UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended
| |
OR
| |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from __________ to __________ | |
Commission
file number:
(Exact name of registrant as specified in its charter)
———————
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices and zip code)
(
(Registrant's telephone number, including area code)
———————
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| 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
Indicate the number
of shares outstanding of each of the registrant’s classes of common stock outstanding as of the latest practicable date:
PRO-DEX, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2024
TABLE OF CONTENTS
| Page | |
| PART I — FINANCIAL INFORMATION | |
| ITEM 1. FINANCIAL STATEMENTS (Unaudited) | 1 |
| Condensed Consolidated Balance Sheets as of March 31, 2024 and June 30, 2023 | 1 |
| Condensed Consolidated Income Statements for the Three and Nine Months Ended March 31, 2024 and 2023 | 2 |
| Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended March 31, 2024 and 2023 | 3 |
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2024 and 2023 | 4 |
| Notes to Condensed Consolidated Financial Statements | 6 |
| ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 25 |
| ITEM 4. CONTROLS AND PROCEDURES | 25 |
| PART II — OTHER INFORMATION | |
| ITEM 1. LEGAL PROCEEDINGS | 29 |
| ITEM 1A. RISK FACTORS | 29 |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 30 |
| ITEM 5. OTHER INFORMATION | 30 |
| ITEM 6. EXHIBITS | 30 |
| SIGNATURES | 31 |
i
PART I — FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
PRO-DEX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
| March
31, 2024 | June 30,
2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net of allowance for expected credit losses of $ | ||||||||
| Deferred costs | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Land and building, net | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Right of use asset, net | ||||||||
| Intangibles, net | ||||||||
| Investments | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Note payable | ||||||||
| Total current liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Deferred income taxes, net | ||||||||
| Notes payable, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Common shares; | ||||||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
PRO-DEX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (restated) | (restated) | |||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development costs | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Unrealized gain (loss) on marketable equity investments | ( | ) | ( | ) | ||||||||||||
| Interest and other income | ||||||||||||||||
| Gain on sale of investments | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic net income per share: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
PRO-DEX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)
| Three
Months Ended March 31, | Nine Months
Ended March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Common shares: | (restated) | (restated) | ||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Share-based compensation expense | ||||||||||||||||
| Share repurchases | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Shares withheld from common stock issued to pay employee payroll taxes | — | — | — | ( | ) | |||||||||||
| Exercise of stock options | — | — | — | |||||||||||||
| ESPP shares issued | ||||||||||||||||
| Balance, at end of period | $ | $ | $ | $ | ||||||||||||
| Retained earnings: | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Balance, at end of period | $ | $ | $ | $ | ||||||||||||
| Total shareholders’ equity | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
PRO-DEX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months
Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | (restated) | |||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of loan fees, net | ( | ) | ||||||
| Share-based compensation | ||||||||
| Unrealized (gain) loss on marketable equity investments | ( | ) | ||||||
| Non-cash straight-line lease amortization | ( | ) | ( | ) | ||||
| Gain on sale of investments | ( | ) | ||||||
| Deferred income taxes | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and other current receivables | ( | ) | ||||||
| Deferred costs | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of investments | ( | ) | ||||||
| Purchases of equipment and improvements | ( | ) | ( | ) | ||||
| Proceeds from sale of investments | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repurchases of common stock | ( | ) | ( | ) | ||||
| Proceeds from exercise of options and ESPP contributions | ||||||||
| Payment of employee payroll taxes on net issuance of common stock | ( | ) | ||||||
| Proceeds from Minnesota Bank & Trust revolving loan, net of fees | ||||||||
| Principal payments on notes payable and revolving loan | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
PRO-DEX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
(In thousands)
| Nine Months
Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
PRO-DEX INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,” “Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2023.
Recently Adopted Accounting Pronouncements
In March 2022, the FASB issued Accounting Standards Update (“ASU”) No 2022-02 (Topic 326) Financial Instruments – Credit Losses to create a new model for credit losses that reflects current expected credit losses (“CECL”) over the lifetime of the underlying accounts receivable. The CECL methodology is applicable to our trade accounts receivable and our deferred costs. We adopted ASU 2022-02 effective July 1, 2023, and the adoption did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU No 2023-09 (Topic 740) Income Taxes – Improvements to Income Tax Disclosures to enhance disclosures for the income tax rate reconciliation as well as cash income taxes paid by jurisdiction. This amendment is effective for our fiscal year ending June 30, 2025. While we are still evaluating the specifics of the adoption, we anticipate this guidance will have a significant impact on our annual income tax disclosures.
