calculation shares owned by officers, directors and 10% stockholders known to the registrant have been deemed to be owned by
affiliates. This calculation does not reflect a determination that persons are affiliates for any other purposes.
As of September 2, 2014, 4,211,019 shares of the registrant’s no par value common stock were outstanding.
Documents incorporated by reference:
Part III of this report incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for its 2014 Annual Meeting of Shareholders. The Proxy
Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
PRO-DEX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2014
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not based on
historical facts but instead reflect the Company’s expectations, estimates or projections concerning future results or events. These statements generally can be
identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “belief,” “estimate,”
“project,” “forecast,” “plan,” “likely,” “will,” “should” or similar words or phrases. These statements are not guarantees of performance and are inherently
subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause actual results, performance or achievements to
differ materially from those expressed or indicated by those statements. The Company cannot assure you that any of its expectations, estimates or projections
will be achieved.
Forward-looking statements included in this report are only made as of the date of this report and the Company disclaims any obligation to publicly
update any forward-looking statement to reflect subsequent events or circumstances.
Numerous factors could cause the Company’s actual results and events to differ materially from those expressed or implied by forward-looking
statements, including, without limitation: loss of a significant customer, entry of new and stronger competitors, capital availability, unexpected costs,
compliance with contractual obligations, failure to capitalize upon access to new customers, marketplace delisting, the ramifications of industry consolidation
of medical products manufacturers, dealers and distributors, managed health care, market acceptance and support of new products, cancellation of existing
contracts, customer “in house” production of products previously designed by and/or acquired from the Company, maintaining favorable supplier
relationships, the Company’s ability to engage qualified human resources as needed, regulatory compliance, general economic conditions and other factors
described under Item 1A (Risk Factors) of this report. This list of factors is illustrative, but by no means exhaustive. All forward-looking statements should be
evaluated with the understanding of their inherent uncertainty.
ITEM 1.
BUSINESS
Company Overview
Pro-Dex, Inc. (“Company”, “Pro-Dex”, “we”, “our”, “us”), with operations in Irvine, California and Beaverton, Oregon, designs and produces
powered surgical and dental instruments and motion control products used in the medical, factory automation and scientific research industries.
Our products are found in hospitals, dental offices, medical engineering labs, scientific research facilities and high-tech manufacturing operations
around the world. In addition to Pro-Dex, the names Micro Motors and Oregon Micro Systems are used for marketing purposes as brand names.
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 certain other Securities and Exchange Commission (“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.
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In February 2012, we sold our fractional horsepower motor product line located in Carson City, Nevada, operating under the name Pro-Dex
Astromec (“Astromec”) to a third party. As a result of the sale, this product line has been classified as a discontinued operation in conformity with applicable
accounting guidance. Accordingly, unless otherwise indicated, Astromec’s results have been reported as discontinued operations and removed from all
financial discussions of continuing operations, including the Consolidated Financial Statements and Notes, beginning on page 23 of this report.
All years relating to financial data herein shall refer to fiscal years ended June 30, unless indicated otherwise.
Description of Business
The majority of our revenue is derived from designing, developing and manufacturing powered instruments for the medical and dental industries and
motion control software and hardware for industrial and scientific applications. The proportion of total sales by customer type is as follows:
Medical device
Industrial and scientific
Dental
Government and other
Total Sales
Years Ended June 30,
2014
2013
$
$
6,848
2,392
1,219
353
10,812
(In thousands)
% of
Revenue
64%
22%
11%
3%
100%
$
$
7,970
2,594
1,092
593
12,249
% of
Revenue
65%
21%
9%
5%
100%
Our medical device products utilize proprietary designs developed by us primarily under exclusive development and supply agreements and are
manufactured in our Irvine, California facility, as are our dental products. Our medical device products are sold primarily to original equipment manufacturers
and our dental products are sold primarily to dental product distributors. In our Beaverton, Oregon facility, we design and manufacture embedded multi-axis
motion controllers which are sold to distributors or original equipment manufacturers in the automation and research industries. The proportion of total sales
by facility is as follows:
Irvine
Beaverton
Total Sales
Years Ended June 30,
2014
2013
(In thousands)
% of
Revenue
$
$
9,298
1,514
10,812
86%
14%
100%
$
$
10,531
1,718
12,249
% of
Revenue
86%
14%
100%
In fiscal year 2014, our top 20 customers accounted for 82% of our sales, compared to 81% in fiscal year 2013. In fiscal year 2014, our largest
customer, included in medical device revenue above, accounted for 49% of our sales with our next largest customer accounting for 6% of our sales. This
compares to fiscal year 2013, when our largest customer accounted for 46% of our sales, with our next largest customer accounting for 6% of our sales. In
many cases, including our largest customers, disclosure of customer names is prohibited by confidentiality agreements with such entities.
We have no plans to discontinue the sales relationships with our existing significant customers and have no knowledge of them discontinuing their
sales relationship with us.
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We continue to implement the steps of a strategic plan, the objectives of which are to sustain business with our largest customer, successfully
complete two significant engineering projects currently in progress and release the related products to manufacturing, identify and capture additional revenue
opportunities and continue to effectively manage our reduced operating costs. There can be no assurance, however, as to either the timing or success of
achieving these objectives, which, during any period not achieved, may cause a prolonged material and adverse impact on our business.
The majority of the raw materials and components used to manufacture our products are purchased and are available from several sources. Precision
Interconnect, Transicoil and Portescap Danaher are examples of key suppliers. We have no exclusive arrangements with any of our suppliers, but in several
instances only one supplier is used for certain high-value components. In most of such instances, secondary suppliers have been identified, although it is
likely that any transition to a new or different supplier would result in a delay in the supply chain. We consider our relationships with our suppliers and
manufacturers to be good. We do not intend to terminate any such relationship at this time, nor does management have knowledge that any supplier or
manufacturer intends to terminate its relationship with us.
Our commitment to product design, manufacturing and quality systems are supported by our compliance with several regulatory agency
requirements and standards. We hold a U.S. Food and Drug Administration (“FDA”) Establishment Registration and a State of California Device
Manufacturing License (Dept of Public Health Food and Drug Branch) with respect to our Irvine, California facility. In addition, our Irvine, California facility
is certified to ISO 13485:2003, Medical Device Directive 93/42/EEC – Annex II, and Canadian Medical Device Conformity Assessment System. Our
Beaverton, Oregon facility is certified to ISO 9001:2008.
At June 30, 2014, we had a backlog of $2.8 million compared with a backlog of $6.7 million at June 30, 2013. We have experienced, and may
continue to experience, variability in our new order bookings due to, among other reasons, the timing of customer orders based on end-user demand and
customer inventory levels, illustrative of which is our receipt in July 2014 of purchase orders from our largest customer aggregating approximately $3.5
million for shipments extending through December 2015. We do not typically experience seasonal fluctuations in our shipments and revenues.
Competition
The markets for products in the industries served by our customers are intensely competitive, and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development and marketing resources, than us.
We compete in all of our markets with other major medical device and motion control related companies. As a provider of outsourced services, we
also compete with our customers’ own internal development and manufacturing groups. Competitive pressures and other factors, such as new product or new
technology introductions by us, our customers’ internal development and manufacturing departments, or our competitors, may result in price or market share
erosion that could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that our
products and services will achieve broad market acceptance or will successfully compete with other products targeting the same customers.
Research and Development
We conduct research and development activities to both maintain and improve our market position. Our research and development effort involves the
design and manufacture of products that perform specific applications for our existing and prospective customers. Our research and development activities are
focused on:
● expanding our knowledge base in the medical device and motion control industries to solidify our products with current customers and expand
our customer base;
● advancing applicable technologies; and
● enhancing our product lines.
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In certain instances we may share research and development costs with our customers by billing for non-recurring engineering services. Fees
received for non-recurring engineering services represented 2% of our revenue in both fiscal years 2014 and 2013. During fiscal years 2012 and 2013, we
entered into certain development and supply contracts, the development portions of which are in progress and provide for billable non-recurring engineering
service fees. Such fees are recognized as revenue generally upon successful completion of the non-recurring engineering services, which we believe will
occur in fiscal year 2015, although successful completion cannot be assured. We also intend to pursue other revenue-generating development projects.
Accordingly, we believe that non-recurring engineering fees could represent a greater share of our revenue in the future.
During the fiscal years ended June 30, 2014 and 2013, we incurred research and development expenses amounting to $1,482,000 and $1,790,000,
respectively, which costs exclude $511,000 and $370,000 in 2014 and 2013, respectively, that were, or will be, shared with our customers through billings for
non-recurring engineering services.
Employees
At June 30, 2014, we had 62 full-time employees, comprised of 53 employees in Irvine and 9 in Beaverton. At June 30, 2013, we had 67 full-time
employees. During each of the three fiscal years in the period ended June 30, 2014, we have initiated reductions-in-force as part of a strategic plan to reduce
expenses.
None of our employees are a party to any collective bargaining agreements with us. We consider our relationships with our employees to be good.
Government Regulations
The manufacture and distribution of medical and dental devices are subject to state and federal requirements set forth by various agencies, including
the FDA, and state medical and dental boards. The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and
subject to diverse, often conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are
unable to eliminate the ongoing risk that one or more of our activities or devices may at some point be determined to be non-compliant. The penalties for non-
compliance could range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined to
have fully complied with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business could adversely affect
or result in the cessation of a portion of our business. A change in such laws or regulations at any time may have an adverse effect on our operations.
The FDA designates all medical devices into one of three classes (Class I, II or III) based on the level of control necessary to assure the safety and
effectiveness of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical instrumentation
we manufacture is generally classified into Class I, and our dental instrumentation is generally classified into Class II. The FDA has broad enforcement
powers to recall and prohibit the sale of products that do not comply with federal regulations, and to order the cessation of non-compliant processes. No claim
has been made to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes have been the subject of routine governmental reviews and investigations.
The total cost of providing health care services has been and will continue to be subject to review by governmental agencies and legislative bodies in
the major world markets, including the United States, which are faced with significant pressure to lower health care costs. The Patient Protection and
Affordable Care Act signed into law in March 2010 (the “Affordable Care Act”) imposes a 2.3% excise tax on sales of certain medical devices, some of
which we produce, that we may be unable to recover through price increases to our customers.
We believe that our business is conducted in a manner consistent with Environmental Protection Agency (“EPA”) and other agency regulations
governing disposition of industrial waste materials.
While we believe that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any
investigation or review which may be undertaken in the future with respect to our products or processes.
Management believes that each of our facilities has manufacturing systems and processes that are based on established Quality Management System
standards. In addition, we believe that our Irvine, California facility is compliant with applicable Good Manufacturing Practices promulgated by the FDA, and
is, along with our Beaverton, Oregon facility, compliant with applicable ISO standards set forth by the International Organization for Standardization.
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Patents, Trademarks and Licensing Agreements
We hold patents relating to miniature rotary drive products and multi-axis motion controllers. Our patents have varying expiration dates. The near
term expiration of the patents, if any, is not expected to cause any change in our revenue-generating operations as the revenue from the products associated
with those patents is not material.
We have no reason to believe that our activities infringe upon the intellectual property of any third party. With respect to our own patents, we have no
reason to believe that our patents are invalid and we believe that at least some of our patents cover certain aspects of our products. While we are unaware of
any reason that would cause us to assert or defend a claim of patent infringement, any such assertion or defense could materially and adversely affect our
business and results of operations due to the costs involved.
We have certain federally registered trademarks relating to our products, including Pro-Dex® OMS® and OMS-EZ®, along with a number of other
common law trademarks.
We have not entered into any franchising agreements. We have not granted nor do we hold any third-party licenses having terms under which we
earn revenue or incur expense in material amounts.
ITEM 1A.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other
information contained in this report, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our
business, financial condition, operating results and prospects would suffer. In that case, the trading price of our common stock would likely decline and you
might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do
not know about or that we currently believe to be immaterial may also impair our operations and business results.
A substantial portion of our revenue is derived from a single customer. If we were to lose that customer, it would have a material adverse effect on
our business, financial condition and results of operations.
In fiscal year 2014, our top 20 customers accounted for 82% of our sales, with our largest customer accounting for 49% of our sales. The loss of our
largest customer, or the loss of any other significant customer, would severely impact us, including having a material adverse effect on our business, financial
condition, cash flows, revenue and results of operations.
Our failure to manage contracting sales levels could harm us by having a material adverse effect on our business and results of operations.
Over the past several fiscal years our total sales have contracted from $27.1 million in 2011 to $17.3 million in 2012, $12.2 million in 2013 and
$10.8 million in 2014. We continue to implement the steps of a strategic plan, the objectives of which are to identify and capture additional revenue
opportunities while continuing to manage our reduced operating costs. There can be no assurance, however, as to either the timing or success of achieving
these objectives, which, during any period not achieved, may cause us to experience a prolonged material and adverse impact on our business.
Even if we are successful in identifying and capturing additional revenue opportunities, we might be required to expand our overall production,
development, marketing, sales, management and training capacity. In the event we are unable to identify, hire, train and retain qualified individuals in such
capacities within a reasonable timeframe, such failure could have a material adverse effect on us.
We terminated our bank credit facility agreements in September 2012. An inability to achieve anticipated cash flows from operations could have a
material adverse effect on our liquidity and could require additional financing, which may not be available on acceptable terms or at all.
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On August 30, 2012, we notified our former bank of our intent to terminate our then-existing credit facility agreements and repay the term loan in
full, which amounted to $685,000 at the time of its repayment in September 2012.
An inability to achieve anticipated cash flows from operations could have a material adverse effect on our ability to fund operations and require us to
obtain new financing. However, there is no assurance that such financing will be available on acceptable terms, if at all.
A substantial portion of our business is derived from our two core business areas that, if not serviced properly, may result in a material adverse
impact upon our business, results of operations and financial condition.
In fiscal year 2014, we derived more than 77% of our revenue from sales of our medical device and motion control products and related services. We
believe that a primary factor in the market acceptance of our products and services is the value they create for our customers. Our future financial
performance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our customers through the timely
development, successful introduction and implementation of new and enhanced products and services, while at the same time continuing to provide the value
our customers have come to expect from us. We have historically expended a significant percentage of our revenue on product development and believe that
significant continued product development efforts will be required to sustain our growth. Continued investment in our sales and marketing efforts will also be
required to support future growth.
There can be no assurance that we will be successful in our product development efforts, that the market will continue to accept our existing
products, or that new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of our customers, or
achieve market acceptance. If the market does not continue to accept our existing products, or our new products or product enhancements do not achieve
market acceptance, our business, results of operations and financial condition could be materially adversely affected.
We face significant competition from a number of different sources, which could negatively impact our results of operations and business conditions.
The markets for products in the industries served by our customers are intensely competitive, and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development and marketing resources, than us.
We compete in all of our markets with other major surgical device and motion control related companies. As a provider of outsourced products and
services, we also compete with our customers’ own internal development groups. Competitive pressures and other factors, such as new product or new
technology introductions by us, our customers’ internal development and manufacturing departments, or our competitors may result in price or market share
erosion that could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that our
products and services will achieve broad market acceptance or will successfully compete with other products.
The industry in which we operate is subject to significant technological change and any failure or delay in addressing such change could adversely
affect our competitive position or could make our current products obsolete.
The medical device and motion control markets are generally characterized by rapid technological change, changing customer needs, frequent new
product introductions and evolving industry standards. The introduction of products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing
new products that respond to technological changes or evolving industry standards.
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New product development requires significant research and development expenditures that we have historically funded through operations; however
we may be unable to do so in the future and we have no credit facility with which to fund such expenditures. Any significant decrease in revenues or research
funding could impair our ability to respond to technological advances in the marketplace and to remain competitive. If we are unable, for technological or
other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, our business,
results of operations and financial condition may be materially adversely affected. Although we target new markets for access, develop new products and
update existing products, there can be no assurance that we will do so successfully or that even if we are successful, such efforts will be completed
concurrently with or prior to the introduction of competing products. Any such failure or delay could adversely affect our competitive position or could make
our current products obsolete.
We rely heavily on our proprietary technology, which, if not properly protected or if deemed invalid, could have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on the maintenance and protection of our proprietary technology and rely on patent filings, exclusive development and supply
agreements, confidentiality procedures and employee nondisclosure agreements to protect it. There can be no assurance that the legal protections and
precautions taken by us will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies
equivalent or superior to ours. Further, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the
United States and are often not enforced as vigorously as those in the United States.
