PRO DEX INC - Quarter Report: 2012 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2012
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 0-14942
PRO-DEX, INC.
(Exact name of registrant as specified in its charter)
Colorado | 84-1261240 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
2361 McGaw Avenue, Irvine, California 92614
(Address of Principal Executive Offices)
Registrants telephone number: 949-769-3200
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 twelve 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 ninety days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company under Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the Registrants classes of Common Stock outstanding as of the latest practicable date: 3,307,350 shares of Common Stock, no par value, as of November 5, 2012.
Table of Contents
Pro-Dex, Inc.
2
Table of Contents
PART I | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
PRO-DEX, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, 2012 | June 30, 2012 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 3,125,000 | $ | 4,112,000 | ||||
Accounts receivable, net of allowance for doubtful accounts of $10,000 at September 30, 2012 and $16,000 at June 30, 2012 |
1,828,000 | 1,581,000 | ||||||
Other current receivables |
94,000 | 123,000 | ||||||
Inventories |
3,482,000 | 2,791,000 | ||||||
Prepaid expenses |
152,000 | 172,000 | ||||||
Income taxes receivable |
567,000 | 609,000 | ||||||
Deferred income taxes |
109,000 | 109,000 | ||||||
|
|
|
|
|||||
Total current assets |
9,357,000 | 9,497,000 | ||||||
Property, plant, equipment and leasehold improvements, net |
2,429,000 | 2,539,000 | ||||||
Real estate held for sale |
733,000 | 733,000 | ||||||
Other assets |
53,000 | 53,000 | ||||||
|
|
|
|
|||||
Total assets |
$ | 12,572,000 | $ | 12,822,000 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,107,000 | $ | 633,000 | ||||
Accrued expenses |
1,464,000 | 1,425,000 | ||||||
Income taxes payable |
47,000 | 47,000 | ||||||
Bank term loan |
| 774,000 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,618,000 | 2,879,000 | ||||||
|
|
|
|
|||||
Non-current liabilities: |
||||||||
Deferred income taxes |
109,000 | 109,000 | ||||||
Deferred rent |
282,000 | 284,000 | ||||||
|
|
|
|
|||||
Total non-current liabilities |
391,000 | 393,000 | ||||||
|
|
|
|
|||||
Total liabilities |
3,009,000 | 3,272,000 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common shares; no par value; 50,000,000 shares authorized; 3,307,350 and 3,272,350 shares issued and outstanding at September 30, 2012 and June 30, 2012, respectively |
16,876,000 | 16,846,000 | ||||||
Accumulated deficit |
(7,313,000 | ) | (7,296,000 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
9,563,000 | 9,550,000 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 12,572,000 | $ | 12,822,000 | ||||
|
|
|
|
See notes to condensed consolidated financial statements.
3
Table of Contents
PRO-DEX, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Net sales |
$ | 3,461,000 | $ | 5,045,000 | ||||
Cost of sales |
2,225,000 | 2,937,000 | ||||||
|
|
|
|
|||||
Gross profit |
1,236,000 | 2,108,000 | ||||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Selling expenses |
274,000 | 374,000 | ||||||
General and administrative expenses |
608,000 | 816,000 | ||||||
Research and development costs |
406,000 | 561,000 | ||||||
|
|
|
|
|||||
Total operating expenses |
1,288,000 | 1,751,000 | ||||||
|
|
|
|
|||||
Income (loss) from continuing operations before items below |
(52,000 | ) | 357,000 | |||||
|
|
|
|
|||||
Other expense: |
||||||||
Interest expense |
(6,000 | ) | (10,000 | ) | ||||
|
|
|
|
|||||
Total other expense |
(6,000 | ) | (10,000 | ) | ||||
|
|
|
|
|||||
Income (loss) from continuing operations before provision for income taxes |
(58,000 | ) | 347,000 | |||||
Provision for income taxes |
1,000 | 1,000 | ||||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(59,000 | ) | 346,000 | |||||
Income from discontinued operations, net of provision for income taxes of $0 in 2012 and 2011 |
42,000 | 100,000 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | (17,000 | ) | $ | 446,000 | |||
|
|
|
|
|||||
Per share data: |
||||||||
Income (loss) from continuing operations |
||||||||
Basic |
$ | (0.02 | ) | $ | 0.11 | |||
Diluted |
$ | (0.02 | ) | $ | 0.11 | |||
Income from discontinued operations |
||||||||
Basic |
$ | 0.01 | $ | 0.03 | ||||
Diluted |
$ | 0.01 | $ | 0.03 | ||||
Net income (loss) |
||||||||
Basic |
$ | (0.01 | ) | $ | 0.14 | |||
Diluted |
$ | (0.01 | ) | $ | 0.14 | |||
Weighted average shares outstanding - basic |
3,279,578 | 3,272,350 | ||||||
Weighted average shares outstanding - diluted |
3,279,578 | 3,280,045 |
See notes to condensed consolidated financial statements.
