UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2015
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, CA
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐
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. ☒
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 ☐ Accelerated filer ☐ Non-accelerated filer (do not check if a smaller reporting company) ☐ Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31, 2014, 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 $6.4 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, 2015, 4,139,579 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 2015 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, 2015
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
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
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART I
PART II
PART III
PART IV
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
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 California and 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 our principle operations described above, our Fineline Molds division, located in San Dimas, California manufactures plastic injection
molds for a wide variety of industries, and our Huber Precision division, located in San Carlos, California is a manufacturer of machined parts, primarily for
the oil and electronics industry. We also provide engineering consulting and placement services, as well as quality and regulatory consulting services through
our Engineering Services Division. In addition to Pro-Dex, the names Micro Motors and Oregon Micro Systems are used for marketing purposes as brand
names. The names Huber Precision, a division of Pro-Dex, and Fineline Molds, a division of Pro-Dex, are used to distinguish our newly acquired businesses
and we have filed fictitious name statements in the counties in which we operate these divisions.
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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During fiscal 2015, we obtained title to an industrial property located in Ramsey, Minnesota (the “Ramsey Property”) and extended financing to a
company, Riverside Manufacturing, Inc. (“Riverside”), that operates out of the Ramsey Property. Riverside provides contract manufacturing services to the
aerospace, commercial airline, transportation and defense-related sectors. Our investment was made through our newly created limited liability company, Pro-
Dex Sunfish Lake, LLC to achieve a return on capital upon liquidation or upon foreclosure of the Riverside assets. The investments in the Ramsey Property
and Riverside are reflected as investment in Ramsey property and related notes receivable in the amount of $1.7 million on our June 30, 2015 Consolidated
Balance Sheet. (See Notes 8 and 15 to the Consolidated Financial Statements contained elsewhere in this report for additional information concerning this
investment.)
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 24 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
Other
Total Sales
Years Ended June 30,
2015
2014
(In thousands)
% of
Revenue
% of
Revenue
8,948
2,052
1,361
1,022
13,383
67% $
15%
10%
8%
100% $
6,848
2,392
1,219
353
10,812
64%
22%
11%
3%
100%
$
$
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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. In our San Carlos, California
facility we manufacture various machined parts, primarily for the oil and electronics industry. In our San Dimas, California facility we manufacture plastic
injection molds for a wide variety of industries. The proportion of total sales by facility is as follows:
Irvine
Beaverton
San Carlos
San Dimas
Total Sales
Years Ended June 30,
2015
2014
(In thousands)
% of
Revenue
% of
Revenue
$
$
11,684
1,394
48
257
13,383
87% $
10%
1%
2%
100% $
9,298
1,514
—
—
10,812
86%
14%
—
—
100%
In both fiscal years 2015 and 2014, our top 20 customers accounted for 82% of our sales. In fiscal year 2015, our largest customer, included in
medical device revenue above, accounted for 49% of our sales with our next largest customer accounting for 9% of our sales. This compares to fiscal year
2014, when our largest customer accounted for 49% 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. Our largest customer has made inquiries regarding
reducing existing purchase orders that were previously expected to be delivered in fiscal 2016. These reductions total approximately $1.6 million and if they
were to occur would have an adverse impact on our financial condition. Since the orders are within lead times, we will be able to charge the customer for the
cost of the materials; however, if this were to occur, we would suffer the loss of the gross margin on the order. At this time, we do not know whether or not
these reductions will occur.
Our current objectives are focused primarily on maintaining our relationship with our current largest customer, expanding our business with new
product launches and services related to our areas of expertise, and successfully integrating fiscal 2015 acquisitions that will further diversify our product
portfolio while increasing our manufacturing efficiency. In that regard, we did complete one of two significant medical device development projects in the
craniomaxillofacial (“CMF”) surgical segment during the fourth quarter of fiscal 2015 and delivered initial products to this new customer. We were able to
recognize revenue, which had been previously deferred, totaling $336,000 related to the development of this surgical instrument. However, there can be no
assurance as to the level of success we will achieve in these objectives.
The majority of the raw materials and components used to manufacture our products are purchased and are available from several sources, including
through our own in-house machining capabilities. Portescap Danaher, Precision Interconnect, and Maxon Precision Motors 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.
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At June 30, 2015, we had a backlog of $10.6 million compared with a backlog of $2.8 million at June 30, 2014. The increase in backlog at the end of
fiscal 2015 is primarily due to orders for the two CMF products we developed, or are developing, as well additional orders for a customer’s unique surgical
handpiece designed to be used in orthopedic surgery applications which launched in the third quarter of fiscal 2015. Of the backlog amount reported as of
June 30, 2015, approximately $442,000 relates to Fineline Molds and Huber Precision had immaterial backlog as of June 30, 2015. Additionally, the June 30,
2015 backlog contains certain orders from our largest customer, which they have asked to reduce by $1.6 million. We have experienced, and may continue to
experience, variability in our new order bookings due to, among other reasons, the launch of new products, the timing of customer orders based on end-user
demand and customer inventory levels, illustrative of which is the two previously described development projects for CMF devices for which we have
received initial purchase orders. We do not typically experience seasonal fluctuations in our shipments and revenues.
Segments
In fiscal 2015, the Company has four reportable segments based on its business activities and organization:
·
·
·
·
Pro-Dex located in Irvine, California – providing primarily medical and dental instruments using shared production and assembly machines and
workforce. This segment also incorporates Huber Precision as the revenues and assets of Huber Precision are not material to the Company’s
total revenues and assets.
OMS located in Beaverton, Oregon – providing multi-axis motion control applications.
Fineline located in San Dimas, California. This business was purchased on February 1, 2015 and is a manufacturer of plastic injection molds for
a variety of industries.
Engineering Services Division or (“ESD”). This division was launched in fiscal 2015 to provide permanent placement and contract services in
the fields of engineering, manufacturing and quality to diverse businesses.
(See Note 14 of Notes to Consolidated Financial Statements contained elsewhere in this report for additional information concerning these reporting
segments.)
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. Revenue
recognized for non-recurring engineering services represented 4% and 2% of our revenue in fiscal year 2015 and 2014, respectively. During fiscal years 2012
and 2013, we entered into certain development and supply contracts, the development portions of which provide for billable non-recurring engineering
service fees. Such fees are recognized as revenue generally upon successful completion of the non-recurring engineering services. The development portion
of the contract entered into during fiscal 2012 was completed during the fourth quarter of fiscal 2015 allowing us to record approximately $336,000 in non-
recurring engineering service revenue, included in medical device revenue. The development portion of the contract entered into during fiscal 2013 is
expected to be completed during the first half of fiscal 2016, although successful completion cannot be assured. In the fourth quarter of fiscal 2015, we
executed a development agreement with another customer to design and develop a powered surgical device valued at approximately $0.5 million. We will
continue 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, 2015 and 2014, we incurred research and development expenses amounting to $1,668,000 and $1,482,000,
respectively, which costs exclude $493,000 and $511,000 in 2015 and 2014, respectively, that were, or will be, shared with our customers through billings for
non-recurring engineering services.
Employees
At June 30, 2015, we had 66 full-time employees, comprised of 54 employees in Irvine, 7 in Beaverton and 5 in San Dimas. At June 30, 2014, we
had 62 full-time employees. 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.
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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.
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 2015, 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. As previously discussed, our largest customer has made inquiries recently regarding reducing
existing purchase orders that were previously expected to be delivered in fiscal 2016. These reductions total approximately $1.6 million and if they were to
occur would have an adverse impact on our financial condition.
We have a history of losses, and we cannot be certain that we will achieve or sustain profitability; we may need additional capital in the future to
fund our businesses, which we may not be able to obtain on acceptable terms.
We have experienced operating losses in the past, and we may continue to incur additional operating losses in the future until such time as we
achieve substantially higher sales volume. We incurred pre-tax losses from continuing operations of $446,000, $755,000, and $1,903,000 in fiscal 2015, 2014
and 2013, respectively. Our ability to achieve or sustain profitability is based on a number of factors, many of which are out of our control, including the
material costs for our products and the demand for our products.
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We currently anticipate that our available capital resources, including our existing cash and cash equivalents and accounts receivable balances, as
well as capital infusions provided by two separate financing transactions entered into in September, 2015 (See Note 15 to the Consolidated Financial
Statements contained elsewhere in this report) will be sufficient to meet our expected working capital and capital expenditure requirements as our business is
currently conducted for at least the next 12 months. Additionally, we plan to liquidate the Ramsey Property and related notes receivable, however there can be
no assurance that we will be successful in our efforts to liquidate these investments within the next 12 months, if at all. We may also attempt to raise
additional funds through public or private debt or equity financings if such financings become available on acceptable terms. We cannot be certain that any
additional financing we may need will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of opportunities, develop new products or otherwise respond to competitive pressures, and our operating results
and financial condition could be adversely affected.
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 2015, 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.
Our customers may cancel or reduce their orders, change production quantities or delay production, any of which would reduce our sales and
adversely affect our operating results.
Since most of our customers purchase our products from us on a purchase order basis, they may cancel, change, or delay product purchase
commitments with little notice to us. As a result, we are not always able to forecast with certainty the sales that we will make in a given period and sometimes
we may increase our inventory, working capital, and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced, or
canceled. As previously discussed, our largest customer has made inquiries recently regarding reducing existing purchase orders that were previously
expected to be delivered in fiscal 2016. These reductions total approximately $1.6 million and if they were to occur would have an adverse impact on our
financial condition.
The following factors, among others, affect our ability to forecast accurately our sales and production capacity:
·
·
Changes in the specific products or quantities our customers order; and
Long lead times and advance financial commitments for components required to complete actual/anticipated customer orders.
Delayed, reduced or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of those orders, such as
costs associated with purchased raw materials and write-offs of obsolete inventory.
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.
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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.
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 August 18, 2015, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, controlled voting power over approximately 37.9%
(25.3% and 12.6%, 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.
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We have invested $1.7 million in real property and promissory notes secured by business assets of Riverside Manufacturing, Inc. (“Riverside”) a
company located in Ramsey, Minnesota. These investments are subject to complex accounting requirements, risk of loss, recoverability and
impairment and represent investments unrelated to our core business operations, which could adversely affect our business, financial condition and
results of operations.
We acquired $1.2 million in promissory notes during the second quarter of fiscal 2015 which are subject to complex impairment loss analysis.
During the third and fourth quarters of fiscal 2015 we exchanged approximately $1.0 million in promissory notes for the conveyance of title to the land and
building and extended additional financing to Riverside under a revolving loan. On August 6, 2015 we sent a notice of default to the Riverside and we expect
to begin eviction proceedings and liquidate the business assets. It is possible that such proceedings may lead to a protracted and costly divestiture of these
investments. If we are unable to successfully evict the company from the premises it may delay a subsequent sale of some or all of the business assets either
owned by Pro-Dex or serving as security for the promissory notes and revolving loan.
We may not be able to successfully integrate our recent business acquisitions, which could adversely affect our business, financial condition, and
results of operations.
We have acquired, and may acquire in the future, businesses, products, and technologies that complement or expand our current operations.
Acquisitions could require significant capital investments and require us to integrate with companies that have different cultures, management teams, and
business infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors,
including:
·
·
·
·
·
·
Difficulties in assimilating and integrating the operations, products, and workforce of an acquired business;
The retention of key employees;
Management of facilities and employees in separate geographic areas;
The integration or coordination of different research and development and product manufacturing facilities;
Successfully converting information and accounting systems, and
Diversion of resources and management attention from our other operations.