We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can be no assurance that
others will not assert infringement or trade secret claims against us with respect to our current or future products. Assertions or claims by others, whether or
not valid, could cause us to incur significant legal costs defending our intellectual property rights and potentially require us to enter into a license agreement
or royalty arrangement with the party asserting the claim or to cease our use of the infringing technology, any of which could have a material adverse effect
on our business, results of operations and financial condition.
Two of our directors hold voting power with respect to a substantial portion of our outstanding common stock that enables them to have significant
influence over the outcome of all matters submitted to our shareholders for approval, which influence may conflict with our interests and the
interests of other shareholders.
As of September 2, 2014, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, controlled voting power over approximately 36.8%
(24.7% and 12.1%, respectively) of the outstanding shares of our common stock. As a result of such voting control, these directors will have significant
influence over all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions, and may have
interests that conflict with our interests and the interests of other shareholders.
A conflict of interest exists with respect to certain investments approved by our Investment Committee.
We have a Surplus Capital Investment Policy (the “Policy”) that provides, among other items, for the following:
(a) Determination by our Board of Directors of (i) our surplus capital balance and (ii) the portion of such surplus capital balance to be invested
according to the Policy;
(b) Selection of an Investment Committee responsible for implementing the Policy; and
(c) Objectives and criteria under which investments may be made.
The Investment Committee is currently comprised of: Messrs. Swenson (Chair) and Cabillot, both of whom are members of our Board of Directors
and professional investment fund managers, and Mr. Harold A. Hurwitz, a member of our Board of Directors, and our Chief Executive Officer and Chief
Financial Officer. The Investment Committee has approved making investments in the common stocks of certain companies in which funds managed by
Messrs. Swenson and/or Cabillot currently hold common stock investments, and may approve making additional such investments in the future. In such
situations, a potential conflict of interest exists, or will exist, in that Messrs. Swenson’s or Cabillot’s interests may not be independent of Investment
Committee decisions. As of August 31, 2014, the investments made pursuant to the Policy in equity securities of publicly held companies had an aggregate
market value of approximately $1.1 million.
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Our investments under the Policy are concentrated in stocks whose fair values are subject to a loss in value and which may not easily be sold.
Our current investments under the Policy include investments in common stocks of various companies. A significant decline in the value of our
investments may produce a large decrease in our consolidated shareholders’ equity and could have a material adverse effect on our consolidated book value
per share. Under certain circumstances, significant declines in the fair value of these investments may require the recognition of losses in the statement of
operations and other comprehensive income. In addition, some stocks in which we are invested under the Policy do not consistently trade on a daily basis
which could adversely affect our ability to sell them on a timely basis or at an acceptable value. It is possible that we could realize a significant or complete
loss of our investments under the Policy.
Our quarterly results can fluctuate significantly from quarter to quarter, which may negatively impact the price of our shares and/or cause
significant variances in the prices at which our shares trade.
Our sales have fluctuated in the past, and may fluctuate in the future from quarter to quarter and period to period, as a result of a number of factors
including, without limitation: the size and timing of orders from customers; the length of new product development cycles; market acceptance of new
technologies; changes in pricing policies or price reductions by us or our competitors; the timing of new product announcements and product introductions by
us or our competitors; the financial stability of major customers; our success in expanding our sales and marketing programs; acceleration, deferral, or
cancellation of customer orders and deliveries; changes in our strategy; revenue recognition policies in conformity with accounting principles generally
accepted in the United States (“GAAP”); personnel changes; and general market and economic factors.
Because a significant percentage of our expenses are fixed, a variation in the timing of sales can cause significant fluctuations in operating results
from quarter to quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future performance for
any particular period.
In addition, it is possible that our operating results in future quarters may be below the expectations of public market analysts and investors. In such
an event, the price of our common stock could be materially adversely affected.
Our operations are subject to a number of complex government regulations, the violation of which could have a material adverse effect on our
business.
The manufacture and distribution of medical and dental devices are subject to state and federal requirements set forth by various government
agencies including the FDA and EPA. The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to
diverse, often conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to
eliminate the ongoing risk that one or more of our activities may at some point be determined to be non-compliant. The penalties for non-compliance could
range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined to have fully complied
with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business could adversely affect or result in the
cessation of a portion of our business. A change in such laws or regulations at any time may have an adverse effect on our operations.
The FDA designates all medical devices into one of three classes (Class I, II or III) based on the level of control necessary to assure the safety and
effectiveness of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical instrumentation
we manufacture is generally classified into Class I, and our dental instrumentation is generally classified into Class II. The FDA has broad enforcement
powers to recall and prohibit the sale of products that do not comply with federal regulations, and to order the cessation of non-compliant processes. No claim
has been made to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes are from time to time subject to routine governmental reviews and investigations. We are also subject to EPA regulations concerning the disposal of
industrial waste.
While management believes that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome
of any such future review or investigation.
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We face significant uncertainty in the healthcare industry due to government reform.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The Affordable Care Act enacted
sweeping reforms to the U.S. healthcare industry, including mandatory health insurance, reforms to Medicare and Medicaid, the creation of large insurance
purchasing groups, new taxes on medical equipment manufacturers that apply to certain of our products and other significant modifications to the healthcare
delivery system. Due to uncertainties regarding the ultimate features of federal legislation and its implementation, we cannot predict what impact the
Affordable Care Act may have on us, our customers or our industry.
The global economic environment may impact our business, operating results or financial condition.
Changes in the global economic environment have caused, and may cause in the future, a general tightening in the credit markets, lower levels of
liquidity, increases in rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These macroeconomic developments
could negatively affect our business, operating results or financial condition should they cause, for example, current or potential customers to become unable
to fund purchases of our products, in turn resulting in delays, decreases or cancellations of purchases of our products and services, or causing the customer to
not pay us or to delay paying us for previously purchased products and services. In addition, financial institution failures may cause us to incur increased
expenses or make it more difficult either to obtain financing for our operations, investing activities (including the financing of any future acquisitions), or
financing activities. Additional economic risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
and adversely affect our business, financial condition or operating results.
We face risks and uncertainties associated with potential litigation by or against us, which could have a material adverse effect on our business,
results of operations and financial condition.
We continually face the possibility of litigation as either a plaintiff or a defendant. It is not reasonably possible to estimate the awards or damages, or
the range of awards or damages, if any, that we might incur in connection with such litigation.
Many of our products are complex and technologically advanced. Such products may, from time to time, be the subject of claims concerning product
performance and construction, including warranty claims. While we are committed to correcting such problems as soon as possible, there is no assurance that
solutions will be found on a timely basis, if at all, to satisfy customer demands or to avoid potential claims or litigation. Also, due to the location of our
facilities, as well as the nature of our business activities, there is a risk that we could be subject to litigation related to environmental remediation claims. We
maintain insurance to protect against claims associated with the manufacture and use of our products, but there can be no assurance that our insurance
coverage will adequately cover any claim asserted against us.
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The uncertainty associated with potential litigation may have an adverse impact on our business. In particular, litigation could impair our
relationships with existing customers and our ability to obtain new customers. Defending or prosecuting litigation could result in significant legal costs and a
diversion of management’s time and attention away from business operations, either of which could have a material adverse effect on our business, results of
operations and financial condition. There can be no assurance that litigation would not result in liability in excess of our insurance coverage, that our
insurance will cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates.
Our operations are dependent upon our key personnel. If such personnel were to leave unexpectedly, we may not be able to execute our business
plan.
Our future performance depends in significant part upon the continued service of our key technical and senior management personnel. Because we
have a relatively small number of employees when compared to other companies in the same industry, our dependence on maintaining our relationship with
key employees is particularly significant. We are also dependent on our ability to attract and retain high quality personnel, particularly in the areas of product
development, operations management, marketing and finance.
A high level of employee mobility and the aggressive recruiting of skilled personnel characterize the medical device and motion control industries.
There can be no assurance that our current employees will continue to work for us. Loss of services of key employees could have a material adverse effect on
our business, results of operations and financial condition. Furthermore, we may need to provide enhanced forms of incentive compensation to attract and
retain such key personnel.
The failure to maintain the market price of our common stock may affect our ability to remain listed on the Nasdaq.
The minimum bid price for our publicly traded common stock was below $1.00 for a significant period of time throughout 2008, 2009 and 2010,
ultimately resulting in us effecting a one-for-three reverse split of our common stock on June 17, 2010 to increase our stock price to satisfy the $1.00
minimum bid price listing requirement of the Nasdaq Capital Market. Notwithstanding the increased price of our common stock that resulted from the reverse
split, our future performance, general market conditions and other factors could result in us failing to satisfy the listing standards of the Nasdaq Capital
Market in the future. If our common stock were to be delisted from the Nasdaq Capital Market, our shareholders may find it difficult to either dispose, or
obtain quotations for the price, of our common stock.
We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance, compliance with
which could be costly and time consuming.
We are subject to changes in and interpretations of financial accounting standards that govern the measurement of our performance. Based on our
reading and interpretations of relevant pronouncements, guidance, or concepts issued by, among other authorities, the Financial Accounting Standards Board,
the SEC and the American Institute of Certified Public Accountants, management believes our performance, including current sales contract terms and
business arrangements, has been properly reported. However, there continue to be issued pronouncements, interpretations and guidance for applying the
relevant standards to a wide range of contract terms and business arrangements that are prevalent in the industries in which we operate. Future interpretations
or changes by the regulators of existing accounting standards or changes in our business practices may result in future changes in our accounting policies and
practices that could have a material adverse effect on our business, financial condition, cash flows, revenue and results of operations.
Our evaluation of internal controls and remediation of potential problems is costly and time consuming and could expose weaknesses in financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002, as amended, requires management’s assessment of the effectiveness of our internal control over
financial reporting. This process is expensive and time consuming, and requires significant attention of management. Management can give no assurance that
material weaknesses in internal controls will not be discovered. If a material weakness is discovered, corrective action may be time consuming and costly, and
could further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in
our financial statements and harm our stock price, especially if a restatement of financial statements for past periods is required.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our executive offices and Irvine manufacturing facility are located at 2361 McGaw Avenue, Irvine, California 92614. We lease the 28,000 square
foot facility from an unrelated third party at a current base monthly lease rate of $35,000, with annual increases of $1,400 per month in the base lease rate
through the expiration of the lease in April 2018. The building is a one-story stand-alone structure of concrete “tilt-up” construction, approximately 25 years
old and in good condition.
Our Beaverton office and manufacturing facility is located at 15201 N.W. Greenbrier Parkway, B-1 Ridgeview, Beaverton, Oregon 97006. The
Company executed a first amendment to the lease in the second quarter of fiscal year 2014 reducing the leased premises from 7,500 square feet to 7,100
square feet. The facility is leased from an unrelated third party, at a base monthly lease rate of $5,900 through the expiration of the lease in July 2017. The
building is a one-story suite in a 20-year-old industrial office complex and is in good condition.
The current leased facilities are believed to be adequate for our expected needs. We believe each facility is in full compliance with applicable state,
EPA and other agency environmental standards.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time a party to various legal proceedings incidental to our business, none of which we consider may be material. The legal
proceedings potentially cover a variety of allegations spanning our entire business. There can be no certainty, however, that we may not ultimately incur
liability or that such liability will not be material and adverse.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted under the symbol “PDEX” on the automated quotation system of the Nasdaq Capital Market (“NASDAQ”). The
following table sets forth for the quarters indicated the high and low sales prices of our common stock as reported by NASDAQ. The quotations reflect inter-
dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions. On September 8, 2014, the last sale
price of our common stock as reported by NASDAQ was $2.05 per share.
Year ended June 30, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended June 30, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
$
$
$
2.10
2.19
2.37
2.10
2.10
2.55
3.77
2.30
1.52
1.72
1.92
1.84
1.90
2.06
1.99
1.90
As of September 8, 2014, there were 79 holders of record of our common stock. This number does not include beneficial owners including holders
whose shares are held in nominee, or “street,” name.
Dividends
We have never paid a cash dividend with respect to our common stock. The current policy of our Board of Directors is to retain any future earnings
to provide funds for the operation and expansion of our business. Any determinations to pay dividends in the future will be at the discretion of our Board of
Directors.
Rights Offering
On April 30, 2014 we completed a rights offering whereby we issued a total of 868,732 shares of common stock. The rights offering was made
pursuant to a Registration Statement on Form S-3 that was filed with the Securities and Exchange Commission ("SEC") and became effective on March 21,
2014. The rights offering was made through the Company’s distribution to its existing shareholders as of March 20, 2014, the record date, of non-transferable
subscription rights to purchase their pro rata portion of newly issued shares of common stock at a subscription price of $1.90 per share. The subscription
period commenced on March 24, 2014 and expired on April 25, 2014. (See Note 12 of Notes to Consolidated Financial Statements contained elsewhere in
this report.)
Repurchases
We did not repurchase any securities during fiscal 2014 or fiscal 2013.
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ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial
Statements and the Notes thereto included in Item 8 of this report as well as the Risk Factors included in Item 1A of this report. The following discussion
contains forward-looking statements. (See “Cautionary Note Regarding Forward-Looking Statements” included in Item 1 of this report.)
Overview
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the
Company’s results of operations and financial condition for the years ended June 30, 2014 and 2013. Unless otherwise indicated, this discussion excludes the
results of our fractional horsepower motor product line, operating under the name Pro-Dex Astromec, which we sold in February 2012 and which has been
classified as a discontinued operation.
The Company, with operations in Irvine, California and Beaverton, Oregon, designs and produces powered surgical and dental instruments and
motion control products used in the medical, factory automation and scientific research industries.
Our products are found in hospitals, dental offices, medical engineering labs, scientific research facilities and high-tech manufacturing operations
around the world. In addition to Pro-Dex, the names Micro Motors and Oregon Micro Systems are used for marketing purposes as brand names.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on
historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Revenue Recognition
Revenue on product sales is recognized upon shipment to the customer when risk of loss and title transfer to the customer and all other conditions
required by GAAP, as promulgated by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Section 605
(formerly Staff Accounting Bulletin No. 104, Revenue Recognition), have been satisfied.
Revenue from billable product development service portions of development and supply contracts is generally recognized upon completion of such
product development services, in conformity with ASC Section 605. Accordingly, revenue from product development milestone billings to our customers
under such contracts is deferred.
Returns of our product for credit are minimal; accordingly, we do not establish a reserve for product returns at the time of sale.
Estimated Losses on Product Development Services
Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated
quarterly. When it is probable that total costs from the development portion of such contracts will exceed product development service revenue, the expected
loss is recognized immediately in cost of sales.
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Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment. It is based upon the
knowledge and experience of our project managers, engineers, and finance professionals. Factors that are considered in estimating the cost of work to be
completed and ultimate profitability of the fixed price product development portion of development and supply contracts include the nature and complexity of
the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and
expected costs for specific regulatory approvals.
Warranties
Certain of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two
years, after the sale. At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return
rates and repair costs, which factors are reviewed quarterly.
Warranty expenses, including changes of estimates, are included in cost of sales in our consolidated statements of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Reductions to estimated market value are recorded, and charged
to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12
months from the measurement date.
Accounts Receivable and Unbilled Receivables
Trade receivables are stated at their original invoice amounts, less an allowance for doubtful portions of such accounts. Management determines the
allowance for doubtful accounts based on facts and circumstances related to specific accounts, and on historical experience related to the age of accounts.
Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously reserved are offset against the allowance when
received.
Unbilled receivables reflect revenues from non-recurring engineering services not yet billable to customers under the terms of the related
development and supply contracts.
Investments
Investments consist of marketable equity securities of publicly held companies. Management intends to hold such securities for a sufficient period in
which to realize a reasonable return, although there is no assurance that positive returns will be realized or that such securities will not be liquidated in a
shorter than expected time frame to accommodate the Company’s liquidity requirements. Accordingly, investments have been classified as non-current and
available-for-sale in conformity with ASC Section 320. Investments are marked to market at each measurement date, with unrealized gains and losses
presented as adjustments to accumulated other comprehensive income or loss.
Long-lived Assets
We review the recoverability of long-lived assets, consisting of equipment and leasehold improvements, when events or changes in circumstances
occur that indicate carrying values may not be recoverable.
Share-Based Compensation
We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated
at the grant date using the Black-Scholes option-pricing model. The portion that is ultimately expected to vest is recognized as compensation cost over the
requisite service period using the straight-line single option method.