4
Table of Contents
PRO-DEX, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (17,000 | ) | $ | 446,000 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
151,000 | 169,000 | ||||||
Allowance for doubtful accounts |
(6,000 | ) | 1,000 | |||||
Share-based compensation |
30,000 | 12,000 | ||||||
Changes in: |
||||||||
Accounts receivable and other current receivables |
(212,000 | ) | 785,000 | |||||
Inventories |
(691,000 | ) | (338,000 | ) | ||||
Prepaid expenses |
20,000 | (119,000 | ) | |||||
Other assets |
| 8,000 | ||||||
Accounts payable and accrued expenses |
511,000 | (616,000 | ) | |||||
Income taxes receivable and payable |
42,000 | 1,000 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
(172,000 | ) | 349,000 | |||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of equipment |
(41,000 | ) | (42,000 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(41,000 | ) | (42,000 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Principal payments on term loan |
(774,000 | ) | (89,000 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(774,000 | ) | (89,000 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash |
(987,000 | ) | 218,000 | |||||
Cash, beginning of period |
4,112,000 | 4,689,000 | ||||||
|
|
|
|
|||||
Cash, end of period |
$ | 3,125,000 | $ | 4,907,000 | ||||
|
|
|
|
|||||
Supplemental Information | ||||||||
Cash payments for interest |
$ | 9,000 | $ | 11,000 | ||||
Cash payments for income taxes |
$ | | $ | |
See notes to condensed consolidated financial statements.
5
Table of Contents
PRO-DEX, INC. AND SUBSIDIARIES
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 generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. 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 consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2012.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
September 30, 2012 | June 30, 2012 | |||||||
Raw materials |
$ | 1,415,000 | $ | 1,087,000 | ||||
Work in process |
879,000 | 579,000 | ||||||
Finished goods |
1,188,000 | 1,125,000 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 3,482,000 | $ | 2,791,000 | ||||
|
|
|
|
NOTE 3. 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 consolidated balance sheets. As of September 30, 2012 and June 30, 2012, the warranty reserve related to continuing operations amounted to $585,000 and $526,000, respectively. 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. Total warranty expense from continuing operations for the three months ended September 30, 2012 and 2011 was $157,000 and $228,000, respectively.
Information regarding the accrual for warranty costs relating to continuing operations for the three months ended September 30, 2012 and 2011 are as follows:
Three months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Balances, beginning of period |
$ | 526,000 | $ | 688,000 | ||||
Accruals during the period |
149,000 | 137,000 | ||||||
Changes in estimates of prior period accruals |
8,000 | 91,000 | ||||||
Warranty expenditures |
(98,000 | ) | (238,000 | ) | ||||
|
|
|
|
|||||
Balances, end of period |
$ | 585,000 | $ | 678,000 | ||||
|
|
|
|
The changes in estimates recorded during the three months ended September 30, 2012 and 2011 were due primarily to fluctuations in per-unit warranty repair costs and the effects of those fluctuations on our estimates of future warranty repair costs.