Correction of Previously Reported Interim Condensed Consolidated Financial Statements
As described in more detail in Note 2 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2023, we previously restated certain of our financial statements, including our financial statements for the three and nine months ended March 31, 2023, to correct the estimated fair value of our warrant to purchase up to five percent (5%) of the outstanding capital stock of Monogram Orthopaedics Inc. (NasdaqCM: MGRM), calculated on a fully diluted basis (the “Monogram Warrant”). The restatement recorded, for all restated periods, the Monogram Warrant at its estimated fair value, an unrealized gain on investments, and the deferred income tax expense associated with the corresponding unrealized gain on investments.
| 6 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
Presented below are the changes to each financial statement line item for the three and nine months ended March 31, 2023 that were affected by the restatement (in thousands except per share amounts).
Three months ended March 31, 2023 Unaudited Income Statement (Third Quarter Fiscal 2023)
| As Previously Reported | Restatement | As Restated | ||||||||||
| Unrealized gain(loss) on investments | $ | ( | ) | $ | (a) | $ | ||||||
| Total other income (expense) | ( | ) | ||||||||||
| Income before income taxes | ||||||||||||
| Income tax expense | (b) | |||||||||||
| Net income | ||||||||||||
| Basic income per share | $ | $ | $ | |||||||||
| Diluted income per share | $ | $ | $ | |||||||||
| (a) |
| (b) |
Nine months ended March 31, 2023 Unaudited Income Statement
| As Previously Reported | Restatement | As Restated | ||||||||||
| Unrealized gain(loss) on investments | $ | $ | (a) | $ | ||||||||
| Total other income (expense) | ||||||||||||
| Income before income taxes | ||||||||||||
| Income tax expense | (b) | |||||||||||
| Net income | ||||||||||||
| Basic income per share | $ | $ | $ | |||||||||
| Diluted income per share | $ | $ | $ | |||||||||
| (a) |
| (b) |
NOTE 2. DESCRIPTION OF BUSINESS
We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.
In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The condensed consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations.
| 7 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
NOTE 3. NET SALES
The following table presents the disaggregation of net sales by revenue recognition model (in thousands):
| Three
Months Ended March 31, | Nine Months
Ended March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net Sales: | ||||||||||||||||
| Over-time revenue recognition | $ | $ | $ | $ | ||||||||||||
| Point-in-time revenue recognition | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
The timing of revenue recognition,
billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed
consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets),
where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition
model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to
the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress
based on costs incurred compared to the estimated total costs upon completion. During the three and nine months ended March 31, 2024,
we did
| 8 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
The following tables summarize our contract assets and liability balances (in thousands):
As of and for the Three
Months Ended | As of and for the Nine
Months Ended | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Contract assets beginning balance | $ | $ | $ | $ | ||||||||||||
| Expenses incurred during the year | ||||||||||||||||
| Amounts reclassified to cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amounts allocated to discounts for standalone selling price | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Contract assets ending balance | $ | $ | $ | $ | ||||||||||||
As of and for the Three
Months Ended | As of and for the Nine
Months Ended | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Contract liabilities beginning balance | $ | $ | $ | $ | ||||||||||||
| Payments received from customers | ||||||||||||||||
| Amounts reclassified to revenue | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Contract liabilities ending balance | $ | $ | $ | $ | ||||||||||||
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):
| March
31, 2024 | June 30,
2023 | |||||||
| Raw materials /purchased components | $ | $ | ||||||
| Work in process | ||||||||
| Sub-assemblies/finished components | ||||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
| 9 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
Investments
Investments are stated at market value and consist of the following (in thousands):
March 31, 2024 | June 30, 2023 | |||||||
| Current: | ||||||||
| Marketable equity securities – short-term | $ | $ | ||||||
| Long-term: | ||||||||
| Warrant | ||||||||
| Marketable equity securities – long-term | ||||||||
| Total Investments | $ | $ | ||||||
Investments at March
31, 2024 and June 30, 2023 had an aggregate cost basis of $
Of the total marketable
equity securities at March 31, 2024 and June 30, 2023, $
On October 6, 2023,
in conjunction with the execution of a supply agreement with Monogram, we exercised the Monogram Warrant in full in cash totaling $
We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Rick, and two non-management directors, Raymond Cabillot (“Ray”) and Nicholas Swenson (“Nick”), who chairs the committee. Both Nick and Ray are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that Nick or Ray (or both) may own from time to time either individually or through the investment funds they manage, or other companies whose boards they sit on, such as Air T, Inc.
| 10 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
Land and building
Land and building consist of the following (in thousands):
| March
31, 2024 | June 30,
2023 | |||||||
| Land | $ | $ | ||||||
| Building | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
On
November 6, 2020, we acquired the Franklin Property for a total purchase price of $
Intangibles
Intangibles consist of the following (in thousands):
| March
31, 2024 | June 30,
2023 | |||||||
| Patent-related costs | $ | $ | ||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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. For the three months ended March 31, 2024, and 2023 we recorded $
NOTE 5. WARRANTY
The
warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in
accrued expenses in the accompanying condensed consolidated balance sheets. As of March 31, 2024 and June 30, 2023, the warranty reserve
amounted to $
| 11 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2024 and 2023, are as follows (in thousands):
| As of
and for the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Accruals during the period | ||||||||
| Changes in estimates of prior period warranty accruals | ( | ) | ||||||
| Warranty amortization and utilization | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
| As of
and for the Nine Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Accruals during the period | ||||||||
| Changes in estimates of prior period warranty accruals | ( | ) | ||||||
| Warranty amortization and utilization | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average number of common shares outstanding used in the calculation of diluted income per share reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.