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The determination of fair value using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex
and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise
behavior. We estimate stock price volatility based on two factors: (a) the measurement date (typically the grant date) and (b) the expected life of the option,
which we calculate using the Staff Accounting Bulletin No. 107 simplified method.
Income Taxes
We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and
liabilities along with net operating loss and tax credit carryovers. Deferred tax assets at June 30, 2014 and 2013 consisted primarily of basis differences
related to research and development tax credit utilization, net operating loss carryovers, intangible assets, accrued expenses and inventories.
Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such
determination is based on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which
deferred tax assets will be recoverable. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we
believe is more likely than not to be realized. When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes
will increase or decrease, respectively, in the period such determination is made. At June 30, 2014 and 2013, we maintained a valuation allowance against the
entire balance of our deferred tax assets, net of deferred tax liabilities.
Results of Operations for the Fiscal Year Ended June 30, 2014 Compared to the Fiscal Year Ended June 30, 2013
The following tables set forth results from continuing operations for the years ended June 30, 2014 and 2013:
Years Ended June 30,
2014
2013
Dollars in thousands
% of Net
Sales
% of Net
Sales
Net sales
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Research and development costs
Operating loss
Other income (expense), net
Loss from continuing operations before income taxes
Benefit from income taxes
Net loss from continuing operations
$
$
10,812
7,846
2,966
585
1,713
1,482
3,780
(814)
59
(755)
104
(651)
100%
73%
27%
5%
16%
14%
35%
(8%)
1%
(7%)
1%
(6%)
$
$
12,249
8,533
3,716
1,255
2,566
1,790
5,611
(1,895)
(8)
(1,903)
39
(1,864)
100%
70%
30%
10%
21%
15%
46%
(15%)
—
(16%)
1%
(15%)
Net Sales
The majority of our revenue is derived from designing, developing and manufacturing powered surgical instruments for medical device original
equipment manufacturers, dental instruments, and motion control software and hardware for industrial and scientific applications. The proportion of total
sales by customer type is as follows:
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Net sales:
Medical device
Industrial and scientific
Dental
Government and other
Years Ended June 30,
2014
2013
Dollars in thousands
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2013
To 2014
$
$
6,848
2,392
1,219
353
10,812
64%
22%
11%
3%
100%
$
$
7,970
2,594
1,092
593
12,249
65%
21%
9%
5%
100%
(14%)
(8%)
12%
(40%)
(12%)
Net sales in fiscal 2014 decreased by $1.4 million, or 12%, as compared to fiscal 2013, due primarily to a reduction in medical device sales of $1.1
million. Shipments to our largest customer, accounted for in medical device sales, decreased $491,000 for fiscal 2014 from fiscal 2013. This decrease resulted
from the customer’s suspension of product delivery orders during the first five months of fiscal 2014, and the negotiation in December 2013 of a revised
delivery schedule that provided for an extension, into fiscal 2015, of the number of months in which the customer would fulfill its ordering obligation.
Additionally, repair sales of $294,000 to our former largest medical device customer in fiscal 2014 represented a decline of approximately $428,000 from
fiscal 2013, and we do not expect to receive further repair orders from this former customer.
At June 30, 2014, we had a backlog of $2.8 million compared with a backlog of $6.7 million at June 30, 2013. We may experience variability in our
new order bookings due to, among other reasons, the timing of customer orders based on end-user demand and customer inventory levels, illustrative of
which is our receipt in July 2014 of purchase orders from our largest customer aggregating approximately $3.5 million for shipments extending through
December 2015.
Cost of Sales and Gross Margin
Cost of sales:
Product costs
Accrued losses on product development services
Under-absorption of manufacturing costs
Inventory and warranty charges
Total cost of sales
Gross profit and gross margin
Years Ended June 30,
Dollars in thousands
% of Net
Sales
64%
3%
4%
2%
73%
27%
$
$
$
2014
6,867
317
474
188
7,846
2,966
2013
7,224
176
465
668
8,533
3,716
% of Net
Sales
59%
2%
4%
5%
70%
30%
Increase
(Decrease)
From 2013
To 2014
(5%)
80%
2%
(72%)
(8%)
(20%)
$
$
$
Cost of sales in fiscal 2014 decreased $687,000, or 8%, from fiscal 2013, due primarily to (a) a $357,000 decrease in product costs, and (b) a
$480,000 decrease in expenses related to inventory and warranty charges, partially offset by (c) a $141,000 increase from fiscal 2013 to 2014 in accruals for
anticipated losses on fixed price product development services portion of certain contracts. The decrease in product costs is due primarily to the decrease in
net sales from fiscal 2013 to 2014. The decrease in costs related to inventory allowances and warranty charges in fiscal 2014 compared to 2013 is due
primarily to the decrease in sales to our largest medical device customer, as well as a reduction in both the number of units returned under warranty and the
average per unit repair cost in fiscal 2014 compared to fiscal 2013.
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Gross margin declined three percentage points from 30% in fiscal 2013 to 27% in fiscal 2014. Contributing to this decline are (a) the increase from
fiscal 2013 to 2014 in accruals of anticipated losses related to certain product development contracts as described in the preceding paragraph, and (b) higher
under-absorbed manufacturing overhead costs as a percentage of sales in fiscal 2014, relative to 2013, partially offset by (c) the reduced warranty costs as
described in the preceding paragraph.
Operating Expenses
Operating expenses:
Selling expenses
General and administrative expenses
Research and development costs
Years Ended June 30,
2014
2013
(Dollars in thousands)
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2013
To 2014
$
$
585
1,713
1,482
3,780
5%
16%
14%
35%
$
$
1,255
2,566
1,790
5,611
10%
21%
15%
46%
(53%)
(33%)
(17%)
(33%)
Selling expenses consist of salaries and other personnel-related expenses related to business development department, as well as trade show
attendance, advertising and marketing expenses, and travel and related costs incurred in generating and maintaining customer relationships. The decrease in
selling expenses of $670,000 in fiscal 2014 from fiscal 2013 relates primarily to decreases in personnel-related costs of $451,000, and advertising and trade
show related expenses of $173,000.
General and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses for corporate, accounting and finance
personnel, as well as costs for outsourced human resource and information technology services, professional fees, directors’ fees and costs associated with
being a public company. The $853,000 decrease in G&A expenses from fiscal 2013 to 2014 is due primarily to (a) decreased personnel costs of $274,000, of
which $167,000 relates to a severance payment made in fiscal 2013 for our former Chief Executive Officer, (b) lower public company related costs in fiscal
2014, relative to 2013, due to costs incurred in 2013 amounting to $190,000 associated with the contested election of directors at our 2012 Annual Meeting of
Shareholders held in January 2013 that were not incurred in 2014, (c) reduced professional service fees, including legal expenses, board of director fees, and
stock compensation expenses of $233,000, $60,000 and $50,000, respectively.
Research and development costs consist of salaries and other personnel-related costs of our product development and engineering personnel, related
professional and consulting fees, and costs related to intellectual property, laboratory usage, materials, and travel and related costs incurred in the
development and support of our products. The decrease in research and development costs in fiscal 2014 as compared to 2013 is primarily due to (a) reduced
expenditures on internal projects in the amount of $96,000, (b) the increased utilization of engineering resources in contractual development projects of
$241,000, the costs of which are reflected in unbilled receivables at June 30, 2014, (c) reduced consulting and recruiting expenses of $59,000, and (d) reduced
supplies, travel and dues of $39,000, offset by increased personnel costs of $151,000, of which $53,000 were severance costs.
Other Income (Expense), Net
Other income and expense consists of interest income earned from our money market account, interest expense related to capital lease obligations for
leased office equipment, and realized gains and losses from sales of investments in marketable equity securities. The increase in other income (expense), net
in fiscal 2014 as compared to 2013 is due primarily to realized gains, amounting to $65,000, from sales of certain investments in marketable equity securities.
There were no sales of investments during fiscal 2013.
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Benefit from Income Taxes
The effective tax rates for fiscal 2014 and 2013 are lower than statutory tax rates due to our inability to fully recognize the benefits of federal and
state loss carryforwards prior to their utilization. (See Note 7 of Notes to Consolidated Financial Statements contained elsewhere in this report).
Liquidity and Capital Resources
The following table is a summary of our Consolidated Statements of Cash Flows and Cash and Working Capital:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Cash, cash equivalents and working capital:
Cash and cash equivalents
Working capital
Cash Flows from Operating Activities
As of and for the Years
Ended June 30,
2014
2013
(In thousands)
$
$
$
$
$
(329)
323
1,514
3,188
6,766
$
$
$
$
$
(1,271)
(452)
(709)
1,680
5,033
Cash used in operating activities during fiscal 2014 was $329,000. The primarily uses of cash arose from (a) the net loss for the year of $488,000,
which was offset by non-cash depreciation and amortization of $527,000, (b) an increase in accounts receivable of $440,000 related to the resumption of
product delivery orders during fiscal 2014 from our largest customer, which orders had been suspended at June 30, 2013, (c) an increase in unbilled
receivables of $828,000 related to the product development portion of certain contracts in progress at June 30, 2014, and (d) an aggregate decrease of
$313,000 in accounts payable, accrued expenses and deferred rent. The primary source of cash was a $1.2 million reduction of inventory, which had been
built up at the end of the fiscal 2013 as a result of the suspension of product delivery orders from our largest customer. With the resumption of the customer’s
orders in December 2013, this inventory build-up was substantially consumed as of June 30, 2014.
Net cash used in operating activities in 2013 amounted to $1.3 million. The primary uses of cash arose from (a) the net loss for the year of $1.8
million, partially offset by non-cash charges for depreciation and amortization, share-based compensation and allowance for doubtful accounts aggregating
$690,000, (b) an increase in unbilled receivables amounting to $244,000 relating to the development portion of certain contracts we entered into with
customers in 2013, and (c) an increase in inventories of $1.0 million, resulting primarily from a build-up of our stock of components related to certain of our
products with the objective of shortening lead times when forecasted purchase orders are received. In the fourth quarter of 2013, our largest customer began
deferring the timing of its product delivery orders, thus prolonging the effect of the inventory build-up described above with respect to inventory unique to
that customer’s products. Sources of cash arose primarily from (a) a reduction in accounts receivable amounting to $325,000, attributable primarily to the
lower sales volume experienced during 2013 relative to 2012, and (b) a reduction in income taxes receivable amounting to $608,000, resulting primarily from
tax refunds received in 2013 from the carryback of tax-basis net operating losses generated in 2012, (c) an increase of $69,000 in accounts payable, accrued
expenses and deferred rent, and (d) an increase in deferred revenue amounting to $121,000, resulting from collections received in 2013 from customers in
connection with the contractual terms of development contracts that will not qualify for revenue recognition until we complete the related non-recurring
engineering services.
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Cash Flows from Investing Activities
Net cash provided by investing activities in fiscal 2014 was $323,000. Sources of cash arose from (a) $900,000 of proceeds received from the sale of
the land and building housing our former Astromec operations, and (b) $228,000 of proceeds received from the sale of investments in common stock of
public companies under the direction of the Investment Committee of our Board (see “Surplus Capital Investment Policy” below). Uses of cash consisted of
(a) investments, aggregating $654,000, in marketable equity securities of publicly held companies, (b) costs of internally developed software and intellectual
property amounting to $105,000, and (c) purchases of equipment amounting to $50,000.
Net cash used in investing activities during fiscal 2013 consisted primarily of investments, aggregating $366,000, in marketable equity securities of
publicly held companies and purchases of equipment amounting to $86,000.
Cash Flows from Financing Activities
Cash provided from financing activities during fiscal 2014 was $1.5 million and consisted almost entirely of our completion of a common stock
rights offering, which raised net proceeds of $1.5 million after deducting legal, accounting and other related fees (see “Rights Offering” below).
Net cash used in financing activities for fiscal 2013 consisted primarily of (a) our payment, in September 2012, of the remaining balance due,
amounting to $685,000, on the Union Bank term loan, fully retiring such indebtedness (see Note 5 of Notes to Condensed Consolidated Financial Statements
contained elsewhere in this report), and (b) normal reductions in the principal balance of the bank term loan, prior to the repayment described above, of
$90,000. These uses were partially offset by $66,000 in proceeds from the exercise of stock options.
We believe that our existing cash and cash equivalent balances and investments in equity securities will be sufficient to fund our operations for the
next twelve months.
Changes in Bank Debt and Credit Facilities
In September 2012, we terminated a bank credit facility and, in connection with such termination, repaid the entire principal balance of a term loan,
amounting to $685,000.
As a result of the foregoing, we no longer have a credit facility with a financial institution. Should we be unable to achieve anticipated cash flows
from operations, we may be required to seek new financing. However, there is no assurance that such financing will be available on acceptable terms, if at
all.
Reduction in Directors’ Compensation
At our 2012 Annual Meeting held on January 17, 2013, our shareholders elected four new members to our Board of Directors. At a meeting of the
newly constituted Board on February 4, 2013, three of those newly elected directors, Messrs. Swenson, Cabillot and Farrell, each opted to waive, through the
date of our 2013 Annual Meeting of Shareholders, (a) receipt of stock options they were otherwise entitled to receive under the provisions of the directors’
compensation plan then in effect (the “2010 Plan”), and (b) any cash retainers or meeting fees they were otherwise entitled to receive under the 2010 Plan in
excess of $200 per meeting and $2,000 per year.
At its meeting on May 2, 2013, our Board replaced the 2010 Plan with the 2013 Directors’ Compensation Plan (the “2013 Plan”) that provides
for the following:
•
•
Fees of $200 for participation in Board or Committee meetings, to a maximum of $2,000 per fiscal year;
An annual retainer of $23,000 for the Audit Committee Chair (which may be modified in compensating any future Audit Committee
Chair)
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The 2013 Plan has no provision for (a) retainers other than that described above, or (b) grants of options to purchase shares of our common stock.
Surplus Capital Investment Policy
The Policy provides, among other items, for the following:
(a) Determination by our Board of Directors of (i) our surplus capital balance and (ii) the portion of such surplus capital balance to
be invested according to the Policy;
(b) Selection of an Investment Committee responsible for implementing the Policy; and
(c) Objectives and criteria under which investments may be made.
The Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot and Hurwitz.
In June 2013, the Investment Committee approved investments aggregating $500,000, and approved an additional $500,000 in July 2013.
Additionally, in May 2014 the Investment Committee approved the transfer to our money market account of $1,650,000, representing the gross proceeds from
the common stock rights offering. At June 30, 2014, $857,000 had been invested in marketable public equity securities, having a market value at June 30,
2014 of $1,058,000, and $1,871,000 was invested in money market funds. Additionally, during the fiscal year ended June 30, 2014, we sold equity securities
with a cost basis of $163,000, for $228,000, resulting in a realized gain of $65,000.
In September 2013, our Board of Directors approved a share repurchase program authorizing the Company, at the direction of the Investment
Committee, to repurchase up to 750,000 shares of our common stock under parameters to be determined by the Investment Committee. The repurchase
program has no stated expiration date and there have been no repurchases under the program.
Rights Offering
We commenced a common stock rights offering on March 24, 2014, pursuant to a registration statement on Form S-3 filed with the SEC. The rights
offering was made through the distribution to our existing shareholders as of March 20, 2014 of non-transferable subscription rights to purchase their pro rata
portion of newly issued shares of our Common Stock (the “Subscription Privilege”) at a price of $1.90 per share (the “Subscription Price”). The subscription
period for exercise of the rights commenced on March 24, 2014 and expired on April 25, 2014.
Upon completion of the rights offering, we received gross proceeds of approximately $1.65 million before estimated expenses of $140,000, through
shareholder subscriptions for 868,732 shares of common stock.
Of the total amount of shares issued, 317,231 and 156,189 shares were issued to AO Partners I, LP (“AO Partners”) and Farnam Street Partners, L.P.
(“Farnam Street Partners”), respectively, the Company’s two largest shareholders, who each exercised its full pro-rata allotment of rights in the offering. AO
Partners, LLC is the General Partner of AO Partners, and Nicholas J. Swenson, a director of the Company, is the Managing Member of AO Partners.
Raymond E. Cabillot, also a director of the Company, is the CEO of Farnam Street Partners.