6
Table of Contents
NOTE 4. NET INCOME (LOSS) PER SHARE
The difference in the weighted average shares outstanding used in the calculation of basic and diluted net income (loss) per share for the three months ended September 30, 2012 and 2011 is as follows:
Three Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
Numerators for basic and diluted per share data: |
||||||||
Income (loss) from continuing operations |
$ | (59,000 | ) | $ | 346,000 | |||
Income from discontinued operations |
42,000 | 100,000 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | (17,000 | ) | $ | 446,000 | |||
|
|
|
|
|||||
Denominators for basic and diluted per share data: |
||||||||
Basic: |
||||||||
Weighted average common shares outstanding |
3,279,578 | 3,272,350 | ||||||
|
|
|
|
|||||
Shares used in the computation of basic per share data |
3,279,578 | 3,272,350 | ||||||
|
|
|
|
|||||
Diluted: |
||||||||
Shares used in the computation of basic per share data |
3,279,578 | 3,272,350 | ||||||
Net shares assumed issued using the treasury stock method for outstanding common stock options |
| 7,695 | ||||||
|
|
|
|
|||||
Shares used in the computation of diluted per share data |
3,279,578 | 3,280,045 | ||||||
|
|
|
|
|||||
Basic per share data: |
||||||||
Income (loss) from continuing operations |
$ | (0.02 | ) | $ | 0.11 | |||
Income from discontinued operations |
0.01 | 0.03 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | (0.01 | ) | $ | 0.14 | |||
|
|
|
|
|||||
Diluted per share data: |
||||||||
Income (loss) from continuing operations |
$ | (0.02 | ) | $ | 0.11 | |||
Income from discontinued operations |
0.01 | 0.03 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | (0.01 | ) | $ | 0.14 | |||
|
|
|
|
Potentially dilutive securities, consisting of options to purchase shares of our common stock as described in Note 8, are not included in the calculation of diluted loss per share for the three months ended September 30, 2012 due to their anti-dilutive effect on the diluted loss per share calculations for that period.
Options having exercise prices that are greater than the per share market price for our common stock have been excluded from the diluted per share calculations for the three months ended September 30, 2011, due to their anti-dilutive effect. Shares represented by such options amounted to 277,508 for the three months ended September 30, 2011.
NOTE 5. BANK DEBT
Union Bank Credit Facility
On February 4, 2011, we entered into a credit facility agreement with Union Bank that provides for the following:
| A revolving credit line of up to $1.5 million in borrowing availability, under which no amounts were borrowed; |
| A non-revolving credit line of up to $350,000 in borrowing availability for the purchase of equipment, which expired unused on February 4, 2012; and |
| A term loan of $1.25 million, the outstanding balance of which, amounting to $685,000, was repaid in full on September 24, 2012, as discussed further below. |
The maximum amount of borrowing under the revolving credit line was the lesser of:
(a) | $1,500,000; or |
(b) | the sum of 80% of eligible domestic accounts receivable, plus the lesser of: |
(i) | $400,000; or |
7
Table of Contents
(ii) | 15% of the eligible raw materials and finished goods inventories. |
The revolving credit lines terms required monthly interest payments based on borrowed amounts at a floating interest rate, calculated as Union Banks Reference Rate plus 0.5% (an aggregate interest rate of 3.75% during the term over which the line was in effect). The lines initial term was to expire on December 15, 2012.
The terms of the $1.25 million term loan required monthly principal payments of $29,762, plus interest over its 42-month term. The term loan bore interest at a floating rate, calculated as Union Banks Reference Rate plus 0.5% (an aggregate interest rate of 3.75% during the term over which the loan was outstanding).
All personal property assets of the Company collateralized the outstanding borrowings under the Union Bank credit facility.
The credit facility agreements contained various covenants, including certain covenants measured annually based on fiscal year results, concerning our financial performance. At June 30, 2012, we were in violation of profitability-based covenants, for which the bank had the right to declare us in default of the bank credit facility agreements and the entire amount owing under the facility, consisting of the term loan, to become immediately due and payable.
On August 30, 2012, we notified the bank of our intent to terminate the credit facility agreements and repay the term loan in full, on or before September 30, 2012. By letter to us dated September 4, 2012, the bank waived, through October 1, 2012, the rights it otherwise would have had pursuant to the covenant violations described above. In conformity with the correspondence described in this paragraph, on September 24, 2012, we repaid the entire principal balance of the term loan, amounting to $685,000 and the credit facility agreements were terminated.