The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for net income. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):
| Three
Months Ended March 31, | Nine Months
Ended March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Basic: | (restated) | (restated) | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic income per share | $ | $ | $ | $ | ||||||||||||
| 12 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
| Three
Months Ended March 31, | Nine Months
Ended March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Diluted: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average shares used in calculation of diluted earnings per share | ||||||||||||||||
| Diluted income per share | $ | $ | $ | $ | ||||||||||||
NOTE 7. INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our estimates of future taxable income by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable.
We recognize accrued interest and penalties related to unrecognized
tax benefits when applicable. As of March 31, 2024 and 2023, we recognized accrued interest of $
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, 2020 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2019 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Our 2016 Equity Incentive Plan provides for the award of up to shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of December 31, 2023, performance awards and non-qualified stock options have been granted under the 2016 Equity Incentive Plan.
Performance Awards
In October 2023, the Compensation Committee reallocated an additional previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2023 was $, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During the three months ended March 31, 2024 and 2023, we recorded share-based compensation expense of $ and $, respectively, related to outstanding performance awards. During the nine months ended March 31, 2024 and 2023, we recorded share-based compensation expense of $ and $, respectively, related to outstanding performance awards. On March 31, 2024, there was approximately $ of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of years.
| 13 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
On July 1, 2022, it was determined by the Compensation Committee of our Board of Directors that the vesting of performance awards for shares of common stock had been achieved. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued shares and paid $ of participant-related payroll tax liabilities.
Non-Qualified Stock Options
In December 2020, the Compensation Committee of our Board of Directors granted non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. The weighted average fair value of the stock options granted was $, calculated using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated previously forfeited non-qualified stock options, having the same remaining terms and conditions, to another employee at a weighted average fair value of $ calculated using a Monte Carlo simulation. During each of the three months ended March 31, 2024 and 2023, we recorded compensation expense of $ related to these stock options. During the nine months ended March 31, 2024 and 2023, we recorded compensation expense of $ and $, respectively, related to these stock options. As of March 31, 2024, none of these stock options have vested and there was approximately $ million of unrecognized compensation cost related to these non-vested non-qualified stock options.
Employee Stock Purchase Plan
In September 2014, our Board
approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our
2014 Annual Meeting. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous . Our Board
of Directors also approved that
During the three months
ended March 31, 2024 and 2023, we recorded ESPP share-based compensation expense in the amount of $ and $, respectively. During
the three months ended March 31, 2024 and 2023, and shares were purchased, respectively, and allocated to employees based upon
their contributions at prices of $
| 14 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
NOTE 9. MAJOR CUSTOMERS AND SUPPLIERS
Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the nine-month periods ended March 31, 2024 and 2023, is as follows (in thousands, except percentages):
| Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
| Net sales | $ | % | $ | % | ||||||||||||
| Customer concentration: | ||||||||||||||||
| Customer 1 | $ | % | $ | % | ||||||||||||
| Customer 2 | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
| Nine Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
| Net sales | $ | % | $ | % | ||||||||||||
| Customer concentration: | ||||||||||||||||
| Customer 1 | $ | % | $ | % | ||||||||||||
| Customer 2 | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2024 or June 30, 2023, is as follows (in thousands, except percentages):
| March 31, 2024 | June 30, 2023 | |||||||||||||||
| Total gross accounts receivable | $ | % | $ | % | ||||||||||||
| Customer concentration: | ||||||||||||||||
| Customer 1. | $ | % | $ | % | ||||||||||||
| Customer 2. | % | % | ||||||||||||||
| Total. | $ | % | $ | % | ||||||||||||
| 15 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
During the three and nine months ended March 31, 2024 and 2023, we had two and three suppliers, respectively, accounting for 10% or more of total inventory purchases. Amounts owed to the suppliers who comprised more than 10% of total accounts payable at either March 31, 2024 or June 30, 2023, is as follows (in thousands, except percentages).
