UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
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, 2015, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
closing sales price on the Nasdaq Capital Market was approximately $5.9 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, 2016, 4,063,837 shares of the registrant’s no par value common stock were outstanding.
Part III of this report incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for its 2016
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.
Documents incorporated by reference:
PRO-DEX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2016
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
Page
1
1
6
11
11
12
12
13
13
14
14
23
24
50
50
50
51
51
51
51
51
51
52
52
Table of Contents
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 principal operations described above, our Fineline Molds division, located in San Dimas, California manufactures plastic injection
molds for a wide variety of industries. We also provide engineering consulting and placement services to a wide range of industries 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 acquired businesses and we have filed fictitious
name statements in the counties in which we operate these divisions. Our Huber Precision division was located in San Carlos, California through November
30, 2015 and after such time we manufacture and ship orders placed from these customers directly from our Irvine, California location.
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.
1
Table of Contents
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 operated out of the Ramsey Property. Our investment was made through our 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 assets were sold during fiscal 2016. (See Note 8 to the Consolidated Financial Statements contained elsewhere in this report
for additional information concerning this investment.)
The income from discontinued operations included in our fiscal 2015 Consolidated Statement of Operations relates to the final earn out provisions
from our sale of Pro-Dex Astromec, which we sold in February 2012.
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 and services
Industrial and scientific
Dental and component
Repairs
Other
Total Sales
Years Ended June 30,
2016
2015
(In thousands)
% of
Revenue
% of
Revenue
$
$
14,292
1,658
1,320
833
2,055
20,158
71% $
8%
7%
4%
10%
100% $
7,619
2,052
1,538
1,779
395
13,383
57%
15%
12%
13%
3%
100%
Our medical device products utilize proprietary designs developed by us primarily under exclusive development and supply agreements and are
manufactured in our Irvine, California facility, as are our dental products. Our medical device products are sold primarily to original equipment manufacturers
and our dental products are sold primarily to dental product distributors. In our Beaverton, Oregon facility, we design and manufacture embedded multi-axis
motion controllers which are sold to distributors or original equipment manufacturers in the automation and research industries. 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 Dimas
Total Sales
Years Ended June 30,
2016
2015
(In thousands)
% of
Revenue
89% $
5%
6%
100% $
11,732
1,394
257
13,383
% of
Revenue
88%
10%
2%
100%
$
$
17,888
969
1,301
20,158
2
Table of Contents
In fiscal year 2016, our top 20 customers accounted for 87% of our sales compared to 82% in fiscal year 2015. In fiscal 2016, we had three
customers, all included in medical device revenue above, that each accounted for more than 10% of sales and cumulatively totaled 56% of sales. This
compares to fiscal year 2015, when 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. 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 in fiscal
2015 and previous years has informed us that they will be replacing a primary product that we sell with one that they will manufacture in the future.
Therefore, although we expect to continue to have sales to this customer in fiscal 2017, we expect revenue to this customer to continue to decline. This
customer accounted for $3.6 million or 18% of revenue in fiscal 2016 compared to $6.6 million or 49% of revenue in fiscal 2015.
Our current objectives are focused primarily on maintaining our relationships with our current customers, continuing our cost reduction analysis of
our new products and expanding our business with new product launches and services related to our areas of expertise. In that regard, we have completed two
significant medical device development projects in the craniomaxillofacial (“CMF”) surgical segment during the fourth quarter of fiscal 2015 and the second
quarter of fiscal 2016. 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, K-V Engineering, and Fischer Connectors 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 (Department of Public Health Food and Drug Branch) with respect to our Irvine, California facility. In addition, our Irvine, California
facility is certified to ISO 13485:2003, Medical Device Directive 93/42/EEC – Annex II, and Canadian Medical Device Conformity Assessment System. Our
Beaverton, Oregon facility is certified to ISO 9001:2008.
At June 30, 2016, we had a backlog of $11.3 million compared with a backlog of $10.6 million at June 30, 2015. 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. We do not typically experience seasonal fluctuations in our shipments and revenues.
Segments
In fiscal 2016, we had four reportable segments based on our 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 our total revenues
and assets. Additionally, effective November 30, 2015 the former San Carlos office of Huber Precision was closed and all orders shipped since
that date are manufactured at our Irvine facility.
OMS located in Beaverton, Oregon – providing multi-axis motion control applications.
3
Table of Contents
·
·
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 15 to the 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.
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 5% and 4% of our revenue in fiscal year 2016 and 2015, respectively. During recent years, we
have 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. During the fourth quarter of fiscal 2015,
we completed the development portion of a contract entered into during fiscal 2012, allowing us to record approximately $336,000 in non-recurring
engineering service revenue, included in medical device revenue. During the second quarter of fiscal 2016 we completed the development portion of a
contract entered into during fiscal 2013 allowing us to record approximately $660,000 in non-recurring engineering service revenue, also included in medical
device and services revenue. In the fourth quarter of fiscal 2015, we executed a development agreement with another customer to design and develop a
powered surgical device and during fiscal 2016 we recognized medical device service revenue in the amount of approximately $367,000 relating to this
contract. 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, 2016 and 2015, we incurred research and development expenses amounting to $1,852,000 and $1,668,000,
respectively, which costs exclude $412,000 and $493,000 in 2016 and 2015 respectively, that were, or will be, shared with our customers through billings for
non-recurring engineering services.
4
Table of Contents
Employees
At June 30, 2016, we had 76 full-time employees comprised of 60 employees in Irvine, California 9 in Beaverton, Oregon 6 in San Dimas, California
and 1 in Boston, Massachusetts, as well as 28 temporary employees, 16 of whom are working on an ESD contract in New Jersey and the balance are working
in Irvine, California. At June 30, 2015, we had 66 full-time employees, comprised of 54 employees in Irvine, 7 in Beaverton and 5 in San Dimas. 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, currently suspended until December 31, 2017, on
sales of certain medical devices, some of which we produce, that we may be unable to recover through price increases to our customers.
We believe that our business is conducted in a manner consistent with Environmental Protection Agency (“EPA”) and other agency regulations
governing disposition of industrial waste materials.
While we believe that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any
investigation or review which may be undertaken in the future with respect to our products or processes.
Management believes that each of our facilities has manufacturing systems and processes that are based on established Quality Management System
standards. In addition, we believe that our Irvine, California facility is compliant with applicable Good Manufacturing Practices promulgated by the FDA, and
is, along with our Beaverton, Oregon facility, compliant with applicable ISO standards set forth by the International Organization for Standardization.
Patents, Trademarks and Licensing Agreements
We hold patents relating to miniature rotary drive products, multi-axis motion controllers and torque-limiting screwdrivers. 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.
5
Table of Contents
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 few customers. If we were to lose a key customer, it would have a material adverse effect on
our business, financial condition and results of operations.
In fiscal year 2016, our top 20 customers accounted for 87% of our sales, with our largest customer accounting for 25% of our sales. The loss of any
of our significant customers, 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 former largest customer has informed us that they will be replacing a primary product that we sell with
one that they will manufacture in the future. Therefore, although we expect to continue to have sales to this customer in fiscal 2017, we expect revenue to this
customer to continue to decline.
A substantial portion of our business is derived from our core business area that, if not serviced properly, may result in a material adverse impact
upon our business, results of operations and financial condition.
In fiscal year 2016, we derived more than 70% of our revenue from sales of our medical device 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.
6
Table of Contents
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.
In recent years, we have launched many new medical device products and our estimates of warranty claims are based largely on our previous history
from similar legacy products and if actual warranty claims exceed our estimates, it could have an adverse effect on our results of operations and
financial condition.