NOTE 6. DISCONTINUED OPERATIONS
On February 27, 2012 (the Closing Date), we completed the sale of our fractional horsepower motor product line, operating under the name Pro-Dex Astromec (Astromec) and located in Carson City, Nevada, to SL Montevideo Technology, Inc. (MTI), a wholly owned subsidiary of SL Industries, Inc., pursuant to an Asset Purchase Agreement (the APA).
Under the terms of the APA, we sold substantially all the assets of Astromec, consisting primarily of inventory, equipment and intangibles, and excluding cash, accounts receivable and the Carson City facility. We retained substantially all of Astromecs liabilities except for those liabilities associated with certain contracts and unfilled purchase orders assumed by MTI.
Upon closing of the sale and finalization of other items required by the APA, such as a physical inventory count, we recorded proceeds from the sale of $756,000, equal to the actual net book value of the assets sold as of the Closing Date, summarized as follows:
Inventories |
$ | 664,000 | ||
Equipment |
82,000 | |||
Other |
10,000 | |||
|
|
|||
Total |
$ | 756,000 | ||
|
|
Under the terms of the APA, we may also receive earnout payments based on revenues generated from the sale of (i) Astromec products and (ii) MTI products to Astromec prospects (defined in the APA) (collectively, the Earnout Sales Base). Such earnout payments, if and when earned, will be paid by MTI to us within 30 days following the end of each of our fiscal quarters during the three years subsequent to the Closing Date, and will amount to 6%, 4% and 2% of the Earnout Sales Base in the first, second and third such years, respectively. The earnout payments will be recognized in the quarter in which we become entitled to receive them. For the three months ended September 30, 2012, we recognized income from earnout payments of $47,000, which was included in other receivables in the accompanying September 30, 2012 consolidated balance sheet and was received in October 2012. An aggregate of $112,000 in income from earnout payments has been recognized during the period from the Closing Date through September 30, 2012.
Also on the Closing Date, we entered into a Transition Production Agreement (the TPA) with MTI, under which we provided MTI with manufacturing and certain administrative support services. MTI paid us for all our costs in providing the manufacturing services, and a fixed monthly amount for the administrative support services. In conformity with its terms, the TPA was terminated effective May 10, 2012.
8
Table of Contents
Based on the foregoing, and in conformity with applicable accounting guidance, the Astromec product line qualifies as a discontinued operation. Accordingly, financial results of Astromec have been reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Information regarding revenue and operating results of Astromec included in discontinued operations is as follows:
Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Revenues |
$ | 47,000 | $ | 985,000 | ||||
Income before provision for income taxes |
$ | 42,000 | $ | 100,000 |
Information regarding Astromec assets and liabilities included in the accompanying consolidated balance sheets is as follows:
September 30, 2012 | June 30, 2012 | |||||||
Other receivables |
$ | 58,000 | $ | 45,000 | ||||
Other assets |
$ | 10,000 | $ | | ||||
Accounts payable |
$ | 7,000 | $ | 3,000 | ||||
Accrued expenses |
$ | 19,000 | $ | 25,000 |
Warranty reserves related to discontinued operations as of September 30, 2012 and June 30, 2012 amounted to $13,000 and $35,000, respectively. Warranty activities from discontinued operations for the three months ended September 30, 2012 and 2011 resulted in a credit of $8,000 and expense of $15,000, respectively.
In addition, as a result of the sale of the Astromec product line, we listed for sale the land and building constituting the facility we own in Carson City, Nevada. Accordingly, effective as of the Closing Date, such land and building were reclassified to assets held for sale and appear as such in the accompanying September 30, 2012 consolidated balance sheet. Concurrent with this reclassification, we evaluated the carrying amount of the land and building in relation to its estimated fair value less cost to sell, and we determined that an adjustment to such carrying amount was not required.
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 bases. 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 will be recoverable. Due to cumulative taxable losses during the past three years, we maintained a $2.6 million valuation allowance against our deferred tax assets as of September 30, 2012 and June 30, 2012.
