UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)
(949) 769-3200
(Registrant’s telephone number, including area code)
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, smaller reporting company, or an emerging growth
company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Accelerated filer ☐
Smaller reporting company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of December 31, 2016, 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 $10.8 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 1, 2017, 4,193,791 shares of the registrant’s no par value common stock were outstanding.
Documents incorporated by reference:
Part III of this report incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for its 2017 Annual Meeting of
Shareholders. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
PRO-DEX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2017
TABLE OF CONTENTS
PART I
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
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
ITEM 6.
ITEM 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
ITEM 12.
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
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PAGE
1
6
11
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11
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12
12
13
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49
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements
are not based on historical facts but instead reflect the Company’s expectations, estimates or projections concerning future results
or events. These statements generally can be identified by the use of forward-looking words or phrases such as “believe,” “expect,”
“anticipate,” “may,” “could,” “intend,” “intent,” “belief,” “estimate,” “project,” “forecast,” “plan,” “likely,” “will,” “should” or
similar words or phrases. These statements are not guarantees of performance and are inherently subject to known and unknown
risks, uncertainties and assumptions that are difficult to predict and could cause actual results, performance or achievements to
differ materially from those expressed or indicated by those statements. The Company cannot assure you that any of its
expectations, estimates or projections will be achieved.
Forward-looking statements included in this report are only made as of the date of this report and the Company disclaims
any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances.
Numerous factors could cause the Company’s actual results and events to differ materially from those expressed or implied
by forward-looking statements, including, without limitation: loss of a significant customer, entry of new and stronger competitors,
capital availability, unexpected costs, compliance with contractual obligations, failure to capitalize upon access to new customers,
marketplace delisting, the ramifications of industry consolidation of medical products manufacturers, dealers and distributors,
managed health care, market acceptance and support of new products, cancellation of existing contracts, customer “in house”
production of products previously designed by and/or acquired from the Company, maintaining favorable supplier relationships, the
Company’s ability to engage qualified human resources as needed, regulatory compliance, general economic conditions and other
factors described under Item 1A (Risk Factors) of this report. This list of factors is illustrative, but by no means exhaustive. All
forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
ITEM 1.
BUSINESS
Company Overview
Pro-Dex, Inc. (“Company”, “Pro-Dex”, “we”, “our”, “us”) specializes in the design, development and manufacture of
powered rotary drive surgical and dental instruments used primarily in the orthopedic, spine, maxocranial facial and dental markets.
Our Fineline Molds division, acquired in fiscal 2015, manufactures plastic injection molding for a variety of industries. Pro-Dex's
products are found in hospitals, dental offices, and medical engineering labs around the world.
Through January, 2017, we also designed and manufactured multi-axis motion control systems used in factory automation
and scientific research markets and these products can be found in scientific research facilities and high tech manufacturing
operations around the world. We sold certain of the assets and the business operations of our OMS division located in Beaverton
Oregon to our long time general manager of the division. This division has been classified as a discontinued operation in
conformity with applicable accounting guidance and the assets that were sold have been reclassified as assets held for sale on our
consolidated balance sheet as of June 30, 2016. Accordingly, unless otherwise indicated, OMS’s results have been reported as
discontinued operations and removed from all financial discussions of continuing operations. (See Note 3 to the Consolidated
Financial Statements contained elsewhere in this report).
Through April, 2017, we provided engineering consulting and placement services, as well as quality and regulatory
consulting services through our Engineering Services Division. Although we continue to provide engineering, quality and
regulatory consulting services to our customers, we have ceased placement services and accordingly have disbanded our
Engineering Services Division. The cessation of placement services is not expected to have a material impact on our financial
position or results of operations.
In fiscal 2015, we acquired Huber Precision (“Huber”), a business that made custom machined parts. We made the
investment to garner a wider customer base, but the sales to the customers that were serviced by Huber dwindled over time, such
that activities have become immaterial. As a result the intangibles relating to Huber were impaired during the first quarter of fiscal
2017.
1
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.
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.)
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 surgical devices for the medical
device and dental industries. The proportion of total sales by type is as follows (in thousands, except percentages):
Medical device and services
Industrial and scientific
Dental and component
Repairs
Other
Total Sales
Years Ended June 30,
2017
2016
(In thousands)
% of Revenue
% of Revenue
$
$
18,584
882
786
302
1,389
21,943
85% $
4%
4%
1%
6%
100% $
14,292
857
1,176
809
2,055
19,189
75%
4%
6%
4%
11%
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 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
San Dimas
Total Sales
Years Ended June 30,
2017
2016
(In thousands)
% of Revenue
% of Revenue
$
$
20,987
956
21,943
96% $
4%
100% $
17,888
1,301
19,189
93%
7%
100%
2
In fiscal year 2017, our top 20 customers accounted for 94% of our sales compared to 92% in fiscal year 2016. In fiscal
2017, we had one customer, included in medical device revenue above, that accounted for 50% of sales with our next largest
customer accounting for 7% of sales. This compares to fiscal year 2016, when we had three customers, all included in medical
device revenue above, that each provided more than 10% of our revenue, cumulatively totaling 59% of 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 replaced a primary product that we sold to them with one that they now manufacture. Therefore, although we
continued to have sales to this customer in fiscal 2017, we expect revenue to this customer to continue to decline. This customer
accounted for $1.5 million or 7% of revenue in fiscal 2017, $3.6 million or 19% of revenue in fiscal 2016 and $6.6 million or 55%
of revenue in fiscal 2015.
Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place
purchase orders for specific products that were developed under various development and/or supply agreements. Our customers
may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to
manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and
electric, multi-function surgical drivers and shavers. We continue to focus a significant percentage of our time and resources on
providing outstanding products and service to our valued principal customers. Additionally, in the current fiscal year we have
realized measurable cost reductions due to our investment in machinery and equipment.
Simultaneously, we are working to build top-line sales through active proposals of new medical device products with new
and existing customers, and completed a significant engineering project during the third quarter of fiscal 2017. Our patented
adaptive torque-limiting has been very well received in the CMF market and we therefore anticipate continued investment in this
area with research and development focused on applying this technology to other surgical applications. Additionally, in April 2017
we invested in Monogram Orthopaedics Inc. (“Monogram”), a medical device start-up specializing in precision, patient specific
orthopedic implants. In conjunction with making the loan to Monogram, we were granted the exclusive right to develop, engineer,
manufacture and supply certain products on behalf of Monogram. We are hopeful that this investment will generate future revenue
streams as contemplated by planned future definitive development and supply agreements. However, we believe that this is a long-
term, strategic investment which will likely take several years to cultivate and generate meaningful additional revenue, if at all.
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.
At June 30, 2017, we had a backlog of $8.7 million compared with a backlog of $11.3 million at June 30, 2016. 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
With the sale of the OMS division this fiscal year and the conscious decision to cease the placement services through our
Engineering Services Division, we no longer have reportable segments. The OMS division was historically the only division that
was significant enough to require segment disclosures and as such, effective with this divestiture, we no longer require segment
disclosure as our business is currently run.
3
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 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 industry 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 4% and 6% of our revenue in fiscal
year 2017 and 2016, 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 fiscal 2017, we completed the development
of a surgical handpiece for a customer and began shipping products to this customer. Revenue for this development contract was
recorded under the milestone completion method and we recognized revenue of $752,000 and $367,000 during fiscal 2017 and
2016, respectively. 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. 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, but there can be no
assurance that we will be successful in these endeavors.
During each of the fiscal years ended June 30, 2017 and 2016, we incurred research and development expenses amounting
to $1.2 million, which costs exclude labor and related expenses of $247,000 and $412,000 in fiscal 2017 and 2016 respectively, that
were shared with our customers through billings for non-recurring engineering services.
Employees
At June 30, 2017, we had 76 employees comprised of 70 employees in Irvine, California and 6 in San Dimas, California as
well as 5 temporary employees working in Irvine, California. 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 were working on an ESD contract in New Jersey and the balance were working in Irvine,
California. None of our employees are a party to any collective bargaining agreements with us. We consider our relationships with
our employees to be good.
4
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 compliant with applicable ISO standards set forth by the
International Organization for Standardization.
Patents, Trademarks and Licensing Agreements
We hold patents relating to miniature rotary drive products and 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.
We have certain federally registered trademarks relating to our products, including Pro-Dex® 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.
5
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 2017, our top 20 customers accounted for 94% of our sales, with our current largest customer accounting for
50% of our sales. This customer has made purchase commitments to us through calendar 2018. The loss of this customer or 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 have replaced a primary product that we sell with one that they now manufacture. Therefore, although we expect to continue
to have sales to this customer in fiscal 2018, 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 2017, we derived 85% 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.