We have recently completed two significant medical device development projects in the craniomaxillofacial (“CMF”) surgical segment as well as a
surgical handpiece used for orthopedic applications for which we have made estimates of product warranty claims based upon similar, legacy products. If the
actual repair volumes or repair costs exceed the estimates that we have been using, we may incur additional costs which could be materially adverse to our
results of operations and financial condition.
We face significant competition from a number of different sources, which could negatively impact our results of operations and business conditions.
The markets for products in the industries served by our customers are intensely competitive, and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development and marketing resources, than us.
We compete in all of our markets with other major surgical device and motion control related companies. As a provider of outsourced products and
services, we also compete with our customers’ own internal development groups. Competitive pressures and other factors, such as new product or new
technology introductions by us, our customers’ internal development and manufacturing departments, or our competitors may result in price or market share
erosion that could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that our
products and services will achieve broad market acceptance or will successfully compete with other products.
The industry in which we operate is subject to significant technological change and any failure or delay in addressing such change could adversely
affect our competitive position or could make our current products obsolete.
The medical device and motion control markets are generally characterized by rapid technological change, changing customer needs, frequent new
product introductions and evolving industry standards. The introduction of products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing
new products that respond to technological changes or evolving industry standards.
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. 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 continue to 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.
7
Table of Contents
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 31, 2016, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, controlled voting power over approximately 41.8%
(27.9% and 13.9%, 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.
We may not be able to successfully integrate our 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.
8
Table of Contents
Because a significant percentage of our expenses are fixed, a variation in the timing of sales can cause significant fluctuations in operating results
from quarter to quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future performance for
any particular period.
In addition, it is possible that our operating results in future quarters may be below the expectations of public market analysts and investors. In such
an event, the price of our common stock could be materially adversely affected.
Our operations are subject to a number of complex government regulations, the violation of which could have a material adverse effect on our
business.
The manufacture and distribution of medical and dental devices are subject to state and federal requirements set forth by various government
agencies including the FDA and EPA. The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to
diverse, often conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to
eliminate the ongoing risk that one or more of our activities may at some point be determined to be non-compliant. The penalties for non-compliance could
range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined to have fully complied
with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business could adversely affect or result in the
cessation of a portion of our business. A change in such laws or regulations at any time may have an adverse effect on our operations.
The FDA designates all medical devices into one of three classes (Class I, II or III) based on the level of control necessary to assure the safety and
effectiveness of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical instrumentation
we manufacture is generally classified into Class I, and our dental instrumentation is generally classified into Class II. The FDA has broad enforcement
powers to recall and prohibit the sale of products that do not comply with federal regulations, and to order the cessation of non-compliant processes. No claim
has been made to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes are from time to time subject to routine governmental reviews and investigations. We are also subject to EPA regulations concerning the disposal of
industrial waste.
While management believes that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome
of any such future review or investigation.
We face increased costs 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, currently suspended through 2017, that apply to certain of our products and other
significant modifications to the healthcare delivery system.
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.
9
Table of Contents
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.
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.
We have experienced losses in the past, and we cannot be certain that we will sustain our current 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. Although we were profitable in fiscal 2016, 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.
We currently anticipate that our available capital resources, including our existing cash and cash equivalents and accounts receivable balances 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.
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.
10
Table of Contents
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.
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 $38,000, with annual increases of $1,400 per month in the base lease rate
through the expiration of the lease in April 2018. The building is a one-story stand-alone structure of concrete “tilt-up” construction, approximately 25 years
old and in good condition.
Our Beaverton office and manufacturing facility is located at 15201 N.W. Greenbrier Parkway, B-1 Ridgeview, Beaverton, Oregon 97006. We
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. We 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 $2,760 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 former San Carlos office and manufacturing facility was 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 was
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 was located in a
one-story building in an approximately 35-year-old industrial office complex 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.
11
Table of Contents
ITEM 3.
LEGAL PROCEEDINGS
On August 1, 2016, we received correspondence from an attorney representing Scott Robertson, the former president of Riverside Manufacturing,
Inc., claiming damages owed under claims of breach of contract, fraudulent inducement, wrongful self-help eviction among others. The letter requested a
payment of $250,000 within 10 days of the date of the letter to fully settle the matter. We have made no such payment nor have we accrued any amounts owed
related to this matter. On August 12, 2016, we responded to the letter indicating that we believe each and every claim has no legal merit. Additionally, on
September 8, 2016, we sent a follow up correspondence asserting claims against Mr. Robertson including slander of title, fraudulent misrepresentation,
conversion and theft. We have proposed a mutual release of all claims to settle this dispute and avoid potentially costly legal fees. As of the date of this filing,
no litigation has commenced nor, to our knowledge, is pending. While we believe that we would prevail should this matter escalate, there can be no
assurances that we will be successful should this matter be litigated.
In addition to the matter described above, 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.
12
Table of Contents
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, 2016, the last sale
price of our common stock as reported by NASDAQ was $5.64 per share.
Year ended June 30, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended June 30, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
$
2.79 $
2.78
3.82
5.61
2.79 $
2.63
2.54
2.42
2.00
2.37
2.24
3.32
2.01
2.16
2.03
2.00
As of September 8, 2016, 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.
Repurchases
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 March 22, 2016, 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” or “Plan”).
The 10b5-1 Plan became effective on March 23, 2016 and through June 30, 2016 we repurchased 99,688 shares at an aggregate cost of approximately
$454,000. The 10b5-1 Plan terminated on July 6, 2016 in accordance with its provisions. Our prior 10b5-1 Plan commenced 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 prior 10b5-1 Plan. Repurchases under both 10b5-1 Plans were administered through an independent broker.
13
Table of Contents
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 contained elsewhere in 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 Part 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 fiscal years ended June 30, 2016 and 2015. The income from discontinued operations included
in our fiscal year 2015 consolidated statement of operations relates to the final earn out provisions from our sale of Pro-Dex Astromec, which we sold in
February 2012.
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 principal operations described above, our Fineline Molds division, located in San Dimas, California manufactures plastic injection
molds for a wide variety of industries. We also provide engineering consulting and placement services to a wide range of industries 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 acquired businesses and we have filed fictitious
name statements in the counties in which we operate these divisions. Our Huber Precision division was located in San Carlos, California through November
30, 2015 and after such time we manufacture and ship orders placed from these customers directly from our Irvine, California location.
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 either upon milestone
completion or completion of the product development services, in conformity with ASC Section 605. We recognize revenue that is contingent upon the
achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the
consideration payable to us for such milestone (i) is consistent with our performance necessary to achieve the milestone, (ii) relates solely to our past
performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all
facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to
achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to
future performance or deliverables. Accordingly, in certain cases, based upon the evaluation of the criteria above, we record revenue upon milestone
completion and in other cases revenue from product development milestone billings to our customers is deferred until completion of all development phases
or milestones.
14
Table of Contents
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.
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 Deferred Costs
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.
Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and supply contracts.
These costs get recorded to cost of sales in the period that the revenue is recognized pursuant to the terms of the underlying contract with our customer.
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.
15
Table of Contents
Goodwill & Intangibles
We recorded goodwill and a trade name in conjunction with the asset purchase of Fineline Molds during fiscal 2015. We assessed the potential
impairment of goodwill and trade name during the third quarter of fiscal 2016 and will continue on an annual basis, 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. Both the legal fees and the capitalized software
development costs will be amortized over the estimated product life of the underlying product related to the associated patent and software development costs.
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.
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.
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, 2016 and 2015 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, 2016 and 2015, we maintained a valuation allowance against the
entire balance of our deferred tax assets, net of deferred tax liabilities.