If market conditions or other factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our
acquisitions. Our failure to successfully integrate our acquisitions or realize the expected value from past or future acquisitions could harm our business,
financial condition, and results of operations.
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.
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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.
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 $36,634, 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
office is located in a single-story building in a 20-year-old industrial office complex and is in good condition.
Our San Dimas office and manufacturing facility is located at 210 West Arrow Highway, Suites C & D, San Dimas, California 91773. The Company
executed the lease in the third quarter of fiscal year 2015, in conjunction with the asset acquisition of Fineline Molds. The 3,680 square foot facility is leased
from an unrelated third party, at a base monthly lease rate of $2,576 through March 1, 2016 when the rent increases to $2,760 through the expiration of the
lease in February 2017. The suites are located in a one-story building in an approximately 35-year-old industrial office complex and are in fair condition.
Our San Carlos office and manufacturing facility is located at 585 Taylor Way, Unit 5, San Carlos, California 94070. The Company executed the
lease in the second quarter of fiscal year 2015, in conjunction with the asset acquisition of Huber Precision. The 1,568 square foot facility is leased from an
unrelated third party, at a base monthly lease rate of $2,148 through the expiration of the lease in November 2015. The suite is located in a one-story building
in an approximately 35-year-old industrial office complex and is in fair 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. 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, 2015, the last sale
price of our common stock as reported by NASDAQ was $2.37 per share.
Year ended June 30, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended June 30, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
$
$
High
Low
2.10 $
2.55
3.77
2.30
2.79 $
2.63
2.54
2.42
1.90
2.06
1.99
1.90
2.01
2.16
2.03
2.00
As of September 8, 2015, there were 88 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
In April 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 13 of Notes to Consolidated Financial Statements contained elsewhere in
this report.)
Repurchases
In September 2013, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 750,000 shares of our
common stock. In accordance with, and as part of, this share repurchase program, our Board approved, on September 23, 2014, the adoption of a prearranged
share repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The
10b5-1 Plan became effective on September 24, 2014 and terminated on March 23, 2015. During fiscal 2015, we repurchased 69,773 shares at an aggregate
cost of $154,000, inclusive of fees, under the terms of the 10b5-1 Plan.
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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, 2015 and 2014. 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 California and 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 our principle operations described above, our Fineline Molds division, located in San Dimas, California manufactures plastic injection
molds for a wide variety of industries and our Huber Precision division, located in San Carlos, California is a manufacturer of machined parts, primarily for
the oil and electronics industry. We also provide engineering consulting and placement services, as well as quality and regulatory consulting services through
our Engineering Services Division. In addition to Pro-Dex, the names Micro Motors and Oregon Micro Systems are used for marketing purposes as brand
names. The names Huber Precision, a division of Pro-Dex, and Fineline Molds, a division of Pro-Dex, are used to distinguish our newly acquired businesses
and we have filed fictitious name statements in the counties in which we operate these divisions.
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.
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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.
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.
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.
Investment in Ramsey Property and Related Notes Receivable
During the fourth quarter of fiscal 2015, as disclosed in a Form 8-K filed with the SEC on May 13, 2015, we entered a settlement agreement such
that we received the deed to the land and building located in Ramsey, Minnesota, (the “Ramsey Property”) which had previously been held as security for
certain notes receivable.
The related notes receivable (as further described in Note 8 to the Consolidated Financial Statements contained elsewhere in this report) are
accounted for under ASC Section 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The notes are recorded at their purchase
price and since the notes remain in default, they are considered impaired and have been placed on nonaccrual status, meaning there is no accrual for interest
earnings. No interest has been collected or recognized since the date of purchase. Due to uncertainties relating to future cash flows projected to be received on
the notes, no accretable yield has been recorded.
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The notes are considered impaired because we do not believe the contractual payments will be collected pursuant to contract terms. Accordingly, the
recorded investment is reflected at the lesser of the purchase price or the estimated fair value of the collateral (with appropriate reductions for estimated
disposal costs).
Goodwill & Intangibles
We recorded $353,000 of goodwill and $54,000 of trade name in conjunction with the asset purchase of Fineline Molds. Accordingly, subsequent to
the measurement period described below under business combinations, we will assess potential impairment of goodwill and trade name annually, or more
frequently if there are events or changes in circumstances that may indicate potential impairment. Other intangibles consist of legal fees incurred in
connection with patent applications, capitalized software development costs, covenant not to compete, and customer lists including backlog. The legal fees
will be amortized over the life of the applicable patent upon its issuance and the capitalized software development costs will be amortized over the estimated
product life of the underlying product which was released for sale during the fourth quarter of fiscal 2015. The covenant not to compete and customer list
including backlog relate to assets acquired in conjunction with the purchase of Huber Precision and Fineline Molds and will be amortized over their estimated
useful lives.
Variable Interest Entities
The Company has a variable interest in Riverside Manufacturing Inc. (“Riverside”) because of extending financing in the form of promissory notes
and a revolving loan. Therefore, Riverside is a variable interest entity (“VIE”) under GAAP. VIEs are legal entities in which the equity investors do not have
sufficient equity at risk for the entity to independently finance its activities or the collective holders do not have the power through voting or similar rights to
direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the expected losses of the entity, or the right
to receive expected residual returns of the entity. Consolidation of a VIE is considered appropriate if a reporting entity is the primary beneficiary, the party
that has both significant influence and control over the VIE. At each reporting period, management performs a qualitative analysis to determine if the
Company is the primary beneficiary of a VIE. This analysis includes review of the VIE’s capital structure, contractual terms, and primary activities, including
the Company’s ability to direct the activities of the VIE and obligations to absorb losses, or the right to receive benefits, significant to the VIE. Additionally,
changes in our investments may result in a reconsideration event that may necessitate consolidation in the future.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their
estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant
estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, useful lives and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are
recorded to earnings.
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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, 2015 and 2014 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, 2015 and 2014, 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, 2015 Compared to the Fiscal Year Ended June 30, 2014
The following tables set forth results from continuing operations for the years ended June 30, 2015 and 2014:
Years Ended June 30,
2015
2014
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
$
13,383
9,679
3,704
975
1,963
1,668
4,606
(902)
456
(446)
44
(402)
17
100% $
72%
28%
7%
15%
12%
34%
(6% )
3%
(3% )
—
(3% ) $
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% )
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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:
Net sales:
Medical device
Industrial and scientific
Dental and component
Other
Years Ended June 30,
2015
2014
Dollars in thousands
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2014
To 2015
$
$
8,948
2,052
1,361
1,022
13,383
67% $
15%
10%
7%
100% $
6,848
2,392
1,219
353
10,812
64%
22%
11%
3%
100%
31%
(14%)
12%
190%
24%
Net sales in fiscal 2015 increased by $2.6 million, or 24%, as compared to fiscal 2014, due primarily to an increase in medical device sales of $2.1
million. Shipments to our largest customer, accounted for in medical device sales, increased $1.2 million for fiscal 2015 from fiscal 2014. Our second largest
medical device customer in both fiscal 2015 and 2014 increased their orders by approximately $474,000 in the current fiscal year. Also we launched
production on a new instrument in the fourth quarter of fiscal 2015 and total revenue from the product sales to this new customer totaled approximately
$324,000. The decrease of $340,000 in industrial and scientific sales from fiscal 2014 to 2015, relates primarily to reduced shipments to our largest multi-axis
motion controller customer whose reduction in orders caused a reduction in revenue of $268,000 in fiscal 2015 compared to fiscal 2014. Our dental and
component revenue are generated from sales to many distributors and end-users whose purchasing activity can vary widely from year to year. Finally, our
other revenue increased $669,000 in fiscal 2015 compared to the prior fiscal year and it includes revenue generated from our Fineline Molds and Engineering
Services Division of $257,000 and $115,000, respectively, in the current year, with no sales in the prior year. We also recorded $335,000 in fiscal 2015 in non-
recurring engineering services related to the completion of one of our long-term CMF contracts.
At June 30, 2015, we had a backlog of $10.6 million compared with a backlog of $2.8 million at June 30, 2014. The increase in backlog at the end of
fiscal 2015 is primarily due to orders for the two CMF products we developed, or are developing, as well additional orders for a customer’s unique surgical
handpiece designed to be used in orthopedic surgery applications which launched in the third quarter of fiscal 2015. Of the backlog amount reported as of
June 30, 2015, approximately $442,000 relates to Fineline Molds and Huber Precision had immaterial backlog as of June 30, 2015. Additionally, the June 30,
2015 backlog contains certain orders from our largest customer, which they have asked to reduce by $1.6 million. We have experienced, and may continue to
experience, variability in our new order bookings due to, among other reasons, the launch of new products, the timing of customer orders based on end-user
demand and customer inventory levels, illustrative of which is the two previously described development projects for CMF devices for which we have
received initial purchase orders. We do not typically experience seasonal fluctuations in our shipments and revenues.
Cost of Sales and Gross Margin
Years Ended June 30,
2015
2014
Dollars in thousands
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2014
To 2015
Cost of sales:
Product costs
Accrued losses on product development services
Under (over)-absorption of manufacturing overhead
Inventory and warranty charges
Total cost of sales
$
$
9,547
399
(483)
216
9,679
18
71% $
3%
(4%)
2%
72% $
6,867
317
474
188
7,846
64%
3%
4%
2%
73%
39%
26%
(202%)
15%
23%
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Cost of sales in fiscal 2015 increased $1.8 million, or 23%, from fiscal 2014, due primarily to a $2.7 million increase in product costs, partially offset
by a $957,000 decrease from fiscal 2014 to 2015 in improved absorption of manufacturing overhead due to increased volumes in fiscal 2015 versus the prior
fiscal year. The increase in product costs is due primarily to the increase in net sales from fiscal 2014 to 2015. The increase in product costs and under-(over)
absorption of manufacturing overhead combined in fiscal 2015 increased 23% compared to fiscal 2014, which is consistent with the increase in sales for the
corresponding periods. Although sales are significantly higher fiscal 2015 than the prior fiscal year, and our product costs have over-absorbed our fixed and
variable manufacturing overhead, our gross margin is consistent because our variable manufacturing overhead increases with increased sales and production
volume. Accrued losses from development services portion of certain contracts increased $82,000, or 26%, from fiscal 2014 relating mostly due to higher
than anticipated engineering labor hours and materials needed to complete the projects, partly due to design changes required subsequent to a validation test
failure, which has since been remediated. Costs related to inventory and warranty charges increased $28,000 in fiscal 2015 compared to 2014 due primarily to
$50,000 in increased warranty expenses offset by a decrease of $22,000 in inventory charges.
Gross margin increased one percentage point in fiscal 2015 compared to fiscal 2014. Although revenue increased by 24% from fiscal 2014 to 2015,
the sales volumes are not high enough to impact the combined product cost and absorption of manufacturing overhead. The other components of cost of sales
described above did not change materially.