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.
6
In fiscal 2017 we invested in Monogram Orthopaedics Inc. (“Monogram”), a start-up technology company which requires
additional funding to complete its regulatory path. If Monogram is not successful in raising the funds it needs to bring its
technology to market, it could negatively impact our results of operations and financial condition.
We recently invested $450,000 in Monogram through a secured convertible promissory note, which funds shall be used as
seed money to assist Monogram in progressing to its next stage of financing, which additional financing we understood will be
required to allow Monogram to complete its FDA regulatory approval requirements. If Monogram is not successful in raising the
additional capital it requires, we may need to impair our existing and/or future investments in Monogram, which would be adverse
to our results of operations and financial condition.
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 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 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 market is 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
We rely heavily on our proprietary technology, which, if not properly protected or if deemed invalid, could have a material
adverse effect on our business, results of operations and financial condition.
We are dependent on the maintenance and protection of our proprietary technology and rely on patent filings, exclusive
development and supply agreements, confidentiality procedures and employee nondisclosure agreements to protect it. There can be
no assurance that the legal protections and precautions taken by us will be adequate to prevent misappropriation of our technology
or that competitors will not independently develop technologies equivalent or superior to ours. Further, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the laws of the United States and are often not enforced as
vigorously as those in the United States.
We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can
be no assurance that others will not assert infringement or trade secret claims against us with respect to our current or future
products. Assertions or claims by others, whether or not valid, could cause us to incur significant legal costs defending our
intellectual property rights and potentially require us to enter into a license agreement or royalty arrangement with the party
asserting the claim or to cease our use of the infringing technology, any of which could have a material adverse effect on our
business, results of operations and financial condition.
Two of our directors hold voting power with respect to a substantial portion of our outstanding common stock that enables
them to have significant influence over the outcome of all matters submitted to our shareholders for approval, which
influence may conflict with our interests and the interests of other shareholders.
As of August 18, 2017, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, controlled voting power over
approximately 41% (27% and 14%, 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
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
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 as well as environmental pollution, 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
industry. 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 2017 and 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
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 $39,452 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 San Dimas office and manufacturing facility is located at 210 West Arrow Highway, Suites C & D, San Dimas,
California 91773. The 3,680 square foot facility is leased from an unrelated third party, at a base monthly lease rate of $2,870
through the expiration of the lease in February 2019. The suites are located in a one-story building in an approximately 35-year-old
industrial office complex and are in fair condition.
The current leased facilities are believed to be adequate for our expected needs. We believe each facility is in full
compliance with applicable state, EPA and other agency environmental standards.
ITEM 3.
LEGAL PROCEEDINGS
See Note 11 of Notes to Consolidated Financial Statements contained elsewhere in this report.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
11
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, 2017, the last sale price of our common stock as reported by NASDAQ
was $7.50 per share.
Year ended June 30, 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended June 30, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
6.53 $
5.26
5.60
6.15
2.79 $
2.78
3.82
5.61
4.41
4.10
4.55
4.30
2.00
2.37
2.24
3.32
Holders
As of September 8, 2017, there were 143 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
There were no repurchases during the fourth quarter of fiscal 2017.
Recent Sales
In February 2017, our Board approved an At The Market Offering Agreement (“ATM” or ATM Agreement”) with
Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows the Company to sell shares of its common stock
pursuant to specific parameters defined by the Company as well as those defined by the SEC and the ATM Agreement. During the
fiscal quarter ended June 30, 2017 we sold 8,276 shares of common stock and raised proceeds of $48,000 net of commissions and
paid fees to Ascendiant totaling $1,500. The shares were sold pursuant to the Company’s shelf registration statement on Form S-3,
as amended (File No. 333-215032) which was declared effective on February 8, 2017 by the SEC.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
12
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, 2017 and 2016.
The income from discontinued operations included in our consolidated statement of operations relates to the sale of our OMS
division, which we sold in January, 2017.
The Company, headquartered in Irvine, California specializes in the design, development and manufacture of autoclavable,
battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, spine, and maxocranial
facial markets. The Company also sells dental instruments and rotary air motors. 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. Through April, 2017, we provided engineering consulting and
placement services, as well as quality and regulatory consulting services through our Engineering Services Division. Although we
continue to provide engineering, quality and regulatory consulting services to our customers, we have ceased placement services
and accordingly have disbanded our Engineering Services Division. The cessation of placement services is not expected to have a
material impact on our financial position or results of operations.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America (“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 “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.
13
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.
Investments
Investments reported on the June 30, 2017 balance sheet consist of marketable equity securities of publicly held companies.
The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized.
Investments are marked to market at each measurement date, with unrealized gains and losses, net of income taxes, presented as
adjustments to accumulated other comprehensive income or loss.
Long-lived Assets
We review the recoverability of long-lived assets, consisting of equipment and leasehold improvements, when events or
changes in circumstances occur that indicate carrying values may not be recoverable.
Goodwill & Intangibles
We recorded goodwill and a trade name in conjunction with the asset purchase of Fineline Molds during fiscal 2015. We
assess the potential impairment of goodwill and trade name 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.
14
Notes Receivable
Notes receivable are stated at unpaid principal balance and are subject to impairment losses. Management considers a note
impaired when based upon current information or factors it is probable that the principal and interest payments will not be
collected, or converted to equity, according to the terms of the secured convertible promissory note.
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, 2017 and
2016 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 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. In evaluating our ability to recover our
deferred tax assets, we consider all available positive and negative evidence, including reversals of deferred tax liabilities, projected
future taxable income and results of recent operations. The assumptions about future taxable income require significant judgment
and are consistent with the plans and estimates we are using to manage the underlying business. In evaluating the objective
evidence that historical results provide, we consider three years of cumulative operating income (loss). During fiscal 2017, we
released approximately $3.3 million of the tax effected valuation allowance, as the Company determined that it was more likely
than not that it would generate sufficient levels of profitability to realize substantially all of its deferred tax assets.
Results of Operations for the Fiscal Year Ended June 30, 2017 Compared to the Fiscal Year Ended June 30, 2016
The following tables set forth results from continuing operations for the fiscal years ended June 30, 2017 and 2016:
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
Other income, net
Income from continuing operations before income taxes
Income tax expense (benefit)
Net income from continuing operations
2017
Years Ended June 30,
(Dollars in thousands)
2016
% of Net Sales
% of Net Sales
$
$
21,943
14,757
7,186
585
2,529
113
1,225
4,452
2,734
18
2,752
(2,089)
4,841
100% $
67%
33%
3%
12%
1%
6%
20%
12%
—
13%
(10%)
22% $
19,189
14,271
4,918
780
1,882
245
1,204
4,111
807
321
1,128
25
1,103
100%
74%
26%
4%
10%
1%
6%
21%
4%
2%
6%
—
6%
15
Net Sales
The majority of our revenue is derived from designing, developing and manufacturing powered surgical instruments for
medical device original equipment manufacturers, dental instruments, and rotary air motors. 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,
2017
2016
(Dollars in thousands)
% of Net Sales
% of Net Sales
Increase
(Decrease)
From 2016
To 2017
$
$
18,584
882
786
302
1,389
21,943
85% $
4%
4%
1%
6%
100% $
14,292
857
1,176
809
2,055
19,189
75%
4%
6%
4%
11%
100%
30%
3%
(33%)
(63%)
(32%)
14%
Net sales in fiscal 2017 increased by $2.8 million, or 14%, as compared to fiscal 2016, due primarily to an increase in
medical device sales of $4.3 million offset by a decrease in dental and component revenue of $390,000, repair revenue of $507,000
and other revenue of $666,000. During fiscal 2017 sales to our largest customer increased by $5.9 million to $10.9 million up from
$5.0 million in fiscal 2016. We manufacture a surgical handpiece designed to be used in orthopedic surgery applications for this
customer and we ramped up sales volume to approximately 150 units per month during fiscal 2017 year compared to an average of
50 to 100 units during fiscal 2016. Offsetting the increases from this customer, sales to our oldest and formerly most significant
customer in medical device have decreased by approximately $2.1 million, from $3.6 million to $1.5 million, of which
approximately $500,000 relates to repairs, this fiscal year compared to the prior fiscal year. This customer replaced a primary
product that we used to sell to them with one that they now manufacture. Therefore, although we expect to continue to have sales to
this customer in fiscal 2018, we expect revenue to this customer to continue to decline.