In connection with the rights offering, we entered into a Standby Purchase Agreement (the “Standby Purchase Agreement”) with AO Partners, LLC
and Farnam Street Capital, Inc. (each a beneficial shareholder of our common stock; each a “Standby Purchaser” and collectively the “Standby Purchasers”)
pursuant to which the Standby Purchasers agreed to purchase, at the Subscription Price, any and all shares of Common Stock not subscribed for by
shareholders in connection with the rights offering, subject to reduction by us as described below. Messrs. Swenson and Cabillot have the power to direct the
affairs of AO Partners, LLC and Farnam Street Capital, Inc., respectively. No fees or other consideration were paid by us to the Standby Purchasers in
exchange for their commitment to purchase any and all unsubscribed shares of Common Stock following the rights offering.
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In the event that the exercise by a shareholder of the Subscription Privilege or the purchase of our common stock under the Standby Purchase
Agreement could, in our sole discretion, have potentially resulted in a limitation of our ability to utilize our tax attributes, such as the annual utilization of net
operating loss or tax credit carry forwards, we had the ability to reduce the exercise by such shareholder of the Subscription Privilege or the amount
purchased under the Standby Purchase Agreement to such number of shares of our Common Stock as we determined advisable in order to preserve our ability
to utilize such tax attributes. On the basis of the Company’s analysis of tax attributes, the Company did not reduce the subscriptions of any shareholder in the
rights offering, but did reduce to zero the number of shares the Standby Purchasers could have otherwise purchased pursuant to the Standby Purchase
Agreement. As a result, no shares were issued to AO Partners, LLC or Farnam Street Capital, Inc. pursuant to the Standby Purchase Agreement.
We intend to use the net proceeds of the rights offering to pursue strategic opportunities that may present themselves from time to time or, if not used
to pursue strategic opportunities, for working capital and general corporate purposes, including to fund ongoing research and development and product
initiatives. Also, to the extent the net proceeds are not deployed, some of the funds may be invested in accordance with the terms of our Surplus Capital
Investment Policy.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in
enhanced revenue related disclosures. ASU 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December
15, 2016. We have not yet determined the impact of ASU 2014-09 on our consolidated results of operations, financial condition, or cash flows.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU
2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity
classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations
and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for
fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The impact of ASU 2014-08 is dependent upon the nature
of dispositions, if any, after adoption.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRO-DEX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets, June 30, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Loss, Years Ended June 30, 2014 and 2013
Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2014 and 2013
Consolidated Statements of Cash Flows, Years Ended June 30, 2014 and 2013
Notes to Consolidated Financial Statements
22
Page
23
24
25
26
27
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The Shareholders and Board of Directors
Pro-Dex, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Pro-Dex, Inc. and Subsidiaries (the “Company”) as of June 30, 2014 and 2013 and the
related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the years in the two-year period ended
June 30, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pro-Dex, Inc. and
Subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30,
2014 in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 18, 2014
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ASSETS
Current assets:
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
2014
2013
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $29 and $24
Unbilled receivables
Other current receivables
Inventory
Prepaid expenses
Deferred income taxes
Total current assets
Investments
Plant, equipment and leasehold improvements, net
Real estate held for sale
Intangibles
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Income taxes payable
Capital lease obligations
Total current liabilities
Non-current liabilities:
Deferred income taxes
Deferred rent
Capital lease obligations, net of current portion
Total non-current liabilities
Total liabilities
Commitments and Contingencies
Shareholders’ equity:
Common stock, no par value, 50,000,000 shares authorized; 4,211,019 and
3,348,184 shares issued and outstanding at June 30, 2014 and 2013,
respectively
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
3,188
1,776
1,073
31
2,600
110
115
8,893
1,058
1,575
—
105
77
11,708
744
1,090
232
53
8
2,127
115
243
7
365
2,492
18,582
202
(9,568)
9,216
11,708
$
$
$
$
1,680
1,339
244
34
3,834
157
59
7,347
370
2,065
733
—
80
10,595
844
1,276
141
48
5
2,314
59
270
15
344
2,658
17,012
5
(9,080)
7,937
10,595
See notes to consolidated financial statements.
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PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling expenses
General and administrative expenses
Research and development costs
Total operating expenses
Operating loss
Other income (expense):
Interest income
Realized gain on sale of investments
Loss on sale of equipment
Interest expense
Total other income (expense)
Loss from continuing operations before income taxes
Benefit from income taxes
Net loss from continuing operations
Income from discontinued operations, net of income taxes
Net loss
Other comprehensive income, net of tax:
Unrealized gain from marketable equity investments
Less: Reclassification of gains included in net loss
Comprehensive loss
Basic and diluted income (loss) per share:
Net loss from continuing operations
Income from discontinued operations
Net loss
Years Ended June 30,
2014
2013
10,812
7,846
2,966
585
1,713
1,482
3,780
(814)
12
65
(10)
(8)
59
(755)
104
(651)
163
(488)
262
(65)
(291)
(0.19)
0.05
(0.14)
$
$
$
$
$
12,249
8,533
3,716
1,255
2,566
1,790
5,611
(1,895)
3
—
—
(11)
(8)
(1,903)
39
(1,864)
80
(1,784)
5
—
(1,779)
(0.56)
0.02
(0.54)
$
$
$
$
$
Weighted average common shares outstanding
3,493,151
3,321,732
See notes to consolidated financial statements.
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Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For The Years Ended June 30, 2014 and 2013
(In thousands, except share data)
Common Shares
Balance at June 30, 2012
Net loss
Exercise of stock options
Unrealized gain from marketable equity investments
Share-based compensation plan activity
Balance at June 30, 2013
Net loss
Issuance of common stock from rights offering
Exercise of stock options
Unrealized gain from marketable equity investments
Share-based compensation plan activity
$
$
Number of
Shares
3,272,350
—
43,334
—
32,500
3,348,184
—
868,732
4,104
—
(10,001)
Accumulated
Other
Comprehensive
Income
Amount
Accumulated
Deficit
Total
$
$
16,846
—
66
—
100
17,012
—
1,514
6
—
50
— $
—
—
5
—
5 $
—
—
—
197
—
(7,296) $
(1,784)
—
—
—
(9,080) $
(488)
—
—
—
—
9,550
(1,784)
66
5
100
7,937
(488)
1,514
6
197
50
9,216
Balance at June 30, 2014
4,211,019
$
18,582
$
202 $
(9,568) $
See notes to consolidated financial statements.
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Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Depreciation and amortization
Gain on sale of real estate held for sale
Loss on sale or disposal of equipment
Realized gain on sale of investments
Share-based compensation
Allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable and other receivables
Unbilled receivables
Inventory
Prepaid expenses and other assets
Accounts payable, accrued expenses and deferred rent
Deferred revenue
Income taxes receivable and payable
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment
Proceeds from sale of real estate held for sale
Proceeds from sale of equipment
Proceeds from sale of investments
Increase in intangibles
Purchase of investments
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease and bank term loan
Net proceeds received from common stock rights offering
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Capital lease agreement for the acquisition of equipment
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
$
$
$
$
(488)
527
(167)
10
(65)
50
5
(440)
(828)
1,234
50
(313)
91
5
(329)
(50)
900
4
228
(105)
(654)
323
(5)
1,513
6
1,514
1,508
1,680
3,188
—
7
8
$
(1,784)
582
—
—
—
100
8
325
(244)
(1,043)
(13)
69
121
608
(1,271)
(86)
—
—
—
—
(366)
(452)
(775)
—
66
(709)
(2,432)
4,112
1,680
22
9
—
$
$
$
$
$
See notes to consolidated financial statements.
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1.
Description of Business
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro-Dex, Inc. (“Pro-Dex”, the “Company”, “we”, “us” or “our”) specializes in the design and manufacture of powered surgical and dental
instruments and multi-axis motion control systems, and serves such markets as medical, research and industrial. Pro-Dex’s products are found in hospitals,
dental offices, medical engineering labs, scientific research facilities and high tech manufacturing operations around the world.
2.
Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial
statements. Such financial statements and related notes are the representations of management, who is responsible for their integrity and objectivity. In the
opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all
material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Pro-Dex Astromec, Inc. (Note 3), and
Pro-Dex Management, Inc., a non-operating subsidiary. All significant inter-company accounts and transactions have been eliminated.
Revenue Recognition
Revenue on product sales is recognized upon shipment to the customer when risk of loss and title transfer to the customer and all other conditions
required by GAAP, as promulgated by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Section 605
(formerly Staff Accounting Bulletin No. 104, Revenue Recognition), have been satisfied.
Certain of our contracts are development and supply contracts. Such contracts provide for billable, fixed-price, non-recurring engineering services in
addition to product sales, which are considered as multiple deliverables under the provisions of ASC 605. Revenue from the non-recurring engineering
service portions of such contracts is generally recognized under the completed contract method. Accordingly, revenue from product development milestone
billing to our customers under such contracts is deferred.
Returns of our product for credit are minimal; accordingly, we do not establish a reserve for product returns at the time of sale.
Estimated Losses on Product Development Services
Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated
quarterly. When it is probable that total costs from the development portion of such contracts will exceed product development service revenue, the expected
loss is recognized immediately in cost of sales. Contract costs include all direct material, labor and those indirect costs related to contract performance.
Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment. It is based upon the
knowledge and experience of our project managers, engineers, and finance professionals. Factors that are considered in estimating the cost of work to be
completed and ultimate profitability of the fixed price product development portion of development and supply contracts include, among others, the nature
and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of
subcontractors, and expected costs for specific regulatory approvals.
Warranties
Certain of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two
years, after the sale. At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return
rates and repair costs, which factors are reviewed quarterly.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses, and is included in accrued
expenses in the accompanying consolidated balance sheets. Warranty expenses are included in cost of sales in the accompanying consolidated statements of
operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and
warranty return rates, and are included in current period warranty expense.
Comprehensive Income
Comprehensive income encompasses all changes in equity other than those with shareholders and consists of net income (loss) and unrealized gain
(loss) on marketable equity investments.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. At June 30, 2014 and 2013, cash
equivalents consisted of investments in money market funds.
Accounts Receivable and Unbilled Receivables
Trade receivables are stated at their original invoice amounts, less an allowance for doubtful portions of such accounts. Management determines the
allowance for doubtful accounts based on facts and circumstances related to specific accounts and on historical experience related to the age of accounts.
Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously reserved are offset against the allowance when
received.
Unbilled receivables reflect revenues from non-recurring engineering services not yet billable to customers under the terms of the related
development and supply contracts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Reductions to estimated market value are recorded, and charged
to cost of sales, when indicated based on a formula that compares on-hand quantities to estimated demand over the ensuing 12 months from the measurement
date.
Investments
Investments consist of marketable equity securities of publicly held companies. Management intends to hold such securities for a sufficient period in
which to realize a reasonable return, which periods may range between one and several years, although there is no assurance that positive returns will be
realized or that such securities will not be liquidated in a shorter-than-expected time frame to accommodate future liquidity requirements. Accordingly,
investments have been classified as non-current and available-for-sale in conformity with ASC Section 320. Investments are marked to market at each
measurement date, with unrealized gains and losses presented as adjustments to accumulated other comprehensive income or loss.
Plant, Equipment and Leasehold Improvements, and Real Estate Held For Sale
Plant, equipment and leasehold improvements are recorded at historical cost and depreciation is provided using the straight-line method over the
following periods:
Equipment
Leasehold improvements
Three to ten years
Shorter of the lease term or the asset’s estimated useful life
As more fully described in Note 3, on February 27, 2012, we completed the sale of our fractional horsepower motor product line, operating under the
name Pro-Dex Astromec (“Astromec”), consisting primarily of inventories and equipment. On that date we also reclassified the land and building we then
owned, which comprised the facility in which Astromec operated, to real estate held for sale. The carrying value of real estate held for sale was based on its
historical cost at the date on which such assets were classified as held for sale (Note 3), and was not subject to depreciation as of that date. Also as described
in Note 3, on July 5, 2013, we completed the sale of the land and building.
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Long-Lived Assets
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We review the recoverability of the carrying amount of long-lived assets, such as equipment and leasehold improvements, and real estate held for
sale, when events or changes in circumstances occur that indicate such carrying values may not be recoverable. With respect to equipment and leasehold
improvements, carrying values are compared to expected future pre-tax cash flows, undiscounted and without interest charges, of related operations. With
respect to real estate held for sale, the carrying value prior to its sale (Note 3) was compared to the then-estimated net proceeds from sale of the real estate.
Impairment losses are recognized in instances where carrying values are less than such expected future cash flows or net proceeds from sale, as applicable.
Income Taxes
We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and
liabilities along with net operating loss and tax credit carryovers. Deferred tax assets at both June 30, 2014 and 2013 consisted primarily of basis differences
related to research and development tax credit utilization, intangible assets, accrued expenses and inventories.
Significant management judgment is required in determining the provision for income taxes and the recoverability of deferred tax assets. Such
determination is based on historical taxable income, with consideration given to estimates of future taxable income and the periods over which deferred tax
assets will be recoverable. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more
likely than not to be realized. When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes will increase or
decrease, respectively, in the period such determination is made.
Shipping and Handling
Payments from customers for shipping and handling are included in net sales. Shipping expenses, consisting primarily of payments made to freight
companies, are included in cost of sales.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risk consist principally of cash and trade receivables. We place our cash with major
financial institutions. At June 30, 2014 and 2013, and throughout the fiscal years then ended, we had deposits in excess of federally insured limits. Credit
sales are made to original equipment manufacturers and resellers throughout the world, and sales to such customers account for a substantial portion of our
trade receivables. While such receivables are not collateralized, we evaluate their collectability based on several factors including customers’ payment
histories.
Compensation Plans
Share-Based Plans
We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated
at the grant date using the Black-Scholes option-pricing model. The portion that is ultimately expected to vest is recognized as compensation cost over the
requisite service period using the straight-line single option method.
The determination of fair value using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex
and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends, projected employee stock option exercise
behaviors and forfeitures. We estimate stock price volatility based on two factors: (a) the measurement date (typically the grant date) and (b) the expected life
of the option, which we calculate using the Staff Accounting Bulletin No. 107 simplified method.
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Cash-Based Plans
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our Annual Incentive Plan (“AIP”) provides annual cash-based incentive opportunities for our key employees based upon the attainment of certain
performance goals. Compensation expense is recognized in the year in which awards under the terms of the AIP are earned.
Our Long-Term Incentive Plan (“LTIP”) provides incentive opportunities to our executives and other key employees. LTIP awards, if any, are
conditioned on attainment of certain performance goals for one or more fiscal years as ratified by our Board of Directors. The amount of awards are defined
in the LTIP as a percentage, ranging from 12.5% to 75%, of the employee’s base compensation at the award date, which amount is then divided by the per
share market price of our common stock at the award date in order to determine the number of common shares to be awarded. Accordingly, LTIP awards,
although paid in shares of our common stock, are dollar-based and accrued as liabilities when their payment becomes probable.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Our operations are affected by numerous factors including market acceptance of our products, changes in technologies, and new laws, government
regulations and policies. We cannot predict what impact, if any, the occurrence of these or other events might have on our operations. Significant estimates
and assumptions made by management include, but are not limited to, revenue recognition, the allowance for doubtful accounts, accrued warranty expense,
inventory valuation, the carrying value of long-lived assets, and the recovery of deferred income tax assets.
Basic and Diluted Per Share Information
Basic per share amounts are computed on the basis of the weighted-average number of common shares outstanding during each period presented.
Diluted per share amounts assume the exercise of all potential common stock equivalents, consisting solely of options to purchase common stock as discussed
in Note 9, unless the effect of such exercise is to increase income, or decrease loss, per common share.
Fair Value Measurements
Fair value is measured based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value.
These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
Cash and cash equivalents: The carrying value of cash and cash equivalents is considered to be representative of their fair values based on the short
term nature of these instruments. As such, cash and cash equivalents are classified within Level 1 of the valuation hierarchy.
Investments: Investments consist of marketable equity securities of publicly held companies. As such, investments are classified within Level 1 of
the valuation hierarchy.
Although the methods above may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair
values, we believe our valuation methods are appropriate.
Research and Development
Research and development costs support the development of our product line platforms, and are charged to expense as incurred.
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Advertising
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising costs are charged to selling expense as incurred and amounted to $61,000 and $139,000 for the fiscal years ended June 30, 2014 and
2013, respectively.
Recent Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from
Contracts with Customers," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue
depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. ASU 2014-09 is effective for fiscal years, and interim
reporting periods within those years, beginning after December 15, 2016. The Company has not yet determined the impact of ASU 2014-09 on its
consolidated results of operations, financial condition, or cash flows.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU
2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity
classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations
and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for
fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The impact of ASU 2014-08 is dependent upon the nature
of dispositions, if any, after adoption.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation.
