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-Dexs 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
|
Three to ten years
|
Leasehold improvements
|
Shorter of the lease term or the assets 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. Managements 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 Companys 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, OMSs 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):
|
|
|
|
|
|
|
June 30,
2016
|
|
Assets held for sale:
|
|
|
|
Inventory
|
|
$
|
209
|
|
Fixed assets
|
|
|
64
|
|
Prepaid expenses
|
|
|
5
|
|
Other assets
|
|
|
9
|
|
Assets held for sale
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
715
|
|
|
$
|
969
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
Gain on sale, net of taxes of $126,000
|
|
$
|
201
|
|
|
$
|
|
|
Income (loss) from discontinued operations, before taxes
|
|
|
68
|
|
|
|
(281
|
)
|
Income tax (expense) benefit
|
|
|
(26
|
)
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
243
|
|
|
$
|
(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 31
st
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):
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Trade name
|
|
Balance at July 1, 2015
|
|
$
|
353
|
|
|
$
|
54
|
|
Impairment charge
|
|
|
(241
|
)
|
|
|
(4
|
)
|
Balance at June 30, 2016 and 2017
|
|
$
|
112
|
|
|
$
|
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 Companys 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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Marketable equity securities
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials /purchased components
|
|
$
|
1,127
|
|
|
$
|
1,462
|
|
Work in process
|
|
|
747
|
|
|
|
818
|
|
Sub-assemblies /finished components
|
|
|
1,018
|
|
|
|
1,010
|
|
Finished goods
|
|
|
193
|
|
|
|
74
|
|
Total inventory
|
|
$
|
3,085
|
|
|
$
|
3,364
|
|
Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Office furnishings and fixtures
|
|
$
|
1,819
|
|
|
$
|
1,761
|
|
Machinery and equipment
|
|
|
5,289
|
|
|
|
4,796
|
|
Leasehold improvements
|
|
|
2,119
|
|
|
|
2,088
|
|
Total
|
|
|
9,227
|
|
|
|
8,645
|
|
Less: Accumulated depreciation and amortization
|
|
|
(7,798
|
)
|
|
|
(7,423
|
)
|
|
|
$
|
1,429
|
|
|
$
|
1,222
|
|
36
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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Capitalized software development costs
|
|
$
|
|
|
|
$
|
73
|
|
Covenant not to compete
|
|
|
52
|
|
|
|
52
|
|
Trade name
|
|
|
50
|
|
|
|
50
|
|
Customer list and backlog
|
|
|
167
|
|
|
|
316
|
|
Patent-related costs
|
|
|
153
|
|
|
|
121
|
|
Total intangibles
|
|
$
|
422
|
|
|
$
|
612
|
|
Less accumulated amortization
|
|
|
(102
|
)
|
|
|
(161
|
)
|
|
|
$
|
320
|
|
|
$
|
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):
|
|
|
|
|
|
|
Amortization Expense
|
|
Fiscal Year:
|
|
|
|
2018
|
|
$
|
48
|
|
2019
|
|
|
55
|
|
2020
|
|
|
51
|
|
2021
|
|
|
46
|
|
2022
|
|
|
36
|
|
Thereafter
|
|
|
34
|
|
Total expected amortization
|
|
$
|
270
|
|
37
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warranty
|
|
$
|
159
|
|
|
$
|
365
|
|
Payroll and related items
|
|
|
417
|
|
|
|
443
|
|
Accrued bonuses
|
|
|
390
|
|
|
|
|
|
Accrued legal and professional fees
|
|
|
151
|
|
|
|
60
|
|
Deferred rent
|
|
|
68
|
|
|
|
79
|
|
Accrued sales, use and excise taxes
|
|
|
9
|
|
|
|
7
|
|
Accrued losses on development contracts
|
|
|
|
|
|
|
28
|
|
Accrued inventory in transit
|
|
|
52
|
|
|
|
11
|
|
Other
|
|
|
98
|
|
|
|
83
|
|
|
|
$
|
1,344
|
|
|
$
|
1,076
|
|
6.