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
$390,000 in fiscal 2017 compared to the prior fiscal year. Our repair revenue declined $507,000 in fiscal 2017 compared to fiscal
2016, driven by the reduced sales to our former largest medical device customer, described above. Finally, our other revenue
decreased $666,000 in fiscal 2017 compared to the prior fiscal year and it includes revenue generated from our Fineline Molds and
Engineering Services Division of $956,000 and $437,000, respectively, in the current year, representing decreases of $345,000 and
$293,000, respectively, compared to fiscal 2016. The $345,000 decrease in sales of Fineline Molds is due in part to fiscal 2017
sales mix being comprised of more repair and smaller jobs as compared to the prior fiscal year. The $293,000 decrease in
Engineering Services Division revenue relates to the completion of the contract for temporary employees in New Jersey. As
indicated previously, in April 2017 we made a conscious decision to disband our Engineering Services Division.
At June 30, 2017, we had a backlog of $8.7 million compared with a backlog of $11.3 million at June 30, 2016. 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.
16
Cost of Sales and Gross Margin
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
Years Ended June 30,
2017
2016
(Dollars in thousands)
% of Net Sales
% of Net Sales
Increase
(Decrease)
From 2016
To 2017
$
$
14,597
—
115
45
14,757
67% $
—
—
—
67% $
14,587
62
(594)
216
14,271
76%
—
(3%)
1%
74%
—
(100%)
119%
(79%)
3%
Cost of sales in fiscal 2017 increased $486,000, or 3%, from fiscal 2016, due primarily to a $709,000 increase in absorption
of manufacturing overhead offset by a decrease in inventory and warranty charges of $171,000 and accrued losses on product
development services of $62,000. The increase in total costs of sales is less than the 14 percent increase in revenue for the same
period, due in large part to savings made by in-sourcing previously out-sourced manufactured parts. Our gross margin increased
from 26 percent in fiscal 2016 to 33 percent in fiscal 2017, largely due to these savings. During fiscal 2017 we did not incur any
losses from the development services portion of certain contracts compared to $62,000 in fiscal 2016, due to improved project
management. Under-absorption of manufacturing costs increased by $709,000 for fiscal 2017 compared to fiscal 2016 due
primarily to adjustments made to lower our standard labor and overhead rates at the beginning of fiscal 2017 in anticipation of
higher manufacturing volumes. Costs related to inventory and warranty charges decreased $171,000 in fiscal 2017 compared to
2016 due primarily to $337,000 in decreased warranty expenses and an increase of $166,000 in inventory charges.
Operating Expenses
Operating expenses:
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible assets
Research and development costs
Years Ended June 30,
2017
2016
(Dollars in thousands)
% of Net Sales
% of Net Sales
Increase
(Decrease)
From 2016
To 2017
$
$
585
2,529
113
1,225
4,452
3% $
11%
—
6%
20% $
780
1,882
245
1,204
4,111
4%
10%
1%
6%
21%
(25%)
34%
(54%)
2%
8%
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)
ESD Division (Irvine)
Fineline Division (San Dimas)
Years Ended June 30,
2017
2016
(Dollars in thousands)
% of Total
% of Total
Decrease
From 2016
To 2017
188
262
135
585
32% $
45%
23%
100% $
254
325
201
780
32%
42%
26%
100%
(26%)
(19%)
(33%)
(25%)
$
$
17
Selling expenses for Pro-Dex Irvine during the fiscal year ended June 30, 2017 decreased $66,000, or 26%, compared to
fiscal 2016 mostly due to the fact that the Huber intangible assets which had been amortized in the prior fiscal year were impaired
during the first quarter of fiscal 2017. The prior fiscal year amortization accounts for approximately $30,000 of the decrease, with
the remaining decrease related to reduced commission and bonus expense of $20,000 and external consulting fees of $13,000. As
previously discussed we disbanded our engineering services division (“ESD”) during the fourth quarter of fiscal 2017, due to poor
performance, resulting in selling expenses for this division decreasing $63,000 in fiscal 2017 compared to fiscal 2016, mostly due
to reduced personnel expenses. The decrease in the Fineline division selling expenses in fiscal 2017 is due to reduced commission
expense of approximately $40,000 and a recovery of bad debt expense in the amount of $15,000, which amount had been expensed
during fiscal 2016.
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 $647,000 increase in G&A expenses from fiscal 2016 to
2017 is due primarily to bonus accruals and increased legal and professional fees. Much of the increased legal fees relate to the
ongoing litigation described in Note 11 of the Consolidated Financial Statements contained elsewhere in this report.
Impairment of goodwill and intangible assets relates to the Huber customer list during fiscal 2017 and Fineline during fiscal
2016 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.
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. While the increase in research and
development costs was only $21,000 in fiscal 2017 as compared to fiscal 2016, the specific cost components did fluctuate.
Personnel and related expenses decreased by $262,000 offset by reduced billings to customers in the amount of $165,000 for NRE
services and spending on a particular internal development project increased by $109,000.
Interest Expense
Interest expense consists primarily of interest expense related to the loans and notes payable described more fully in Note
10 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.
Income Taxes
The effective tax rate for the year ended June 30, 2017 is lower that the statutory rate primarily because we released a
valuation allowance during the year in the amount of $3.3 million. Management concluded that it is more likely than not, that
substantially all of its deferred tax assets will be realized, in part because in the current fiscal year, we achieved three years of
cumulative pre-tax income and we have forecasted future income. The effective tax rate for the year ended June 30, 2016 is lower
than the statutory tax rate due to our utilization of federal and state loss carryforwards.
The $2.1 million of income tax benefit recorded to continuing operations for fiscal 2017 consists of the $3.3 million benefit
from the reduction of the valuation allowance, including $2.4 million federal benefit and $900,000 state benefit net of federal
impact, offset by $900,000 of federal and state income taxes on current year income from continuing operations and by
approximately $300,000 of tax expense for a reduction of state tax losses recorded in prior years.
We expect our effective tax rates for fiscal 2018 to be much closer to statutory rates.
18
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,
2017
2016
(In thousands)
$
$
$
$
$
3,235 $
(1,026) $
(298) $
466
1,588
(457)
4,205 $
9,341 $
2,294
7,135
Cash provided by operating activities during fiscal 2017 was $3.2 million and relates primarily to our net income of $5.1
million offset by the non-cash increase in the deferred income tax receivables of $2.0 million due to the current year reversal of the
valuation allowance. The changes in operating assets and liabilities net to a decrease of approximately $125,000.
Cash provided by operating activities during fiscal 2016 relates primarily to our net income of $822,000 and non-cash
impairment charge of $245,000 and non-cash depreciation and amortization of $614,000 offset by both the gain on sale of Ramsey
in the amount of $340,000 and 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 Flows from Investing Activities
Net cash used in investing activities in fiscal 2017 was $1.0 million. During the 2017 fiscal year, we invested $663,000 in
the purchase of marketable equity securities under the direction of the Investment Committee of our Board, made capital
expenditures in the amount of $606,000 primarily for manufacturing equipment and invested $450,000 in Monogram Orthopaedics
Inc. through a promissory note as further described in Note 9 to the Consolidated Financial Statements contained elsewhere in this
report. We also sold our OMS division in January 2017 for proceeds of $636,000.
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.
Cash Flows from Financing Activities
During fiscal 2017 we borrowed and repaid the principal amount of $600,000 from Summit Financial Resources LP
(“Summit”) and we spent $312,000 on the repurchase of 63,496 shares of our common stock pursuant to the share repurchase
program described in more detail below.
During fiscal 2016 we borrowed and repaid the principal amount of $1.7 million and $500,000 from Summit and Fortitude
Income Funds LLC, respectively. 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.
19
Liquidity Requirements for the Next 12 Months
As of June 30, 2017, our working capital was $9.3 million. We currently believe that our existing cash and cash equivalent
balances together with our account receivable balances, will provide us sufficient funds to satisfy our cash requirements as our
business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to
derive a portion of our liquidity from our cash flows from operations. We may also borrow against our $500,000 Revolving Loan
Facility from Farmers & Merchants Bank of Long Beach.
We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in
those development programs and products that we believe will most likely contribute to our profitability. As we execute on our
current strategy, however, we may require debt and/or equity capital to fund our working capital needs and requirements for capital
equipment to support our manufacturing and inspection processes. In particular, we have experienced negative operating cash flow
in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject to extensive variability.
We believe that if we need to raise additional capital to fund our operations we can do so by selling additional shares of our
common stock through our ATM.
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;
Selection of an Investment Committee responsible for implementing the Policy; and
(b)
(c) Objectives and criteria under which investments may be made.
The Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot and Van Kirk.