| March 31, 2024 | June 30, 2023 | |||||||||||||||
| Total accounts payable | $ | % | $ | % | ||||||||||||
| Supplier concentration: | ||||||||||||||||
| Supplier 1. | $ | % | $ | % | ||||||||||||
| Supplier 2. | % | % | ||||||||||||||
| Supplier 3. | % | % | ||||||||||||||
| Total. | $ | % | $ | % | ||||||||||||
NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS
Minnesota Bank & Trust
On
November 6, 2020 (the “Closing Date”), PDEX Franklin, our wholly owned subsidiary, purchased an approximate
The
Property Loan bears interest at a fixed rate of
On
the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”),
providing for a $
| 16 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
The
Term Loan A matures on
The
Term Loan B matures on
On December 29, 2022 (the “Amendment
Date”), we entered into Amendment No. 2 to Amended and Restated Credit Agreement (the “Amendment”) with MBT, which amends
the Amended Credit Agreement and provides for a supplemental line of credit in the amount of $
The Revolving Loan was also amended
(the “Amended Revolving Loan”) in connection with the Amendment to extend
The Amended Revolving Loan and
Supplemental Loan bear interest at an annual rate equal to the greater of (a)
Any
payment on the Term Loan A, the Term Loan B, the Amended Revolving Loan or the Supplemental Loan (collectively, the “Loans”)
not made within seven days after the due date is subject to a late payment fee equal to
The Amended Credit Agreement, Amended Security Agreement, Term Note A, Term Note B, Amended Revolving Note and Supplemental Note contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type. We believe that we are in compliance with all of our debt covenants as of March 31, 2024, but there can be no assurance that we will remain in compliance for the duration of the term of these loans.
| 17 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
NOTE 11. COMMON STOCK
Share Repurchase Program
In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the three and nine months ended March 31, 2024, we repurchased and shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ and $, respectively. During the three and nine months ended March 31, 2023, we repurchased and shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ and $, respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of shares under the share repurchase program at an aggregate cost of $.0 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.
NOTE 12. LEASES
Our operating lease right-of-use
asset and long-term liability are presented separately on our condensed consolidated balance sheet. The current portion of our operating
lease liability as of March 31, 2024, in the amount of $
As of March 31, 2024, the maturity of our lease liability is as follows (in thousands):
| Operating Lease | |||||
| Fiscal Year: | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Total lease payments | |||||
| Less imputed interest: | ( | ) | |||
| Total | $ | ||||
As of March 31, 2024, the
operating lease for our Irvine, California headquarters has a remaining lease term of three years and six months and an imputed interest
rate of
| 18 |
| PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal Matters
We may be involved from time to time in various legal proceedings arising either in the ordinary course of our business or 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.
NOTE 14. SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of this filing. There were no subsequent events that require disclosure.
| 19 |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.
COMPANY OVERVIEW
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” or “us”) for the three-month and nine-month periods ended March 31, 2024 and 2023. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. This report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein.
Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities, and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales in markets characterized by rapid technological evolution, our ability to optimize our operations at our Franklin facility, consolidation within our target marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities. Many other economic, competitive, governmental, and technological factors could impact our ability to achieve our goals. You are urged to review the risks, uncertainties, and other cautionary language described in this report, as well as in our other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including, but not limited to, the risks, uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2023.
We specialize in the design, development, and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.
Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet address is www.pro-dex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.
Basis of Presentation
The condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2024. Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.
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Critical Accounting Estimates and Judgments
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that there have been no significant changes during the three and nine months ended March 31, 2024 to the items that we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Business Strategy and Future Plans
Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and electric, multi-function surgical drivers and shavers. We continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customers. During the first quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply their surgical handpieces to them through calendar 2025.
Simultaneously, we are working to build top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive torque-limiting software has been very well received in the CMF and thoracic markets. Additionally, we have other significant engineering projects under way described more fully below under “Results of Operations.”
In November 2020, we purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth, including anticipated expanded capacity for the manufacture of batteries and new products. We began operations in the new facility during the fourth quarter of fiscal 2023 and believe that the additional capacity will allow for our continued expected growth.
In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, expanding our manufacturing capacity with the addition of the Franklin Property, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, and promoting active product development proposals to new and existing customers for orthopedic shavers, screw drivers for a multitude of surgical applications, and other medical devices, while monitoring closely the progress of all these individual endeavors. Our investments in research and development have historically increased disproportionately to our growth in revenue and we anticipate this may continue in future periods. These expenditures are being made in an effort to release new products and garner new customer relationships. While we expect revenue growth in the future, it may not be a consistent trajectory but rather periods of incremental growth that current expenditures are helping to create. However, there can be no assurance that we will be successful in any of these objectives.