Warranty Accrual
Information relating to the accrual for warranty costs for the years ended June 30, 2017 and 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
365
|
|
|
$
|
261
|
|
Accruals during the year
|
|
|
316
|
|
|
|
350
|
|
Change in estimates of prior period accruals
|
|
|
(224
|
)
|
|
|
(154
|
)
|
Warranty amortization
|
|
|
(298
|
)
|
|
|
(92
|
)
|
Balance at end of year
|
|
$
|
159
|
|
|
$
|
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):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
34
|
|
|
$
|
11
|
|
State
|
|
|
40
|
|
|
|
14
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,263
|
)
|
|
|
|
|
State
|
|
|
(900
|
)
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,089
|
)
|
|
$
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent Pretax Income
|
|
|
Amount
|
|
|
Percent Pretax Income
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
2,752
|
|
|
|
100
|
%
|
|
$
|
1,128
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed expected income tax expense (benefit) on income (loss) from continuing operations before income taxes
|
|
$
|
936
|
|
|
|
34
|
%
|
|
$
|
384
|
|
|
|
34
|
%
|
State tax, net of federal benefit
|
|
|
270
|
|
|
|
10
|
%
|
|
|
9
|
|
|
|
1
|
%
|
Tax incentives
|
|
|
(36
|
)
|
|
|
(1
|
%)
|
|
|
(133
|
)
|
|
|
(12
|
%)
|
Change in valuation allowance
|
|
|
(3,252
|
)
|
|
|
(118
|
%)
|
|
|
(237
|
)
|
|
|
(21
|
%)
|
Permanent differences
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax rate adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(7
|
)
|
|
|
(1
|
%)
|
|
|
2
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,089
|
)
|
|
|
(76
|
%)
|
|
$
|
25
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Federal & State NOL carryforward
|
|
$
|
181
|
|
|
$
|
1,144
|
|
Research & other credits
|
|
|
1,832
|
|
|
|
1,790
|
|
Reserves and accruals
|
|
|
180
|
|
|
|
337
|
|
Inventory
|
|
|
446
|
|
|
|
432
|
|
Other intangibles
|
|
|
178
|
|
|
|
237
|
|
Goodwill
|
|
|
77
|
|
|
|
89
|
|
Other
|
|
|
1
|
|
|
|
5
|
|
Total gross deferred tax assets
|
|
$
|
2,895
|
|
|
$
|
4,034
|
|
Less: valuation allowance
|
|
|
(89
|
)
|
|
|
(3,773
|
)
|
Total deferred tax assets
|
|
$
|
2,806
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property and equipment, principally due to differing depreciation methods
|
|
$
|
(438
|
)
|
|
$
|
(261
|
)
|
Deferred state tax
|
|
|
(295
|
)
|
|
|
|
|
Other intangibles
|
|
|
(2
|
)
|
|
|
|
|
Other
|
|
|
(23
|
)
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(758
|
)
|
|
|
(261
|
)
|
Net deferred tax assets
|
|
$
|
2,048
|
|
|
$
|
|
|
39
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 managements 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 Companys 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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Unrecognized tax benefits:
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
446
|
|
|
$
|
399
|
|
Additions based on federal tax positions related to the current year
|
|
|
18
|
|
|
|
15
|
|
Additions based on state tax positions related to the current year
|
|
|
|
|
|
|
13
|
|
Additions for tax positions of prior years
|
|
|
1
|
|
|
|
19
|
|
Reductions for tax positions of prior years
|
|
|
(19
|
)
|
|
|
|
|
Ending balance
|
|
$
|
446
|
|
|
$
|
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 Riversides 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 Monograms 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 Borrowers 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):