The Investment Committee approved each of the investments comprising the $718,000 of marketable public equity
securities held at June 30, 2017, which amount includes unrealized holding gains in the amount of $33,000, net of taxes at June 30,
2017.
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 has approved the adoption of several prearranged share repurchase plans intended to
qualify for the safe harbor Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During
the quarter ended September 30, 2016, our Board approved a 10b5-1 Plan, which became effective on September 8, 2016 and
terminated on the earlier of September 8, 2017 or when and if the maximum shares are repurchased. During the quarter ended
December 31, 2016, the Investment Committee of our Board approved an additional concurrently running 10b5-1 Plan, which
became effective on December 8, 2016 and terminates on the earlier of December 8, 2017 or when and if the maximum shares are
repurchased. During the fiscal year ended June 30, 2017, we repurchased 63,496 shares at an aggregate cost of $312,000, inclusive
of fees under the Plans. On a cumulative basis, we have repurchased a total of 232,957 shares under the share repurchase program
at an aggregate cost of $920,000. All repurchases under the 10b5-1 Plans were administered through an independent broker. In
February, 2017 our Board terminated the two effective 10b5-1 Plans in conjunction with the approval of the Company’s ATM
described further in Note 15 of Notes to Consolidated Financial statements contained elsewhere in this report.
20
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. Application of the guidance in ASU 2014-09 is expected to require
more judgment and estimates within the revenue recognition process compared to existing GAAP. ASU 2014-09 is required to be
adopted by the Company in the first quarter of fiscal 2019. The Company expects to adopt the requirements of ASU 2014-09 using
the modified retrospective adoption method. The Company also expects that disclosures related to revenue recognition including
judgments made will increase compared to existing GAAP. The Company is currently evaluating the impact of the future adoption
of ASU 2014-09 on its consolidated financial statements and does not currently expect significant changes in the timing of revenue
recognition compared to existing GAAP.
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. While we are
still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our
leases, we expect the adoption will lead to a material increase in the assets and liabilities recorded on our consolidated balance
sheet.
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. This guidance will impact our accounting related to future
exercises or forfeiture of stock option awards.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), “Classification of Certain Cash
Receipts and Cash Payments”. This update provides guidance on eight specific cash flow issues: (1) debt prepayment or debt
extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business
combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life
insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7)
beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance
principle. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is permitted. We do not expect the application of this guidance to have a material impact on our
consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update 2017-09, “Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting” (“ASU 2017-09”). The update provides guidance as to which changes to the terms or
conditions of a share-based payment award should be accounted for as a modification under Topic 718. Specifically, an entity
would not apply modification accounting if the fair value, vesting conditions, and classification of an award as an equity or liability
instrument are the same immediately before and after the modification. The standard is effective for the Company for annual
periods beginning after December 15, 2017. Early adoption is permitted and prospective application is required. The Company is
currently evaluating the impact of the adoption of ASU 2017-09 on its consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL 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, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Income, Years Ended June 30, 2017 and 2016
Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2017 and 2016
Consolidated Statements of Cash Flows, Years Ended June 30, 2017 and 2016
Notes to Consolidated Financial Statements
Page
23
24
25
26
27
29
22
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Pro-Dex, Inc.
We have audited the accompanying consolidated balance sheets of Pro-Dex, Inc. and Subsidiaries (the “Company”) as of June 30,
2017 and 2016 and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash
flows for each of the two years in the period ended June 30, 2017. 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 audits 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 consolidated
financial position of Pro-Dex, Inc. and Subsidiaries as of June 30, 2017 and 2016, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended June 30, 2017, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 14, 2017
23
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Investments
Accounts receivable, net of allowance for doubtful accounts of $3 and $20 at June 30, 2017 and 2016, respectively
Due from factor
Deferred costs
Assets held for sale
Other current receivables
Inventory
Prepaid expenses
Total current assets
Plant, equipment and leasehold improvements, net
Goodwill
Intangibles, net
Deferred income taxes, net
Notes receivable (See Note 9)
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 rent
Notes and capital leases 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; 4,025,193 and 4,052,987 shares issued and outstanding at
June 30, 2017 and 2016, respectively
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
24
$
$
$
June 30,
2017
2016
4,205 $
718
3,538
—
12
—
86
3,085
277
11,921
1,429
112
320
2,048
450
71
16,351 $
1,159 $
1,344
19
—
26
32
2,580
—
61
61
2,641
2,294
—
1,469
1,419
238
287
91
3,364
129
9,291
1,222
112
451
—
—
71
11,147
841
1,076
212
1
26
—
2,156
68
46
114
2,270
17,704
33
(4,027)
13,710
16,351 $
17,988
—
(9,111)
8,877
11,147
$
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling expenses
General and administrative expenses
Impairment of goodwill and intangible assets
Research and development costs
Total operating expenses
Operating income
Other income (expense):
Interest and dividend income
Gain from sale of Investment in Ramsey Property
Gain from disposal of equipment
Interest expense
Total other income
Income from continuing operations before income taxes
Income tax (expense) benefit
Net income from continuing operations
Income (loss) from discontinued operations, net of income taxes
Net income
Other comprehensive income, net of tax:
Unrealized gain from marketable equity investments, net of income taxes
Comprehensive income
Basic income (loss) per share:
Net income from continuing operations
Income (loss) from discontinued operations
Net income
Diluted income (loss) per share:
Net income from continuing operations
Income (loss) from discontinued operations
Net income
Weighted average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
25
Years Ended June 30,
2017
2016
$
21,943 $
14,757
7,186
19,189
14,271
4,918
585
2,529
113
1,225
4,452
2,734
27
—
3
(12)
18
2,752
2,089
4,841
243
5,084 $
33
5,117 $
1.20 $
0.06
1.26 $
1.19 $
0.06
1.25 $
780
1,882
245
1,204
4,111
807
—
340
18
(37)
321
1,128
(25)
1,103
(281)
822
—
822
0.27
(0.07)
0.20
0.27
(0.07)
0.20
4,040,308
4,077,575
4,141,353
4,173,556
$
$
$
$
$
$
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For The Years Ended June 30, 2016 and 2015
(In thousands, except share data)
Common Shares
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Amount
Balance at June 30, 2015
Net income
Exercise of stock options
ESPP shares issued
Share-based compensation
Share repurchases
Balance at June 30, 2016
Net income
Exercise of stock options(1)
Net change in unrealized gain from marketable equity investments
ESPP shares issued
Share-based compensation
Shares issued under ATM(2)
Share repurchases
Balance at June 30, 2017
———————
(1) During fiscal 2017 a total of 33,834 stock options were exercised and a total of 10,202 shares were used to effect a cashless exercise.
(2)
18,411 $
—
16
11
4
(454)
17,988 $
—
7
—
18
3
—
(312)
17,704 $
— $
—
—
—
—
—
— $
—
—
33
—
Number of
Shares
4,139,579 $
—
7,500
5,596
—
(99,688)
4,052,987 $
—
23,632
—
3,794
—
8,276
(63,496)
4,025,193 $
—
—
33 $
(9,933) $
822
—
—
—
—
(9,111) $
5,084
—
—
—
—
—
(4,027) $
The proceeds raised from the ATM shares issued in the net amount of $48,000 were accounted for as a reduction of prepaid expenses related to
establishing the ATM.
8,478
822
16
11
4
(454)
8,877
5,084
7
33
18
3
—
(312)
13,710
See notes to consolidated financial statements.
26
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
2016
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
5,084 $
Depreciation and amortization
Gain on sale of OMS
Gain on sale of investment in Ramsey
Gain on sale or disposal of equipment
Impairment of goodwill and intangible assets
Share-based compensation
Deferred income tax benefit
Allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable, due from factor and other current receivables
Deferred costs
Assets held for sale
Inventory
Prepaid expenses and other assets
Accounts payable, accrued expenses and deferred rent
Deferred revenue
Income taxes payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements
Proceeds from sale of OMS
Purchase of notes receivable (See Note 9)
Investment in Ramsey property and related notes receivable
Proceeds from sale of investment in Ramsey
Proceeds from sale of equipment
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 shares issued under ATM
Proceeds from note payable
Borrowings from Summit loan
Repayments on Summit loan
Repurchases of common stock
Proceeds from exercise of stock options and ESPP contributions
Net cash used in financing activities
Net increase 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.