As of September 30, 2012, we have accrued $318,000 of unrecognized tax benefits related to federal and state income tax matters. The amount that would reduce the Companys income tax expense if recognized and result in a corresponding decrease in the Companys effective tax rate is $47,000. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at July 1, 2012 |
$ | 313,000 | ||
Additions based on tax positions related to the current year |
5,000 | |||
Additions for tax positions of prior years |
| |||
|
|
|||
Balance at September 30, 2012 |
$ | 318,000 | ||
|
|
Amounts accrued for unrecognized tax benefits are included as components of income taxes receivable or income taxes payable, as applicable, in the accompanying condensed consolidated balance sheets.
9
Table of Contents
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when applicable. As of September 30, 2012 and June 30, 2012, 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.
Pro-Dex and its subsidiaries 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, 2009 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2008 and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
NOTE 8. SHARE-BASED COMPENSATION
We have two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the Employees Stock Option Plan) and the Amended and Restated 2004 Directors Stock Option Plan (the Directors Stock Option Plan) (collectively, the Plans), pursuant to which (i) options to purchase shares of common stock, or (ii) restricted shares of common stock, may be granted up to an aggregate amount of 1,333,333 common shares, with 1,066,667 and 266,666 shares distributed between the Employees Stock Option Plan and the Directors Stock Option Plan, respectively. The Plans are substantially similar, providing for a strike price equal to the closing price for a share of our common stock as of the last business day immediately prior to the grant date, vesting periods (as determined by the Board for the Employees Stock Option Plan and six months for the Directors Stock Option Plan), and terms of up to ten years, subject to forfeit 30 days after the holder ceases to be an employee or 90 days after the holder ceases to be director, as the case may be. At September 30, 2012, 219,966 and 81,667 shares under the Employees Stock Option Plan and the Directors Stock Option Plan, respectively, are available to grant in future years. Share-based compensation expense under the Plans for the three months ended September 30, 2012 and 2011 were $30,000 and $12,000, respectively.
Stock Options
The following weighted-average assumptions were used in the calculation of share-based compensation expense for options granted during the three months ended September 30, 2012 and 2011:
2012 | 2011 | |||
Dividend rate |
None | None | ||
Price volatility |
87% | 42% | ||
Risk-free interest rate |
0.9% | 0.9%-1.4% | ||
Expected life |
6.0 years | 6.5 years |
10
Table of Contents
As of September 30, 2012, there was an aggregate of $288,000 of unrecognized compensation cost under the Plans related to 344,445 non-vested outstanding stock options with a per share weighted average value of $1.35. The unrecognized expense is anticipated to be recognized on a straight-line basis over a weighted average period of 2.4 years. Following is a summary of stock option activity for the three months ended September 30, 2012 and 2011:
2012 | 2011 | |||||||||||||||
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
|||||||||||||
Outstanding at beginning of period |
591,672 | $ | 2.48 | 320,842 | $ | 3.04 | ||||||||||
Granted |
35,000 | 1.73 | 115,000 | 1.80 | ||||||||||||
Exercised |
| | | | ||||||||||||
Forfeited |
(13,334 | ) | 7.74 | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at end of period |
613,338 | $ | 2.33 | 435,842 | $ | 2.71 | ||||||||||
Exercisable at end of period |
268,893 | $ | 2.84 | 228,064 | $ | 3.44 | ||||||||||
Weighted-average fair value per option granted during the period |
$ | 1.25 | $ | 0.78 |
Following is a summary of information regarding options outstanding and options exercisable at September 30, 2012:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
Range of Exercise Price |
Number Outstanding |
Average Contractual Life |
Average Exercise Price |
Aggregate Intrinsic Value |
Number Outstanding |
Average Remaining Contractual Life |
Average Exercise Price |
Aggregate Intrinsic Value |
||||||||||||||||||||||||
$1.35 to $3.48 |
548,334 | 8.9 years | $ | 1.94 | $ | 9,734 | 203,889 | 8.1 years | $ | 1.97 | $ | 9,734 | ||||||||||||||||||||
$3.49 to $5.62 |
50,003 | 3.5 years | $ | 3.32 | | 50,003 | 3.5 years | $ | 4.81 | | ||||||||||||||||||||||
$5.63 to $7.76 |
10,001 | 3.0 years | $ | 7.33 | | 10,001 | 3.0 years | $ | 7.33 | | ||||||||||||||||||||||
$7.77 to $9.90 |
5,000 | 2.8 years | $ | 9.90 | | 5,000 | 2.8 years | $ | 9.90 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
613,338 | 8.4 years | $ | 2.33 | $ | 9,734 | 268,893 | 7.0 years | $ | 2.84 | $ | 9,734 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
The following is a summary of restricted share activity for the three months ended September 30, 2012:
Shares | Weighted-Average Grant Date Fair Value |
|||||||
Outstanding at beginning of year |
| | ||||||
Granted |
35,000 | $ | 1.73 | |||||
Vested |
| | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Outstanding at end of period |
35,000 | $ | 1.73 | |||||
|
|
|
|
As of September 30, 2012, there was $44,000 in unrecognized compensation cost related to non-vested outstanding restricted shares. The unrecognized expense is anticipated to be amortized over the next three fiscal years.