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Description of Business Operations
Revenue
The majority of our revenue is derived from designing, developing and manufacturing surgical devices for the medical device industry. The proportion of total sales by type is as follows (in thousands, except percentages):
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | % of Revenue | % of Revenue | |||||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||||||||
| Medical device products | $ | 9,782 | 68 | % | $ | 6,990 | 54 | % | $ | 26,536 | 68 | % | $ | 23,631 | 67 | % | ||||||||||||||||
| Industrial and scientific | 211 | 1 | % | 260 | 2 | % | 591 | 2 | % | 691 | 2 | % | ||||||||||||||||||||
| Dental and component | 62 | 1 | % | 43 | — | 146 | — | 182 | — | |||||||||||||||||||||||
| NRE & Proto-type | 234 | 2 | % | 970 | 7 | % | 762 | 2 | % | 2,361 | 7 | % | ||||||||||||||||||||
| Repairs | 4,433 | 31 | % | 5,068 | 39 | % | 11,749 | 30 | % | 9,410 | 26 | % | ||||||||||||||||||||
| Discounts and other | (429 | ) | (3 | %) | (252 | ) | (2 | %) | (965 | ) | (2 | %) | (827 | ) | (2 | %) | ||||||||||||||||
| $ | 14,293 | 100 | % | $ | 13,079 | 100 | % | $ | 38,819 | 100 | % | $ | 35,448 | 100 | % | |||||||||||||||||
Certain of our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements. All of our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility, along with our industrial products. Details of our medical device sales by type is as follows (in thousands, except percentages):
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| % of Total | % of Total | % of Total | % of Total | |||||||||||||||||||||||||||||
| Medical device sales: | ||||||||||||||||||||||||||||||||
| Orthopedic | $ | 6,765 | 69 | % | $ | 3,866 | 55 | % | $ | 17,136 | 65 | % | $ | 15,271 | 65 | % | ||||||||||||||||
| CMF | 2,247 | 23 | % | 2,886 | 41 | % | 6,641 | 25 | % | 7,208 | 30 | % | ||||||||||||||||||||
| Thoracic | 770 | 8 | % | 238 | 4 | % | 2,759 | 10 | % | 1,152 | 5 | % | ||||||||||||||||||||
| Total | $ | 9,782 | 100 | % | $ | 6,990 | 100 | % | $ | 26,536 | 100 | % | $ | 23,631 | 100 | % | ||||||||||||||||
Sales of our medical device products increased $2.8 million, or 40%, and $2.9 million, or 12%, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer, included in orthopedic sales above, increased $2.9 million and $1.9 million, respectively, for the three and nine months ended March 31, 2024 compared to the corresponding periods of the prior fiscal year. Additionally, recurring revenue from distributors of thoracic drivers increased $532,000 and $1.6 million, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding periods of the prior fiscal year in part due to the launch of a new driver to one of our customers in the first quarter of this fiscal year. Our CMF sales revenue decreased $639,000 and $567,000, for the three and nine months ended March 31, 2024, respectively, compared to the corresponding periods of the prior fiscal year. While we do not have much visibility into our customers’ distribution networks, we do know that one of our distributors is selling some legacy products in their inventory which has caused a reduction in demand for the CMF driver they procure from us.
Sales of our compact pneumatic air motors, reported as industrial and scientific sales above, decreased $49,000, or 19%, and $100,000, or 14%, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding periods of the prior fiscal year. These are legacy products with no substantive marketing efforts. Our NRE and proto-type revenue decreased $736,000, or 76%, and $1.6 million, or 68%, for the three and nine months ended March 31, 2024, compared to the corresponding periods of the prior fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for our customers.
Sales of our dental products and components increased $19,000, or 44%, and decreased $36,000, or 20%, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding periods of the prior fiscal year. In the prior fiscal year we sold component inventory to our largest customer used in their legacy design which did not recur in the current fiscal year. We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.
Repair revenue decreased $635,000 or 13%, and increased $2.3 million, or 25%, for the three and nine months ended March 31, 2024, respectively, compared to the corresponding periods of the prior fiscal year due to repairs of the orthopedic handpiece we sell to our largest customer. The year-to-date increase was expected as we have been upgrading handpieces to the next generation, which design was released to manufacture in the third quarter of fiscal 2022. The repair revenue recorded during the three months ended March 31, 2023, included an additional $520,000 in compensation, for handpieces upgraded between July 2022 and December 2022. There was no similar adjustment in the current fiscal year.
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At March 31, 2024, we had a backlog of approximately $25.2 million, of which $9.9 million is scheduled to be delivered in the fourth quarter of fiscal 2024 and the balance is scheduled to be delivered next fiscal year. Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts. We may experience variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches and customer planned inventory builds. However, we do not typically experience seasonal fluctuations in our shipments and revenues.