27
555
(327)
—
(3)
113
3
(2,048)
(17)
(633)
226
(22)
279
(299)
518
(193)
(1)
3,235
(606)
636
(450)
—
86
3
(32)
(663)
(1,026)
(59)
48
—
600
(600)
(312)
25
(298)
1,911
2,294
4,205 $
$
822
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
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Capital lease for the acquisition of equipment
Value of shares surrendered in connection with a stock option exercise
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Years Ended June 30,
2016
2017
$
$
$
$
105 $
64 $
217 $
12 $
—
—
21
37
See notes to consolidated financial statements.
28
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business
Pro-Dex, Inc. (“Pro-Dex”, the “Company”, “we”, “us” or “our”) specializes in the design and manufacture of powered
surgical and dental instruments used primarily in the orthopedic, spine, maxocranial facial and dental markets. Our Fineline Molds
division, acquired in fiscal 2015, manufactures plastic injection molding for a variety of industries. Pro-Dex’s products are found in
hospitals, dental offices, and medical engineering labs around the world.
Through January, 2017, we also designed and manufactured multi-axis motion control systems used in factory automation
and scientific research markets and these products can be found in scientific research facilities and high tech manufacturing
operations around the world. (See Note 3)
Through April, 2017, we provided engineering consulting and placement services, as well as quality and regulatory
consulting services through our Engineering Services Division. Although we continue to provide engineering, quality and
regulatory consulting services to our customers, we have ceased placement services and accordingly have disbanded our
Engineering Services Division. The cessation of placement services is not expected to have a material impact on our financial
position or results of operations.
In fiscal 2015, we acquired Huber Precision (“Huber”), a business that made custom machined parts. We made the
investment to garner a wider customer base, but the sales to the customers that were serviced by Huber dwindled over time, such
that activities have become immaterial. As a result, the intangibles relating to Huber were impaired during the first quarter of fiscal
2017.
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 “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.
29
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Returns of our product for credit are minimal; accordingly, we do not establish a reserve for product returns at the time of
sale.
Estimated Losses on Product Development Services
Cost and revenue estimates related to the product development service portions of development and supply contracts are
reviewed and updated quarterly. When it is probable that total costs from the development portion of such contracts will exceed
product development service revenue, the expected loss is recognized immediately in cost of sales. Contract costs include all direct
material, labor and those indirect costs related to contract performance.
Due to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant
judgment. It is based upon the knowledge and experience of our project managers, engineers, and finance professionals. Factors
that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development
portion of development and supply contracts include, among others, the nature and complexity of the work to be performed,
availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and
expected costs for specific regulatory approvals.
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,
2017 and 2016 cash equivalents consisted of investments in money market funds.
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. Cost includes materials, labor and
manufacturing overhead related to the purchase and production of inventories. 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. On an on-going basis, we evaluate inventory for
obsolescence and slow-moving items. This evaluation includes analysis of historical sales and usage, existing demand, as well as
specific factors known to management. As of June 30, 2017, there was approximately $50,000 of inventory in-transit.
30
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Investments reported on the June 30, 2017 balance sheet consist of marketable equity securities of publicly held companies.
The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized.
Investments are marked to market at each measurement date, with unrealized gains and losses, net of income taxes, presented as
adjustments to accumulated other comprehensive income or loss.
Long-lived Assets
We review the recoverability of long-lived assets, consisting of plant, equipment and leasehold improvements, when events
or changes in circumstances occur that indicate carrying values may not be recoverable.
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
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. There were no business acquisitions during fiscal 2017 and 2016.
Goodwill & Intangibles
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 above under “Business
Combinations,” we 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. Both the software development costs and
corresponding accumulated amortization were offset during the first quarter of fiscal 2017. 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. The expense associated with the amortization of the covenants not to
compete and customer list is recognized in selling expenses.
Notes Receivable
Notes receivable are stated at unpaid principal balance and are subject to impairment losses. Management considers a note
impaired when based upon current information or factors it is probable that the principal and interest payments will not be
collected, or converted to equity, according to the terms of the secured convertible promissory note.
31
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
and 2016 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, 2017 and 2016, and throughout the fiscal years then ended, we had deposits in
excess of federally insured limits. Credit sales are made to original equipment manufacturers and resellers throughout the world,
and sales to such customers account for a substantial portion of our trade receivables. While such receivables are not collateralized,
we evaluate their collectability based on several factors including customers’ payment histories.
Compensation Plans
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.
32
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 14, unless the effect of such exercise is to increase income, or decrease
loss, per common share.
Fair Value Measurements
Fair value is measured based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that
prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in
active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable;
and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its
own assumptions.
Cash and cash equivalents: The carrying value of cash and cash equivalents is considered to be representative of their fair
values based on the short term nature of these instruments. As such, cash and cash equivalents are classified within Level 1 of the
valuation hierarchy.
Investments: Investments consist of marketable equity securities of publicly held companies. As such, investments are
classified within Level 1 of the valuation hierarchy.
Notes receivable: This investment is classified within Level 3 of the valuation hierarchy for purposes of evaluating potential
impairment of these assets as of June 30, 2017. The fair value of the notes receivable was based upon the cost basis of the
investment as well as our internal assessment of the value of the underlying technology.
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 $3,000 and $4,000 for the fiscal years ended
June 30, 2017 and 2016, respectively.
Recent Accounting Standards
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers,"
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to
recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced revenue related
disclosures. Application of the guidance in ASU 2014-09 is expected to require more judgment and estimates within the revenue
recognition process compared to existing GAAP. ASU 2014-09 is required to be adopted by the Company in the first quarter of
fiscal 2019. The Company expects to adopt the requirements of ASU 2014-09 using the modified retrospective adoption method.
The Company also expects that disclosures related to revenue recognition including judgments made will increase compared to
existing GAAP. The Company is currently evaluating the impact of the future adoption of ASU 2014-09 on its consolidated
financial statements and does not currently expect significant changes in the timing of revenue recognition compared to existing
GAAP.
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. While we are
still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our
leases, we expect the adoption will lead to a material increase in the assets and liabilities recorded on our consolidated balance
sheet.
33
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO 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. This guidance will impact our accounting related to future
exercises or forfeiture of stock option awards.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), “Classification of Certain Cash
Receipts and Cash Payments”. This update provides guidance on eight specific cash flow issues: (1) debt prepayment or debt
extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business
combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life
insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7)
beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance
principle. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is permitted. We do not expect the application of this guidance to have a material impact on our
consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update 2017-09, “Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting” (“ASU 2017-09”). The update provides guidance as to which changes to the terms or
conditions of a share-based payment award should be accounted for as a modification under Topic 718. Specifically, an entity
would not apply modification accounting if the fair value, vesting conditions, and classification of an award as an equity or liability
instrument are the same immediately before and after the modification. The standard is effective for the Company for annual
periods beginning after December 15, 2017. Early adoption is permitted and prospective application is required. The Company is
currently evaluating the impact of the adoption of ASU 2017-09 on its consolidated financial statements.
Reclassifications
The short-term portion of deferred rent, in the amount of $79,000 as of June 30, 2016, has been reclassified to accrued
liabilities to conform to the current period presentation. As described in more detail in Note 3 below, the assets sold relating to the
Company’s Oregon Micro Systems (“OMS”) division have been reclassified as assets held for sale in accordance with applicable
accounting guidance. These reclassifications had no impact on our consolidated net income.
3.
Discontinued Operations
On January 27, 2017, we sold certain of the assets and the business operations of our OMS division located in Beaverton
Oregon. We sold the business to our long time general manager of the division. The sale was structured as an asset sale as disclosed
in a Form 8-K filed with the SEC on January 30, 2017. The aggregate sales price received was $636,000, and no liabilities other
than warranty obligations were assumed by the buyer. As a result of the sale, this division has been classified as a discontinued
operation in conformity with applicable accounting guidance and the assets that were sold have been reclassified as assets held for
sale on our consolidated balance sheet as of June 30, 2016. Accordingly, unless otherwise indicated, OMS’s results have been
reported as discontinued operations and removed from all financial discussions of continuing operations.
The following summarizes the carrying values of the assets sold as of June 30, 2016 (in thousands):
Assets held for sale:
Inventory
Fixed assets
Prepaid expenses
Other assets
Assets held for sale
June 30,
2016
$
$
209
64
5
9
287
The divestiture was completed in support of raising capital to invest in our core medical device product development
efforts.
34
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating results of the OMS division are as follows (in thousands):
Revenues
Income (loss) from discontinued operations:
Gain on sale, net of taxes of $126,000
Income (loss) from discontinued operations, before taxes
Income tax (expense) benefit
Net income (loss) from discontinued operations
Years Ended June 30,
2016
2017
715 $
969
201 $
68
(26)
243 $
—
(281)
—
(281)
$
$
$
Income from discontinued operations consists of direct revenues and direct expenses of the OMS business, including cost of
revenues, as well as other fixed costs to the extent that such costs will be eliminated as a result of the sale. The Company
historically did not allocate corporate overhead to this division. Additionally, the OMS division has historically been the only
division that was significant enough to require segment disclosures and as such, effective with this divestiture, we no longer require
segment disclosure as our business is currently run.