3.
Discontinued Operations and Real Estate Held for Sale
In February 2012, we completed the sale of our fractional horsepower motor product line located in Carson City, Nevada, operating under the name
Pro-Dex Astromec (“Astromec”) to SL Montevideo Technology, Inc. (“MTI”), a wholly owned subsidiary of SL Industries, Inc., pursuant to an Asset
Purchase Agreement (the “APA”).
Under the terms of the APA, we sold substantially all the assets of Astromec, consisting primarily of inventory, equipment and intangibles, and
excluding cash, accounts receivable and the Carson City facility. We retained substantially all of Astromec’s liabilities except for those liabilities associated
with certain contracts and unfilled purchase orders assumed by MTI.
Under the terms of the APA, we also receive earnout payments based on revenues generated from the sale of (i) Astromec products and (ii) MTI
products to Astromec prospects (defined in the APA) (collectively, the “Earnout Sales Base”). Such earnout payments, if and when earned, are paid by MTI to
us within 30 days following the end of each of our fiscal quarters during the three years subsequent to the Closing Date, and amount to 6%, 4% and 2% of the
Earnout Sales Base in the first, second and third such years, respectively. The earnout payments are recognized in the quarter in which we become entitled to
receive them. For the years ended June 30, 2014 and 2013, we recognized income from earnout payments of $120,000 and $166,000, respectively, of which
$17,000 and $31,000 was included in trade receivables in the accompanying June 30, 2014 and 2013 balance sheets, respectively, and were received in July
2014 and 2013, respectively.
In addition, as a result of the sale of the Astromec product line, we listed for sale the land and building constituting the facility in Carson City,
Nevada, which was presented as real estate held for sale in the June 30, 2013 consolidated balance sheet with an aggregate carrying amount of $733,000. On
April 22, 2013, we entered into a Purchase Agreement with Aesthetic and Reconstructive Technologies, Inc., a Nevada corporation, whereby we agreed to sell
the Carson City facility described above. On July 5, 2013, we completed the sale and closed the Purchase Agreement in conformity with its terms. The sales
price of the property was $980,000, of which we received net proceeds of $900,000, after deductions for expenses related to the sale, primarily consisting of
broker commissions and fees, aggregating approximately $80,000, resulting in a gain of $167,000.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the foregoing, and in conformity with applicable accounting guidance, the Astromec product line qualifies as a discontinued operation.
Accordingly, financial results of Astromec have been reported as discontinued operations in the accompanying consolidated statements of operations for all
periods presented. Information regarding revenue and operating results of Astromec included in discontinued operations is as follows (in thousands):
Revenues
Income before provision for income taxes of $107,000 and $51,000,
respectively
Years Ended June 30,
2014
2013
$
$
120
270
$
$
166
131
Information regarding Astromec assets and liabilities included in the accompanying consolidated balance sheets is as follows (in thousands):
June 30,
2014
2013
Accounts receivable
Prepaid expenses
Accrued expenses
$
$
$
17
3
2
4.
Composition of Certain Financial Statement Items
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and consists of the following (in thousands):
Raw materials /purchased components
Work in process
Sub-assemblies /finished components
Finished goods
Total inventory
June 30,
2014
$
$
878
525
823
374
2,600
$
$
$
$
$
31
—
5
2013
1,640
572
1,291
331
3,834
Investments
Investments are stated at market value and consist of the following (in thousands):
Marketable equity securities
June 30,
2014
2013
$
1,058
$
370
Investments at June 30, 2014 and June 30, 2013 had an aggregate cost basis of $857,000 and $365,000, respectively, gross unrealized gains
aggregating $209,000 and $5,000, respectively, and unrealized losses of $7,000 and $0, respectively. During the fiscal year ended June 30, 2014, we sold
certain of our investments in marketable equity securities of publicly held companies and recorded realized gains of $65,000. There were no sales of
investments during fiscal 2013.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in thousands):
Office furnishings and fixtures
Machinery and equipment
Leasehold improvements
Total
Less: Accumulated depreciation and amortization
June 30,
2013
2013
$
$
2,054
4,574
2,312
8,940
(7,365)
1,575
$
$
2,207
4,626
2,312
9,145
(7,080)
2,065
Depreciation expense, which includes capital lease amortization, for the years ended June 30, 2014 and 2013 amounted to $527,000 and $582,000,
respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Warranty
Payroll and related items
Accrued losses on development contracts
Termination benefits
Accrued inventory in transit
Other
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
Unrealized gain on marketable equity securities
Less: Reclassification of gains included in net loss
Unrealized gain on marketable securities, net
Intangibles
June 30,
2014
2013
237
240
468
—
22
123
1,090
June 30,
2014
262
(65)
197
$
$
$
$
323
243
176
165
142
227
1,276
2013
5
—
5
$
$
$
$
Intangibles at June 30, 2014 consist of approximately $68,000 in legal fees incurred in connection with patent applications, and will be amortized
over the life of the applicable patent upon its issuance as well as approximately $37,000 of capitalized software costs relating to internally developed software
which will be amortized over the estimated product life of the underlying product currently in development.
5.
Bank Debt
In September 2012, we terminated a bank credit facility and, in connection with such termination, repaid the entire principal balance of a term loan,
amounting to $685,000.
As a result of the foregoing, we no longer have a credit facility with a financial institution.
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6.
Warranty Accrual
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information relating to the accrual for warranty costs for the years ended June 30, 2014 and 2013 is as follows (in thousands):
Balance at beginning of year
Accruals during the year
Change in estimates of prior period accruals
Warranty amortization
Balance at end of year
June 30,
2014
2013
323
225
(108)
(203)
237
$
$
526
346
(51)
(498)
323
$
$
Warranty expense was $117,000 and $295,000 for the fiscal years ended June 30, 2014 and 2013.
7.
Income Taxes
The provision for (benefit from) income taxes from continuing operations consists of the following amounts (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Benefit from income taxes
Years Ended June 30,
2014
2013
$
$
—
3
(84)
(23)
(104)
$
$
5
7
(41)
(10)
(39)
The effective income tax rate on loss from continuing operations differs from the United States statutory income tax rates for the reasons set forth in
the table below (in thousands, except percentages).
Loss from continuing operations before income taxes
Computed “expected” income tax benefit on loss from continuing operations
before income taxes
State tax, net of federal benefit
Tax incentives
Change in valuation allowance
Permanent differences
State income tax rate adjustment
Income tax benefit
Years Ended June 30,
2014
2013
Amount
Percent
Pretax Income
Amount
(755)
100% $
(1,903)
Percent
Pretax Income
100%
257
(10)
30
(154)
(31)
12
104
34% $
(1%)
4%
(21%)
(4%)
2%
14% $
647
130
129
(851)
(29)
13
39
34%
7%
7%
(45%)
(2%)
1%
2%
$
$
$
The total income tax expense recorded for the years ended June 30, 2014 and 2013 was as follows (in thousands):
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax benefit from continuing operations
Tax expense from discontinued operations
June 30,
2014
2013
$
$
(104)
107
3
$
$
(39)
51
12
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2014 and 2013 are as
follows (in thousands):
Deferred tax assets/(liabilities) – current:
Accrued expenses
Inventory
Net operating losses
State taxes
Less: valuation allowance
Net deferred tax assets
Deferred tax assets/(liabilities) – non-current:
Income tax credit carry forwards
Net operating losses
Intangible assets
Deferred rent
State taxes
Property and equipment, principally due to differing depreciation
methods
Share based compensation
Unrealized gain on investment
Total gross deferred tax assets
Less: valuation allowance
Net deferred tax liabilities
June 30,
2014
2013
253
486
119
1
(744)
115
June 30,
2014
1,443
1,299
287
132
16
(458)
16
(85)
2,650
(2,765)
(115)
$
$
$
$
206
504
—
2
(653)
59
2013
1,381
1,092
350
149
16
(291)
32
(2)
2,727
(2,786)
(59)
$
$
$
$
We have federal net operating loss carry forwards at June 30, 2014 and 2013 in the amount of $2,556,000 and $1,701,000, respectively, which begin
to expire in 2034. State net operating loss carry forwards at June 30, 2014 and 2013 amount to $6,339,000 and $6,134,000, respectively, and begin to expire
in 2025. Federal tax credit carry forwards at June 30, 2014 and 2013 amount to $884,000 and $867,000, respectively, and begin to expire in 2027. State tax
credit carry forwards at June 30, 2014 and 2013 amount to $559,000 and $514,000, respectively, the majority of which do not expire.
Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax asset. 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 will be recoverable. Due to cumulative taxable losses in recent years, we have maintained
a full valuation allowance against our deferred tax assets at June 30, 2014 and 2013, information related to which is as follows (in thousands):
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance at July 1, 2013
Increase in deferred tax asset valuation allowance
Balance at January 31, 2014
Valuation
Allowance
(3,439)
(70)
(3,509)
$
$
As of June 30, 2014, we have accrued $363,000 of unrecognized tax benefits related to federal and state income tax matters. The amount that would
reduce the Company’s income tax expense if recognized and result in a corresponding decrease in the Company’s effective tax rate is $47,000.
Information with respect to our accrual for unrecognized tax benefits is as follows (in thousands):
Balance at July 1, 2013
Additions based on tax positions related to the current year
Reductions for tax positions of prior years
Balance at June 30, 2014
$
$
347
21
(5)
363
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when applicable. As of June 30, 2014, 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, 2011 and later. Our state income tax returns are open to audit under the statute of
limitations for the years ended June 30, 2010 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the
next 12 months.
8.
Commitments and Contingencies
Leases
We lease our office, production and warehouse facilities in Irvine, California and Beaverton, Oregon under agreements that expire in April 2018 and
July 2017, respectively. Both leases require us to pay insurance, taxes, and other expenses related to the leased space. Rent expense in 2014 and 2013 was
$518,000 and $592,000, respectively. On December 13, 2013, we entered into a first amendment with respect to our Beaverton, Oregon lease which extended
the lease termination from April 30, 2014 to July 31, 2017, reduced the occupied square footage, reduced the corresponding monthly base rent by $1,352 and
provided for one month of rent abatement over each of the next three years of the extended lease term. On July 15, 2013, we entered into an amendment with
respect to our Irvine, California lease which provides for a $4,227 reduction in the monthly base rent (as compared to the monthly base rent that would have
been payable under the original lease terms) beginning on July 1, 2013 and continuing for the remainder of the term of the lease. Minimum lease payments
for future fiscal years ending June 30 are as follows (in thousands):
Fiscal Year:
2015
2016
2017
2018
Total minimum lease payments
37
Operating Leases
$
$
488
504
527
361
1,880
Table of Contents
Compensation Arrangements
Retirement Savings 401(k) Plan
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Pro-Dex, Inc. Retirement Savings 401(k) Plan (the “401(k) Plan”) is a defined contribution plan we administer that covers substantially all our
employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Employees are eligible to participate in the
401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter. Participants are eligible
to receive non-discretionary Pro-Dex matching contributions of 25% of their contributions up to 5% of eligible compensation, once they have completed six
months of service. For the years ended June 30, 2014 and 2013, we recognized compensation expense amounting to $31,000 and $41,000, respectively, in
connection with the 401(k) Plan.
Annual Incentive Plan (“AIP”)
The AIP provides annual incentive opportunities for our key employees based upon the attainment of certain performance goals. Compensation
expense under the terms of the AIP amounted to $29,000 in fiscal year 2012. No compensation expense was accrued under the terms of the AIP in either
fiscal year 2014 or 2013, however a reversal of approximately $9,000 of previously accrued compensation expense was recorded in fiscal 2014 due to the
separation from employment with us of one of the fiscal 2012 AIP participants whose separation released us from payment under the terms of the AIP.
Accrued AIP awards included in accrued liabilities in the accompanying consolidated balance sheets as of June 30, 2014 and 2013 were $20,000 and $29,000,
respectively.
In September 2013, our Board approved an AIP that provides sets of incentives to achieve performance goals on an annual and a multi-year basis.
Long-Term Incentive Plan (“LTIP”)
The LTIP provides incentive opportunities to our executives and other key employees, and are conditioned on attainment of certain performance
goals for one or more fiscal years. Awards under the LTIP are accrued when payment of such awards becomes probable. For the years ended June 30, 2014
and 2013, compensation expense reductions under the terms of the LTIP amounted to $4,000 and $52,000, respectively. Accrued LTIP awards related to the
fiscal 2012 – 2015 award period included in accrued liabilities in the accompanying consolidated balance sheets as of June 30, 2014 and 2013 were $6,000
and $10,000, respectively.
Concurrent with our Board’s approval in September 2013 of an AIP that provides incentives over a multi-year basis of achievement as described
above, the LTIP was discontinued for years subsequent to the fiscal 2012 – 2015 award period.
Change of Control Agreements
Through July 2014, we were party to Change of Control Agreements (the “CIC Agreements”) with members of senior management, including our
former Chief Executive Officer, Michael J. Berthelot, our current Chief Executive Officer and Chief Financial Officer, Harold A. Hurwitz, and our Chief
Operating Officer, Richard L. Van Kirk. The CIC agreements provided for awards to be paid to individuals whose employment with us involuntarily
terminated (as such term is defined in the CIC Agreements) within 12 months after a change of control.
As a result of a contested election of directors in fiscal year 2013, our shareholders, at our January 17, 2013 Annual Meeting of Shareholders, elected
four new directors and one then-incumbent director to fill the five seats on our Board. This degree of change in the composition of our Board of Directors
constituted a “change of control” as defined in the CIC Agreements. On February 25, 2013, Mr. Berthelot, then our Chief Executive Officer, was separated
from the Company. In connection with the separation, Mr. Berthelot was paid, among other items, $165,423 as contemplated by his CIC Agreement. In
addition, on June 19, 2013, we effected a reduction in force that included one additional member of senior management, resulting in a $97,000 benefit to such
individual as contemplated by this individual’s CIC Agreement, which was included in accrued expenses as of June 30, 2013 and paid in July 2013.
38
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After giving effect to our payments to Mr. Berthelot and the additional member of senior management under their respective CIC Agreements as
described above, we had remaining CIC Agreements with Messrs. Hurwitz and Van Kirk that expired in July 2014 in conformity with their CIC Agreements’
terms.
Legal Matters
We are from time to time a party to various legal proceedings incidental to our business, none of which we consider may be material. There can be
no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.
9.
Share-Based Compensation
Stock Option Plans
Through June 2014, we had two active stock option plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employees Stock
Option Plan”) and the Amended and Restated 2004 Directors Stock Option Plan (the “Directors Stock Option Plan” and, collectively with the Employees
Stock Option Plan, the “Option Plans”), pursuant to which (i) options to purchase shares of common stock, or (ii) restricted shares of common stock, could be
granted up to an aggregate amount of 1,333,333 common shares, with 1,066,667 and 266,666 shares distributed between the Employees Stock Option Plan
and the Directors Stock Option Plan, respectively. The Option Plans were substantially similar, providing for a strike price equal to the closing price for a
share of our common stock as of the last business day immediately prior to the Grant Date, vesting periods, as determined by the Board of Directors for the
Employees Stock Option Plan and six months for the Directors Stock Option Plan, and terms of up to ten years, subject to forfeit 30 days after the holder
ceases to be an employee or 90 days after the holder ceases to be director, as the case may be. At June 30, 2014, options to purchase an aggregate of 531,381
and 173,334 shares under the Employees Stock Option Plan and the Directors Stock Option Plan, respectively, were available to grant in future years.
Aggregate share-based compensation expense under the Plans for the years ended June 30, 2014 and 2013 were $50,000 and $100,000, respectively.