|
|
|
|
|
|
|
Operating Leases
|
|
Fiscal Year:
|
|
|
|
2018
|
|
$
|
395
|
|
2019
|
|
|
23
|
|
Total minimum lease payments
|
|
$
|
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 PDRs request for dismissal of several of Robertson et als 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 Directors 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 Companys 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
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
Balance, July 1, 2015
|
|
|
106,668
|
|
|
$
|
2.41
|
|
Options granted
|
|
|
|
|
|
|
|
|
Options canceled or expired
|
|
|
(8,334
|
)
|
|
|
7.65
|
|
Options exercised
|
|
|
(7,500
|
)
|
|
|
2.14
|
|
Balance, July 1, 2016
|
|
|
90,834
|
|
|
$
|
1.95
|
|
Options granted
|
|
|
|
|
|
|
|
|
Options canceled or expired
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(33,834
|
)
|
|
|
2.07
|
|
Balance, June 30, 2017
|
|
|
57,000
|
|
|
$
|
1.88
|
|
Stock Options Exercisable at June 30, 2017
|
|
|
57,000
|
|
|
$
|
1.88
|
|
Employee Stock Purchase Plan
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
Total revenue
|
|
$
|
21,943
|
|
|
|
100
|
%
|
|
$
|
19,189
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
10,939
|
|
|
|
50
|
%
|
|
$
|
4,999
|
|
|
|
26
|
%
|
Customer 2
|
|
|
1,523
|
|
|
|
7
|
%
|
|
|
3,630
|
|
|
|
19
|
%
|
Customer 3
|
|
|
1,566
|
|
|
|
7
|
%
|
|
|
2,855
|
|
|
|
15
|
%
|
Total
|
|
$
|
14,028
|
|
|
|
64
|
%
|
|
$
|
11,484
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Total gross accounts receivable, including amounts due from factor
|
|
$
|
3,541
|
|
|
|
100
|
%
|
|
$
|
2,908
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer concentration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
2,187
|
|
|
|
62
|
%
|
|
$
|
850
|
|
|
|
29
|
%
|
Customer 3
|
|
|
554
|
|
|
|
16
|
%
|
|
|
573
|
|
|
|
20
|
%
|
Total
|
|
$
|
2,741
|
|
|
|
78
|
%
|
|
$
|
1,423
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4,841
|
|
|
$
|
1,103
|
|
Weighted average shares outstanding
|
|
|
4,040
|
|
|
|
4,141
|
|
Basic earnings per share from continuing operations
|
|
$
|
1.20
|
|
|
$
|
0.27
|
|
Income (loss) from discontinued operations
|
|
$
|
243
|
|
|
$
|
(281
|
)
|
Weighted average shares outstanding
|
|
|
4,040
|
|
|
|
4,141
|
|
Basic earnings (loss) per share from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
Net income
|
|
$
|
5,084
|
|
|
$
|
822
|
|
Weighted average shares outstanding
|
|
|
4,040
|
|
|
|
4,141
|
|
Basic earnings per share
|
|
$
|
1.26
|
|
|
$
|
0.20
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4,841
|
|
|
$
|
1,103
|
|
Weighted average shares outstanding
|
|
|
4,040
|
|
|
|
4,141
|
|
Effect of dilutive securities stock options
|
|
|
37
|
|
|
|
32
|
|
Weighted average shares used in calculation of diluted earnings per share
|
|
|
4,077
|
|
|
|
4,173
|
|
Diluted earnings per share from continuing operations
|
|
$
|
1.19
|
|
|
$
|
0.27
|
|
Income (loss) from discontinued operations
|
|
$
|
243
|
|
|
$
|
(281
|
)
|
Weighted average shares used in calculation of diluted earnings per share
|
|
|
4,077
|
|
|
|
4,141
|
|
Diluted earnings (loss) per share from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
Net income
|
|
$
|
5,084
|
|
|
$
|
822
|
|
Weighted average shares used in calculation of diluted earnings per share
|
|
|
4,077
|
|
|
|
4,173
|
|
Diluted earnings per share
|
|
$
|
1.25
|
|
|
$
|
0.20
|
|
45
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 Companys 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