16
Table of Contents
Results of Operations for the Fiscal Year Ended June 30, 2016 Compared to the Fiscal Year Ended June 30, 2015
The following tables set forth results from continuing operations for the fiscal years ended June 30, 2016 and 2015:
Years Ended June 30,
2016
2015
Dollars in thousands
% of Net
Sales
% of Net
Sales
Net sales
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible assets
Research and development costs
$
Operating income (loss)
Other income, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
$
20,158
14,755
5,403
898
1,882
245
1,852
4,877
526
321
847
25
822
100% $
73%
27%
5%
9%
1%
9%
24%
2%
2%
4%
—
4% $
13,383
9,679
3,704
975
1,963
—
1,668
4,606
(902)
456
(446)
(44)
(402)
100%
72%
28%
7%
15%
—
12%
34%
(6%)
3%
(3%)
—
(3%)
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 product/service type is as follows:
Net sales:
Medical device and services
Industrial and scientific
Dental and component
Repairs
Other
Years Ended June 30,
2016
2015
Dollars in thousands
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2015
To 2016
$
$
14,292
1,658
1,320
833
2,055
20,158
71% $
8%
7%
4%
10%
100% $
7,619
2,052
1,538
1,779
395
13,383
57%
15%
12%
13%
3%
100%
88%
(19%)
(14%)
(53%)
420%
51%
17
Table of Contents
Net sales in fiscal 2016 increased by $6.8 million, or 51%, as compared to fiscal 2015, due primarily to an increase in medical device sales of $6.7
million. During fiscal 2016 we had three customers, all in medical device, that each accounted for more than 10 percent of total revenue compared to only one
customer in the medical device space that accounted for more than 10 percent of our total revenue during fiscal 2015. Our two new significant customers
reflect the release of new products that we either designed to customer specification or were contracted to manufacture. Sales to these two customers
accounted for $7.9 million in revenue during fiscal 2016 compared $467,000 during the prior fiscal year. In the current year, in addition to our surgical
handpieces designed to be used in orthopedic surgery applications, we also shipped handpieces for use in CMF surgical applications and have broadened both
our customer base and medical device products. We increased sales to three additional medical device customers by $775,000, $520,000, and $349,000,
respectively. Offsetting the increases from these customers, sales to our oldest and formerly most significant customer in medical device have decreased by
approximately $3.0 million, from $6.6 million to $3.6 million, of which approximately $948,000 relates to repairs, this fiscal year compared to the prior fiscal
year. This customer has informed us that they will be replacing a primary product that we sell with one that they will manufacture in the future. Therefore,
although we expect to continue to have sales to this customer in fiscal 2017, we expect revenue to this customer to continue to decline.
The decrease of $394,000 in industrial and scientific sales from fiscal 2015 to 2016, relates primarily to reductions of our multi-axis motion control
products sales which decreased by $425,000 in fiscal 2016 compared to fiscal 2015. 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. Our dental and component products are legacy products, which
although they continue to sell to many long-held customers, have not had a product line refresh, which may be a contributing factor to the decrease in sales of
$218,000 in fiscal 2016 compared to the prior year. Our repair revenue declined $946,000 in fiscal 2016 compared to fiscal 2015, driven by the reduced sales
to our former largest medical device customer, described above. Finally, our other revenue increased $1.7 million in fiscal 2016 compared to the prior fiscal
year and it includes revenue generated from our Fineline Molds and Engineering Services Division of $1.3 million and $730,000, respectively, in the current
year, representing increases of $1.0 million and $615,000, respectively, compared to fiscal 2015. The $1.0 million increase in sales of Fineline Molds is due in
part to fiscal 2016 containing a full year of operations compared to only 5 months in fiscal 2015, as well as a mix of more complex, larger jobs completed in
the current year. Of the $615,000 increase in Engineering Services Division revenue, $487,000 relates to a contract for temporary employees in New Jersey as
well as various other temporary and direct hire placements.
At June 30, 2016, we had a backlog of $11.3 million compared with a backlog of $10.6 million at June 30, 2015. 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. We do not typically experience seasonal fluctuations in our shipments and revenues.
Cost of Sales and Gross Margin
Years Ended June 30,
2016
2015
Dollars in thousands
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2015
To 2016
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
$
14,869
62
(437)
261
14,755
74% $
—
(2%)
1%
73% $
9,547
399
(483)
216
9,679
71%
3%
(4%)
2%
72%
56%
(84%)
(10%)
21%
52%
Cost of sales in fiscal 2016 increased $5.1 million, or 52%, from fiscal 2015, due primarily to a $5.3 million increase in product costs. The increase
in product costs is due primarily to the increase in sales from fiscal 2015 to 2016 of 51 percent. Although sales are significantly higher in fiscal 2016 than the
prior fiscal year, our gross margin declined from 28 percent in fiscal 2015 to 27 percent in fiscal 2016. Many of our newer products that we began selling in
late fiscal 2015 and 2016 have lower margins than our legacy products. Also contributing to the deterioration in our product margin during fiscal 2016
includes expedite fees and outsourcing versus manufacturing of certain components in order to meet delivery expectations for recent product launches. As we
continue to manufacture and deliver these products, our operations team can focus on improving margins by continuing to evaluate “make-or-buy” decisions
and process improvements. Accrued losses from development services portion of certain contracts decreased $337,000, or 84%, from fiscal 2015 relating to
improved project management as well as fewer development contracts in process during fiscal 2016 compared to fiscal 2015. Costs related to inventory and
warranty charges increased $45,000 in fiscal 2016 compared to 2015 due primarily to $34,000 in increased warranty expenses and an increase of $11,000 in
inventory charges.
18
Table of Contents
Operating Expenses
Years Ended June 30,
2016
2015
(Dollars in thousands)
% of Net
Sales
% of Net
Sales
Increase
(Decrease)
From 2015
To 2016
Operating expenses:
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible assets
Research and development costs
$
$
898
1,882
245
1,852
4,877
5% $
9%
1%
9%
24% $
975
1,963
—
1,668
4,606
7%
15%
—
12%
34%
(8%)
(4%)
100%
11%
6%
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.
Selling Expenses by division
(in thousands except % of total)
Selling expenses:
Pro-Dex (Irvine)
OMS Division (Beaverton)
ESD Division (Irvine)
Fineline Division (San Dimas)
Years Ended June 30,
2016
2015
(Dollars in thousands)
% of
Total
$
$
254
118
325
201
898
28% $
13%
36%
23%
100% $
330
126
441
78
975
Increase
(Decrease)
From 2015
To 2016
(23%)
(6%)
(26%)
158%
(8%)
% of
Total
34%
13%
45%
8%
100%
Selling expenses for Pro-Dex Irvine during the year ended June 30, 2016 decreased $76,000, or 23%, compared to fiscal 2015 mostly due to
reductions in personnel costs and trade show costs associated with the sales of our medical, dental and industrial revenue generating activities. The selling
expenses for our OMS division remained relatively flat in the current fiscal year compared to the prior fiscal year. 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 in our Irvine, California office and previously, a Troy, Michigan office. In an effort to
reduce the overall expenses of this division as we focused on revenue growth, we closed the Troy, Michigan office and reduced overall head count of the
division, therefore selling expenses for this division decreased $116,000 in fiscal 2016 compared to fiscal 2015. The increase in the Fineline division is
primarily due to the fact that fiscal 2016 contains twelve months of operations compared to 5 months in the prior fiscal year, because we acquired this
business on February 1, 2015. In addition, the current fiscal year includes commission expense in the amount of $41,000 with no similar expense included in
the prior fiscal year.
19
Table of Contents
Impairment of goodwill and intangible assets relates to Fineline as a result of our annual impairment test described more fully in Note 4 of Notes to
Consolidated Financial statements contained elsewhere in this report.