Operating Expenses
Operating expenses:
Selling expenses
General and administrative expenses
Research and development costs
Years Ended June 30,
2015
2014
(Dollars in thousands)
% of Net
Sales
% of Net
Sales
Increase From
2014 To 2015
$
$
975
1,963
1,668
4,606
7% $
15%
12%
34% $
585
1,713
1,482
3,780
5%
16%
14%
35%
67%
15%
13%
22%
Selling expenses consist of salaries and other personnel-related expenses related to our business development departments, as well as trade show
attendance, advertising and marketing expenses, and travel and related costs incurred in generating and maintaining customer relationships. In the second
quarter of fiscal 2015, we launched our engineering services division (“ESD”) to recruit and place contract personnel in engineering, manufacturing and other
technical consulting capacities. This division includes a team of sales and recruiting staff and contributed $441,000 of the total selling expenses during fiscal
2015. Additionally, as discussed in Note 3 of Notes to Consolidated Financial Statements contained elsewhere in this report, we acquired both Fineline Molds
and Huber Precision during fiscal 2015 and these divisions contributed $35,000 and $78,000, respectively, to the selling expenses incurred during fiscal 2015.
Offsetting these increases, the selling expenses for our primary medical and dental business in Irvine decreased by $162,000 in fiscal 2015 compared to fiscal
2014, mostly due to a reduction in personnel, travel and trade show related expenses.
General and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses for corporate, accounting, finance and human
resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees and costs associated with being a public
company. The $250,000 increase in G&A expenses from fiscal 2014 to 2015 is due primarily to increased legal and professional fees, commercial insurance
and severance payments made to our former Chief Executive Officer. Legal expenses relating to intellectual property matters increased approximately
$33,000 during fiscal 2015 compared to the corresponding period of the prior year. Other legal and professional expenses increased approximately $151,000
in fiscal 2015 compared to the prior fiscal year. Approximately $110,000 of fees incurred during the 2015 fiscal year relate to legal and consulting expenses
incurred in connection with our investment in the Ramsey Property and related notes receivable.
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In fiscal 2015 we also incurred legal fees relating to services provided in conjunction with our two business acquisitions, the filing our Form S-8
related to our ESPP Plan and legal expenses associated with the separation agreement of our former Chief Executive Officer. Our commercial insurance
expense increased approximately $20,000 in fiscal 2015 compared to the prior fiscal year primarily due to increases in our directors and officers insurance
premiums. During fiscal 2015, severance costs increased by $31,000 compared to the prior fiscal year due to the separation of our former Chief Executive
Officer. Our tax, Sarbanes-Oxley and other consulting expense increased approximately $29,000 during fiscal 2015 compared to the corresponding periods of
the prior fiscal year primarily due to timing of annual engagements as well as additional services.
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 increase in research and development costs of $186,000 in fiscal 2015 as compared to 2014 is primarily due to
the launch of an engineering battery development project to enable us to manufacture batteries for our powered surgical devices in-house as well as additional
consulting expenses.
Other Income (Expense), Net
Other income and expense consists primarily of realized gains and losses from sales of investments in marketable equity securities, interest income
earned from our money market account, and interest expense related to the Fineline Molds promissory note and capital lease obligations for leased office
equipment.. The increase in other income (expense), net, in fiscal 2015 as compared to 2014 is due primarily to an increase in realized gains, amounting to
$390,000, from sales of certain investments in marketable equity securities.
Benefit from Income Taxes
The effective tax rates for fiscal 2015 and 2014 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 6 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,
2015
2014
(In thousands)
$
$
$
$
$
(775)
(1,513)
(203)
697
4,712
$
$
$
$
$
(329)
323
1,514
3,188
6,766
Cash used in operating activities during fiscal 2015 was $775,000. The primary uses of cash arose from our net loss of $365,000, increases in
inventory of $1.7 million to service our backlog of $10.6 million as of June 30, 2015 as well as increases in accounts receivable totaling $554,000, consistent
with our increase in net sales. These uses of cash are offset primarily by an increase in accounts payable, accrued expenses and deferred rent of $1.2 million,
an increase in deferred revenue of $362,000 and a decrease in unbilled receivables of $220,000 caused by the completion of one of our long-term product
development contracts.
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Cash used in operating activities during fiscal 2014 was $329,000. The primary uses of cash arose from the net loss for the year of $488,000, which
was offset by non-cash depreciation and amortization of $527,000, 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, an increase in unbilled receivables of
$828,000 related to the product development portion of certain contracts in progress at June 30, 2014, and 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.
Cash Flows from Investing Activities
Net cash used in investing activities in fiscal 2015 was $1.5 million. During the 2015 fiscal year, we invested $1.7 million in the purchase of notes
receivable and the extension of additional revolving credit as further described in Note 8 to the Consolidated Financial Statements contained elsewhere in this
report. We also purchased Huber Precision and Fineline Molds for a total of $866,000, made capital expenditures primarily for tooling and manufacturing
equipment in the amount of $244,000 and received $1.3 million in proceeds from the sale of equity securities in conformity with our Surplus Capital
Investment Policy described in more detail below. Additionally, we expended $64,000 in capitalized legal fees and software development costs related to
internally developed intellectual property.
Net cash provided by investing activities in fiscal 2014 was $323,000. We received $900,000 in proceeds received from the sale of the land and
building housing our former Astromec operations, and $228,000 in proceeds received from the sale of investments in common stock of public companies.
Uses of cash consisted of investments, aggregating $654,000, in marketable equity securities of publicly held companies, costs of internally developed
software and intellectual property amounting to $105,000, and purchases of equipment amounting to $50,000.
Cash Flows from Financing Activities
During fiscal year 2015 we spent $154,000 on the repurchase of 69,773 shares of our common stock pursuant to the share repurchase program
described in more detail below. We also repurchased the outstanding in-the money stock options held by our former Chief Executive Officer for $32,000,
pursuant to the terms of his separation agreement.
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).
Liquidity Requirements for the Next 12 Months
As of June 30, 2015, our working capital was $4.7 million. We currently believe that our existing cash and cash equivalent balances as well as our
account receivable balances, as well as capital infusions provided by two separate financing transactions entered into in September, 2015 (See Note 15 to the
Consolidated Financial Statements contained elsewhere in this report) will provide us sufficient funds to satisfy our cash requirements as our business is
currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from
our cash flows from operations. Additionally, we plan to liquidate the Ramsey Property and related notes receivable, however there can be no assurance that
we will be successful in our efforts to liquidate these investments within the next 12 months, if at all. Certain factors and events could negatively affect our
cash flows from operations, including:
·
·
In the event that any of our significant customers are unable to perform due to cancelation of their ordered products and/or their ability to pay for
such products in a timely manner. Such significant change would negatively impact our revenue, operating results, and cash flows.
If we are unable to successfully evict the company located in Ramsey, Minnesota from the premises it may delay a subsequent sale of some or all of
the business assets either owned by Pro-Dex or serving as security for the promissory notes and revolving loan.
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We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs
and products that we believe will most likely contribute to our profitability. As we execute on our current strategy, however, we may require debt and/or
equity capital to fund our working capital needs. In particular, we have experienced, and anticipate that we may experience a negative operating cash flow in
the future, especially as we procure long-lead time materials to satisfy our current backlog. We may attempt to raise additional funds through public or private
debt or equity financings if such financings become available on acceptable terms, or we may seek working capital financing through the extension of
additional credit. We cannot be certain that any additional financing we may need will be available on terms acceptable to us, or at all. If adequate funds are
not available or are not available on acceptable terms, we may not be able to take advantage of opportunities, develop new products or otherwise respond to
competitive pressures, and our operating results and financial condition could be adversely affected.
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 Van Kirk.
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. During the third quarter of fiscal 2015, the Investment Committee
liquidated the entire equity portfolio to assist with our working capital requirements. The Company recorded realized gains on the sales of securities of
$455,000 for the fiscal year ended June 30, 2015.
In September 2013, our Board approved a share repurchase program authorizing the Company to repurchase up to 750,000 shares of our common
stock. In accordance with, and as part of this share repurchase program, our Board approved, on September 23, 2014, the adoption of a prearranged share
repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The 10b5-
1 Plan became effective on September 24, 2014 and terminated on March 23, 2015. Through March 23, 2015, we repurchased 69,773 shares at an aggregate
cost of $154,000, inclusive of fees, under the terms of the 10b5-1 Plan. Repurchases under the 10b5-1 Plan were administered through an independent broker.
Rights Offering
We completed a common stock rights offering in April, 2014, pursuant to a registration statement on Form S-3 filed with the SEC. We received gross
proceeds of approximately $1.65 million before expenses of approximately $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.
Since the rights offering we have invested approximately $1.7 million in real property and promissory notes secured by business assets of Riverside
located in Ramsey, Minnesota. We also completed the business acquisitions of Huber and Fineline for a total cash investment of $866,000.
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Recent Accounting Pronouncements
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 also requires enhanced revenue related disclosures. In July 2015, the FASB deferred the effective date to fiscal years
beginning after December 15, 2018 and early adoption of the standard is permitted, but not before the original effective date of December 15, 2017. This
update permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect this guidance will have on the
consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). This guidance defines
management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide
related footnote disclosures. Under the guidance, management is required to evaluate, for each annual and interim reporting period, whether it is probable
that the entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued or are available
to be issued. When management identifies substantial doubt about the entity’s ability to continue as a going concern, additional disclosures are required. This
guidance will be effective for annual reporting periods beginning after December 15, 2016. The Company is evaluating the effect this guidance will have on
the consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation. This guidance amends existing consolidation guidance in which a reporting entity
might be required to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on
its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal
entity’s economic benefits or obligations. The guidance:
·
·
·
·
modifies the evaluations of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities;
eliminates the presumption that a general partner should consolidate a limited partner;
affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements
and related party relationships; and
provides a scope exception from consolidation guidance for reporting entities with interests in certain investment funds.
The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company does not
expect the adoption of this guidance to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs” to simplify the presentation of debt issuance costs. The amendments in this accounting standard update require debt issuance costs be presented on the
balance sheet as a direct reduction from the carrying amount of the related debt liability. The amendments in this accounting standard update are to be applied
retrospectively and are effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect the adoption of this
accounting standard update to have a material impact on our balance sheet.
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
Consolidated Financial Statements:
Consolidated Balance Sheets, June 30, 2015 and 2014
Consolidated Statements of Operations and Comprehensive Loss, Years Ended June 30, 2015 and 2014
Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2015 and 2014
Consolidated Statements of Cash Flows, Years Ended June 30, 2015 and 2014
Notes to Consolidated Financial Statements
24
Page
25
26
27
28
29
31
Table of Contents
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, 2015 and 2014 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30,
2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 17, 2015
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ASSETS
Current assets:
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
2015
2014
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $36 and $29 at June 30, 2015 and 2014,
$
697 $
3,188
respectively
Unbilled receivables
Other current receivables
Inventory
Prepaid expenses
Deferred income taxes
Total current assets
Investments
Plant, equipment and leasehold improvements, net
Investment in Ramsey property and related notes receivable
Goodwill
Intangibles
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Income taxes payable
Note payable
Capital lease obligations
Total current liabilities
Non-current liabilities:
Deferred income taxes
Deferred rent
Note payable, net of current portion
Capital lease obligations, net of current portion
Total non-current liabilities
Total liabilities
Commitments and Contingencies
Shareholders’ equity:
$
$
2,326
853
28
4,310
124
70
8,408
—
1,470
1,652
353
547
86
12,516 $
1,867 $
1,202
594
—
24
7
3,694
70
204
70
—
344
4,038
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
Common stock, no par value, 50,000,000 shares authorized; 4,139,579 and 4,211,019 shares issued and
outstanding at June 30, 2015 and 2014, respectively
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
18,411
—
(9,933)
8,478
12,516 $
18,582
202
(9,568)
9,216
11,708
$
See notes to consolidated financial statements.