There were no stock options granted during the fiscal year ended June 30, 2014. The following weighted average assumptions were used in the
calculation of share-based compensation expense for options granted during the year ended June 30, 2013:
Weighted average risk-free interest rate
Expected life (in years)
Expected stock price volatility
Dividend yield
Year Ended
June 30, 2013
0.9%
5.7
89%
None
As of June 30, 2014, there was an aggregate of $11,000 of unrecognized compensation cost under the Option Plans related to 19,167 non-vested
outstanding stock options with a per share weighted average value of $1.56. The unrecognized expense is anticipated to be recognized on a straight-line basis
over a weighted average period of 10 months.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option activity under the Option Plans for the years ended June 30, 2014 and 2013:
Balance, July 1, 2012
Options granted
Options canceled or expired
Options exercised
Balance, July 1, 2013
Options granted
Options canceled or expired
Options exercised
Balance, June 30, 2014
Stock Options Exercisable at June 30, 2014
Outstanding Options
Number of Shares
Weighted-Average
Exercise Price
591,672
70,000
(325,834)
(43,334)
292,504
—
(123,398)
(4,104)
165,002
145,835
$
$
$
$
2.48
1.92
2.61
1.53
2.35
—
2.22
2.33
2.40
2.49
The following table summarizes information regarding options outstanding and options exercisable under the Option Plans at June 30, 2014:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$0 to 2.50
2.5 to 5.00
5.01 to 7.50
7.51 to 10.00
Total
Number
Outstanding
145,500
3,334
8,334
8,334
165,002
Weighted-Avg.
Remaining
Contractual
Life
7.23
2.88
0.02
1.52
6.49 years
Weighted-
Avg.
Exercise
Price
$1.87
4.38
5.58
7.65
$2.40
Aggregate.
Intrinsic Value
$33,600
—
—
—
$33,600
Number
Outstanding
125,833
3,334
8,334
8,334
145,835
Weighted-Avg.
Remaining
Contractual
Life
7.13
2.88
0.02
1.52
6.31
Weighted-Avg.
Exercise Price
$1.89
4.38
5.58
7.65
$2.49
Average
Intrinsic
Value
$26,917
—
—
—
$26,917
In June 2014, our Board of Directors terminated the Employees Stock Option Plan, with the provision that options outstanding under the Employees
Stock Option Plan will remain outstanding in accordance with their respective terms. In September 2014, our Board approved the inclusion in our proxy
statement for approval by our shareholders at the 2014 Annual Meeting of Shareholders its recommendation to terminate the Directors Stock Option Plan.
Employee Stock Purchase Plan
Also in September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”). The ESPP conforms to the
provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase
shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of
our common stock at the end of the purchase period. The Board of Directors also approved the provision that shares formerly reserved for issuance under the
Employee Stock Option Plan in excess of shares issuable pursuant to outstanding options be reserved for issuance pursuant to the ESPP.
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Restricted Stock
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of restricted share activity for the years ended June 30, 2014 and 2013:
Balance, June 30, 2012
Granted
Forfeited
Vested
Balance, June 30, 2013
Granted
Forfeited
Vested
Balance, June 30, 2014
Outstanding Restricted Stock Units
Weighted-
Average Stock
Price
On Grant
Date
Number
of Shares
—
35,000
(2,500)
—
32,500
—
(10,001)
(9,166)
13,333
$
$
$
—
1.73
1.73
—
1.73
—
1.73
1.73
1.73
As of June 30, 2014, there was $10,000 in unrecognized compensation cost related to non-vested outstanding restricted shares. The unrecognized
expense is anticipated to be amortized over the next 1.2 years.
10.
Major Customers
The customer providing 10 percent or more of our revenue for either of the years ended June 30, 2014 and 2013 is listed below (in thousands, except
percentages).
Total revenue
Customer concentration:
Customer 1
Years Ended June 31,
2014
2013
$10,812
100%
$12,249
100%
$ 5,318
49%
$ 5,809
47%
The customer comprising 10 percent or more of our gross accounts receivable at either June 30, 2014 or 2013 is listed below (in thousands, except
percentages).
Total gross accounts receivable
Customer concentration:
Customer 1
11.
Loss Per Share
June 30,
2014
2013
$1,805
100%
$1,355
100%
$ 962
53%
$ 417
31%
We calculate basic loss per share by dividing net loss by the weighted average number of common shares outstanding during the reporting period.
Diluted loss per share reflects the effects of potentially dilutive securities. Because we incurred net losses for the fiscal years ended June 30, 2014 and 2013,
basic and diluted loss per share were the same as the inclusion common shares, amounting to 23,519 and 11,999 as of June 30, 2014 and 2013, respective,
potentially issuable under the terms of outstanding stock option grants would have had an antidilutive effect. The summary of the basic and diluted earnings
per share calculations for the years ended June 30, 2014 and 2013 is as follows (in thousands, except per share data):
41
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic & Diluted:
Loss from continuing operations
Weighted average shares outstanding
Basic and diluted loss per share from continuing operations
Income from discontinued operations
Weighted average shares outstanding
Basic and diluted income per share from discontinued operations
Net loss
Weighted average shares outstanding
Basic and diluted loss per share
12.
Common Stock
Rights Offering
Years Ended June 30,
2014
2013
(651)
3,493
(0.19)
163
3,493
0.05
(488)
3,493
(0.14)
$
$
$
$
$
$
(1,864)
3,322
(0.56)
80
3,322
0.02
(1,784)
3,322
(0.54)
$
$
$
$
$
$
We commenced a common stock rights offering on March 24, 2014, pursuant to a registration statement on Form S-3 filed with the Securities and
Exchange Commission (“SEC’). The rights offering was made through the distribution to our existing shareholders as of March 20, 2014 of non-transferable
subscription rights to purchase their pro rata portion of newly issued shares of our Common Stock (the “Subscription Privilege”) at a price of $1.90 per share
(the “Subscription Price”). The subscription period for exercise of the rights commenced on March 24, 2014 and expired on April 25, 2014.
Upon completion of the rights offering, we received gross proceeds of approximately $1.65 million, before estimated expenses of $140,000, through
shareholder subscriptions for 868,732 shares of common stock.
Of the total amount of shares issued, 317,231 and 156,189 shares were issued to AO Partners I, LP (“AO Partners”) and Farnam Street Partners, L.P.
(“Farnam Street Partners”), respectively, the Company’s two largest shareholders, who each exercised its full pro-rata allotment of rights in the offering. AO
Partners, LLC is the General Partner of AO Partners, and Nicholas J. Swenson, a director of the Company, is the Managing Member of AO Partners.
Raymond E. Cabillot, also a director of the Company, is the CEO of Farnam Street Partners.
In connection with the rights offering, we entered into a Standby Purchase Agreement (the “Standby Purchase Agreement”) with AO Partners, LLC
and Farnam Street Capital, Inc. (each a beneficial shareholder of our common stock; each a “Standby Purchaser” and collectively the “Standby Purchasers”)
pursuant to which the Standby Purchasers agreed to purchase, at the Subscription Price, any and all shares of Common Stock not subscribed for by
shareholders in connection with the rights offering, subject to reduction by us as described below. Messrs. Swenson and Cabillot have the power to direct the
affairs of AO Partners, LLC and Farnam Street Capital, Inc., respectively. No fees or other consideration were paid by us to the Standby Purchasers in
exchange for their commitment to purchase any and all unsubscribed shares of Common Stock following the rights offering.
In the event that the exercise by a shareholder of the Subscription Privilege or the purchase of our common stock under the Standby Purchase
Agreement could, in our sole discretion, have potentially resulted in a limitation of our ability to utilize our tax attributes, such as the annual utilization of net
operating loss or tax credit carry forwards, we had the ability to reduce the exercise by such shareholder of the Subscription Privilege or the amount
purchased under the Standby Purchase Agreement to such number of shares of our Common Stock as we determined advisable in order to preserve our ability
to utilize such tax attributes. On the basis of the Company’s analysis of tax attributes, the Company did not reduce the subscriptions of any shareholder in the
rights offering, but did reduce to zero the number of shares the Standby Purchasers could have otherwise purchased pursuant to the Standby Purchase
Agreement. As a result, no shares were issued to AO Partners, LLC or Farnam Street Capital, Inc. pursuant to the Standby Purchase Agreement.
42
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We intend to use the net proceeds of the rights offering to pursue strategic opportunities that may present themselves from time to time or, if not used
to pursue strategic opportunities, for working capital and general corporate purposes, including to fund ongoing research and development and product
initiatives. Also, to the extent the net proceeds are not deployed, some of the funds may be invested in accordance with the terms of our Surplus Capital
Investment Policy.
Share Repurchase Program
In September 2013, our Board approved a share repurchase program authorizing the Company, at the direction of the Investment Committee of the
Board, to repurchase up to 750,000 shares of our common stock under parameters to be determined by the Investment Committee. The repurchase program
has no stated expiration date and there have been no purchases under the program.
13.
Subsequent Events
On July 2, 2014, we made an initial deposit in the amount of $10,000 to open an escrow account to facilitate the purchase of substantially all of the
assets of a Northern California-based sole proprietorship that is engaged in the manufacture of machined parts, primarily for customers in the oil and
electronics industries. The initial deposit was made pursuant to an Asset Purchase Agreement between the parties dated June 23, 2014 (the “Agreement”),
which Agreement became effective upon the Company making the initial deposit. On September 8, 2014, we made a second $10,000 deposit in conformity
with amended terms of the Agreement which acknowledged that certain due diligence procedures had yet to be completed. The deposits, less escrow costs,
are refundable to the Company if the transaction is not consummated due to a failure of certain closing conditions, including certain due diligence procedures,
to be satisfied.
43
Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer) has concluded, based on his
evaluation as of June 30, 2014, that the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are effective at a reasonable assurance level to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f)
under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management concluded that our internal control over financial reporting was effective as of June 30, 2014.
Our internal control over financial reporting is supported by written policies and procedures, that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of our Company are being made only in accordance with authorizations of our
management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
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.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that apply to smaller reporting
companies that permit us to provide only management’s attestation in this annual report.
During the quarter ended June 30, 2014, there were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-
15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
44
Table of Contents
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2014, and delivered to stockholders in connection with our 2014 annual meeting of shareholders.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2014, and delivered to stockholders in connection with our 2014 annual meeting of shareholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2014, and delivered to stockholders in connection with our 2014 annual meeting of shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2014, and delivered to stockholders in connection with our 2014 annual meeting of shareholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2014, and delivered to stockholders in connection with our 2014 annual meeting of shareholders.
45
Table of Contents
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
Reference is made to the Exhibit Index beginning on page 48 of this report.
46
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 16, 2014.
PRO-DEX, INC.
/s/ Harold A. Hurwitz
Harold A. Hurwitz
President and Chief Executive Officer and Director
POWER OF ATTORNEY
We, the undersigned directors and officers of Pro-Dex, Inc., do hereby constitute and appoint Harold A. Hurwitz, as our true and lawful attorney-in-
fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to
enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us
or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/s/ Harold A. Hurwitz
Harold A. Hurwitz
/s/ Nicholas J. Swenson
Nicholas J. Swenson
/s/ Raymond E. Cabillot
Raymond E. Cabillot
/s/ William J. Farrell III
William J. Farrell III
/s/ David C. Hovda
David C. Hovda
Title
Date
President, Chief Executive Officer, Treasurer, Chief
Financial Officer, Secretary and Director (Principal
Executive Officer, and Principal Financial and
Accounting Officer)
September 16, 2014
Chairman of the Board, Director
September 16, 2014
Director
Director
Director
47
September 18, 2014
September 16, 2014
September 17, 2014
Table of Contents
INDEX TO EXHIBITS
Description
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed April 23, 2007).
Articles of Amendment to Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed
December 5, 2007).
Exhibit
No.
3.1
3.2
3.3
Articles of Amendment to Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed June 18,
2010).
3.4
Amended and Restated Bylaws, dated January 31, 2011 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed
February 4, 2011)
10.1*
Second Amended and Restated 2004 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Form S-8 filed
February 15, 2012).
10.2*
Amended and Restated 2004 Directors Stock Option Plan (incorporated herein by reference to Exhibit 4.2 to the Company’s Form S-8 filed
February 15, 2012).
10.3*
Form of Indemnification Agreement for directors and certain officers (incorporated herein by reference to Exhibit 10.1 to the Company’s Form
8-K filed October 29, 2008).
10.4
Lease agreement with Irvine Business Properties, dated August 3, 2007 (incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 8-K filed August 23, 2007).
10.5*
Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed July 16, 2010).
10.6*
Annual Incentive Plan for the Senior Management (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed July 16,
2010).
10.7*
Description of Non-Employee Director Compensation Program (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K
filed July 16, 2010).
10.8*
Separation Agreement between Pro-Dex, Inc. and Jeffrey S. Ritchey, dated October 7, 2010 (incorporated herein by reference to Exhibit 10.1 to
the Company’s Form 8-K filed October 12, 2010).
10.9*
Employment Arrangement between Pro-Dex, Inc. and Harold A. Hurwitz (incorporated herein by reference to Exhibit 10.2 to the Company’s
Form 8-K filed October 12. 2010).
10.10*
Long-Term Incentive Plan as amended on October 7, 2010 (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed
October 12, 2010).
10.11
Business Loan Agreement, dated as of February 4, 2011, between Pro-Dex, Inc. and Union Bank, National Association (incorporated herein by
reference to Exhibit 10.1 to the Company’s Form 8-K filed February 10, 2011).
10.12
Revolving Credit Line Note, dated as of February 4, 2011, by Pro-Dex, Inc. in favor of Union Bank, National Association (incorporated herein
by reference to Exhibit 10.2 to the Company’s Form 8-K filed February 10, 2011).
10.13
Non-Revolving Credit Line Note, dated as of February 4, 2011, by Pro-Dex, Inc. in favor of Union Bank, National Association (incorporated
herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed February 10, 2011).
48
Table of Contents
10.14
Term Loan Note, dated as of February 4, 2011, by Pro-Dex, Inc. in favor of Union Bank, National Association (incorporated herein by
reference to Exhibit 10.4 to the Company’s Form 8-K filed February 10, 2011).
10.15
Security Agreement, dated as of February 4, 2011, by Pro-Dex, Inc. in favor of Union Bank, National Association (incorporated herein by
reference to Exhibit 10.5 to the Company’s Form 8-K filed February 10, 2011).
10.16
Security Agreement, dated as of February 4, 2011, by Pro-Dex Astromec, Inc. in favor of Union Bank, National Association (incorporated
herein by reference to Exhibit 10.6 to the Company’s Form 8-K filed February 10, 2011.)
10.17*
Employee Severance Policy, adopted July 1, 2011 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed July 7,
2011).
10.18*
Change of Control Agreement entered into between Pro-Dex, Inc. and Harold A. Hurwitz, dated July 19, 2011 (incorporated herein by
reference to Exhibit 10.1 to the Company’s Form 8-K filed July 22, 2011).
10.19
Asset Purchase Agreement entered into by and among Pro-Dex, Inc., Pro-Dex Astromec, Inc., SL Montevideo Technology, Inc. and SL
Industries, Inc., dated February 27, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 1, 2012).
10.20*
Separation Agreement entered into between Pro-Dex, Inc. and Mark P. Murphy, dated April 19, 2012 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Form 8-K filed April 20, 2012).
10.21*
Employment Arrangement entered into between Pro-Dex, Inc. and Michael J. Berthelot, dated April 20, 2012 (incorporated herein by reference
to Exhibit 10.3 to the Company’s Form 8-K filed April 20, 2012).
10.22*
Change of Control Agreement entered into between Pro-Dex, Inc. and Michael J. Berthelot, dated April 20, 2012 (incorporated herein by
reference to Exhibit 10.4 to the Company’s Form 8-K filed April 20, 2012).
10.23
First Amendment to the Business Loan Agreement dated February 4, 2011 between Pro-Dex, Inc. and Union Bank, N.A., dated May 31, 2012
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 5, 2012).
10.24
Letter from Union Bank, N.A. to Pro-Dex, Inc. dated September 4, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 8-K filed September 4, 2012).
10.25
Waiver of Director Compensation of Nick Swenson, dated February 4, 2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 10-Q filed February 13, 2013).
10.26
Waiver of Director Compensation of Ray Cabillot, dated February 4, 2013 (incorporated herein by reference to Exhibit 10.2 to the Company’s
Form 10-Q filed February 13, 2013).
10.27
Waiver of Director Compensation of William Farrell, dated February 4, 2013 (incorporated herein by reference to Exhibit 10.3 to the
Company’s Form 10-Q filed February 13, 2013).
10.28*
Separation Agreement and General Release of All Claims entered into between Pro-Dex, Inc. and Michael J. Berthelot, dated February 25,
2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 25, 2013).
10.29*
Employment Arrangement entered into between Pro-Dex, Inc. and Harold A. Hurwitz, dated February 19, 2013 (incorporated herein by
reference to Exhibit 10.2 to the Company’s Form 8-K filed February 25, 2013).