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 $81,000 decrease in G&A expenses from fiscal 2015 to 2016 is due primarily to decreased legal and professional fees and non-recurring
severance payments made to our former Chief Executive Officer during the third quarter of fiscal 2015. 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.
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 $184,000 in fiscal 2016 as compared to 2015 is primarily related
to increases in personnel and related expenses as we have grown our engineering team in support of our increased development projects and medical device
products.
Interest Expense
Interest expense consists primarily of interest expense related to the loans and notes payable described more fully in Note 9 to the Consolidated
Financial Statements contained elsewhere in this report. The increase in interest expense for fiscal 2016 relates to the recent financing arrangements described
in Note 9 to the Consolidated Financial Statements contained elsewhere in this report.
Gain from sale of Investment in Ramsey
During the quarter ended March 31, 2016, we sold the Ramsey Property for an aggregate sale price of $1.6 million. Additionally, during the second
and third quarter of fiscal 2016 we liquidated the Riverside machine shop equipment and collected some accounts receivable of Riverside that served as
collateral to the promissory notes in the gross amount of $529,000. Therefore during the third quarter ended March 31, 2016 we recorded a gain from the sale
of the investment in Ramsey in the amount of $340,000.
Realized Gain on Sale of Investments
During the quarter ended March 31, 2015, we liquidated our investment portfolio to fund our working capital requirements. During fiscal 2015, we
sold certain of our investments in marketable equity securities of publicly held companies and recorded realized gains of $455,000. We have not purchased,
held or disposed of any marketable securities during fiscal 2016.
Income Taxes
The effective tax rates for fiscal 2016 and 2015 are lower than statutory tax rates primarily due to our utilization of federal and state loss
carryforwards, with a full valuation allowance. (See Note 7 of Notes to Consolidated Financial Statements contained elsewhere in this report).
20
Table of Contents
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,
2016
2015
(In thousands)
$
$
$
$
$
466
1,588
(457)
2,294
7,141
$
$
$
$
$
(775)
(1,513)
(203)
697
4,714
Cash provided by operating activities during fiscal 2016 relates primarily to our operating income of $526,000 and non-cash impairment charge of
$245,000 and non-cash depreciation and amortization of $614,000 offset by increases in total accounts receivable, including amounts due from factor, in the
amount of $523,000, consistent with our increase in net sales. Additionally, deferred revenue decreased $382,000 and our accounts payable, accrued expenses
and deferred rent decreased by $1.3 million. Offsetting these uses of cash, our inventory decreased by $737,000 and our deferred costs decreased by $615,000
due to the completion of a product development contract.
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 during fiscal 2015 compared to fiscal 2014. These uses of cash were 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 deferred costs of $220,000 caused by the
completion of one of our long-term product development contracts.
Cash Flows from Investing Activities
During fiscal 2016 we sold the Ramsey Property for an aggregate purchase price of $1.6 million realizing cash proceeds from the escrow close in the
amount of $1.4 million and liquidated the Riverside machine shop equipment and collected some accounts receivable of Riverside that served as collateral to
the promissory notes in the gross amount of $529,000 after investing an additional $87,000. Additionally during fiscal 2016, we made capital expenditures
primarily for tooling and manufacturing equipment in the amount of $311,000 and sold fully depreciated equipment for $18,000.
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 (secured by Ramsey Property and Riverside assets) 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.
Cash Flows from Financing Activities
During fiscal 2016 we borrowed and repaid the principal amount of $1.7 million and $500,000, respectively, from Summit Financial Resources LP
and Fortitude Income Funds LLC. Additionally, we spent $454,000 on the repurchase of 99,688 shares of our common stock pursuant to the share repurchase
program described in more detail below.
21
Table of Contents
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.
Liquidity Requirements for the Next 12 Months
As of June 30, 2016, our working capital was $7.1 million. We currently believe that our existing cash and cash equivalent balances as well as our
account receivable balances, including amounts due from factor, will provide us sufficient funds to satisfy our cash requirements as our business is currently
conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash
flows from operations.
We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs
and products that we believe will most likely contribute to our profitability. As we execute on our current strategy, however, we may require debt and/or
equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes. In particular,
we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject
to extensive variability. We 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
During fiscal 2013, our Board approved a Surplus Capital Investment Policy (the “Policy”) that provides, among other items, for the following:
(a) Determination by our Board of Directors of (i) our surplus capital balance and (ii) the portion of such surplus capital balance to
be invested according to the Policy;
(b) Selection of an Investment Committee responsible for implementing the Policy; and
(c) Objectives and criteria under which investments may be made.
The Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot and Van Kirk.
In September 2013, our Board approved a share repurchase program authorizing the Company to repurchase up to 750,000 shares of our common
stock under parameters to be determined by the Investment Committee. In accordance with, and as part of this share repurchase program, our Board approved,
on March 22, 2016, 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 March 23, 2016 and through June 30, 2016 we repurchased 99,688
shares at an aggregate cost of $454,000, inclusive of fees. The Plan terminated on July 6, 2016, in accordance with its provisions. Our prior 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 both 10b5-1 Plans were administered through an independent broker.
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.
22
Table of Contents
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. The adoption of this accounting standard did
not have a material impact on our balance sheet.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” which requires all
deferred tax assets and liabilities, as well as any related valuation allowance, to be classified as non-current on the balance sheet. The guidance is effective for
fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and earlier adoption is permitted. We elected early adoption
during fiscal 2016 and have netted our current deferred income tax assets against our long term deferred income tax liabilities in the accompanying
consolidated balance sheet.
In February 2016, the FASB issued ASU 2016-02, (Topic 842) “Leases”. The objective of this update is to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This
ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a
modified retrospective approach. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment
Accounting”. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance
to determine the impact it may have on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
Table of Contents
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, 2016 and 2015
Consolidated Statements of Operations, Years Ended June 30, 2016 and 2015
Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2016 and 2015
Consolidated Statements of Cash Flows, Years Ended June 30, 2016 and 2015
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, 2016 and 2015 and the
related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the two-year period ended June 30, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30,
2016 in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 15, 2016
25
Table of Contents
ASSETS
Current assets:
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
2016
2015
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $20 and $36 at June 30, 2016 and 2015,
$
2,294 $
697
respectively
Due from factor
Deferred costs
Other current receivables
Inventory
Prepaid expenses
Deferred income taxes
Total current assets
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
Total non-current liabilities
Total liabilities
Commitments and Contingencies
Shareholders’ equity:
Common stock, no par value, 50,000,000 shares authorized; 4,052,987 and 4,139,579 shares issued and
outstanding at June 30, 2016 and 2015, respectively
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
26
1,469
1,419
238
91
3,573
134
—
9,218
1,286
—
112
451
80
11,147 $
841 $
997
212
1
26
—
2,077
—
147
46
193
2,270
17,988
—
(9,111)
8,877
11,147 $
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
18,411
—
(9,933)
8,478
12,516
$
$
$
Table of Contents
Net sales
Cost of sales
Gross profit
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Operating expenses:
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible assets
Research and development costs
Total operating expenses
Operating income (loss)
Other income (expense):
Interest income
Realized gain on sale of investments
Gain from sale of Investment in Ramsey Property
Gain from disposal of equipment
Interest expense
Total other income
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss)
Basic and diluted income (loss) per share:
Net income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Weighted average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
27
Years Ended June 30,
2016
2015
$
20,158 $
14,755
5,403
13,383
9,679
3,704
898
1,882
245
1,852
4,877
526
—
—
340
18
(37)
321
847
25
822
—
822 $
0.20 $
—
0.20 $
975
1,963
—
1,668
4,606
(902)
6
455
—
1
(6)
456
(446)
(44)
(402)
37
(365)
(0.10)
0.01
(0.09)
4,141,353
4,173,556
4,169,326
4,169,326
$
$
$
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For The Years Ended June 30, 2016 and 2015
(In thousands, except share data)
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
Net income
Exercise of stock options
ESPP shares issued
Share-based compensation
Share repurchases
Balance at June 30, 2016
Common Shares
Number of
Shares
Amount
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
4,211,019 $
—
—
—
—
(1,667)
—
(69,773)
4,139,579 $
—
7,500
5,596
—
(99,688)
4,052,987 $
18,582 $
—
(2)
(32)
—
—
17
(154)
18,411 $
—
16
11
4
(454)
17,988 $
202 $
—
—
—
(202)
—
—
—
— $
—
—
—
—
—
— $
(9,568) $
(365)
—
—
—
—
—
—
(9,933) $
822
—
—
—
—
(9,111) $
9,216
(365)
(2)
(32)
(202)
—
17
(154)
8,478
822
16
11
4
(454)
8,877
See notes to consolidated financial statements.