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Table of Contents
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
Gain (loss) on sale of equipment
Interest expense
Total other income
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,
2015
2014
$
13,383 $
9,679
3,704
975
1,963
1,668
4,606
(902)
6
455
1
(6)
456
(446)
44
(402)
37
(365) $
—
—
(365) $
(0.10) $
0.01
(0.09) $
$
$
$
$
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)
Basic and diluted weighted average common shares outstanding
4,169,326
3,493,151
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, 2015 and 2014
(In thousands, except share data)
Common Shares
Number of
Shares
Amount
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Balance at June 30, 2013
Net loss
Issuance of common stock from rights offering
Exercise of stock options
Net change in unrealized gain from marketable equity
investments
Restricted stock forfeitures
Share-based compensation
Balance at June 30, 2014
Net loss
Rights offering costs
Repurchase of options
Net change in unrealized gain from marketable equity
investments
Restricted stock forfeitures
Share-based compensation
Share repurchases
Balance at June 30, 2015
3,348,184 $
—
868,732
4,104
—
(10,001)
—
4,211,019 $
—
—
—
—
(1,667)
—
(69,773)
4,139,579 $
17,012 $
—
1,514
6
—
—
50
18,582 $
—
(2)
(32)
—
—
17
(154)
18,411 $
5 $
—
—
—
197
—
—
202 $
—
—
—
(202)
—
—
—
— $
(9,080) $
(488)
—
—
—
—
—
(9,568) $
(365)
—
—
—
—
—
—
(9,933) $
7,937
(488)
1,514
6
197
—
50
9,216
(365)
(2)
(32)
(202)
—
17
(154)
8,478
See notes to consolidated financial statements.
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PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Realized gain on sale of investments
Gain on sale of real estate held for sale (Carson City facility)
Loss (gain) on sale or disposal of equipment
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 and leasehold improvements
Proceeds from sale of real estate held for sale (Carson City Facility)
Business acquisitions
Purchase of notes receivable (See Note 8)
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 note payable
Repurchases of common stock
Net proceeds received (paid) related to common stock rights offering
Proceeds (payments) from exercise (repurchase) 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
See notes to consolidated financial statements.
29
Years Ended June 30,
2015
2014
$
(365) $
578
(455)
—
(1)
17
7
(554)
220
(1,705)
(22)
1,196
362
(53)
(775)
(244)
—
(866)
(1,652)
1
1,324
(64)
(12)
(1,513)
(15)
(154)
(2)
(32)
(203)
(2,491)
3,188
697 $
$
(488)
527
(65)
(167)
10
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
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Promissory note issued in conjunction with a business acquisition
Exchange of notes receivable for real property
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
See notes to consolidated financial statements.
30
Years Ended June 30,
2015
2014
$
$
$
$
100 $
1,059 $
7 $
6 $
—
—
7
8
Table of Contents
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.
During fiscal 2015 we acquired Fineline Molds and Huber Precision, businesses that manufacture plastic injection molds and machined parts,
respectively, for a wide variety of industries. We also provide engineering consulting and placement services, as well as quality and regulatory consulting
services through our Engineering Services Division.
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 7),
Pro-Dex Management, Inc., a non-operating subsidiary as well as Pro-Dex Sunfish Lake, LLC and Pro-Dex Riverside, LLC, both Delaware limited liability
companies created in fiscal 2015. 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.
Due 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.
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Warranties
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2015 there were no cash
equivalents included in the cash and cash equivalents balance. At June 30, 2014 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 reported on the June 30, 2014 balance sheet consist of marketable equity securities of publicly held companies. Management intended 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 were 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 plant, equipment and leasehold improvements, when events or changes in
circumstances occur that indicate carrying values may not be recoverable.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Investment in Ramsey Property and Related Notes Receivable
During the fourth quarter of fiscal 2015, as disclosed in a Form 8-K filed with the SEC on May 13, 2015, we entered a settlement agreement such
that we received the deed to the land and building located in Ramsey, Minnesota (the “Ramsey Property”) which had previously been held as security for
certain notes receivable.
The related notes receivable (as further described in Note 8) are accounted for under ASC Section 310-30 “Loans and Debt Securities Acquired with
Deteriorated Credit Quality.” The notes are recorded at their purchase price and since the notes remain in default, they are considered impaired and have been
placed on nonaccrual status, meaning there is no accrual for interest earnings. No interest has been collected or recognized since the date of purchase. Due to
uncertainties relating to future cash flows projected to be received on the notes, no accretable yield has been recorded.
The notes are considered impaired because we do not believe the contractual payments will be collected pursuant to contract terms. Accordingly, the
recorded investment is reflected at the lesser of the purchase price or the estimated fair value of the collateral (with appropriate reductions for estimated
disposal costs).
Goodwill & Intangibles
We recorded $353,000 of goodwill and $54,000 of trade name in conjunction with the asset purchase of Fineline Molds. Accordingly, subsequent to
the measurement period described below under business combinations, we will assess potential impairment of goodwill and trade name annually, or more
frequently if there are events or changes in circumstances that may indicate potential impairment. Intangibles consist of legal fees incurred in connection with
patent applications, capitalized software development costs, covenant not to compete, trade name, and customer lists including backlog. The patent costs will
be amortized over the life of the applicable patent upon its issuance and the capitalized software development costs will be amortized over the estimated
product life of the underlying product which was released for sale during the fourth quarter of fiscal 2015. The covenant not to compete and customer list
including backlog relate to assets acquired in conjunction with the purchase of Huber Precision and Fineline Molds and will be amortized over their estimated
useful lives.
Variable Interest Entities
The Company has a variable interest in Riverside Manufacturing, Inc. (“Riverside”) because of extending financing in the form of promissory notes
and a revolving loan. Therefore, Riverside is considered a variable interest entity (“VIE”) under GAAP. VIEs are legal entities in which the equity investors
do not have sufficient equity at risk for the entity to independently finance its activities or the collective holders do not have the power through voting or
similar rights to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the expected losses of the
entity, or the right to receive expected residual returns of the entity. Consolidation of a VIE is considered appropriate if a reporting entity is the primary
beneficiary, the party that has both significant influence and control over the VIE. Management periodically performs a qualitative analysis to determine if the
Company is the primary beneficiary of a VIE. This analysis includes review of the VIE’s capital structure, contractual terms, and primary activities, including
the Company’s ability to direct the activities of the VIE and obligations to absorb losses, or the right to receive benefits, significant to the VIE. Additionally,
changes in our investments may result in a reconsideration event that may necessitate consolidation in the future.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their
estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant
estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, useful lives and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are
recorded to earnings.
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Income Taxes
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 losses and tax credit carryovers. Deferred tax assets at both June 30, 2015 and 2014 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, 2015 and 2014, 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.
Cash-Based Plans
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.
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.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 12, 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.
Investment in Ramsey property and related notes receivable: These investments are classified within Level 3 of the valuation hierarchy for purposes
of evaluating potential impairment of these assets. The fair value of the property and related notes receivable is based upon the valuation of third party
appraisals of the land and building as well as the equipment which is security for the notes less estimates of liquidation costs.
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.
Advertising
Advertising costs are charged to selling expense as incurred and amounted to $51,000 and $61,000 for the fiscal years ended June 30, 2015 and
2014, 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 also requires enhanced revenue related disclosures. In July 2015, the FASB deferred the effective date to fiscal years
beginning after December 15, 2018 and early adoption of the standard is permitted, but not before the original effective date of December 15, 2017. This
update permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect this guidance will have on the
consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). This guidance defines
management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide
related footnote disclosures. Under the guidance, management is required to evaluate, for each annual and interim reporting period, whether it is probable that
the entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued or are available to
be issued. When management identifies substantial doubt about the entity’s ability to continue as a going concern, additional disclosures are required. This
guidance will be effective for annual reporting periods beginning after December 15, 2016. The Company is evaluating the effect this guidance will have on
the consolidated financial statements and related disclosures.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2015, the FASB issued ASU 2015-02, Consolidation. This guidance amends existing consolidation guidance in which a reporting entity
might be required to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on
its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal
entity’s economic benefits or obligations. The guidance:
·
·
·
·
modifies the evaluations of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities;
eliminates the presumption that a general partner should consolidate a limited partner;
affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements
and related party relationships; and
provides a scope exception from consolidation guidance for reporting entities with interests in certain investment funds.
The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company does
not expect the adoption of this guidance to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs” to simplify the presentation of debt issuance costs. The amendments in this accounting standard update require debt issuance costs be presented on the
balance sheet as a direct reduction from the carrying amount of the related debt liability. The amendments in this accounting standard update are to be applied
retrospectively and are effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect the adoption of this
accounting standard update to have a material impact on our balance sheet.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation.
3.
Business Acquisitions
During the fiscal year ended June 30, 2015, we completed two acquisitions. On December 1, 2014, we completed the acquisition of Huber Precision
(“Huber”), a manufacturer of machined parts, primarily for the oil and electronics industry. The aggregate purchase price paid was $209,000. On February 1,
2015, we completed the acquisition of Fineline Molds (“Fineline”), a manufacturer of plastic injection molds for a variety of industries. The aggregate
purchase price was $757,000, of which $657,000 was paid in cash at closing and $100,000 of which is to be paid by the Company under the terms of a four-
year promissory note issued to Fineline at closing, which bears interest at 4% per annum and requires sixteen equal quarterly payments of principal and
accrued interest in the amount on $6,794. The note is secured by all of the assets acquired by us from Fineline.
36
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the consideration paid and the estimated fair values of the assets acquired for each acquisition as of the respective
acquisition date (in thousands):
Consideration:
Cash
Promissory note payable to seller
Total consideration
Fair value of assets acquired:
Inventory
Fixed Assets
Covenant not to compete
Trade name
Customer list and backlog
Net assets acquired
Goodwill
Huber
Purchase Price
Allocation
Fineline
Purchase Price
Allocation
$
$
$
$
$
209 $
—
209 $
5 $
37
30
—
137
209 $
— $
657
100
757
—
149
22
54
179
404
353
The acquisitions were completed to support expansion of the business and broaden the Company’s customer base. We have accounted for these
acquisitions as business combinations using the acquisition method of accounting. This method requires, among other things, that assets acquired and
liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. There were no liabilities assumed as part of either
the Huber or Fineline acquisitions. Pro forma historical results of operations related to both acquisitions during the period prior to the acquisition date have
not been presented because they are not material to our consolidated statements of operations and comprehensive income (loss). The results of operations
related to the businesses acquired have been included in the Company’s consolidated statements of operations since the date of acquisition, respectively. The
fair value determination of assets recorded are those of management. The fair value determination of the customer list and backlog was based on the excess of
earnings method which is based on the prospective net cash flows of the existing customers. The fair value determination of the trade name was based upon a
relief from royalty approach which assesses the royalty savings an entity realizes since it owns the asset and isn’t required to pay a third party license for its
use. The fair value determination of the covenants no to compete was based upon a discounted cash flow model.