Cost of Sales and Gross Margin
(in thousands except percentages)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| % of Total | % of Total | % of Total | % of Total | |||||||||||||||||||||||||||||
| Cost of sales: | ||||||||||||||||||||||||||||||||
| Product cost | $ | 9,815 | 95 | % | $ | 8,510 | 92 | % | $ | 28,156 | 99 | % | $ | 24,066 | 92 | % | ||||||||||||||||
| Under(over)-absorption of manufacturing costs | 170 | 2 | % | 729 | 8 | % | (146 | ) | — | 1,705 | 7 | % | ||||||||||||||||||||
| Inventory and warranty charges | 306 | 3 | % | 29 | — | 347 | 1 | % | 287 | 1 | % | |||||||||||||||||||||
| Total cost of sales | $ | 10,291 | 100 | % | $ | 9,268 | 100 | % | $ | 28,357 | 100 | % | $ | 26,058 | 100 | % | ||||||||||||||||
| Three Months Ended March 31, | Nine Months Ended March 31, | Year over Year ppt Change | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Three Months | Nine Months | |||||||||||||||||||
| Gross margin | 28 | % | 29 | % | 27 | %% | 26 | % | (1 | ) | 1 | |||||||||||||
Cost of sales for the three months ended March 31, 2024, increased $1.0 million, or 11%, compared to the corresponding period of the prior fiscal year. The increase in total costs of sales is consistent with the 9% increase in revenue for the same period. Under-absorption of manufacturing costs decreased by $559,000 for the three months ended March 31, 2024, compared to the corresponding period of the prior fiscal year due to increases in our standard labor and overhead rates. Costs relating to inventory and warranty charges increased $277,000 for the three months ended March 31, 2024 compared to the corresponding period of the prior fiscal year, due to an increase in both inventory reserves and warranty accruals.
Gross profit increased by approximately $191,000, or 5%, for the three months ended March 31, 2024, compared to the corresponding period of the prior fiscal year, consistent with the overall increase in revenue. Gross margin as a percentage of sales decreased by approximately 1 percentage point compared to the corresponding period of the prior fiscal year due primarily to our increased inventory and warranty charges compared to the corresponding period of the prior fiscal year.
Cost of sales for the nine months ended March 31, 2024, increased by $2.3 million, or 9%, compared to the corresponding period of the prior fiscal year. Although some of the increase in cost of sales is consistent with the 4% increase in revenue for the same period, for the reasons discussed above, the majority of the increase relates to increased labor and overhead rates in the current fiscal year, compared to the corresponding period of the prior fiscal year. Inventory and warranty charges increased by approximately $60,000, or 21%, for the nine months ended March 31, 2024, compared to the corresponding period of the prior fiscal year, due to an increase in both inventory reserves and warranty accruals. Some of the inventory charges relate to our in-house packaging of batteries. This fiscal year we have begun the process of packaging our batteries, which we had previously out-sourced, and we are continuing to make improvements to our assembly procedures and processes to reduce our costs.
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Gross profit increased by $1.1 million, or 11%, for the nine months ended March 31, 2024, compared to the corresponding period of the prior fiscal year, representing an increase of 1 percentage point compared to the corresponding period of the prior fiscal year.
Operating Expenses
Operating Costs and Expenses
(in thousands except percentages)
| Three Months Ended March 31, | Nine Months Ended March 31, | Year over Year % Change | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Three Months | Nine Months | |||||||||||||||||||||||||||||||||||
| % of Net Sales | % of Net Sales | % of Net Sales | % of Net Sales | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
| Selling expenses | $ | 17 | — | $ | 24 | — | $ | 79 | — | $ | 146 | — | (29 | %) | (46 | %) | ||||||||||||||||||||||||
| General and administrative expenses | 1,012 | 7 | % | 1,009 | 8 | % | 3,208 | 9 | % | 2,983 | 9 | % | — | 8 | % | |||||||||||||||||||||||||
| Research and development costs | 760 | 5 | % | 713 | 5 | % | 2,353 | 6 | % | 2,109 | 6 | % | 7 | % | 12 | % | ||||||||||||||||||||||||
| $ | 1,789 | 12 | % | $ | 1,746 | 13 | % | $ | 5,640 | 15 | % | $ | 5,238 | 15 | % | 2 | % | 8 | % | |||||||||||||||||||||
Selling expenses consist of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three and nine months ended March 31, 2024, decreased $7,000, or 29%, and $67,000, or 46%, respectively, compared to the corresponding periods of fiscal 2023. The decrease in both periods is primarily due to decreased sales commissions.
General and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and other costs and expenses attributable to being a public company. G&A increased $3,000 and $225,000, respectively, during the three and nine months ended March 31, 2024, when compared to the corresponding periods of the prior fiscal year. The increases relate primarily to increased professional fees (consisting primarily of audit and valuation fees, related to the restatement of our financial statements as referenced in Note 1 to the condensed consolidated financial statements contained elsewhere in this report) and increased personnel costs, offset by decreased legal fees related to intellectual property matters.