There was no restricted share activity during the three months ended September 30, 2011, nor were any restricted shares outstanding during the period.
11
Table of Contents
NOTE 9. MAJOR CUSTOMERS
Information with respect to two customers who accounted for sales in excess of 10% of our total sales in either of the three-month periods ended September 30, 2012 or 2011, is as follows:
As of and for the three months ended September 30, | ||||||||||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||||||||||
Sales | Percent of Total |
Accounts Receivable |
Percent of Total |
Sales | Percent of Total |
Accounts Receivable |
Percent of Total |
|||||||||||||||||||||||||
Customer 1 |
$ | 118,000 | 3 | % | $ | | | % | $ | 2,388,000 | 47 | % | $ | 632,000 | 40 | % | ||||||||||||||||
Customer 2 |
$ | 1,936,000 | 56 | % | $ | 1,082,000 | 59 | % | $ | 1,661,000 | 33 | % | $ | 545,000 | 34 | % |
In December 2009, Customer 1 (the Customer), our then-largest customer, informed us that it was in the process of developing, and planned to eventually manufacture, its own surgical devices which were functionally comparable to the products the Company provided to the Customer at that time. Pro-Dex had been the exclusive manufacturer of these products since they were developed. Through May 2012, we provided the Customer with two products (Product A and Product B) and we continue to provide repair services for both products. Sales for each of these categories for the three months ended September 30, 2012 and 2011 were as follows:
Three months ended September 30, | ||||||||
2012 | 2011 | |||||||
Product A |
$ | | $ | 793,000 | ||||
Product B |
| 1,191,000 | ||||||
Repairs |
118,000 | 404,000 | ||||||
|
|
|
|
|||||
Total |
$ | 118,000 | $ | 2,388,000 | ||||
|
|
|
|
In June 2011, the Customer informed us that its product development had progressed to the point at which it did not plan to place any new orders with us for these products beyond those orders already placed with delivery dates through May 2012, and we have received no such new orders.
In addition, the Customer indicated that it planned to limit repair requests from us to those Products A and B that are covered by our product warranty. Although we continue to receive repair orders from the Customer, repair revenue (for out-of-warranty products) would decline to zero or a negligible amount should the Customer decide at any time in the future to cease placing new repair orders with us.
We are continuing to implement the steps of a strategic plan, the objectives of which are to identify and capture additional revenue opportunities and concurrently reduce operating costs not critical to revenue growth. There can be no assurance, however, as to either the timing or success of achieving these objectives, which, during any period not achieved, could cause us to experience a prolonged material and adverse impact on our business.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In February 2011, we became aware of a report entitled Site Discovery Report, Southeast Santa Ana Project DTSC Cypress Region, dated February 2010 (the Report), that was prepared by the Cypress regional office of the Cal/EPA Department of Toxic Substances Control (DTSC) for Region 9 of the U.S. Environmental Protection Agency (USEPA) under an agreement between the two agencies. The purpose of the Report was to identify sites within an area of southeast Santa Ana, California that may be sources of groundwater contamination previously detected in that area. The Report identified 25 sites, including our former Santa Ana site, for further screening by DTSC staff over the next two years. DTSC has informed us that no further evaluation of our former site took place during either fiscal year 2011 or 2012. It is uncertain whether future developments, if any, from DTSCs screening process would have any application to our former site.