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
Investments
June 30,
2015
2014
2,025 $
1,030
1,095
160
4,310 $
878
525
823
374
2,600
$
$
During the fiscal year ended June 30, 2015, we liquidated our investment portfolio to fund our working capital requirements, especially our
inventory requirements, as we prepared to launch production of two new products. We recorded realized gains of $455,000 during fiscal 2015 upon the sale of
our investments in marketable equity securities of publicly held companies.
Our investments at June 30, 2014 amounted to $1,058,000 which represented an aggregate cost basis of $857,000, gross unrealized gains aggregating
$209,000 and unrealized losses of $7,000. 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.
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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,
2015
2014
2,008 $
4,803
2,086
8,897
(7,427)
1,470 $
2,054
4,574
2,312
8,940
(7,365)
1,575
$
$
Depreciation expense, which includes capital lease amortization, for the years ended June 30, 2015 and 2014 amounted to $534,000 and $527,000,
respectively.
Intangibles
Intangibles consist of the following (in thousands):
Capitalized software development costs
Covenant not to compete
Trade name
Customer list and backlog
Patent-related costs
Total intangibles
Less accumulated amortization
June 30,
2015
June 30,
2014
73 $
52
54
316
96
591 $
(44)
547 $
37
—
—
—
68
105
—
105
$
$
$
Capitalized software development costs relate to internally developed software, which will be amortized over the estimated product life of the
underlying product which was released for sale during the fourth quarter of fiscal 2015. Both the covenant not to compete and the customer list and backlog
relate to assets acquired in conjunction with the business acquisitions more fully described in Note 3 above and will be amortized over various periods not to
exceed ten years. The trade name relates exclusively to Fineline Molds and has an indefinite life, subject to impairment loss consideration if certain conditions
exist. Patent-related costs consist of legal fees incurred in connection with patent applications, and will be amortized over the life of the applicable patent
upon its issuance, or expensed immediately in the event the patent office denies the issuance of the patent. Expected amortization expense for the next five
fiscal years ending June 30 are as follows (in thousands):
Fiscal Year:
2016
2017
2018
2019
2020
Total expected amortization
38
Amortization
Expense
$117
53
53
53
47
$323
Table of Contents
Accrued Liabilities
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities consist of the following (in thousands):
Warranty
Payroll and related items
Accrued legal and professional fees
Accrued sales, use and excise taxes
Accrued losses on development contracts
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
5. Warranty Accrual
$
$
$
$
June 30,
2015
2014
261 $
302
46
36
385
83
89
1,202 $
237
240
13
8
468
22
102
1,090
June 30,
2015
2014
— $
—
— $
Information relating to the accrual for warranty costs for the years ended June 30, 2015 and 2014 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,
2015
2014
$
$
237 $
372
(208)
(140)
261 $
262
(65)
197
323
225
(108)
(203)
237
Warranty expense relating to new product sales and changes to estimates was $164,000 and $117,000, respectively, for the fiscal years ended June
30, 2015 and 2014.
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6. Income Taxes
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2015
2014
$
$
— $
(44)
—
—
(44) $
—
3
(84)
(23)
(104)
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).
Years Ended June 30,
2015
2014
Amount
Percent
Pretax Income
Amount
Percent
Pretax Income
Loss from continuing operations before income taxes
$
(446)
100% $
(755)
100%
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
Other
Income tax benefit
$
$
152
30
88
(227)
—
—
1
44
34% $
7%
20%
(51%)
—
—
—
10% $
257
(10)
30
(154)
(31)
12
—
104
34%
(1%)
4%
(21%)
(4%)
2%
—
14%
The total income tax expense recorded for the years ended June 30, 2015 and 2014 was as follows (in thousands):
Tax benefit from continuing operations
Tax expense from discontinued operations
June 30,
2015
2014
$
$
(44) $
—
(44) $
(104)
107
3
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2015 and 2014 are as
follows (in thousands):
Deferred tax assets/(liabilities) – current:
Accrued expenses
Inventory
Other
Net operating losses
State taxes
Less: valuation allowance
Net deferred tax assets
June 30,
2015
2014
$
$
385 $
457
6
—
(3)
(775)
70 $
253
486
—
119
1
(744)
115
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets/(liabilities) – non-current:
Income tax credit carry forwards
Net operating losses
Intangible assets
Deferred rent
Other
State taxes
Property and equipment, principally due to differing depreciation methods
Goodwill
Federal impact of state taxes
Share based compensation
Unrealized gain on investment
Total gross deferred tax assets
Less: valuation allowance
Net deferred tax liabilities
June 30,
2015
2014
1,562 $
1,592
251
—
28
22
(316)
(4)
(20)
—
—
3,115
(3,185)
(70) $
1,443
1,299
287
132
—
16
(458)
—
—
16
(85)
2,650
(2,765)
(115)
$
$
We have federal net operating loss carry forwards at June 30, 2015 and 2014 in the amount of $2,983,000 and $2,556,000, respectively, which begin
to expire in 2034. Fiscal 2015 federal net operating losses include $17,000 of losses which have been created from excess stock compensation deductions.
State net operating loss carry forwards at June 30, 2015 and 2014 amount to $6,543,000 and $6,339,000, respectively, and begin to expire in 2025. Federal tax
credit carry forwards at June 30, 2015 and 2014 amount to $1,072,000 and $884,000, respectively, and begin to expire in 2026. State tax credit carry forwards
at June 30, 2015 and 2014 amount to $773,000 and $559,000, 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, 2015 and 2014, information related to which is as follows (in thousands):
Balance at July 1, 2014
Increase in deferred tax asset valuation allowance
Balance at June 30, 2015
Valuation
Allowance
$
$
(3,509)
(451)
(3,960)
As of June 30, 2015, we have accrued $399,000 of unrecognized tax benefits related to federal and state income tax matters that would reduce the
Company’s income tax expense if recognized. However, since we currently have a full valuation allowance against our deferred tax assets the timing of the
favorable effective tax rate impact will be delayed until such time, if ever, that the valuation allowance is eliminated.
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PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to our accrual for unrecognized tax benefits is as follows (in thousands):
Unrecognized tax benefits:
Beginning balance
Additions based on federal tax positions related to the current year
Additions based upon state tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Ending balance
June 30,
2015
2014
$
$
363 $
8
15
13
—
399 $
347
21
—
—
(5)
363
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax
examinations, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of
published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when applicable. As of June 30, 2015, 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, 2012 and later. Our state income tax returns are open to audit under the statute of
limitations for the years ended June 30, 2011 and later.
7.
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”) pursuant to an Asset Purchase Agreement (the “APA”).
Under the terms of the APA, we received earnout payments based on revenues generated from the sale of certain products as defined in the APA.
Such earnout payments, if and when earned, were paid to us within 30 days following the end of each of our fiscal quarters during the three years subsequent
to the February 2012 closing date, and amount to 6%, 4% and 2% of the eligible sales 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, 2015 and 2014, we recognized income
from earnout payments of $53,000 and $120,000, respectively, of which $17,000 was included in trade receivables in the accompanying June 30, 2014
balance sheet, and was received in July 2014. We have recognized an aggregate of $404,000 in income from such earnout payments since the February 2012
closing date.
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
July 5, 2013, we completed the sale of the Carson City facility. 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 $0 and $107,000, respectively
Years Ended June 30,
2014
2015
$
$
53 $
37 $
120
270
We do not expect to receive any future revenue or incur any future expenses related to the sale of Astromec.
8.
Investment in Ramsey Property and Related Notes Receivable & Variable Interest Entity Considerations
In November 2014, the Company purchased two promissory notes through a Loan Purchase and Sale Agreement in the amount of $1.2 million. The
promissory notes were cross-collateralized and originally secured by (collectively, the “Collateral”), among other things, real property consisting of 2.3 acres
of land and an approximate 30,000 square foot industrial building and a security interest in substantially all of the assets of Riverside Manufacturing, Inc.
(“Riverside”) (consisting primarily of machine shop equipment and accounts receivable).
The notes were recorded at their purchase price and since the notes remain in default, they have been placed on nonaccrual status, and therefore, the
Company has not collected or recognized any interest income since the date of purchase. Additionally, due to uncertainties relating to future cash flows
projected to be received on the notes, no accretable yield has been recorded.
During the third quarter of fiscal 2015, we entered into forbearance agreements with Riverside whereby we agreed to forbear from enforcing our
rights under the promissory notes until July 31, 2015. Additionally, we entered into a revolving loan agreement, whereby we have agreed to advance
Riverside from time-to-time up to an aggregate amount of $200,000 at any time prior to July 31, 2015. During the fourth quarter of fiscal 2015, we amended
the revolving loan agreement to provide for advances to Riverside of up to an aggregate amount of $300,000 under a Revolving Loan Modification
Agreement filed herewith.
Additionally, during the fourth quarter of fiscal 2015, as disclosed in a Form 8-K filed with the SEC on May 13, 2015, we entered a settlement
agreement such that we received the deed to the land and building located in Ramsey, Minnesota which had previously been held as security for notes
receivable. The notes are considered impaired because we do not believe the contractual payments will be collected pursuant to contract terms. Accordingly,
the recorded investment is reflected at the lesser of the purchase price or the estimated fair value of the collateral (with appropriate reductions for estimated
disposal costs). As of June 30, 2015, we obtained third party appraisals of the land and building as well as the equipment which is security for the notes, less
estimates of liquidation costs and have determined that no impairment charge is necessary.
As of June 30, 2015, the Company has evaluated whether or not the investments in Riverside create a variable interest entity (“VIE”) requiring
consolidation. VIEs are legal entities in which the equity investors do not have sufficient equity at risk for the entity to independently finance its activities or
the collective holders do not have the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic
performance, the obligation to absorb the expected losses of the entity, or the right to receive expected residual returns of the entity. Consolidation of a VIE is
considered appropriate if a reporting entity is the primary beneficiary, the party that has both significant influence and control over the VIE. Management
performed a qualitative analysis to determine if the Company is the primary beneficiary of Riverside. The Company performed a VIE analysis including a
review of Riverside’s capital structure, contractual terms, and primary activities, including the Company’s ability to direct the activities of Riverside and its
obligations to absorb losses, or the right to receive benefits, significant to Riverside. The Company has determined that Riverside’s debt represented by the
two promissory notes and the revolving loan constitute the majority of its financial support and continuing support for its ongoing operations, and that the
equity investment at risk in Riverside was insufficient to permit financing of activities without additional financial support from the Company. Accordingly, it
was determined that the Company has a variable interest in Riverside and Riverside is a variable interest entity of the Company. Based on the Company’s
analysis as of June 30, 2015, however, it was determined that the Company is not the primary beneficiary of Riverside because the sole shareholder of
Riverside has retained the day to day management and control over all key economic decisions of the Riverside business and the Company has no authority as
the primary creditor of Riverside to affect any of these management decisions nor does the Company have any obligation to absorb Riverside’s losses or the
right to receive any benefits from Riverside.