Research and development costs generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel, as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products. Research and development costs for the three and nine months ended March 31, 2024, increased $47,000, or 7%, and $244,000, or 12%, compared to the corresponding periods of the prior fiscal year. This relates to a decrease in personnel-related costs as well as a decrease in spending on billable development projects. When our engineers are engaged in a billable project as opposed to an internal project, costs get shifted to cost of sales instead of research and development.
| 24 |
Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products. Many of our product development efforts are undertaken only upon completion of an analysis of the size of the market, our ability to differentiate our product from our competitors’, as well as an analysis of our specific sales prospects with new and/or existing customers. The research and development costs represent between 40% and 42% of total operating expenses for all periods presented and are expected to increase in the future as we continue to invest in product development efforts. The amount spent on internal projects under development is summarized below (in thousands):
| Three and Nine Months Ended March 31, 2024 | Three and Nine Months Ended March 31, 2023 | Market Launch (1) | Est Annual Revenue (2) | |||||||||||||||||||
| Total Research & Development costs: | $ | 760 | $ | 2,353 | $ | 713 | $ | 2,109 | ||||||||||||||
| Products in development: | ||||||||||||||||||||||
| ENT Shaver. | $ | — | $ | 2 | $ | 6 | $ | 50 | n/a | n/a | ||||||||||||
| CMF Driver. | 3 | 3 | 10 | 17 | Q1 2025 | $ | 500 | |||||||||||||||
| Sustaining & Other | 757 | 2,348 | 697 | 2,042 | ||||||||||||||||||
| Total. | $ | 760 | $ | 2,353 | $ | 713 | $ | 2,109 | ||||||||||||||
| (1) | Represents the calendar quarter of expected market launch. The ENT Shaver project has been suspended. At this time, we do not know when or whether we will continue with this product development effort. |
| (2) | The products in development include risks that they could be abandoned in the future prior to completion, they could fail to become commercialized, or the actual annual revenue realized may be less than the amount estimated. |
As we introduce new products into the market, we expect to see an increase in sustaining and other engineering expenses. Typical examples of sustaining engineering activities include, but are not limited to, end-of- life component replacement, especially in electronic components found in our printed circuit board assemblies, analysis of customer complaint data to improve process and design, replacement and enhancement of tooling and fixtures used in our machine shop, assembly operations, and inspection areas to improve efficiency and through-put. Additionally, these costs include development projects that may be in their infancy and may or may not result in a full-fledged product development effort.
Interest & Other Income
Interest income for the three and nine months ended March 31, 2024 and 2023, includes interest and dividends from our money market accounts and investment portfolio.
Interest Expense
Interest expense consists primarily of interest expense related to the notes payable described more fully in Note 10 to the condensed consolidated financial statements contained elsewhere in this report.
Unrealized Gain (Loss) on Marketable Equity Investments
The unrealized gain (loss) on marketable equity investments relates to our investment portfolio more fully described in Note 4 to the condensed consolidated financial statements contained elsewhere in this report. All of these investments are recorded at estimated fair value and as of March 31, 2024, all of these investments relate to common stock of publicly traded companies whose stock price is subject to significant volatility.
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Gain on Sale of Investments
During the first quarter ended September 30, 2022, we sold some of the stocks in our portfolio of equity investments receiving proceeds of $89,000 and recording a gain on the sale in the amount of $7,000.
Income Tax Expense
The effective tax rate for the three months ended March 31, 2024 and 2023 was 28% and 25%, respectively. These tax rates are consistent with our combined expected federal and applicable state corporate income tax rates. The effective tax rate for the nine months ended March 31, 2024 and 2023 was 23% and 24%, respectively, and is less than our combined expected federal and applicable state corporate income tax rates due to the release of a valuation allowance related to previously recognized unrealized losses on investments in the current fiscal year and a tax benefit recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal 2023 as described more fully in Note 8 to the condensed consolidated financial statements contained elsewhere in this report, as well as unrealized gains on our marketable equity investments.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2024, increased $283,000 to $3.2 million as compared to $2.9 million at June 30, 2023. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.
| As of and For the Nine Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 5,179 | $ | 4,835 | ||||
| Investing activities | $ | (2,126 | ) | $ | (733 | ) | ||
| Financing activities | $ | (2,770 | ) | $ | (2,863 | ) | ||
| Cash and Working Capital: | ||||||||
| Cash and cash equivalents | $ | 3,219 | $ | 2,088 | ||||
| Working capital | $ | 25,538 | $ | 21,001 | ||||
Operating Activities
Net cash provided by operating activities was $5.2 million for the nine months ended March 31, 2024, primarily due to net income of $540,000, non-cash unrealized losses on marketable equity investments of $3.8 million, depreciation and amortization of $854,000, share-based compensation of $588,000 as well as a decrease in inventory of $1.9 million. Offsetting these sources of cash, our accounts receivable increased by $2.6 million consistent with our increase in revenue.
Net cash provided by operating activities was $4.8 million for the nine months ended March 31, 2023, primarily due to net income of $5.6 million, non-cash depreciation and amortization of $594,000, share-based compensation of $584,000, and collections of accounts receivable in the amount of $4.8 million offset by non-cash unrealized gains on marketable equity investments of $3.4 million, a decrease in accounts payable and accrued expenses of $1.0 million, a decrease in deferred revenue of $956,000, and an increase in inventory in the amount of $2.5 million.