28
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
$
822 $
Depreciation and amortization
Realized gain on sale of investments
Gain on sale of investment in Ramsey
Gain on sale or disposal of equipment
Impairment of goodwill and intangible assets
Share-based compensation
Allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable, due from factor and other current receivables
Deferred costs
Inventory
Prepaid expenses and other assets
Accounts payable, accrued expenses and deferred rent
Deferred revenue
Income taxes receivable and payable
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements
Business acquisitions
Purchase of notes receivable (See Note 8)
Investment in Ramsey property and related notes receivable
Proceeds from sale of investment in Ramsey
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
Proceeds from note payable
Borrowings from Summit loan
Repayments on Summit loan
Repurchases of common stock
Net proceeds paid related to common stock rights offering
Proceeds (payments) from exercise (repurchase) of stock options and ESPP contributions
Net cash 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
614
—
(340)
(18)
245
4
(16)
(523)
615
737
(5)
(1,288)
(382)
1
466
(311)
—
—
(87)
1,992
18
—
(24)
—
1,588
(530)
500
1,689
(1,689)
(454)
—
27
(457)
1,597
697
2,294 $
(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
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
2016
$
$
$
$
— $
— $
21 $
37 $
100
1,059
7
6
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 Sunfish Lake, LLC and Pro-
Dex Riverside, LLC, both Delaware limited liability companies formed by the Company 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.
Revenue from billable product development service portions of development and supply contracts is generally recognized either upon milestone
completion or completion of the product development services, in conformity with ASC Section 605. We recognize revenue that is contingent upon the
achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the
consideration payable to us for such milestone (i) is consistent with our performance necessary to achieve the milestone, (ii) relates solely to our past
performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all
facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to
achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to
future performance or deliverables. Accordingly, in certain cases, based upon the evaluation of the criteria above, we record revenue upon milestone
completion and in other cases revenue from product development milestone billings to our customers is deferred until completion of all development phases
or milestones.
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.
31
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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.
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, 2016 cash equivalents
consisted of investments in money market funds. At June 30, 2015 there were no cash equivalents included in the cash and cash equivalents balance.
Accounts Receivable and Deferred Costs
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.
Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and supply contracts.
These costs get recorded to cost of sales in the period that the revenue is recognized pursuant to the terms of the underlying contract with our customer.
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.
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.
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
32
Table of Contents
Goodwill & Intangibles
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recorded $353,000 of goodwill and $54,000 of trade name in conjunction with the asset purchase of Fineline Molds during the fiscal year ended
June 30, 2015. 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. Certain of the patent costs are being amortized over a period of seven years, the estimated life of the product that is currently
utilizing the patented technology. The remaining patent costs will be amortized over the estimated life of the product(s) that will be utilizing the technology,
or expensed immediately in the event the patent office denies the issuance of the patent. The capitalized software development costs have been fully
amortized as of June 30, 2016. 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.
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.
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 losses and tax credit carryovers. Deferred tax assets at both June 30, 2016 and 2015 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, 2016 and 2015, 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.
33
Table of Contents
Compensation Plans
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Our operations are affected by numerous factors including market acceptance of our products, changes in technologies, and new laws, government
regulations and policies. We cannot predict what impact, if any, the occurrence of these or other events might have on our operations. Significant estimates
and assumptions made by management include, but are not limited to, revenue recognition, the allowance for doubtful accounts, accrued warranty expense,
inventory valuation, the carrying value of long-lived assets, and the recovery of deferred income tax assets.
Basic and Diluted Per Share Information
Basic per share amounts are computed on the basis of the weighted-average number of common shares outstanding during each period presented.
Diluted per share amounts assume the exercise of all potential common stock equivalents, consisting solely of options to purchase common stock as discussed
in Note 13, 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.
Investment in Ramsey property and related notes receivable: These investments were classified within Level 3 of the valuation hierarchy for
purposes of evaluating potential impairment of these assets as of June 30, 2015. The fair value of the property and related notes receivable was based upon the
valuation of third party appraisals of the land and building as well as the equipment which was 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 $21,000 and $51,000 for the fiscal years ended June 30, 2016 and
2015, respectively.
34
Table of Contents
Recent Accounting Standards
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. The adoption of this accounting standard did
not have a material impact on our balance sheet.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” which requires all
deferred tax assets and liabilities, as well as any related valuation allowance, to be classified as non-current on the balance sheet. The guidance is effective for
fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and earlier adoption is permitted. We elected early adoption
during fiscal 2016 and have netted our current deferred income tax assets against our long term deferred income tax liabilities in the accompanying
consolidated balance sheet.
In February 2016, the FASB issued ASU 2016-02, (Topic 842) “Leases”. The objective of this update is to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This
ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a
modified retrospective approach. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment
Accounting”. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance
to determine the impact it may have on its consolidated financial statements.
Reclassifications
Certain prior period balances have been reclassified as it relates to our income tax disclosures in Note 7 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 and is subordinate to the security interest
created by the Summit Loan (as defined and described in Note 9).
35
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 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. 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.
Goodwill and Indefinite-Lived Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. Indefinite-lived intangibles
are intangible assets whose useful lives are indefinite in that their lives extend beyond the foreseeable horizon – that is there is no foreseeable limit on the
period of time over which they are expected to contribute to the cash flows of the reporting entity. The Company accounts for these items in accordance with
Accounting Standards Codification (“ASC”) 350 Intangibles – Goodwill and Other, which requires that impairment testing for goodwill is performed at least
annually at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). We
perform our annual impairment test as of January 31st of each year. Goodwill is also tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
36
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the carrying amount of the Fineline goodwill and trade name (in thousands):
Balance at July 1, 2014
Purchased
Balance at July 1, 2015
Impairment charge
Balance at June 30, 2016
Goodwill
Trade name
$
$
—
353
353
(241)
112
$
$
—
54
54
(4)
50
The impairment test for goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to its carrying value including
goodwill. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value
of the reporting unit’s goodwill to its implied value (i.e., the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including
identifiable intangible assets). If the carrying value of goodwill exceeds its implied value, the excess is recorded as an impairment.
Under Step 1 of the impairment test the Company determined that the carrying value of the reporting unit including goodwill exceeded the fair value,
requiring us to perform Step 2 of the goodwill impairment test to measure the amount of impairment loss, if any.
The Company then performed Step 2 of the impairment test, and determined the implied value of Fineline goodwill was $112,000, which was less
than its carrying value and, as a result, the Company recognized a non-cash, pre-tax charge of $241,000 during the fiscal year ended June 30, 2016.