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 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.
The following table presents the changes in the carrying amount of the Fineline goodwill and trade name during fiscal 2016
(there were no changes to the carrying amounts during fiscal 2017 (in thousands):
Balance at July 1, 2015
Impairment charge
Balance at June 30, 2016 and 2017
Goodwill
Trade name
$
$
353 $
(241)
112 $
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 performed during fiscal 2016, 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 intangible assets" in our consolidated
statements of operations.
35
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although there was no impairment charge for goodwill or indefinite-lived intangibles during the fiscal year ended June 30,
2017, we did record an impairment charge in the amount of $113,00 relating to the customer list of Huber as described in Note 5
below.
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
Investments
Investments are stated at market value and consist of the following (in thousands):
Marketable equity securities
June 30,
2017
2016
$
718 $
—
Investments at June 30, 2017 had an aggregate cost basis of $663,000 and gross unrealized gains of $55,000 and related tax
expense of approximately $22,000 recorded in other comprehensive income.
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
Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in thousands):
Office furnishings and fixtures
Machinery and equipment
Leasehold improvements
Total
Less: Accumulated depreciation and amortization
36
June 30,
2017
2016
1,127 $
747
1,018
193
3,085 $
1,462
818
1,010
74
3,364
June 30,
2017
2016
1,819 $
5,289
2,119
9,227
(7,798)
1,429 $
1,761
4,796
2,088
8,645
(7,423)
1,222
$
$
$
$
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended June 30, 2017 and 2016 amounted to $505,000 and $486,000, respectively. During
the current fiscal year, fully depreciated assets in the amount of approximately $130,000 were either retired or sold. In conjunction
with the sale of the OMS division during the fiscal year ended June 30, 2017, assets with a cost basis of $410,000 and accumulated
amortization totaling $346,000 have been eliminated from the June 30, 2016 balances above, consistent with the discontinued
operations presentation previously described.
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,
2017
2016
$
$
$
— $
52
50
167
153
422 $
(102)
320 $
73
52
50
316
121
612
(161)
451
Amortization expense for the years ended June 30, 2017 and 2016 amounted to $50,000 and $117,000 respectively.
Capitalized software development costs relate to internally developed software, which was fully amortized during fiscal
2016 and both the software development costs and corresponding accumulated amortization were offset during the first quarter of
fiscal 2017. Both the covenant not to compete and the customer list and backlog relate to assets acquired in conjunction with the
business acquisitions described in Note 1 above and are being amortized over various periods not to exceed ten years. The customer
backlog has been fully amortized and both the cost and related accumulated amortization have been offset during the current fiscal
year. During the first quarter of fiscal 2017, we recognized an impairment charge for the remaining un-amortized customer list
related to the Huber business in the amount of $113,000, as we do not expect there to be any significant future cash flows resulting
from these customer relationships and have written-off the cost basis and accumulated amortization during the current fiscal year.
The trade name relates exclusively to Fineline and has an indefinite life, subject to impairment loss assessment annually, or more
frequently 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:
2018
2019
2020
2021
2022
Thereafter
Total expected amortization
37
Amortization
Expense
$
$
48
55
51
46
36
34
270
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Warranty
Payroll and related items
Accrued bonuses
Accrued legal and professional fees
Deferred rent
Accrued sales, use and excise taxes
Accrued losses on development contracts
Accrued inventory in transit
Other
6.
Warranty Accrual
June 30,
2017
2016
$
$
159 $
417
390
151
68
9
—
52
98
1,344 $
365
443
—
60
79
7
28
11
83
1,076
Information relating to the accrual for warranty costs for the years ended June 30, 2017 and 2016 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,
2017
2016
$
$
365 $
316
(224)
(298)
159 $
261
350
(154)
(92)
365
Warranty expense relating to new product sales and changes to estimates was $92,000 and $196,000, respectively, for the
fiscal years ended June 30, 2017 and 2016.
7.
Income Taxes
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,
2017
2016
$
$
34 $
40
(1,263)
(900)
(2,089) $
11
14
—
—
25
38
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
Income (loss) from continuing operations before income taxes
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)
Years Ended June 30,
2017
2016
Amount
Percent Pretax
Income
Amount
Percent Pretax
Income
2,752
100% $
1,128
100%
936
270
(36)
(3,252)
—
—
(7)
(2,089)
34% $
10%
(1%)
(118%)
—
—
(1%)
(76%) $
384
9
(133)
(237)
—
—
2
25
34%
1%
(12%)
(21%)
—
—
—
2%
$
$
$
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
Deferred tax liabilities:
Property and equipment, principally due to differing depreciation methods
Deferred state tax
Other intangibles
Other
Total gross deferred tax liabilities
Net deferred tax assets
39
June 30,
2017
2016
181 $
1,832
180
446
178
77
1
2,895 $
(89)
2,806 $
1,144
1,790
337
432
237
89
5
4,034
(3,773)
261
June 30,
2017
2016
(438) $
(295)
(2)
(23)
(758)
2,048 $
(261)
—
—
—
(261)
—
$
$
$
$
$
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are
uncertain. As of June 30, 2017, our deferred tax assets were primarily the result of Federal and State tax credit carryforwards. For
the year ended June 30, 2017, there was a decrease in the valuation allowance in the amount of $3.7 million, primarily based upon
management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized. During the year
ended June 30, 2017, in part, because in the current year we achieved three years of cumulative pre-tax income, and have
forecasted future earnings, management concluded that it is more likely than not that substantially all of its deferred tax assets are
realizable, and therefore reduced the valuation allowance accordingly.
As of June 30, 2017, we did not have any net operating losses for federal income tax purposes. As of June 30, 2017 we have
state net operating loss carry forwards of approximately $2,146,000 which will begin to expire in 2026. Federal research and
development and alternative minimum tax credit carry forwards at June 30, 2017 amount to $1,111,000, and begin to expire in
2027. State tax research credit carry forwards at June 30, 2017 amount to $721,000, the majority of which do not expire.
As of June 30, 2017, 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. If we are eventually able to recognize our uncertain tax
positions, our effective tax rate would be reduced. Any adjustment to our uncertain tax positions would result in an adjustment of
our tax credit carryforwards rather than resulting in a cash outlay.
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 on 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,
2017
2016
$
$
446 $
18
—
1
(19)
446 $
399
15
13
19
—
446
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, 2017, 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, 2014 and later. However, because
of net operating losses and research credit carryovers, substantially all of our tax years are open to audit.
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).
40
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 fiscal 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 the second and third quarter of fiscal 2016 we liquidated the machine shop equipment and
collected some accounts receivable that served as Collateral to the promissory notes 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 aggregate amount of $108,000 related to $86,000 to be released from escrow upon completion of voluntary
foreclosure proceedings and $22,000 due from our equipment liquidator. The $86,000 was released from escrow during fiscal 2017
and the $22,000 was collected in the fourth quarter of fiscal 2016.
9.
Notes Receivable
On April 19, 2017 (the “Closing Date”), we entered into a Secured Convertible Promissory Note (the “Promissory Note”)
with Monogram Orthopaedics Inc. (“Monogram” or the “Borrower”). Monogram is a New York based medical device start-up
specializing in precision, patient specific orthopedic implants.
Pursuant to the terms of the Promissory Note, the Company advanced Monogram $450,000, on the Closing Date, and upon
Monogram’s satisfaction of certain milestones, as determined by us in good faith, the Company will advance an additional
$350,000. The Promissory Note bears interest at 4% per annum calculated on a 360-day year and matures on April 19, 2019, upon
which the outstanding principal and accrued interest will become due and payable if not converted to Borrower’s common stock.
As of the date of this report, Monogram is still completing certain milestones and we have agreed to extend the original three
month milestone completion date. We currently expect to advance the additional $350,000 within the next three months.
10.
Notes Payable and Financing Transactions
Farmers & Merchants Bank of Long Beach
On April 19, 2017 we entered into a Business Loan Agreement (the “Loan Agreement”), dated effective March 28, 2017,
with Farmers & Merchants Bank of Long Beach, a California corporation, providing for a $500,000 revolving loan facility (the
“Revolving Loan Facility”). The Revolving Loan Facility is secured by substantially all of the assets of the Company and bears
interest at prime plus 2 percent (6.25%) and matures on March 28, 2018. As of June 30, 2017, we have not borrowed against this
Revolving Loan Facility.