49
Table of Contents
10.30*
Employment Arrangement entered into between Pro-Dex, Inc. and Richard L. Van Kirk, dated April 23, 2013 (incorporated herein by reference
to Exhibit 10.1 to the Company’s Form 8-K filed April 24, 2013).
10.31*
Employment Arrangement entered into between Pro-Dex, Inc. and Richard L. Van Kirk, dated January 6, 2006 (incorporated herein by
reference to Exhibit 10.2 to the Company’s Form 8-K filed April 24, 2013).
10.32*
Change of Control Agreement entered into between Pro-Dex, Inc. and Richard L. Van Kirk dated July 19, 2011 (incorporated herein by
reference to Exhibit 10.3 to the Company’s Form 8-K filed April 24, 2013).
10.33
Purchase Agreement, dated April 22, 2013, by and between Pro-Dex, Inc. and Aesthetic and Reconstructive Technologies, Inc. (incorporated
herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 26, 2013).
10.34
Letter from William L. Healey to Mr. Nick Swenson dated June 7, 2013 (incorporated herein by reference to Exhibit 99.1 to the Company’s
Form 8-K filed June 12, 2013).
10.35
First Amendment To Lease – July 2013 by and between Irvine Business Properties and Pro-Dex, Inc., dated effective July 1, 2013
(incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed July 17, 2013).
10.36
Standby Purchase Agreement dated December 17, 2013, between the Registrant and AO Partners, LLC and Farnam Street Capital Inc
(incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-3 filed by the Registrant on December 17, 2013)
10.37
Amendment No. 1 to Standby Purchase Agreement, dated March 3, 2014, between the Registrant and AO Partners, LLC and Farnam Street
Capital Inc (incorporated herein by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form S-3 filed by the
Registrant on March 5, 2014)
10.38
Asset Purchase Agreement dated June 20, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of Huber Precision filed
herewith.
10.39
Amendment #1 to Asset Purchase Agreement dated August 4, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of Huber
Precision filed herewith.
10.40
Amendment #2 to Asset Purchase Agreement dated September 6, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of Huber
Precision filed herewith.
21.1
List of Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the Company’s Form 10-KSB filed September 28, 2007).
23
31
Consent of Independent Registered Public Accounting Firm.
Certification of the Chief Executive Officer and Chief Financial Officer Required by 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
Certification of the Chief Executive Officer and Chief 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.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
50
Table of Contents
101.DEF** XBRL Extension Definition Linkbase Document
*
**
Denotes management contract or compensatory arrangement required to be filed as an exhibit to the Form 10-K.
Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the
submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws
as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amend the interactive data
files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that,
pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
51
Exhibit 10.38
California Association of Business Brokers
Professional Service since 1987
www.cabb.org
Asset Purchase Agreement
INTRODUCTION: This is an offer and an agreement to buy and sell business assets, dated June 20, 2014.
1.
DEFINITIONS: The following definitions and designations shall apply regardless of number or gender:
BUSINESS Huber Precision
Address 585 Taylor Way # 5
BUYER Pro-Dex, Inc. A Calif. Corporation
SELLER Hans Huber, an individual
SIGNING: Signing of this Agreement by both Buyer and Seller.
CLOSING: Transfer of ownership of business assets from Seller to Buyer.
COP: Change of possession of business assets from Seller to Buyer.
DAYS: Calendar days.
INVENTORY: Current raw material, work in process, saleable finished goods and consumable supplies valued at lower of cost or market.
Work in process and finished goods shall be valued at the actual cost of material and direct labor incurred by Seller.
ASSETS: Assets of the Business include, but are not limited to, Inventory, equipment, trade fixtures, leasehold, leasehold improvements,
contract rights, business records (with Seller retaining a reasonable right of inspection), software and software licenses, transferable
governmental licenses and permits, other licenses, franchises, goodwill, covenant not to compete, trade secrets, patents, intellectual
property, trade name, customer lists, marketing materials, telephone and fax numbers, web sites, URL’s, email addresses, sales order
backlog and N/A. Assets being sold shall not include bank accounts, deposits, cash, accounts receivable (unless specified in paragraph
4), financial records (but Buyer shall have a right to make copies prior to Closing), or N/A.
2.
SALE OF BUSINESS ASSETS: Seller agrees to sell to Buyer and Buyer agrees to buy from Seller the Assets for the price and on the
terms and conditions set forth below.
3.
CONSIDERATION: The Consideration shall be $ 225,000 paid or credited as follows:
a. $ 10,000
as a deposit by Buyer upon signing this Agreement and included as part of the down payment, Broker is
authorized to: (Broker is not in possession of check which will be given upon
o hold deposit check uncashed until escrow instructions are signed, or acceptance)
x deposit check Into escrow trust account or broker trust account upon acceptance of offer.
b. $ 10,000
additional cash deposited in escrow upon signing of escrow Instructions.
c. $ 205,000
additional cash deposited in escrow 10 days before Closing.
d. $ N/A
additional down payment provided from third party financing as described in paragraph 5.d.
e. $ 225,000
Total down payment o See attached addendum for details of the down payment.
(a + b + c +d)
f. $ N/A
assumption of specified liabilities, as detailed in attached addendum. If the actual balance differs at Closing, the o
Seller note, or o down payment, shall be adjusted accordingly.
g. $ N/A
approximate balance of a non-negotiable Seller note payable in equal monthly installments, including N/A % per
annum interest computed from COP, so as to fully amortize over N/A months (i.e., $ N/A per month), with
payments to begin one month from COP. Note shall be secured by a security agreement on the Assets, contain a
right to prepay without penalty and be assumable with Seller’s consent, which shall not be unreasonably withheld.
Seller note shall be subordinated to any third-party financing described in 5.d. If Buyer is a corporation or other
entity, its owners shall personally guarantee this note.
o See attached addendum for details of the Seller note.
h. $ 225,000
Total
(e + f + g)
Page 1 of 6
Business Pro-Dex, Inc.
Buyer Huber Precision
Date 6/20/2014
4.
INVENTORY AND ACCOUNTS RECEIVABLE:
x
o
The Consideration shall include inventory of $ 23,000 and collectable accounts receivable of $ N/A. If the actual amount of inventory
and accounts receivable at COP is less than the tolal of these figures, the Consideration shall be decreased accordingly, and if the
actual amount is more than these figures, then the Consideration shall be increased accordingly.
At Closing, the Consideration and o cash down payment or o Seller note, shall be increased by the cost of inventory.
Notwithstanding the above, the inventory shall not exceed $ 25,000 (and Buyer can reject any part of the inventory over that amount) or
be less than $ 20,000. The inventory count shall be made on COP x by Buyer and Seller, or o by an independent inventory service with
the fees to be divided equally between Buyer and Seller.
5.
CONDITIONS: This Agreement is subject to the following conditions:
a.
b.
Buyer’s due diligence:
i.
Within 5 days of Signing, Buyer shall request in writing any and all information and appointment(s) for access to inspect the
premises as may reasonably be required to evaluate the Business.
ii. Within 5 days of Buyer’s request, Seller shall provide all requested information and access.
iii. Within 20 days of Buyer’s receipt, Buyer shall review and approve in writing the information requested and provided, and the
condition of the Assets and premises.
Seller’s due diligence:
i.
Within 5 days of Signing, Seller shall request in writing any and all information as may reasonably be required to evaluate
Buyer’s qualifications to purchase and operate the Business.
ii. Within 5 days of Seller’s request, Buyer shall provide all requested information.
iii. Within 20 days of Seller’s receipt, Seller shall review and approve in writing information requested and provided.
Should either party not approve in writing, as provided in 5.a.iii or 5.b.iii, as applicable, within 20 days from Signing, the other party may
terminate this Agreement with written notice and failure to cure within 48 hours of such notice, and the Buyer’s total deposit will be
returned less any escrow costs.
c.
d.
e.
f.
Lease contingency: Within 15 days from Signing or upon COP if sooner.
x
o
Written consent of the landlord to assignment of the existing premises lease or
The making of a new lease between the landlord and Buyer which is acceptable to Buyer.
Buyer submitting complete loan application(s) to N/A lenders within N/A days from Signing.
Buyer receiving a commitment letter for third party financing in the amount of $ N/A within N/A days from Signing.
Buyer receiving funding in the amount indicated in 5.d.ii within N/A days after Signing.
Financing contingency: N/A
i.
ii.
iii.
Buyer shall use its best efforts to obtain said financing and Seller shall fully and promptly comply with lender requests for
information and access to the Business.
Licenses: Closing is contingent upon the transfer or issuance of any necessary permits and licenses.
Other contingencies: Seller’s delivery to Buyer of all third party consents and approvals: truth and accuracy of Seller representations and
warranties at Closing. An assignment & assumption agreement & Management Consulting Agreement with Hans Huber in form in substance
reasonably acceptable to Buyer.
If Buyer is unable to satisfy conditions 5.c, 5.d, 5.e or 5.f within the specified time limits, either party may terminate this Agreement by
giving written notice to the other party or his or her Broker, and the Buyer’s deposit will be returned less any escrow costs.
6.
ESCROW: The Consideration, closing costs and closing adjustments shall be paid through an escrow to be established with Business and
Escrow Service Center, the escrow holder. Upon removal of conditions 5.a, 5.b and 5.c, Buyer and Seller agree to sign separate escrow
instructions that define the duties of the parties and the escrow holder. All parties shall cooperate with the escrow holder in completing
any documents and performing any acts necessary to complete the transfer of the Business Assets, including compliance with the Bulk
Sale law if applicable. The Broker(s) is/are a party to the escrow as to the payment of any broker’s fees and an irrevocable assignee(s) of
the sale proceeds to the extent of such fees.
Page 2 of 6
Business Huber Precision
Buyer Pro-Dex, Inc.
Date 6/20/2014
7.
8.
9.
CLOSING: The estimated date for Closing is July 31, 2014. Buyer and Seller shall make their best efforts to complete Closing on or
before that date. COP shall occur at Closing.
PURCHASE PRICE ALLOCATION: Before Closing, Buyer and Seller shall endeavor to allocate the purchase price among the Assets
purchased and submit the allocation to escrow.
SELLER AND BUYER DISCLOSURE STATEMENTS:
a.
b.
o
x
o
x
Buyer has received and read the completed Seller’s Disclosure Statement, or
Seller shall provide to Buyer the completed Seller’s Disclosure Statement within 3 days from Signing.
Seller has received and read the completed Buyer’s Disclosure Statement, or
Buyer shall provide to Seller the completed Buyer’s Disclosure Statement within 3 days from Signing.
The parties warrant the accuracy and completeness of their respective Disclosure Statements. The parties warrant that these
representations are true, shall be true as of Closing and shall survive Closing.
10.
SELLER REPRESENTATIONS & WARRANTIES: Except as noted in paragraph 10.j, Seller and its owners acknowledge and represent
as follows:
a. Seller is operating the Business in compliance with all applicable laws and environmental regulations. This compliance will not be
violated by this sale and the Business will pass all applicable inspections upon COP. If any inspection by a government agency is
required to complete Closing, Seller shall make whatever remedies are required to satisfy said inspection, and if remedies are not
complete and paid for by Closing, then sufficient monies shall be held in Escrow to pay for the completion of such remedies.
b. There are no claims, legal proceedings or investigations pending which would affect the Business or Assets being sold or do any
facts or circumstances exist that could give rise to any such claim, legal proceedings or investigation.
c. The Business is in compliance with all material contracts relevant to the ownership and operation of the Business. All such
contracts have been furnished to Buyer and are complete and in effect, and there are no undisclosed amendments.
d. All financial information and statements furnished or to be furnished to Buyer are complete, accurate, prepared in a manner
consistent with prior statements and fairly present the financial condition of the Business as of the dates stated on them. Since the
date of the last financial statements furnished, there have been no material adverse changes in the aggregate in the assets,
liabilities, revenues, expenses or any other items shown on such statements.
e. All accounts receivable of the Business, if included in the sale, arose from the normal course of business, none have been
previously assigned and they are fully collectable.
f. All Inventory of the Business is marketable and in good condition.
g. All Assets currently used in the Business are owned by Seller free from liens and encumbrances, and they are in good working
condition, except as otherwise noted in 10.j.
h.
(see “j.” below)
i.
j.
There are no liabilities of the Business for which Buyer will be liable, except as stated herein or in a further written agreement of the
parties. Seller will honor and discharge when due, all excluded liabilities.
Seller’s relationship with its employees is good. There are no facts or circumstances that could give rise to a claim by any current or former
employee of Seller against seller, the Business or the Assets. Seller understands that, except as may be set forth in a separate written agreement,
Buyer does not intend to hire any of the employees of the business.
Seller warrants that these representations are true, shall be true as of Closing and shall survive Closing. Prompt notice will be given to
Buyer of any event which materially alters the accuracy of the above Seller Representations & Warranties or the Seller’s Disclosure
Statement. Seller shall indemnity and hold Buyer and Broker harmless from any damage resulting from their falsity.
11.
CONTINUITY: Pending Closing, Seller shall continue to operate the Business in the usual way, protect and preserve its Assets and
goodwill, maintain the equipment in good working order, maintain good relations with suppliers, customers and employees and allow
Buyer to make reasonable inspections.
12.
PRORATIONS, CREDITS, TAXES and EXPENSES:
a. Except as otherwise noted in this Agreement, each party shall pay when due all operating costs and taxes incurred while that party
is in possession and hold the other party harmless therefrom.
b. Seller shall pay all wages, salaries and benefits, including without limitation, vacation, sick leave and other paid time off, payable to
its employees prior, and after Closing. Except as may be set forth in a separate written agreement, Buyer does not intend to hire any employees
of the Business.
c. Prorations: Utilities, personal property taxes, other taxes, insurances, rents, and other prepaid and accrued expenses of the
Business transferred to Buyer shall be prorated to COP.
d. Credits: Buyer shall credit Seller at Closing for lease deposits and other deposits transferred to Buyer, and Seller shall credit Buyer
at Closing for customer deposits, unredeemed gift certificates and warranty claims assumed by Buyer.
Page 3 of 6
Business Huber Precision
Buyer Pro-Dex, Inc.
Date 6/20/2014
Franchise transfer fee, if applicable, shall be paid by ____________, and training fee, if applicable, by ____________.
e. Buyer shall pay any transfer or issue fees for permits and licenses required.
f.
g. Each party shall pay its own accountants, attorneys and other advisors.
h. Buyer shall pay at Closing any sales taxes assessed on the sale of the Business Assets.
i.
j.
Seller shall obtain and pay for any smog certificates needed and Buyer shall pay DMV fees assessed on registered vehicles
included in the sale.
Buyer and Seller shall pay equally all escrow fees and costs and other transfer costs except
____________________________________ _________________________________________________________________
_______________________________________________.
k. Seller shall be responsible for any warranty obligations arising from products manufactured or delivered prior to the Closing, which includes,
l.
without limitation, to the extent such warranty
After COP, Buyer shall remit to Seller upon receipt any refund of overpayments of worker’s compensation premiums, taxes, trade
payables or the like which relate to the period prior to COP.
m. Seller shall defend and indemnify Buyer from any liability to the California Employment Development Department, the California
Franchise Tax Board or the California State Board of Equalization arising from the operation of the Business until COP. Prior to the
receipt by the escrow holder of releases of transferee liability from these agencies, the Buyer shall be protected from the possible
imposition of transferee liability by a reserve set by the taxing agencies or approved by the Buyer and retained in escrow until such
releases are obtained.
13.
MATERIAL CONTRACTS: Seller shall transfer to Buyer the following contracts used in the operation of the Business, and the Buyer
shall assume obligation for them:
o Advertising contracts, including yellow pages
o Alarm system agreements
o Copier agreements
o Telephone agreements
o Other equipment leases
o Other equipment service agreements
o Software maintenance agreements
(“k” cont’d) obligation is traceable to work in progress prior to the Closing.
o Vehicle agreements
o Web site agreements
x Real Property Lease
x All contracts lists on Exhibit , which Exhibit may be modified by Buyer
o (by either adding or deleting contracts) up to two days prior to Closing.
o
o
14.