Our total investment in Riverside as of June 30, 2015 is represented by real estate and notes receivable in the amount of $1,624,000 reported on our
consolidated balance sheet collectively as Investment in Ramsey property and related notes receivable. Our maximum investment at risk, inclusive of
additional credit extended to Riverside between June 30, 2015 and July 31, 2015, should Riverside remain in default on the notes coupled with our inability to
foreclose on the collateral and sell the land and building would be $1,710,000. During the fiscal year ended June 30, 2015 we have provided no support,
financial or otherwise, to Riverside other than as contractually required by the revolving loan agreement. The payments we have advanced to Riverside under
the revolving loan agreement have generally been made to fund Riverside’s ongoing working capital needs. Riverside is a contract manufacturer providing
services to the aerospace, commercial airline, transportation and defense-related sectors and its unaudited revenues for its fiscal year ended December 31,
2014 totaled $1.9 million. The Company originally acquired the notes to achieve a return on capital upon liquidation or operation of the Riverside assets. The
Company entered into the forbearance agreements with Riverside to allow further time for Riverside to improve its financial performance and for the
Company to evaluate those results prior to liquidating the investment. See Note 15 Subsequent Events.
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9.
Commitments and Contingencies
Leases
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
Additionally, during the fiscal year ended June 30, 2015 we entered leases in conjunction with the acquisitions of Huber Precision and Fineline
Molds, located in San Carlos, California and San Dimas, California respectively. These leases expire on November 30, 2015 and February 28, 2017,
respectively. Finally, during fiscal 2015 we opened a sales office in Troy, Michigan to support our engineering services division. The lease will expire on
December 31, 2015 and as a result of closing down the office during fiscal 2015, we accrued for the remaining rent expense as of June 30, 2015. Rent
expense in 2015 and 2014 was $550,000 and $518,000, respectively. Minimum lease payments for future fiscal years ending June 30 are as follows (in
thousands):
Fiscal Year:
2016
2017
2018
Total minimum lease payments
Compensation Arrangements
Retirement Savings 401(k) Plan
Operating Leases
$
$
553
552
361
1,466
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. For the years ended June 30,
2015 and 2014, we recognized compensation expense amounting to $33,000 and $31,000, 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 2015 or 2014, however a reversal of approximately $5,000 and $9,000 of previously accrued compensation expense was recorded in fiscal 2015
and 2014, respectively, due to the separation from employment with us of one of the 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, 2015 and 2014 were
$15,000 and $20,000, respectively.
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Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Legal Matters
We are from time to time a party to various legal proceedings incidental to our business. There can be no certainty, however, that we may not
ultimately incur liability or that such liability will not be material and adverse.
10.
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, 2015 and 2014 were $17,000 and $50,000, respectively.
There were no stock options granted during the fiscal years ended June 30, 2015 and 2014.
As of June 30, 2015, there was an aggregate of $1,000 of unrecognized compensation cost under the Option Plans related to 5,000 non-vested
outstanding stock options with a per share weighted average value of $1.73. The unrecognized expense is anticipated to be recognized on a straight-line basis
over a weighted average period of 2.4 months.
The following is a summary of stock option activity under the Option Plans for the years ended June 30, 2015 and 2014:
Balance, July 1, 2013
Options granted
Options canceled or expired
Options exercised
Balance, July 1, 2014
Options granted
Options canceled or expired
Options exercised
Balance, June 30, 2015
Stock Options Exercisable at June 30, 2015
45
Outstanding Options
Number of
Shares
Weighted-
Average
Exercise
Price
292,504 $
—
(123,398)
(4,104)
165,002 $
—
(10,001)
(48,333)
106,668 $
101,668 $
2.48
—
2.22
2.33
2.40
—
4.94
1.87
2.41
2.44
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information regarding options outstanding and options exercisable under the Option Plans at June 30, 2015:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$0 to 2.50
2.5 to 5.00
7.51 to 10.00
Number
Outstanding
95,000
3,334
8,334
Weighted-Avg.
Remaining
Contractual Life
6.39
1.88
.52
Total
106,668
5.79 years
Weighted-
Avg.
Exercise
Price
$1.88
4.38
7.65
$2.41
Aggregate.
Intrinsic
Value
$43,850
—
—
$43,850
Weighted-Avg.
Remaining
Contractual
Life
6.35
1.88
.52
5.72
Number
Outstanding
90,000
3,334
8,334
101,668
Weighted-
Avg.
Exercise Price
$1.89
4.38
7.65
$2.44
Average
Intrinsic
Value
$40,800
—
—
$40,800
In June 2014, our Board of Directors terminated the Employee Stock Option Plan, with the provision that options outstanding under the Employee
Stock Option Plan will remain outstanding in accordance with their respective terms. At the date of termination, 531,381 shares were reserved for issuance
under the Employee Stock Option Plan in excess of shares issuable pursuant to outstanding options, all of which shares will be available for issuance under
the provisions of the Employee Stock Purchase Plan described below.
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, which proposal was approved by our shareholders at the December 3, 2014
Annual Meeting. At September 30, 2014, 173,334 shares were reserved for issuance under the Directors’ Stock Option Plan, all of which will be available for
issuance under the provisions of the Employee Stock Purchase Plan described below.
Restricted Stock
The following is a summary of restricted share activity for the years ended June 30, 2015 and 2014:
Balance, June 30, 2013
Granted
Forfeited
Vested
Balance, June 30, 2014
Granted
Forfeited
Vested
Balance, June 30, 2015
Outstanding Restricted Stock Units
Number
of Shares
Weighted-Average
Stock Price
On Grant Date
32,500
—
(10,001)
(9,166)
13,333
—
(1,667)
(6,666)
5,000
$
$
$
1.73
—
1.73
1.73
1.73
—
1.73
1.73
1.73
As of June 30, 2015, there was $1,000 in unrecognized compensation cost related to non-vested outstanding restricted shares. The unrecognized
expense is anticipated to be amortized over the next 2.4 months.
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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Table of Contents
11. Major Customers & Suppliers
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 2015 and 2014, the Company had one customer with sales totaling 49 percent of total sales each year.
Accounts receivable at June 30, 2015 and 2014 from that same significant customer accounted for 30 percent and 53 percent, respectively, of total
gross accounts receivable.
During fiscal 2015, we had one supplier that accounted for 16 percent of total purchases. Accounts payable due to this same significant supplier
represented 36 percent of total accounts payable as of June 30, 2015. We had no suppliers during fiscal 2014 who accounted for more than 10 percent of total
purchases.
12. Loss Per Share
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, 2015 and 2014,
basic and diluted loss per share were the same as the inclusion of common shares of 22,607 and 23,519 as of June 30, 2015 and 2014, respectively,
representing potentially issuable shares 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, 2015 and 2014 is as follows (in thousands, except per share data):
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
13. Common Stock
Rights Offering
Years Ended June 30,
2015
2014
$
$
$
$
$
$
(402)
4,169
(0.10)
37
4,169
0.01
(365)
4,169
(0.09)
$
$
$
$
$
$
(651)
3,493
(0.19)
163
3,493
0.05
(488)
3,493
(0.14)
In April 2014, we completed a common stock rights offering, whereby we received gross proceeds of approximately $1.65 million, before 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.
Share Repurchase Program
In September 2013, our Board approved a share repurchase program authorizing the Company to repurchase up to 750,000 shares of our common
stock. In accordance with, and as part of, this share repurchase program, our Board approved, on September 23, 2014, the adoption of a prearranged share
repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The 10b5-
1 Plan became effective on September 24, 2014 and terminated on March 23, 2015. Through March 23, 2015, we repurchased 69,773 shares at an aggregate
cost of $154,000, inclusive of fees, under the terms of the 10b5-1 Plan. Repurchases under the 10b5-1 Plan were administered through an independent broker.
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14. Segment Information
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2015, the Company has four reportable segments based on its business activities and organization:
·
·
·
·
Pro-Dex located in Irvine, California – providing primarily medical and dental instruments using shared production and assembly machines and
workforce. This segment also incorporates Huber Precision as the revenues and assets of Huber Precision are not material to the Company’s
total revenues and assets.
OMS located in Beaverton, Oregon – providing multi-axis motion control applications.
Fineline located in San Dimas, California. This business was purchased on February 1, 2015 and is a manufacturer of plastic injection molds
for a variety of industries.
Engineering Services Division or (“ESD”). This division was launched in fiscal 2015 to provide permanent placement and contract services in
the fields of engineering, manufacturing and quality to diverse businesses.
In deciding how to allocate resources and assess performance, the Company’s chief executive officer regularly evaluates the sales and operating
income of these segments. Operating income is the gross margin of the segment less direct expenses of the segment. Unallocated corporate expenses include
our corporate administrative cost center, which primarily includes costs associated with being a public company, as well as general and administrative
expenses incurred related to our investment in the Ramsey property and related notes receivable and is a subset of total general and administrative expenses.
Additionally, other costs incurred in our general and administrative expenses (“G&A”) including salaries and other personnel-related expenses for corporate,
accounting, finance and human resource personnel, as well as costs for outsourced information technology services, are not allocated by segment internally
and are included in Pro-Dex in the tables below. The following tables summarize segment performance for fiscal 2015 and 2014 (in thousands):
Fiscal 2015
Net Sales
Gross Profit
Operating Income (loss)
Depreciation and amortization expense
Total assets
Fiscal 2014
Net Sales
Gross Profit
Operating Income (loss)
Depreciation and amortization expense
Total assets
$
$
Pro-Dex
OMS
Fineline
ESD
Corporate
Unallocated
Total
$
11,617
2,653
75
536
8,479
$
1,394
927
144
11
548
257 $
44
(33)
31
962
115 $
80
(361)
—
17
— $
—
(727)
—
2,510
13,383
3,704
(902)
578
12,516
Pro-Dex
OMS
Fineline
ESD
Corporate
Unallocated
Total
$
9,298
2,040
(376)
513
6,639
$
1,514
926
103
14
602
— $
—
—
—
—
— $
—
—
—
—
— $
—
(541)
—
4,467
10,812
2,966
(814)
527
11,708
48
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15. Subsequent Events
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 6, 2015 we sent a notice of default to Riverside Manufacturing, Inc. (“Riverside”) noting defaults under the various notes more fully
described in Note 8, including but not limited to, failure to pay monthly payments from March 1, 2015 to July 1, 2015, failure to pay accrued interest from
March 1, 2015 to July 1, 2015 and failure to pay the principal balance due by July 31, 2015. We are prepared to pursue legal action and evict Riverside from
the premises. As of the date of this filing, we do not know how long it will take to complete the eviction proceedings.
In September, 2015 we entered into two separate financing transactions, as reported in the Company’s Current Report on Form 8-K filed with the
SEC on September 14, 2015. The Company borrowed $500,000 from Fortitude Income Funds, LLC under a promissory note dated September 8, 2015. The
loan bears interest at 12 percent per annum, contains a loan origination fee of $15,000 plus expenses, and requires monthly interest only payments until its
maturity on March 15, 2016. The loan contains two three-month options to extend the principal re-payment, each requiring an up-front payment of $3,750.
The loan is secured by a combination mortgage, security agreement and fixture statement covering the Ramsey Property. Additionally, on September 9, 2015
we entered a Loan and Security Agreement with Summit Financial Resources LP, (the “Summit Loan”) whereby we can borrow up to $1.0 million against our
eligible receivables, as defined in the agreement. Borrowed funds will bear interest at a rate of prime plus 2 percent, and incur an additional administrative fee
of 0.7 percent on the average outstanding balance. The Summit Loan has an initial period of 18 months with successive one year renewal options and requires
an annual facility fee of $10,000. Both financing agreements contain customary representations and warranties for loans of this nature.
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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) have concluded, based on
their evaluation as of June 30, 2015, 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 issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on this
evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2015.
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, 2015, 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.