Additionally, our analysis indicated that the estimated fair value of the trade name acquired was $50,000 and therefore we recognized an impairment charge
of $4,000 during the fiscal year ended June 30, 2016. These impairment charges are included under the caption “Impairment of goodwill and long-lived
assets” in our consolidated statements of operations. There were no impairment charges recognized during the fiscal year ended June 30, 2015.
The valuation methods utilized to value the long-lived assets and the goodwill discussed above are based on the amount and timing of expected
future cash flows and growth rates and include a determination of an appropriate discount rate. The cash flows utilized in the discounted cash flow analyses
were based on financial forecasts developed internally by management. Estimating future cash flows requires significant judgment and projections may vary
from the cash flows eventually realized. Determining the fair value using a discounted cash flow method requires significant estimates and assumptions,
including market conditions, discount rates, and long-term projections of cash flows. The Company’s estimates are based upon historical experience, current
market trends, projected future volumes and other information. The Company believes that the estimates and assumptions underlying the valuation
methodology are reasonable; however, different estimates and assumptions could result in a different estimate of fair value.
5.
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
37
June 30,
2016
2015
1,596
818
1,044
115
3,573
$
$
2,025
1,030
1,095
160
4,310
$
$
Table of Contents
Realized Gain on Sale of Investments
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. We have not purchased, held or disposed of any marketable securities during
fiscal 2016.
Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in thousands):
June 30,
2016
2015
Office furnishings and fixtures
Machinery and equipment
Leasehold improvements
Total
Less: Accumulated depreciation and amortization
$
$
2,007
4,953
2,094
9,054
(7,768)
1,286
Depreciation expense for the years ended June 30, 2016 and 2015 amounted to $497,000 and $534,000, 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,
2016
73
52
50
316
121
612
(161)
451
$
$
$
$
$
$
$
$
2,008
4,803
2,086
8,897
(7,427)
1,470
June 30,
2015
73
52
54
316
96
591
(44)
547
Amortization expense for the years ended June 30, 2016 and 2015 amounted to $117,000 and $44,000 respectively.
38
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized software development costs relate to internally developed software, which was amortized over minimum unit sales of the underlying
product and has been fully amortized as of June 30, 2016. Both the covenant not to compete and the customer list and backlog relate to assets acquired in
conjunction with the business acquisitions of Huber and Fineline more fully described in Note 3 above and are being amortized over various periods not to
exceed ten years. The trade name relates exclusively to Fineline 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 both patent applications and a patent issuance, and will be amortized over the estimated
life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent.
Expected amortization expense for the next five fiscal years ending June 30, are as follows (in thousands):
Fiscal Year:
2017
2018
2019
2020
2021
Thereafter
Total expected amortization
Accrued Liabilities
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
5.
Due from Factor
Amortization
Expense
$
$
June 30,
2016
2015
$
$
365 $
443
60
7
28
11
83
997 $
62
65
65
60
55
94
401
261
302
46
36
385
83
89
1,202
On September 9, 2015, we entered a Loan and Security Agreement (the “Summit Loan”) with Summit Financial Resources LP, (the “Factor”)
whereby we can borrow up to $1.0 million against our eligible receivables, on a revolving basis, 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 monthly 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.
As of June 30, 2016, the total amount of receivables assigned to the Factor pursuant to the Summit Loan was $1.4 million and we bear the risk of
loss in the event of non-payment by the customers. During the fiscal year ended June 30, 2016, we borrowed $1.7 million, on a revolving basis, under the
Summit Loan, which amounts were paid in full by June 30, 2016. Therefore, at June 30, 2016, we had no outstanding borrowings against the Summit Loan.
6.
Warranty Accrual
Information relating to the accrual for warranty costs for the years ended June 30, 2016 and 2015 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,
2016
2015
$
$
261 $
350
(154)
(92)
365 $
237
372
(208)
(140)
261
Warranty expense relating to new product sales and changes to estimates was $196,000 and $164,000, respectively, for the fiscal years ended June
30, 2016 and 2015.
39
Table of Contents
7.
Income Taxes
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income tax expense (benefit) from continuing operations consists of the following amounts (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Income tax expense (benefit)
Years Ended June 30,
2016
2015
$
$
11 $
14
—
—
25 $
—
(44)
—
—
(44)
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,
2016
2015
Amount
Percent Pretax
Income
Amount
Percent Pretax
Income
Income (loss) from continuing operations before income taxes
$
847
100% $
(446)
100%
Computed “expected” income tax expense (benefit) on income
(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 expense (benefit)
$
288
9
(133)
(141)
—
—
2
25
34% $
1%
(16%)
(17%)
—
—
—
2% $
(152)
(30)
(88)
227
—
—
(1)
(44)
(34%)
(7%)
(20%)
51%
—
—
—
(10%)
Deferred income taxes reflect the net effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for
federal and state income taxes are as follows (in thousands):
Deferred tax assets:
Federal & State NOL carryforward
Research & other credits
Reserves and accruals
Inventory
Other intangibles
Goodwill
Other
Total gross deferred tax assets
Less: valuation allowance
Total deferred tax assets
$
$
June 30,
2016
2015
1,144 $
1,790
337
432
237
89
5
4,034 $
(3,773)
261
1,592
1,562
407
457
252
—
34
4,304
(3,961)
343
40
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax liabilities:
Property and equipment, principally due to differing depreciation methods
Goodwill
Other intangibles
Other
Total gross deferred tax liabilities
Net deferred tax assets
June 30,
2016
2015
$
$
(261) $
—
—
—
(261)
— $
(316)
(4)
(1)
(22)
(343)
—
As of June 30, 2016 we had a net operating loss carry forward in the amount of approximately $1,899,000 including $22,000 of losses which have
been created from excess stock compensation deductions, portions of which begin to expire in 2033. As of June 30, 2016 we have state net operating loss
carry forwards of approximately $5,876,000, which will begin to expire in 2026. Federal research and development and alternative minimum tax credit carry
forwards at June 30, 2016 amount to $1,356,000, and begin to expire in 2027. State tax research credit carry forwards at June 30, 2016 amount to $870,000,
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, 2016 and 2015. The valuation allowance decreased by $188,000 and increased by
$451,000 during the years ended June 30, 2016 and 2015, respectively.
As of June 30, 2016, we have accrued $446,000 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.
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,
2016
2015
$
$
399 $
15
13
19
—
446 $
363
8
15
13
—
399
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, 2016, 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, 2013 and later. However, because of net operating losses and research credit
carryovers, substantially all of our tax years are open to audit.
41
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Investment in Ramsey Property and Related Notes Receivable
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 remained in default, they were placed on nonaccrual status and therefore, the
Company did not collect or recognize 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 was 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 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.
Additionally, during the fourth quarter of fiscal 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 the notes receivable. The notes were considered
impaired because we did not believe the contractual payments would be collected pursuant to contract terms. Accordingly, the recorded investment was
reflected at the lesser of the purchase price or the estimated fair value of the collateral (with appropriate reductions for estimated disposal costs).
On September 22, 2015 we sent Riverside a proposal to accept the collateral in full satisfaction of Riverside’s debt. On October 13, 2015, title to the
collateral transferred to the Company by operation of law. Therefore, on October 13, 2015, we took possession of all assets secured by the revolving loan
agreement and promissory notes and Riverside ceased to operate.
During the third quarter ended March 31, 2016 we sold the Ramsey Property for an aggregate purchase price of $1,653,000, collecting $1,441,000
upon close of escrow. Additionally, during fiscal 2016 we liquidated the Riverside machine shop equipment and collected some accounts receivable of
Riverside that served as Collateral in the gross amount of $529,000. Therefore, during fiscal 2016 we recorded a gain on the sale of Investment in Ramsey in
the amount of $340,000, which included a final accrual in the amount of $86,000 to be released from escrow upon completion of voluntary foreclosure
proceedings. Accordingly, the $86,000 remaining to be collected as of June 30, 2016, has been recorded as other current receivables in our accompanying
consolidated balance sheet.