Summit Financial Resources LP
On September 9, 2015 we entered into a Loan and Security Agreement (the “Summit Loan”) with Summit Financial
Resources LP, whereby we could borrow up to $1.0 million against our eligible receivables, as defined in the agreement. Borrowed
funds bore interest at a rate of prime plus 2 percent (6.25%), and incurred an additional administrative fee of 0.7 percent on the
monthly average outstanding balance. The Summit Loan had an initial period of 18 months. During the fiscal years ended June 30,
2017 and 2016 we borrowed $600,000 and $1.7 million, respectively, on a revolving basis, under the Summit Loan, which amounts
were paid in full by June 30, 2017 and 2016. On March 9, 2017, we terminated the Summit Loan in accordance with its terms.
Therefore as of June 30, 2017 we no longer present amounts due from factor.
41
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Jules & Associates
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 $105,000 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. The lease was subsequently assigned to
Hitachi Capital America Corporation. The balance owed on the lease as of June 30, 2017 is approximately $74,000.
Fineline Molds
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. The balance owed on the note as of
June 30, 2017 and June 30, 2016 was approximately $46,000 and $70,000 respectively.
Fortitude Income Funds
The Company borrowed $500,000 from Fortitude Income Funds, LLC (“Fortitude”) 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 maturity originally scheduled on March 15, 2016. We repaid the loan in full on
February 22, 2016.
11.
Commitments and Contingencies
Leases
We lease our office, production and warehouse facility in Irvine, California under an agreement that expires in April 2018.
We are currently in negotiations with our landlord to renew our lease, but there is no guarantee that we will successfully conclude
these negotiations. We leased our former Beaverton, Oregon office under an agreement that expired in July 2017. Upon the sale of
the OMS division, we assigned the Beaverton lease to OMS Motion, Inc. and received sublease income in the amount of $43,000
during fiscal 2017, which was recorded as a reduction to rent expense. 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 a lease in conjunction with the acquisition of Fineline
located in San Dimas, California, which has since been renewed and currently expires in February 2019. Rent expense in fiscal
2017 and 2016 was $515,000 and $561,000, respectively. Minimum lease payments for future fiscal years ending June 30 are as
follows (in thousands):
Fiscal Year:
2018
2019
Total minimum lease payments
Operating
Leases
$
$
395
23
418
Compensation Arrangements
Retirement Savings 401(k) Plan
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, 2017 and 2016,
we recognized compensation expense amounting to $53,000 and $68,000, respectively, in connection with the 401(k) Plan.
42
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Matters
In September 2015, Pro-Dex Sunfish Lake, LLC (“PDSL”) a subsidiary of the Company foreclosed its lien against the
assets of Riverside (see Note 8). After the foreclosure, Scott Robertson (the former president of Riverside), Riverside and Heron
Enterprises, LLC, an affiliated entity, asserted claims of breach of contract, fraudulent inducement and wrongful self-help eviction
among others, against PDSL and another subsidiary of the Company, Pro-Dex Riverside LLC (“PDR”). PDSL and PDR asserted
various claims, including slander of title, fraudulent misrepresentation, conversion and theft against one or more of those parties, in
turn. In October 2016, the parties filed lawsuits against one another asserting the aforementioned claims. On February 8, 2017, a
hearing was held on PDSL and PDR’s request for dismissal of several of Robertson et al’s claims, which the court dismissed
effective May 8, 2017. We are unable to quantify the value of the remaining respective claims at this time, as the damages are
unspecified in the pleadings. However, prior to the filing of the lawsuits, Mr. Robertson requested payment of $250,000 to fully
settle the matter and later called our management directly requesting a payment of $170,000. We proposed a mutual release of all
claims to settle this dispute and the court has scheduled an October 6, 2017 hearing to review the matter, as it is our position that
Robertson et al. agreed to the settlement. While we believe that there is a reasonable likelihood that PDSL and PDR would prevail
should this matter go to trial, there can be no assurances that we would prevail.
Additionally, two former employees have asserted claims of wrongful termination and unpaid commission earnings on
March 20, 2017 and April 21, 2017, respectively. The former employees were seeking payments of $100,000 and $41,000,
respectively. As we have not heard back from the claimant relating to wrongful termination after sending our legal response, we
assume that this matter has concluded. We settled the matter relating to the claimant seeking unpaid commission during the fourth
quarter of fiscal 2017. We paid this former employee $30,000 to fully satisfy the matter.
In addition to the matters 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.
12.
Share-Based Compensation
Stock Option Plans
Through June 2014 we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the
“Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option
Plan”) (collectively, the “Former Stock Option Plans”). There was no share-based compensation expense for the fiscal year ended
June 30, 2017 as all outstanding options under the Former Stock Option Plans are fully vested. Share-based compensation expense
year ended June 30, 2016 was $2,000 relating to stock option plans. The Employee Stock Option Plan and Director’s Stock Option
Plan were terminated in June 2015 and September 2014, respectively.
In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our
shareholders at the November 29, 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000
shares of the Company’s common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation
rights, restricted shares, restricted stock units, performance awards and other stock-based awards. As of June 30, 2017, no awards
have been granted under the 2016 Equity Incentive Plan.
43
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
There were no stock options granted during the fiscal years ended June 30, 2017 and 2016. As of June 30, 2017, there was
no unrecognized compensation cost under the Stock Option Plans as all outstanding stock options are fully vested. The intrinsic
value of stock options outstanding and exercisable at June 30, 2017 was approximately $116,000.
The following is a summary of stock option activity under the Option Plans for the years ended June 30, 2017 and 2016:
Outstanding Options
Balance, July 1, 2015
Options granted
Options canceled or expired
Options exercised
Balance, July 1, 2016
Options granted
Options canceled or expired
Options exercised
Balance, June 30, 2017
Stock Options Exercisable at June 30, 2017
Employee Stock Purchase Plan
Number of
Shares
Weighted-
Average
Exercise Price
2.41
—
7.65
2.14
1.95
—
—
2.07
1.88
1.88
106,668 $
—
(8,334)
(7,500)
90,834 $
—
—
(33,834)
57,000 $
57,000 $
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 Former Stock Option Plans 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 fiscal years ended June 30, 2017 and 2016 shares totaling 3,794 and 5,596 were purchased respectively, and
allocated to participating employees based upon their contributions at weighted average prices of $4.74 and $2.32, respectively. On
a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of 9,390 shares. During the fiscal year
ended June 30, 2017 and 2016, we recorded stock compensation expense in the amount of $3,000 and $2,000, respectively, relating
to the ESPP.
13.
Major Customers & Suppliers
Customers that accounted for sales in excess of 10% of our total sales in either of fiscal year 2017 or 2016, is as follows (in
thousands, except percentages):
Total revenue
Customer concentration:
Customer 1
Customer 2
Customer 3
Total
Years Ended June 30,
2017
2016
Amount
Percent of
Total
Amount
Percent of
Total
21,943
100% $
19,189
100%
10,939
1,523
1,566
14,028
50% $
7%
7%
64% $
4,999
3,630
2,855
11,484
26%
19%
15%
60%
$
$
$
44
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, 2017 or June 30, 2016, is as follows (in thousands, except percentages):
Total gross accounts receivable, including amounts due from factor
Customer concentration:
Customer 1
Customer 3
Total
$
$
$
June 30, 2017
3,541
100% $
June 30, 2016
2,908
100%
2,187
554
2,741
62% $
16%
78% $
850
573
1,423
29%
20%
49%
During fiscal 2017 and 2016, we had one supplier that accounted for 10 percent and 11 percent of total purchases,
respectively. Accounts payable due to this same significant supplier represented 12 percent and 3 percent of total accounts payable
as of June 30, 2017 and 2016, respectively.
14.
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.