50
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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, 2015, and delivered to stockholders in connection with our 2015 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, 2015, and delivered to stockholders in connection with our 2015 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, 2015, and delivered to stockholders in connection with our 2015 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, 2015, and delivered to stockholders in connection with our 2015 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, 2015, and delivered to stockholders in connection with our 2015 annual meeting of shareholders.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
PART IV
Reference is made to the Exhibit Index beginning on page 54 of this report.
52
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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 17, 2015.
SIGNATURES
PRO-DEX, INC.
/s/ Richard L. Van Kirk
Richard L. Van Kirk
President, Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and officers of Pro-Dex, Inc., do hereby constitute and appoint Richard L. Van Kirk, 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/ Richard L. Van Kirk
Richard L. Van Kirk
/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
President, Chief Executive Officer, and Director (Principal
Executive Officer)
Date
September 17, 2015
Chairman of the Board, Director
September 17, 2015
Director
Director
Director
53
September 17, 2015
September 17, 2015
September 17, 2015
Table of Contents
Exhibit
No.
3.1
3.2
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).
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*
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).
10.6*
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).
10.7*
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).
10.8
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).
10.9
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).
10.10*
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).
10.11*
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).
10.12*
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).
54
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10.13*
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).
10.14
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).
10.15
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).
10.16
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)
10.17
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)
10.18
Asset Purchase Agreement dated June 20, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of Huber Precision
(incorporated herein by reference to Exhibit 10.38 to the Company’s Form 10-K filed September 18, 2014)
10.19
Amendment #1 to Asset Purchase Agreement dated August 4, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of Huber
Precision (incorporated herein by reference to Exhibit 10.39 to the Company’s Form 10-K filed September 18, 2014)
10.20
Amendment #2 to Asset Purchase Agreement dated September 6, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of
Huber Precision (incorporated herein by reference to Exhibit 10.40 to the Company’s Form 10-K filed September 18, 2014)
10.21
Loan Purchase and Sale Agreement, dated November 21,2014, among the Bank, Pro-Dex Sunfish Lake, LLC, Heron Enterprises, LLC and
Scott Robertson (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 28, 2014)
10.22
Promissory Notes, as of various dates issued by Riverside Manufacturing, Inc. in favor of the Bank (incorporated herein by reference to
Exhibit 10.2 to the Company’s Form 8-K filed November 28, 2014)
10.23
Promissory Notes, as of various dates issued by Sheldon A. Mayer, LLC in favor of the Bank (incorporated herein by reference to Exhibit
10.3 to the Company’s Form 8-K filed November 28, 2014)
10.24
Debt Purchase Agreement, dated November 21, 2014, among Pro-Dex Sunfish Lake, LLC, Heron Enterprises, LLC and Scott C. Robertson
(incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed November 28, 2014)
10.25
Promissory Note, dated September 20, 2013, issued by Riverside Manufacturing, Inc. in favor of Heron Enterprises, LLC (incorporated herein
by reference to Exhibit 10.5 to the Company’s Form 8-K filed November 28, 2014)
10.26
Combination Amended and Restated Convertible Promissory Note, dated August 15, 2012 issued by Riverside Manufacturing Inc. in favor of
Heron Enterprises, LLC (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K filed November 28, 2014)
10.27
Employment Agreement, dated November 21, 2014, between Pro-Dex Riverside, LLC and Scott C. Robertson (incorporated herein by
reference to Exhibit 10.7 to the Company’s Form 8-K filed November 28, 2014)
55
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10.28
Amendment #3 to Asset Purchase Agreement dated November 28, 2014 by and between Pro-Dex, Inc. and Hans Huber, sole proprietor of
Huber Precision (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 4, 2014)
10.29
Asset Purchase Agreement dated December 8, 2014 by and between Pro-Dex, Inc., Fineline Molds and the shareholders of Fineline Molds
(incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 11, 2014)
10.30
Separation Agreement and General Release of All Claims entered into between Pro-Dex, Inc. and Harold. A. Hurwitz, dated February 12,
2015 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 17, 2015)
10.31
Heron Forbearance Agreement, effective February 3, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex Sunfish Lake, LLC
(incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 9, 2015)
10.32
Riverside Forbearance Agreement, effective February 3, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex Sunfish Lake,
LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed March 9, 2015)
10.33
Revolving Loan Agreement, effective February 3, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex Sunfish Lake, LLC
(incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed March 9, 2015)
10.34
First Amendment to Employment Agreement, effective February 4, 2015, by and between Pro-Dex Riverside, LLC and Scott C. Robertson
(incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed March 9, 2015)
10.35
Deed and Settlement Agreement, dated May 7, 2015, by and among Sheldon A. Mayer, LLC, Sheldon A. Mayer and Pro-Dex Sunfish Lake,
LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 13, 2015)
10.36*
Pro-Dex, Inc. Amended and Restated Employee Severance Policy effective as of September 16, 2014 (incorporated herein by reference to
Exhibit 10.5 to the Company’s Form 10-Q filed May 14, 2015)
10.37
Loan and Security Agreement, dated September 9, 2015 between Summit Financial Resources, L.P. and Pro-Dex, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 14, 2015)
10.38
Intercreditor Agreement, dated September 9, 2015, among Summit Financial Resources, L.P., Fineline Molds and Pro-Dex, Inc. (incorporated
herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed on September 14, 2015)
10.39
Promissory Note, dated September 8, 2015, made by Pro-Dex Sunfish Lake, LLC in favor of Fortitude Income Funds, LLC (incorporated
herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed on September 14 ,2015)
10.40
Combination Mortgage, Security Agreement and Fixture Financing Statement, dated September 8, 2015, made by Pro-Dex Sunfish Lake,
LLC in favor of Fortitude Income Funds, LLC(incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed on
September 14 ,2015)
10.41
Assignment of Leases and Rents, dated September 8, 2015, made by Pro-Dex Sunfish Lake, LLC in favor of Fortitude Income Funds, LLC
(incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K filed on September 14 ,2015)
10.42 Ω Revolving Loan Agreement Modification Agreement, effective June 11, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex
Sunfish Lake, LLC incorporated herewith
21.1 Ω List of Subsidiaries
23 Ω
Consent of Independent Registered Public Accounting Firm.
31.1 Ω Certification of the Chief Executive 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.
31.2 Ω Certification of the 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 Ω
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
56
Table of Contents
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**
XBRL Extension Definition Linkbase Document
Ω
*
**
Filed herewith.
Denotes management contract or compensatory arrangement.
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.
57
REVOLVING LOAN MODIFICATION AGREEMENT
EXHIBIT 10.42
THIS REVOLVING LOAN MODIFICATION AGREEMENT (“Agreement”) is made effective as of June 11, 2015, by and among PRO-DEX
SUNFISH LAKE, LLC, a Delaware limited liability company, (“Lender”), and RIVERSIDE MANUFACTURING, INC., a Minnesota corporation
(“Borrower”).
PRELIMINARY STATEMENT OF FACTS:
A. Borrower has heretofore executed and delivered to Lender that certain Revolving Promissory Note, dated February 3, 2015 (“Note”),
evidencing a loan (“Loan”) in the original principal amount of $200,000.00. The current principal balance of the Note prior to the Modification (as defined
below) is $191,793.51. Immediately after the Modification the total principal available under the Note will be $300,000.00.
B. In connection with the Loan, Borrower executed and delivered to Lender that certain Revolving Loan Agreement, dated February 3, 2015
(“Loan Agreement”), which terms govern Lender’s commitment to lend and Borrower’s ability to borrower under the Loan.
C. Repayment of the Note, to the extent advanced by Lender is secured by all of Borrower’s accounts and other rights to payment, inventory,
equipment, instruments, general intangibles, deposit accounts, and other assets (“Collateral”), described in more detail in the Commercial Security
Agreement, dated March 10, 2006 (“Security Agreement”), executed by Borrower in favor of Vermillion State Bank, which was subsequently assigned to
Lender on November 21, 2014. The Security Agreement, and all preceding and subsequent security agreements executed by Borrower in favor of Lender or
Vermillion State Bank, Lender’s predecessor in title, were and are perfected by the UCC-1 Financing Statement originally filed with the Minnesota Secretary
of State on December 10, 1998, filing number 2089800; and the continuation filed on September 29, 2003, filing number 2003888914; and the amendment
and continuation both filed on August 25, 2008, filing numbers 20081297350 and 20081297347, respectively; and the amendment filed on January 7, 2011,
filing number 20112271998; and the continuation filed on October 17, 2013, filing number 20133419570; and the amendment filed on December 8, 2014,
filing number 798191000025.
D. The Note, the Security Agreement, and the Loan Agreement, and all other instruments or documents evidencing or securing the Loan or
otherwise executed or delivered in connection therewith, shall be collectively referred to herein as the “Loan Documents.”
E. Borrower has requested that Lender increase the amount of the Loan by $100,000.00 (the “Modification”) and that the additional Loan
proceeds be available for Borrower to borrower in accordance with the borrowing procedure and conditions precedent for additional advances, among other
terms, as described in the Loan Agreement.
F. Lender is willing to consent to and approve the request of Borrower on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. MODIFICATION
1.1 Lender hereby consents to the Modification in accordance with the terms and conditions of this Agreement and subject to the terms and
conditions of the Loan Documents; however, in no event shall such consent be deemed or construed as a waiver of Lender’s right to withhold its consent to
any other transaction.
2. AMENDMENT TO LOAN DOCUMENTS.
2.1 The amount of the Loan is hereby increased to $300,000.00. Accordingly, all references in the Loan Documents to “TWO HUNDRED
THOUSAND AND NO/100 DOLLARS” and “200,000” are hereby replaced with “THREE THOUSAND AND NO/100 DOLLARS” and “300,000,”
respectively.
2.2 The following new Section 5.5 is hereby added to the Loan Agreement:
“5.5 Borrower’s Factoring/Funding Partners. Notify Lender of any and all payments or funds received by Borrower or that are
available for use by Borrower from Borrower’s factoring/funding partners, whoever they may be from time to time, by identifying the
respective factoring/funding partner, the amount of funds received or available for use, and the date such funds were received, will be
received, or are available for use by Borrower. As used herein, “Borrower’s factoring/funding partners” shall mean all factoring or other
companies or individuals providing financing or other money to Borrower, including but not limited to SLS Government Factoring.
Borrower shall immediately use all funds received from or that are available for use from Borrower’s factoring/funding partners to pay
down the principal and interest due on the Loan and to pay all other amounts due under the Loan Documents, including but not limited to
all costs Borrower is obligated to pay under the Loan Documents.”
3. RELATIONSHIP OF LENDER AND BORROWER
3.1 Lender and Borrower intend that the relationship between Lender and Borrower is solely that of creditor and debtor. Nothing contained
in the Loan Documents or in this Agreement shall be deemed or construed to create a partnership, tenancy in common, joint tenancy, joint venture or co-
ownership by or between Lender and Borrower.
3.2 Lender shall not be in any way responsible or liable for the debts, losses, obligations or duties of Borrower with respect to the Collateral,
the Borrower’s business, or otherwise.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents, warrants, covenants, acknowledges and agrees to Lender as follows:
4.1 This Agreement and the Loan Documents have been duly executed and constitute valid, legal and binding obligations, enforceable in
accordance with their respective terms, except as may be limited by bankruptcy, insolvency and or other laws regarding or affecting creditors’ rights
generally, and all representations and warranties made by Borrower in the Loan Documents remain true and correct. Borrower has been duly organized as a
corporation pursuant to the laws of the State of Minnesota and has the valid power and authority to perform as contemplated hereunder. Further, the person
signing this Agreement on behalf of Borrower has the authority to execute this Agreement and the execution hereof is not in violation of any provision of
Borrower’s articles of organization or any other organizational document of Borrower, or any amendment thereto.