9.
Notes Payable and Financing Transactions
Fortitude Income Funds
The Company borrowed $500,000 from Fortitude Income Funds, LLC under a promissory note dated September 8, 2015. The loan bore interest at
12 percent per annum, contained a loan origination fee of $15,000 plus expenses, and required monthly interest only payments until its original maturity
scheduled on March 15, 2016. The loan was secured by a combination mortgage, security agreement and fixture statement covering the Ramsey Property. On
February 22, 2016, the loan was repaid in full in conjunction with the sale of the Ramsey Property described above.
42
Table of Contents
Summit Financial Resources LP
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, as discussed in Note 5, on September 9, 2015 we entered into the Summit Loan, whereby we can borrow up to $1.0 million against our
eligible receivables, on a revolving basis, as defined in the loan 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 monthly 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. During the fiscal year ended June 30, 2016 we borrowed 1.7 million, on a revolving
basis, under the Summit Loan, which amounts were paid in full by June 30, 2016.
Fineline Molds
As discussed in Note 3, in conjunction with our acquisition of the assets of Fineline we issued a promissory note to Fineline in the amount of
$100,000 which bears interest at 4% per annum and requires sixteen equal quarterly payments of principal and accrued interest in the amount of $6,794. The
note is secured by all of the assets acquired by us from Fineline and is subordinate to the security interest created by the Summit Loan. The balance owed on
the note as of June 30, 2016 and June 30, 2015 was approximately $70,000 and $94,000, respectively.
10.
Commitments and Contingencies
Leases
We lease our office, production and warehouse facilities in Irvine, California and Beaverton, Oregon under agreements that expire in April 2018 and
July 2017, respectively. Both leases require us to pay insurance, taxes, and other expenses related to the leased space.
Additionally, during the fiscal year ended June 30, 2015 we entered leases in conjunction with the acquisitions of Huber and Fineline, located in San
Carlos, California and San Dimas, California respectively. The Huber lease expired on November 30, 2015 and all orders shipped since that date are
manufactured at the Irvine facility. The Fineline lease expires on February 28, 2017. Finally, during fiscal 2015 we opened a sales office in Troy, Michigan to
support our engineering services division. The lease expired 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 fiscal 2016 and 2015 was $561,000 and $550,000, respectively. Minimum lease payments
for future fiscal years ending June 30 are as follows (in thousands):
Fiscal Year:
2017
2018
Total minimum lease payments
Compensation Arrangements
Retirement Savings 401(k) Plan
Operating Leases
$
$
549
361
910
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 fiscal years ended
June 30, 2016 and 2015, we recognized compensation expense amounting to $68,000 and $33,000, respectively, in connection with the 401(k) Plan.
Annual Incentive Plan (“AIP”)
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.
Previously accrued AIP awards of $15,000 were paid to the participants during fiscal 2016. No compensation expense was accrued under the terms of the AIP
in either fiscal year 2016 or 2015.
43
Table of Contents
Legal Matters
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2016, we received correspondence from an attorney representing Scott Robertson, the former president of Riverside Manufacturing,
Inc., claiming damages owed under claims of breach of contract, fraudulent inducement, wrongful self-help eviction among others. The letter requested a
payment of $250,000 within 10 days of the date of the letter to fully settle the matter. We have made no such payment nor have we accrued any amounts owed
related to this matter. On August 12, 2016, we responded to the letter indicating that we believe each and every claim has no legal merit. Additionally, on
September 8, 2016, we sent a follow up correspondence asserting claims against Mr. Robertson including slander of title, fraudulent misrepresentation,
conversion and theft. We have proposed a mutual release of all claims to settle this dispute and avoid potentially costly legal fees. As of the date of this filing,
no litigation has commenced nor, to our knowledge, is pending. While we believe that we would prevail should this matter escalate, there can be no
assurances that we will be successful should this matter be litigated.
In addition to the matter described above 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.
11.
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”). 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. Aggregate share-based compensation expense under the Plans for the years
ended June 30, 2016 and 2015 were $2,000 and $17,000, respectively.
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 were reallocated 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 shares were
reallocated for issuance under the provisions of the Employee Stock Purchase Plan described below.
Stock Options
There were no stock options granted during the fiscal years ended June 30, 2016 and 2015. As of June 30, 2016, there was no unrecognized
compensation cost under the Stock Option Plans as all outstanding stock options are fully vested.
44
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option activity under the Option Plans for the years ended June 30, 2016 and 2015:
Outstanding Options
Balance, July 1, 2014
Options granted
Options canceled or expired
Options exercised
Balance, July 1, 2015
Options granted
Options canceled or expired
Options exercised
Balance, June 30, 2016
Stock Options Exercisable at June 30, 2016
Number of
Shares
Weighted-
Average
Exercise Price
2.40
—
4.94
1.87
2.41
—
(7.65)
(2.14)
1.95
1.95
165,002 $
—
(10,001)
(48,333)
106,668 $
—
(8,334)
(7,500)
90,834 $
90,834 $
The following table summarizes information regarding options outstanding and options exercisable under the Option Plans at June 30, 2016:
Range of
Exercise Prices
$0 to 2.50
2.5 to 5.00
Total
Number
Outstanding
Options Outstanding & Exercisable
Weighted-Avg.
Remaining
Weighted-Avg.
Exercise Price
Contractual Life
Aggregate
Intrinsic Value
87,500
3,334
90,834
5.28 $
0.88
5.12 years $
1.86 $
4.38
1.95 $
323,750
3,934
327,684
Restricted Stock
The following is a summary of restricted share activity for the years ended June 30, 2016 and 2015:
Balance, June 30, 2014
Granted
Forfeited
Vested
Balance, June 30, 2015
Granted
Forfeited
Vested
Balance, June 30, 2016
Outstanding Restricted Stock Units
Weighted-
Average Stock
Price
On Grant Date
1.73
—
1.73
1.73
1.73
—
—
1.73
—
Number
of Shares
13,333 $
—
(1,667)
(6,666)
5,000 $
—
—
(5,000)
— $
45
Table of Contents
Employee Stock Purchase Plan
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and the Directors’ Stock Option Plan in excess of shares issuable pursuant to outstanding options, aggregating 704,715 shares,
be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at the December 3, 2014 Annual Meeting. On February 2, 2015,
the Company filed a Registration Statement on Form S-8 registering the 704,715 shares issuable under the ESPP under the Securities Act of 1933.
During the first quarter ended September 30, 2015, 1,925 shares were purchased and allocated to employees based upon their contributions at a price
of $2.34 per share, upon the completion of the first offering period. During the third quarter ended March 31, 2016, 3,671 shares were purchased and
allocated to employees based upon their contributions at a price of $2.31 per share, upon the completion of the second offering period. During the fiscal year
ended June 30, 2016, we recorded stock compensation expense in the amount of $2,000 relating to the ESPP.
12.
Major Customers & Suppliers
Customers that accounted for sales in excess of 10% of our total sales in either of fiscal year 2016 or 2015, is as follows (in thousands, except
percentages):
Total revenue
Customer concentration:
Customer 1
Customer 2
Customer 3
Total
Years Ended June 30,
2016
2015
Amount
Percent of Total
Amount
Percent of Total
20,157
100% $
13,383
100%
4,999
3,630
2,855
11,484
25% $
18%
14%
57% $
445
6,569
21
7,035
3%
49%
—
52%
$
$
$
46
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to accounts receivable from those customers whom comprised more than 10% of our gross accounts receivable at either
June 30, 2016 or June 30, 2015, is as follows (in thousands, except percentages):
Total gross accounts receivable, including amounts due from factor
Customer concentration:
Customer 1.