BROKER: Buyer acknowledges that Broker has furnished to Buyer financial and other information obtained from Seller and other
sources, the accuracy and completeness of which have not been verified by Broker, and that Buyer without limiting the representations,
warranties and obligations of Seller under this Agreement, Buyer is relying solely on his own inspection of the Business, its Assets, financial
statements, business records, contracts, any assumed liabilities, operational history, future profitability and the representations by the
Seller, and not on any representations of the Broker. Seller acknowledges that he is relying solely on his own investigation of the Buyer’s
creditworthiness and ability to complete this transaction and to successfully operate the Business, and not on any representations of the
Broker. Should any such representations of Seller or Buyer be untrue, Buyer and Seller agree to look solely to each other for relief and
shall release, hold harmless, indemnify and defend the Broker from any such claims. Buyer and Seller acknowledge and agree that
Broker may receive a referral fee, from an institutional lender.
15.
AGENCY RELATIONSHIP CONFIRMATION: The following agency relationships are hereby confirmed for this transaction, and
supersede any prior agency relationships:
BUYER’S BROKER Business Team
Agent for o Buyer only or x both Buyer and Seller
Fax 408-246-2219
Phone 408-385-0402
Email
Broker’s Agent
farley@business-team.com
Farley Gouner DRE # 01271117
SELLER’S BROKER Business Team
Agent for o Seller only or x both Buyer and Seller
Fax 408-246-2219
Phone 408-385-0515
Email hiren@business-team.com
Broker’s Agent
Hiren Dave 01381381
16.
17.
TRAINING: Seller and N/A, individually, shall train Buyer in the operation of the Business for a period of 2 consecutive weeks from COP,
for 40 hours per week, without additional cost to Buyer.
COVENANT NOT TO COMPETE: Seller and N/A, individually, shall not directly or indirectly carry on a similar business x within a radius
of 100 miles of the present location of the Business, or x within five years, attempt to hire any existing employees of the Business, solicit
any customers of the Business or assist anyone else except the Buyer to do so within these limits, or have any interest, directly or
indirectly, in such business, except as an employee of the Buyer, for a period of five consecutive years from COP. This covenant shall
become an asset of the Business and may be transferred as part of any future transfer of the Business.
Page 4 of 6
Business Huber Precision, Inc.
Buyer Pro-Dex, Inc.
Date 6/20/2014
18.
MEDIATION OF DISPUTES: Except as reasonably necessary for a party to seek equitable relief from a Court, such as an injunction or
other expedited relief (writ of attachment, specific performance, appointment of a receiver or similar remedies), as a condition precedent
to initiation of any legal action or arbitration proceeding by either party, Buyer and Seller shall mediate any dispute or claim between
them arising out of this Agreement or any resulting relationship or transaction between such parties. Either party may demand mediation
by notice to the other party, which notice shall state the nature of the dispute to be resolved. From the date such notice is given, the
parties shall agree upon a mediator not later than the tenth business day thereafter. If the parties cannot agree upon a mediator, the
matter shall be submitted to the JAMS for appointment of a mediator and to conduct the mediation. Mediation shall occur in the county
in which the Seller’s Broker’s office is located. The parties shall have 45 days from the selection of the mediator to commence the first
mediation session. The parties shall share all mediation costs equally. The parties agree that any mediated settlement agreement may
be converted to an arbitration award or judgment (or both) and enforced according to the governing rules of civil procedure. Should
either party fail to participate timely and in good faith in the selection process for the mediator, or in the mediation process, such party
will be deemed to have refused mediation, and that party shall not be entitled to attorney fees that might be otherwise available to it in
any subsequent court action or arbitration.
19.
BROKER FEES and LIQUIDATED DAMAGES: The Broker(s) identified In paragraph 15 has/have acted as the only Broker(s) for this
sale and earned a broker fee. Seller agrees to pay Broker Fee(s) for services as follows:
o _________ percent of the Consideration to ______________________________________________, Broker, and
o _________ percent of the Consideration to ______________________________________________, Broker, or
x as per representation agreement between Seller and Seller’s Broker.
Broker Fees shall be payable (a) at Closing, or (b) if Closing is prevented by default of Seller, upon Seller’s default, with the deposit
returned to Buyer. If Buyer fails to complete this purchase because of Buyer’s default, Buyer shall relinquish and Seller shall retain, as
liquidated damages, the entire sum of deposits paid under 3.a and 3.b, payable first to the Broker Fees and any remaining amount
released to Seller. Buyer and Seller agree that this amount is a reasonable sum given that it is impractical or extremely difficult to
establish the amount of damages that would actually be suffered by Seller in the event Buyer were to default under this Agreement. In
any action, proceeding or arbitration relating to the payment of such a fee, the prevailing party shall be entitled to reasonable attorney’s
fees and costs.
20.
SUMMARY: The entire agreement of the parties relating to the sale of the Business is set forth in this Agreement and can only be
modified in writing signed by the parties. There are no other representations, agreements, arrangements or understandings, either oral
or written, between or among the parties hereto relating to the subject matter of this Agreement that are not fully expressed herein. This
Agreement shall bind and benefit the parties and their legal successors and shall supersede any prior written or oral agreements. Buyer
may not assign any rights under this Agreement without prior consent of Seller, except to an entity owned and controlled by the Buyer.
Any unauthorized assignment will be void and unenforceable. Any assignment shall not relive Buyer of Buyer’s obligations pursuant to
this Agreement. This Agreement may be signed in counterparts and faxed and electronic signatures may be considered as originals.
Captions in this Agreement are for convenience only and shall not be considered in construing its meaning. This Agreement shall be
governed by the laws of the State of California. In any action, proceeding or arbitration between Buyer and Seller arising out of this
Agreement, the prevailing party shall be entitled to reasonable attorney’s fees and costs, except as provided in paragraph 18. Venue
shall be the county in which the Seller’s Broker’s office is located.
21.
NOTICES: All notices or approvals required or permitted by this Agreement shall be in writing and shall be addressed to the parties, at
the respective addresses set forth below. Notice shall be sufficiently given for all purposes when: (a) personally delivered to the
recipient; (b) delivered by an overnight delivery service, charges prepaid or charged to the sender’s account; or (c) delivered by
verifiable electronic transmission. Any party or Broker may change its address by giving written notice of the change to the other parties
and Brokers in accordance with the provisions of this paragraph.
22.
ACKNOWLEDGMENT AND PERSONAL GUARANTEE: By signing below, Buyer and Seller each acknowledge that they have carefully
read and fully understand this Agreement and have received a copy of it. The undersigned warrant that their signatures are legally
sufficient to bind the Buyer and Seller.
23.
ACCEPTANCE: This offer shall expire unless it is accepted in writing by Seller and that acceptance is delivered to Buyer or Buyer’s
agent by 6:00 o a.m. x p.m. on Tuesday June 24, 2014. Any later acceptance shall constitute a counteroffer. Any offer can be withdrawn or
revoked before acceptance is delivered to Buyer or Buyer’s agent. The undersigned Seller accepts and agrees to sell the Business on
the above terms and conditions.
Page 5 of 6
Business Huber Precision, Inc.
Buyer Pro-Dex, Inc.
Date 6/20/2014
THE CALIFORNIA ASSOCIATION OF BUSINESS BROKERS MAKES NO REPRESENTATION AS TO THE LEGAL VALIDITY OR
ADEQUACY OF ANY PROVISION OF THIS FORM IN ANY SPECIFIC TRANSACTION. A BUSINESS BROKER IS NOT LICENSED OR
QUALIFIED TO PROVIDE LEGAL, ACCOUNTING OR TAX ADVICE. SELLER AND BUYER ARE ADVISED TO CONSULT WITH
INDEPENDENT ATTORNEYS, ACCOUNTANTS AND OTHER COMPETENT PROFESSIONALS WHEN ENTERING INTO AND
COMPLETING THE TRANSACTION.
x Subject to attached addendum
o Subject to attached counteroffer
BUYER
Print Name
Signature
Print Name
Signature
SELLER
Hans Huber, an individual dba Huber Precision
Print Name
6/20/14
Date
Signature
Print Name
Date
Signature
Pro-Dex, Inc.
Corporation (or other entity)
by:
Print Name and Title
Corporation (or other entity)
Date
by:
Print Name and Title
Address 2361 McGaw Avenue
Address 585 Taylor Way # 5
City, State Zip Irvine, CA 92614
City, State Zip San Carlos, CA 94070
Signature of Broker’s Agent (for Buyer)
Date
Signature of Broker’s Agent (for Seller)
DRE# 01381381
DRE#
01271117
6/23/14
Equipment List
Seller’s Disclosure Statement
Buyer’s Disclosure Statement
Agency Disclosure
LIST OF ATTACHMENTS:
o
o
o
o
x Management Consulting Agreement
o
o
o
Page 6 of 6
6/23/14
Date
Date
Date
6/23/14
Date
California Association of Business Brokers
Professional Service since 1987
www.cabb.org
Amendment/Addendum to Purchase Agreement #1
Exhibit 10.39
The Purchase Agreement dated June 20, 2014 between Hans Huber, an individual (Seller) and Pro-Dex, Inc. a Colorado Corporation (Buyer)
on the Business known as Huber Precision located at 585 Taylor Way # 5 San Carlos, Calif. 94070 is hereby modified as follows:
Buyer agrees to waive any and all Buyer conditions in Section 5 of the above Purchase Agreement except for the following exceptions:
1. Paragraph 5c. Lease contingency: The agreement notes an assignment of current lease. Buyer now agrees the lease will be a new one
year lease and will accept or reject in writing aid lease terms and conditions after its review of the lease. Rejection of the lease will be cause for
the Buyer to withdraw its offer and receive its escrow deposit less any escrow charges attributable to Buyer portion of escrow charges.
2. Paragraph 5 e is still in effect.
3. Seller’s representations and warranties shall be true and correct at Closing.
4. Buyer will interview a select number of Huber Precision clients as a contingency to the Purchase Agreement and this contingency will be
released in writing upon completion of interviews and if not released in writing by Buyer will be cause for the Buyer to withdraw its offer and
receive its escrow deposit less any escrow charges attributable to Buyer portion of escrow charges.
Seller agrees to waive any and all Seller conditions in Section 5 of the above Purchase Agreement and further guarantees to Buyer that there
are no third party contracts in force or effect as of this date and Seller will not enter into any such agreements prior to the close of escrow
without the express written consent of the Buyer.
Purchase Agreement noted Pro-Dex, Inc. as a California Corporation. Pro-Dex is a Colorado Corporation. Acceptance of this Amendment by
Buyer and Seller will serve to extend any time limits per the Purchase Agreement.
Buyer and Seller acknowledge that Business Team is a Broker, is not a CPA or an attorney, and is not qualified to review or audit the financial
status of the Seller’s business or the financial status of the Buyer and/or the value of the Seller’s business improvements and/or give advice for
legal aspects of the transaction. Buyer and Seller acknowledge that Broker has not done so. By signing below, Buyer acknowledges that Buyer
is relying solely on information provided to Buyer by Seller and Broker has not verified and will not verify any representations of Seller, any
reliance by Buyer on such information will be based solely on Buyer’s examination of the business. By signing below Seller acknowledges
Seller is relying solely on information provided by Buyer to evaluate Buyer’s creditworthiness or ability to perform this agreement and Broker
has not verified and will not verify any representations of Buyer. Buyer and Seller both agree to look solely to each other for relief and to
indemnify and hold Business Team harmless in connection with any damage caused to either the Buyer or the Seller in the event of a dispute
between Buyer and Seller regarding this agreement except in the event a judgment is rendered that Broker acted improperly regarding such
dispute under this agreement.
All other terms and conditions of the Purchase Agreement remain the same and in full force and effect. The undersigned acknowledge having
received, read and understood a fully completed copy of this Agreement.
/s/ Harold A. Hurwitz, CEO for
Buyer Pro-Dex, Inc.
7/29/14
Date
/s/ Hans Huber
Seller Hans Huber, an individual
Buyer
Farley Gouner CA Lic #01271117
Brokers Agent
Date
Date
Seller
Hiren Dave CA Lic #01381381
Brokers Agent
8/4/14
Date
Date
Date
Page 1 of 1
California Association of Business Brokers
Professional Service since 1987
www.cabb.org
Amendment/Addendum to Purchase Agreement #2
Exhibit 10.40
The Purchase Agreement dated June 20, 2014 between Hans Huber, an individual (Seller) and Pro-Dex, Inc. a Colorado Corporation (Buyer)
on the Business known as Huber Precision located at 585 Taylor Way # 5 San Carlos, Calif. 94070 is hereby modified as follows:
Buyer agrees to waive Buyer conditions in Section 5c of the above Purchase Agreement:
1. Paragraph 6c. Lease contingency: The agreement notes an assignment of current lease. Buyer now agrees the lease will be a new one year
lease and will accept said lease per the terms and conditions of the Pro-Dex Lease Revision #3 with addendum the term of said lease to start
on December 1, 2014. The lease shall be attached as Exhibit A hereto.
2. Paragraph 5 e is still in effect.
3. Seller’s representations and warranties shall be true and correct at Closing.
4. Buyer will interview a select number of Huber Precision clients as a contingency to the Purchase Agreement and this contingency will be
released in writing upon completion of interviews and if not released in writing by Buyer will be cause for the Buyer to withdraw its offer and
received its escrow deposit less any escrow charges attributable to Buyer portion of escrow charges.
Seller agrees to waive any and all Seller conditions in Section 5 of the above Purchase Agreement and further guarantees to Buyer that there
are no third party contracts in force or effect as of this date and Seller will not enter into any such agreements prior to the close of escrow
without the express written consent of the Buyer.
Purchase Agreement noted Pro-Dex, Inc. as a California Corporation. Pro-Dex, In. is a Colorado Corporation.
Buyer and Seller acknowledge that Business Team is a Broker, is not a CPA or an attorney, and is not qualified to review or audit the financial
status of the Seller’s business or the financial status of the Buyer and/or the value of the Seller’s business improvements and/or give advice for
legal aspects of the transaction. Buyer and Seller acknowledge that Broker has not done so. By signing below, Buyer acknowledges that Buyer
is relying solely on information provided to Buyer by Seller and Broker has not verified and will not verify any representations of Seller, any
reliance by Buyer on such information will be based solely on Buyer’s examination of the business. By signing below Seller acknowledges
Seller is relying solely on information provided by Buyer to evaluate Buyer’s creditworthiness or ability to perform this agreement and Broker
has not verified and will not verify any representations of Buyer. Buyer and Seller both agree to look solely to each other for relief and to
indemnify and hold Business Team harmless in connection with any damage caused to either the Buyer or the Seller in the event of a dispute
between Buyer and Seller regarding this agreement except in the event a judgment is rendered that Broker acted improperly regarding such
dispute under this agreement.
All other terms and conditions of the Purchase Agreement remain the same and in full force and effect. The undersigned acknowledge having
received, read and understood a fully completed copy of this Agreement.
/s/ Harold A. Hurwitz, for
Buyer Pro-Dex, Inc.
9/2/14
Date
/s/ Hans Huber
Seller Hans Huber, an individual
Buyer
Date
Seller
Farley Gouner CA Lic #01271117
Brokers Agent
Hiren Dave CA Lic #01381381
Date
Brokers Agent
9/6/14
Date
Date
Date
Page 1 of 1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-112133, 333-141178, 333-179536) of Pro-Dex, Inc.
pertaining to the Pro-Dex, Inc. Second Amended and Restated 2004 Stock Option Plan and the Pro-Dex, Inc. Amended and Restated 2004 Directors’ Stock
Option Plan, Inc., of our report dated September 18, 2014 with respect to the consolidated financial statements of Pro-Dex, Inc. and Subsidiaries included in
this Annual Report (Form 10-K) for the year ended June 30, 2014.
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 18, 2014
EXHIBIT 31
Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Harold A. Hurwitz, certify that:
1.
2.
3.
4.
I have reviewed this Form 10-K of Pro-Dex, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to registrant, including its consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: September 16, 2014
/s/ Harold A. Hurwitz
Harold A. Hurwitz
Chief Executive Officer and Chief Financial Officer
(principal executive officer and principal financial officer)
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certifications of Chief Executive Officer and Chief Financial Officer
EXHIBIT 32
In connection with the annual report on Form 10-K of Pro-Dex Inc. (the “Company”) for the annual period ended June 30, 2014 (the “Report”), the
undersigned hereby certifies in his capacities as Chief Executive Officer and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 16, 2014
By: /s/ Harold A. Hurwitz
Harold A. Hurwitz
Chief Executive Officer, President and Chief Financial Officer
(principal executive officer and principal financial officer)
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the
signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and
will be retained by the Company and Furnished to the Securities and Exchange Commission or its staff upon request.