Investing Activities
Net cash used in investing activities for the nine months ended March 31, 2024, was $2.1 million and related to the exercise of the Monogram Warrant for cash in the amount of $1,250,000 (See Note 4 to the condensed consolidated financial statements contained elsewhere in this report) as well as equipment and improvements purchases in the amount of $876,000.
Net cash used in investing activities for the nine months ended March 31, 2023, was $733,000 and related primarily to the purchases of equipment and improvements primarily for the Franklin Property totaling $822,000. Offsetting this use of cash, we sold some of our marketable securities during the nine months ended March 31, 2023 for $89,000.
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Financing Activities
Net cash used in financing activities for the nine months ended March 31, 2024, totaled $2.8 million and related primarily to the $1.8 million repurchase of 96,890 shares of our common stock pursuant to our share repurchase program as well as $990,000 of net principal payments on our loans from Minnesota Bank and Trust (“MBT”) more fully described in Note 10 to the condensed consolidated financial statements contained elsewhere in this report.
Net cash used in financing activities for the nine months ended March 31, 2023, totaled $2.9 million and related primarily to the $1.5 million repurchase of 86,422 shares of our common stock pursuant to our share repurchase program, $4.8 million of payments to MBT as well as payment of $223,000 of employee payroll taxes related to the award of 37,500 shares of common stock to employees under previously granted performance awards. Offsetting these uses of cash we also borrowed $3.6 million from MBT under our amended revolving loan, and collected $78,000 and $11,000, respectively, related to employee contributions to the ESPP plan and exercises of stock options.
Financing Facilities & Liquidity Requirements for the next twelve months
As of March 31, 2024, our working capital was $25.5 million. We currently believe that our existing cash and cash equivalent balances together with our accounts receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. We may also liquidate some or all of our investment portfolio or borrow further against our $7.0 million Amended Revolving Loan with MBT (see Note 10 to condensed consolidated financial statements contained elsewhere in this report), under which we had availability of $4.5 million as of March 31, 2024.
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.
Investment Strategy
We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors, Raymond (“Ray”) Cabillot and Nicholas (“Nick”) Swenson, who chairs the committee. Both Nick and Ray are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Nick or Ray or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on. The Investment Committee approved each of the investments comprising the $6.1 million of marketable public equity securities held at March 31, 2024.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) conducted an evaluation of 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”)). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of March 31, 2024, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that:
| (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
| (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 the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
| (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. A material weakness was discovered relating to the valuation and disclosure of level 3 investments during fiscal 2023 as well as level 2 investments for the three months ended December 31, 2023. We are continuing to remediate this weakness. While we no longer hold any level 3 investments, all of the investments in our portfolio continue to be considered level 2 investments because they are either thinly traded, or we own a substantial percentage of total outstanding shares. While we believe that our fair value assessment and disclosures at March 31, 2024, are appropriate, we are continuing to monitor our internal controls.
Based on that evaluation as of March 31, 2024, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are not effective.
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Internal Control Over Financial Reporting
During the three months ended March 31, 2024, there were no changes in our 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, our internal controls over financial reporting.
Inherent Limitations on the Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II — OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
See Note 13 to condensed consolidated financial statements contained elsewhere in this report.
| ITEM 1A. | RISK FACTORS |
Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2023, as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended March 31, 2024. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements included elsewhere in this report and in Part I, Item 2, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks and uncertainties disclosed in our Form 10-K, our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect our business, financial condition and results of operations in the future.
There have been no material changes to the risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, except as provided in any amendments thereto.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Repurchases by us of our common stock during the quarter ended March 31, 2024, were as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||
| January 1, 2024 to January 31, 2024 | 23,838 | $ | 20.84 | 23,838 | 598,808 | |||||||||||||
| February 1, 2024 to February 29, 2024 | 34,565 | $ | 19.10 | 34,565 | 564,243 | |||||||||||||
| March 1, 2024 to March 31, 2024 | 32,202 | $ | 17.56 | 32,202 | 532,041 | |||||||||||||
| Total | 90,605 | $ | 19.01 | 90,605 | ||||||||||||||
All repurchases were made pursuant to our previously announced repurchase programs. For information concerning our repurchase program, please see the discussion under the caption “Share Repurchase Program” in Note 11 to the condensed consolidated financial statements included elsewhere in this report.
| ITEM 5. | OTHER INFORMATION |
Insider Trading Arrangements and Policies
During the quarter ended
March 31, 2024, no director or officer of the Company
| ITEM 6. | EXHIBITS | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PRO-DEX, INC. | ||
| Date: May 2, 2024 | By: | /s/ Richard L. Van Kirk |
| Richard L. Van Kirk | ||
|
Chief Executive Officer (principal executive officer) | ||
| Date: May 2, 2024 | By: | /s/ Alisha K. Charlton |
| Alisha K. Charlton | ||
|
Chief Financial Officer (principal financial officer and principal accounting officer) |
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EXHIBIT INDEX
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