Customer 2.
Customer 3.
Customer 4.
Customer 5.
Total.
$
$
$
June 30, 2016
2,908
100% $
June 30, 2015
2,362
850
135
573
230
337
2,125
29% $
5%
20%
8%
11%
73% $
78
711
—
303
531
1,623
100%
3%
30%
—
13%
22%
68%
During fiscal 2016 and 2015, we had one supplier that accounted for 11 percent and 16 percent of total purchases, respectively. Accounts payable
due to this same significant supplier represented 3 percent and 36 percent of total accounts payable as of June 30, 2016 and 2015, respectively.
13.
Net Income (Loss) Per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Because we incurred a net loss for the fiscal year ended
June 30, 2015, basic and diluted loss per share were the same as the inclusion of common shares of 22,607 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, 2016 and 2015 is as follows (in thousands, except per share data):
Basic:
Income (loss) from continuing operations
Weighted average shares outstanding
Basic earnings (loss) per share from continuing operations
Income from discontinued operations
Weighted average shares outstanding
Basic earnings per share from discontinued operations
Net income (loss)
Weighted average shares outstanding
Basic earnings (loss) per share
Diluted:
Income (loss) from continuing operations
Weighted average shares outstanding
Effect of dilutive securities – stock options
Weighted average shares used in calculation of diluted earnings per share
Diluted earnings (loss) per share from continuing operations
Income from discontinued operations
Weighted average shares used in calculation of diluted earnings per share
Diluted earnings per share from discontinued operations
Net income (loss)
Weighted average shares used in calculation of diluted earnings per share
Diluted earnings (loss) per share
47
Years Ended June 30,
2016
2015
822 $
4,141
0.20 $
— $
4,141
— $
822 $
4,141
0.20 $
822 $
4,141
32
4,173
0.20 $
— $
4,173
— $
822 $
4,173
0.20 $
(402)
4,169
(0.10)
37
4,169
0.01
(365)
4,169
(0.09)
(402)
4,169
—
4,169
(0.10)
37
4,169
0.01
(365)
4,169
(0.09)
$
$
$
$
$
$
$
$
$
$
$
$
Table of Contents
14.
Common Stock
Share Repurchase Program
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March 22, 2016, 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” or “Plan”).
The 10b5-1 Plan became effective on March 23, 2016 and through June 30, 2016 we repurchased 99,688 shares at an aggregate cost of approximately
$454,000. The 10b5-1 Plan terminated on July 6, 2016 in accordance with its provisions. Our prior 10b5-1 Plan commenced 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 prior 10b5-1 Plan. Repurchases under both 10b5-1 Plans were administered through an independent broker.
15.
Segment Information
In fiscal 2016, 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. Additionally, effective November 30, 2015 the former San Carlos office of Huber Precision was closed and all orders
shipped since that date are manufactured at the Irvine facility.
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 2016 and 2015 (in thousands):
Fiscal 2016
Net Sales
Gross Profit
Operating Income (loss)
Depreciation and amortization expense
Total assets
Pro-Dex OMS
Fineline(1)
ESD
Corporate
Unallocated Total
$
17,158 $
4,632
1,985
536
7,414
969 $
484
(282)
11
371
1,301 $
32
(415)
67
660
730 $
255
(70)
—
186
— $
—
(692)
—
2,516
20,158
5,403
526
614
11,147
(1)
The Fineline operating loss includes $245,000 related to impairment of goodwill and long-lived assets.
48
Table of Contents
Fiscal 2015
Net Sales
Gross Profit
Operating Income (loss)
Depreciation and amortization expense
Total assets
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Revenue by geographic region, based upon the ship to address, consisted of the following (in thousands):
Revenue by geographic region:
North America
Europe
Other
Total Revenue
16.
Subsequent Events
Years ended June 30,
2015
2016
$
$
16,093 $
3,840
225
20,158 $
6,367
6,972
44
13,383
On July 21, 2016, we entered a master equipment lease agreement with Jules and Associates, Inc. to lease a specific machine used in our inspection
process. The cost of the equipment was approximately $106,000 and the lease provides for 36 monthly payments in the amount of $3,121, as well as interim
rent in the amount of $7,388. Additionally, as reported in our Current Report on Form 8-K filed with the SEC on September 12, 2016, the Company approved
the adoption of a share repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities and Exchange Act of 1934 effective
September 8, 2016.
49
Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer) have concluded, based on
their evaluation as of June 30, 2016, that the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are effective at a reasonable assurance level to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f)
under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management concluded that our internal control over financial reporting was effective as of June 30, 2016.
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, 2016, 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
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of
June 30, 2016, and delivered to stockholders in connection with our 2016 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, 2016, and delivered to stockholders in connection with our 2016 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, 2016, and delivered to stockholders in connection with our 2016 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, 2016, and delivered to stockholders in connection with our 2016 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, 2016, and delivered to stockholders in connection with our 2016 annual meeting of shareholders.
51
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
Reference is made to the Exhibit Index beginning on page 54 of this report.
52
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 15, 2016.
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
Date
President, Chief Executive Officer, and
Director (Principal Executive Officer)
September 15, 2016
Chairman of the Board, Director
September 15, 2016
Director
Director
Director
53
September 15, 2016
September 15, 2016
September 15, 2016
Table of Contents
Exhibit
No.
INDEX TO EXHIBITS
Description
3.1
3.2
3.3
3.4
10.1*
10.2*
10.3*
10.4
10.5*
10.6
10.7
10.8
10.9
10.10
10.11
10.12
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).
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).
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)
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).
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).
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).
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).
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).
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).
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)
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)
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)
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)
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)
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)
54
Table of Contents
10.13
10.14
10.15
10.16
10.17
10.18
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)
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)
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)
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)
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)
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)
10.19*
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)
10.20
10.21
10.22
10.23
10.24
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)
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)
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)
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)
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)
10.25*
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)
10.26
10.27
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)
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)
55
Table of Contents
10.28
10.29
10.30
10.31
10.32
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)
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)
Assignment of Leases and Rents, dated September 8, 2015, made by Pro-Dex Sunfish Lake, LLC 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)
Revolving Loan Agreement Modification Agreement, effective June 11, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex
Sunfish Lake, LLC (incorporated herein by reference to Exhibit 10.42 to the Company’s Form 10-K filed on September 17, 2015)
Receipt for Earnest Money Deposit and Real Estate Purchase Contract, including Addendum to Real Estate Purchase Contract, dated January 6,
2016, by and between MO Real Estate, LLC and Pro-Dex Sunfish Lake, LLC (incorporated herein by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on January 8, 2016)
10.33
Amendment to Real Estate Purchase Contract, dated February 19, 2016, by and between MO Real Estate, LLC and Pro-Dex Sunfish Lake,
LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 25, 2016)
21.1 Ω
List of Subsidiaries
23 Ω
31.1 Ω
31.2 Ω
32 Ω
Consent of Independent Registered Public Accounting Firm.
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.
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.
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
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.
56
Pro-Dex Sunfish Lake, LLC, a Delaware Limited Liability Company
Pro-Dex Riverside, LLC, a Delaware Limited Liability Company
List of Subsidiaries
Exhibit 21.1
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 and 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 15, 2016 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, 2016.
Exhibit 23
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 15, 2016
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 15, 2016
/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 15, 2016
/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, 2016 (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 15, 2016
Date: September 15, 2016
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.