The summary of the basic and diluted earnings per share calculations for the years ended June 30, 2017 and 2016 is as follows (in
thousands, except per share data):
Basic:
Income from continuing operations
Weighted average shares outstanding
Basic earnings per share from continuing operations
Income (loss) from discontinued operations
Weighted average shares outstanding
Basic earnings (loss) per share from discontinued operations
Net income
Weighted average shares outstanding
Basic earnings per share
Diluted:
Income 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 per share from continuing operations
Income (loss) from discontinued operations
Weighted average shares used in calculation of diluted earnings per share
Diluted earnings (loss) per share from discontinued operations
Net income
Weighted average shares used in calculation of diluted earnings per share
Diluted earnings per share
45
Years Ended June 30,
2016
2016
$
$
$
$
$
$
$
$
$
$
$
$
4,841 $
4,040
1.20 $
243 $
4,040
0.06 $
5,084 $
4,040
1.26 $
4,841 $
4,040
37
4,077
1.19 $
243 $
4,077
0.06 $
5,084 $
4,077
1.25 $
1,103
4,141
0.27
(281)
4,141
(0.07)
822
4,141
0.20
1,103
4,141
32
4,173
0.27
(281)
4,141
(0.07)
822
4,173
0.20
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
Common Stock
Share Repurchase Program
In September, 2013 our Board approved a share repurchase program authorizing the Company to repurchase up to 750,000
shares of our common stock. In accordance with, and as part of, this share repurchase program, our Board has approved the
adoption of several prearranged share repurchase plans intended to qualify for the safe harbor Rule 10b5-1 under the Securities
Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the quarter ended September 30, 2016, our Board approved
a 10b5-1 Plan, which became effective on September 8, 2016 and terminated on the earlier of September 8, 2017 or when and if the
maximum shares are repurchased. During the quarter ended December 31, 2016, the Investment Committee of our Board approved
an additional concurrently running 10b5-1 Plan, which became effective on December 8, 2016 and terminates on the earlier of
December 8, 2017 or when and if the maximum shares are repurchased. During the fiscal year ended June 30, 2017, we
repurchased 63,496 shares at an aggregate cost of $312,000, inclusive of fees under the Plans. On a cumulative basis, we have
repurchased a total of 232,957 shares under the share repurchase program at an aggregate cost of $920,000. All repurchases under
the 10b5-1 Plans were administered through an independent broker. In February, 2017 our Board terminated the two effective 10b5-
1 Plans in conjunction with the approval of the Company’s At The Market Offering Agreement (“ATM” or “ATM Agreement”)
further described below.
At The Market Offering Agreement
In February 2017, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The
ATM Agreement allows the Company to sell shares of its common stock pursuant to specific parameters defined by the Company
as well as those defined by the SEC and the ATM Agreement. During the fiscal year ended June 30, 2017 we have sold 8,276
shares of common stock and raised net proceeds of $48,000. The proceeds collected were accounted for as a reduction of the
prepaid expenses relating to establishing the ATM. The ATM allows for quick and agile sales of our common stock to interested
investors and provides an opportunity to raise additional capital for working capital requirements or to fund strategic opportunities
that may present themselves from time to time.
16.
Subsequent Events
From July 7, 2017 through September 7, 2017, we have sold 227,319 shares of common stock and raised net proceeds of
approximately $1.5 million and paid fees of approximately $46,000 to Ascendiant under our ATM. We expect to continue to sell
shares of common stock in the future if our stock price continues to increase. As of September 12, 2017, we believe we are in final
negotiations with our landlord relating to an amendment of our Irvine, California lease. Once this amendment is executed, we will
timely file a Form 8-K reporting the amendment.
46
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, 2017, 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, 2017.
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, 2017, 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.
47
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, 2017, and delivered to stockholders in connection with our 2017 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, 2017, and delivered to stockholders in connection with our 2017 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, 2017, and delivered to stockholders in connection with our 2017 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, 2017, and delivered to stockholders in connection with our 2017 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, 2017, and delivered to stockholders in connection with our 2017 annual meeting of shareholders.
48
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
PART IV
Reference is made to the Exhibit Index beginning on page 51 of this report.
49
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 14, 2017.
SIGNATURES
PRO-DEX, INC.
By: 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
Title
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Date
September 14, 2017
September 14, 2017
Chairman of the Board, Director
September 14, 2017
September 14, 2017
September 14, 2017
September 14, 2017
Director
Director
Director
50
/s/ Richard L. Van Kirk
Richard L. Van Kirk
/s/ Alisha K. Charlton
Alisha K. Charlton
/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
Exhibit
No.
Description
INDEX TO EXHIBITS
3.1
3.2
3.3
3.4
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)
10.1*
Second Amended and Restated 2004 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Form S-8 filed
February 15, 2012).
10.2*
Amended and Restated 2004 Directors Stock Option Plan (incorporated herein by reference to Exhibit 4.2 to the Company’s Form S-8 filed
February 15, 2012).
10.3*
Form of Indemnification Agreement for directors and certain officers (incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 8-K filed October 29, 2008).
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).
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).
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)
Debt Purchase Agreement, dated November 21, 2014, among Pro-Dex Sunfish Lake, LLC, Heron Enterprises, LLC and Scott C. Robertson
10.4
10.5
10.6
10.7
10.8
10.9
(incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed November 28, 2014)
10.10
Promissory Note, dated September 20, 2013, issued by Riverside Manufacturing, Inc. in favor of Heron Enterprises, LLC (incorporated
herein by reference to Exhibit 10.5 to the Company’s Form 8-K filed November 28, 2014)
10.11
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
10.12
reference to Exhibit 10.7 to the Company’s Form 8-K filed November 28, 2014)
10.13
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)
10.14
Heron Forbearance Agreement, effective February 3, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex Sunfish Lake, LLC
(incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 9, 2015)
10.15
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)
51
10.16
Revolving Loan Agreement, effective February 3, 2015, by and between Riverside Manufacturing, Inc. and Pro-Dex Sunfish Lake, LLC
(incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed March 9, 2015)
10.17
First Amendment to Employment Agreement, effective February 4, 2015, by and between Pro-Dex Riverside, LLC and Scott C. Robertson
(incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed March 9, 2015)
10.18
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)
10.19*
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)
10.20
Loan and Security Agreement, dated September 9, 2015, between Summit Financial Resources, L.P. and Pro-Dex, Inc. (incorporated herein
10.21
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)
10.22
Promissory Note, dated September 8, 2015, made by Pro-Dex Sunfish Lake, LLC in favor of Fortitude Income Funds, LLC (incorporated
herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed on September 14, 2015)
10.23
Combination Mortgage, Security Agreement and Fixture Financing Statement, dated September 8, 2015, made by Pro-Dex Sunfish Lake,
LLC in favor of Fortitude Income Funds, LLC (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed on
September 14, 2015)
10.24
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)
10.25
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
10.26
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)
10.27
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)
10.28
Agreement for Sale and Purchase of Business Assets dated January 27, 2017 by and between Pro-Dex, Inc. and OMS Motion, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 30, 2017)
10.29
Noncompetition and Nonsolicitation Agreement dated January 27,2017 by and between Pro-Dex, Inc. and OMS Motion, Inc. (incorporated
herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 30, 2017)
10.30
At the Market Offering Agreement, dated February 16, 2017 by and between Pro-Dex, Inc. and Ascendiant Capital Markets LLC
(incorporated herein by reference to Exhibit 1.1 to the Company’s Form 8-K filed on February 16, 2017)
10.31
Business Loan Agreement, dated March 28, 2017 between Pro-Dex, Inc. and Farmers and Merchants Bank of Long Beach (incorporated
10.32∆
23 Ω
31.1 Ω
herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 21, 2017)
Secured Convertible Promissory Note, dated April 19, 2017 by and between Pro-Dex, Inc. and Monogram Orthopaedics Inc. (incorporated
herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 25, 2017)
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.
52
31.2 Ω
32 Ω
Certification of the Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
XBRL Instance Document
101.INS
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
XBRL Extension Definition Linkbase Document
101.DEF
———————
Ω
∆
Filed herewith.
Portions of this exhibit indicated in the body of the exhibit by “####” have been omitted pursuant to the Company’s request for confidential
treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and the omitted material has been separately filed with the
Securities and Exchange Commission
*
Denotes management contract or compensatory arrangement.
53
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of Pro-Dex, Inc. and Subsidiaries (the
“Company”) of our report dated September 14, 2017, relating to the consolidated financial statements of the Company appearing in
this Annual Report on Form 10-K for the year ended June 30, 2017:
·
·
·
Registration Statement on Form S-3 (No. 333-215032) pertaining to the registration of common stock;
Registration Statement on Form S-8 (No. 333-214944) pertaining to the Pro-Dex, Inc. 2016 Equity Incentive Plan; and
Registration Statement on Form S-8 (No. 333-201825) pertaining to the Pro-Dex, Inc. 2014 Employee Stock Purchase Plan.
EXHIBIT 23
/s/ Moss Adams LLP
Moss Adams LLP
Irvine, California
September 14, 2017
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 14, 2017
/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 14, 2017
/s/ Alisha K. Charlton
Alisha K. Charlton
Chief Financial Officer
(principal financial officer)
EXHIBIT 32
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
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 14, 2017
Date: September 14, 2017
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.