2
4.2 Neither this Agreement nor the Loan Documents nor any other document, financial statement, credit information, certificate or statement
furnished to Lender by Borrower, whether pursuant to this Agreement or otherwise, contains any untrue statement or omits to state a fact material to the truth
and completeness of any statement made.
4.3 No event has occurred and no condition exists which, as of the date hereof, will result, either immediately or with a lapse of time or the
giving of notice or both, in the occurrence or existence of any monetary default or event of non-monetary default under this Agreement or any of the Loan
Documents, or if any such event has occurred or condition exists, Borrower has heretofore provided Lender written notice thereof.
4.4 There are no actions, suits or proceedings at law or in equity or by or before any governmental agency or authority now pending or, to
Borrower’s knowledge, threatened against or affecting Borrower or the Collateral, and, to Borrower’s knowledge, there are no facts now in existence which,
with the giving of notice or the lapse of time, or both, would form the basis for any such action, suit or proceeding. Borrower is not in default with respect to
any order, writ, injunction, decree or demand of any court or any governmental agency or authority which would have a material adverse effect on Borrower’s
ability to perform its obligations hereunder or under the Loan Documents.
4.5 Borrower claims no defense, counterclaim, offset, cause of action, cross-complaint, claim or demand of any kind or nature whatsoever
and releases and waives all defenses, counterclaims, offsets, causes of action, cross-complaints, claims or demands of any kind or nature whatsoever which
could be asserted against Lender, its officers, representatives, agents, attorneys, employees, subsidiaries, parents, affiliates or their successors or assigns.
4.6 Borrower is not in default under any contracts, agreements or commitments to which it is a signatory or by which it is bound. The
execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, and the compliance with the terms and conditions
hereof or under the Loan Documents will not:
court or governmental agency or authority having jurisdiction, or
(a) violate any now existing provision of law or any now existing applicable regulation, order, writ, injunction or decree of any
(b) conflict or be inconsistent with, or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute
a default under, any mortgage, instrument, documents, commitment, agreement or contract of any kind to which Borrower is a signatory or by which
Borrower may be bound.
4.7 The parties agree to be responsible for their own costs and expenses relating to this Modification, including, without limitation,
attorney’s fees.
5. EFFECT
5.1 The parties hereto acknowledge, ratify and affirm that the liens and security interests created and evidenced by the Security Agreement
are valid and subsisting and further acknowledge and agree that there are no offsets, claims or defenses to the indebtedness evidenced by the Note or any of
the other Loan Documents.
3
5.2 Nothing in this Agreement shall be construed to be a novation of the Note or the Security Agreement and it is intended that Lender shall
continue to be entitled to all of the priorities existing under the Security Agreement as of the date first executed and delivered.
5.3 Nothing in this Agreement or in any of the Loan Documents shall be construed as constituting an agreement to modify the Loan
Documents in the future or to forbear from bringing an action to enforce the Security Agreement by means of the remedies contained therein or as a waiver or
limitation upon the right to exercise any other right, power, privilege or other remedy under this Agreement or under any of the Loan Documents or otherwise
as provided at law or in equity.
5.4 Except as expressly modified hereby, the terms and provisions of the Loan Documents shall remain unchanged and shall remain in full
force and effect. Any modification herein of the Security Agreement shall in no way affect the security of the Security Agreement.
5.5 If any one or more default(s) shall have occurred hereunder or under the Loan Documents, Lender may, in addition to any rights
conferred by this Agreement or the Loan Documents, proceed to protect and/or enforce any right, power, privilege or remedy of Lender by an action at law,
suit in equity or other appropriate proceeding. All rights, powers, privileges and remedies provided herein or in the Loan Documents shall be cumulative and
are in addition to all of the rights, powers, privileges and remedies provided by law or in equity.
6. MISCELLANEOUS
6.1 This Agreement constitutes the entire agreement between the parties hereto regarding the modification of the Loan Documents as set
forth herein and supersedes any prior or contemporaneous representations and agreements regarding the modification of the Loan Documents not contained
herein.
6.2 Nothing contained in this Agreement shall be deemed to confer any right or benefit on any person or entity who is not a party to this
Agreement. This Agreement is made for the sole protection and benefit of Borrower and Lender, and no other person or entity shall have any right of action
hereon or hereunder, it being the intent of the parties that no person or entity shall be a third party beneficiary of this Agreement.
6.3 Notwithstanding the place of execution of this instrument, the parties to this Agreement have contracted for Minnesota law to govern this
Agreement and it is agreed that this Agreement is made pursuant to and shall be construed and governed by the laws of the State of Minnesota without regard
to the principles of conflicts of law.
6.4 This Agreement and each and every part hereof shall be binding upon the parties hereto and their successors or assigns and shall inure to
the benefit of each and every future holder of the Note, including any endorsees, successors and/or assigns of Lender.
6.5 Borrower, upon request from Lender, agrees to execute such other and further documents reasonably required by Lender to effectuate the
purposes of this Agreement and to subject to the liens and security interests created by the Security Agreement, any of Borrower’s properties, rights or
interests, covered or intended to be covered thereby, and to perfect and maintain such liens and security and the priority thereof.
6.6 This Agreement may be executed in any number of counterparts all of which, together, shall constitute one and the same Agreement with
the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument,
but in making proof hereof it shall only be necessary to produce one such counterpart. The signature page of any counterpart may be removed therefrom and
attached to any other counterpart.
4
6.7 The headings at the beginning of each section hereof are solely for the convenience of the parties and shall have no effect upon the
construction or interpretation of any provision or provisions of this Agreement. Whenever required by the context of this Agreement, the singular shall
include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. This Agreement shall not be
construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. All exhibits referred to in this Agreement are
attached and incorporated by this reference. The unenforceability or invalidity of any provisions of this Agreement shall not render any other provision or
provisions of this Agreement unenforceable or invalid.
6.8 Any notices and other communications permitted or required by the provisions of this Agreement shall be given in accordance with the
notice provisions of the Loan Agreement.
6.9 BORROWER, BY ITS EXECUTION OF THIS AGREEMENT, HEREBY KNOWINGLY, VOLUNTARILY, IRREVOCABLY, AND
INTENTIONALLY WAIVES AND RELEASES LENDER AND EACH OF LENDER’S PAST, PRESENT AND FUTURE OFFICERS, DIRECTORS,
ATTORNEYS, INSURERS, SERVANTS, REPRESENTATIVES, EMPLOYEES, SHAREHOLDERS, SUBSIDIARIES, AFFILIATES, PARTICIPANTS,
PARTNERS, PREDECESSORS, PRINCIPALS, AGENTS, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE “WAIVER PARTIES”) OF AND
FROM (a) ANY AND ALL EXISTING CLAIMS, DEMANDS, OBIGATIONS, INTERESTS, SUITS, ACTIONS OR CAUSES OF ACTION, AT LAW OR
IN EQUITY, WHETHER ARISING BY CONTRACT, STATUTE, COMMON LAW OR OTHERWISE, BOTH DIRECT OR INDIRECT, KNOWN OR
UNKNOWN, OF WHATSOEVER KIND OR NATURE, ARISING OUT OF OR BY REASON OF OR IN CONNECTION WITH (i) THE LOAN
DOCUMENTS OR THIS AGREEMENT, OR (ii) ANY ACTS, OMISSIONS OR CONDUCT OF THE WAIVER PARTIES IN CONNECTION WITH THE
LOAN OCCURRING ON OR BEFORE THE DATE HEREOF; (b) ANY DEFENSE, COUNTERCLAIM, SETOFF, RIGHT OF RECOUPMENT OR
ABATEMENT, OR OTHER CLAIM AGAINST THE WAIVER PARTIES RELATING TO ANY MATTER, CAUSE, OR THING OF WHATSOEVER
KIND OR NATURE, ARISING OUT OF OR BY REASON OF OR IN CONNECTION WITH (i) THE LOAN DOCUMENTS OR THIS AGREEMENT,
OR (ii) ANY ACTS, OMISSIONS OR CONDUCT OF THE WAIVER PARTIES IN CONNECTION WITH THE LOAN EVIDENCED THEREBY
OCCURRING ON OR BEFORE THE DATE HEREOF.
6.10 TO THE EXTENT PERMITTED BY APPLICABLE LAW, LENDER BY ITS ACCEPTANCE HEREOF AND BORROWER
HEREBY VOLUNTARILY, KNOWINGLY AND INTENTIONALLY WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL ACTION
OR PROCEEDING ARISING UNDER THIS AGREEMENT, REGARDLESS OF WHETHER SUCH ACTION OR PROCEEDING CONCERNS ANY
CONTRACTUAL OR TORTIOUS OR OTHER CLAIM. BORROWER ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL
INDUCEMENT TO LENDER IN EXTENDING CREDIT TO BORROWER AND CONSENTING TO THE MODIFICATION, THAT LENDER WOULD
NOT HAVE EXTENDED SUCH CREDIT OR CONSENTED TO THE MODIFICATION WITHOUT THIS JURY TRIAL WAIVER, AND THAT
BORROWER HAS BEEN REPRESENTED BY AN ATTORNEY OR HAD AN OPPORTUNITY TO CONSULT WITH AN ATTORNEY IN
CONNECTION WITH THIS JURY TRIAL WAIVER AND UNDERSTANDS THE LEGAL EFFECT OF THIS WAIVER.
5
IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to be executed as of the day and year first above written.
BORROWER:
RIVERSIDE MANUFACTURING, INC.,
a Minnesota corporation
By:
/s/ Scott Robertson
Scott Robertson, President
LENDER:
PRO-DEX SUNFISH LAKE, LLC,
a Delaware limited liability company
By:
/s/ Richard L. Van Kirk
Richard L. Van Kirk, President
List of Subsidiaries
EXHIBIT 21.1
Pro-Dex Astromec, Inc, a Nevada corporation
Pro-Dex Management, Inc., a California corporation
Pro-Dex Sunfish Lake, LLC, a Delaware Limited Liability Company
Pro-Dex Riverside, LLC, a Delaware Limited Liability Company
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-201825, 333-112133, 333-141178, 333-179536) of
Pro-Dex, Inc. pertaining to the Pro-Dex, Inc. 2014 Employee Stock Purchase Plan, 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 17, 2015 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, 2015.
EXHIBIT 23
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 17, 2015
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Richard L. Van Kirk, 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 17, 2015
/s/ Richard L. Van Kirk
Richard L. Van Kirk
Chief Executive Officer
(principal executive officer)
Certifications of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Alisha K. Charlton, 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 17, 2015
/s/ Alisha K. Charlton
Alisha K. Charlton
Chief Financial Officer
(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, 2015 (the “Report”), the
undersigned hereby certifies in their 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 17, 2015
Date: September 17, 2015
By: /s/ Richard L. Van Kirk
Richard L. Van Kirk
Chief Executive Officer and President
(principal executive officer)
By: /s/ Alisha K. Charlton
Alisha K. Charlton
Chief Financial Officer
(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.