In general, we are from time to time a party to various legal proceedings incidental to our business, none of which we consider may be material. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.
12
Table of Contents
NOTE 11. 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.
Real estate held for sale: The land and building comprising this asset category are classified within Level 2 of the valuation hierarchy for purposes of evaluating carrying value.
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 its valuation methods are appropriate.
NOTE 12. SUBSEQUENT EVENTS
We have evaluated events or transactions that occurred after the balance sheet date of September 30, 2012 and have identified no such events or transactions which required adjustment to, or disclosure in, these Condensed Consolidated Financial Statements.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 periods ended September 30, 2012 and 2011. 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 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, consolidation within our target marketplace and among our competitors, and competition from larger, better capitalized competitors. 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, as amended, for our fiscal year ended June 30, 2012.
With operations in Irvine, California and Beaverton, Oregon, we provide products used in medical, research and industrial applications. Experience in surgical devices and multi-axis motion control applications allows us to develop products that require high precision in harsh environments.
Our products are found in hospitals, dental offices, medical engineering labs, scientific research facilities and high tech manufacturing operations around the world. The names of Micro Motors and Oregon Micro Systems are used for marketing purposes as brand names.
On February 27, 2012, we completed the sale of our fractional horsepower motor product line, operating under the name Pro-Dex Astromec (Astromec) and located in Carson City, Nevada, to SL Montevideo Technology, Inc., a wholly owned subsidiary of SL Industries, Inc. The Astromec product line has been treated as a discontinued operation in the Condensed Consolidated Financial Statements and the Notes thereto included elsewhere in this report for all periods presented. The following discussion and analysis provides information solely with respect to our continuing operations, which excludes Astromec, unless otherwise indicated.
13
Table of Contents
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 SECs 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.
Critical Accounting Estimates and Judgments
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Revenue Recognition
Revenue on product sales is recognized upon shipment to the customer when risk of loss, title transfer to the customer and all other conditions required by GAAP, as promulgated by the Financial Accounting Standards Board (FASB) in Accounting Standards Codification (ASC) Section 605 (formerly Staff Accounting Bulletin No. 104, Revenue Recognition), have been satisfied.
Returns of our product for credit are minimal; accordingly, we do not establish a reserve for product returns at the time of sale.
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 year, after the sale. At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return rates and repair costs, which factors are reviewed quarterly.
Warranty expenses, including changes of estimates, are included in cost of sales in our consolidated statements of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market value. Reductions to estimated market value are recorded, and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to estimated demand over the ensuing 12 months from the measurement date.
Accounts Receivable
Trade receivables are stated at their original invoice amounts, less an allowance for portions of such amounts, the collection of which is believed to be doubtful. 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.
Long-lived Assets and Real Estate Held for Sale
We review the recoverability of long-lived assets, consisting primarily of equipment and leasehold improvements, and of real estate held for sale, when events or changes in circumstances occur that indicate carrying values may not be recoverable.
14
Table of Contents
Stock-Based Compensation
We recognize compensation expense for all share-based awards made to employees and directors by estimating the fair value of share-based awards at the grant date and recognizing compensation expense over the requisite service period.
For stock options, fair value is estimated 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 and projected employee stock option exercise behavior. We currently estimate stock price volatility based upon historical activity, with future volatility expected to approximate past volatility. The expected time to exercise is based on a simplified model of the vesting term of the option plus one-half the option life.
15
Table of Contents
Income Taxes
We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers. Deferred tax assets at September 30, 2012 and June 30, 2012 consisted primarily of basis differences related to net operating loss and research and development tax credit carryovers, intangible assets, accrued expenses and inventories.
Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which deferred tax assets will be recoverable. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. At September 30, 2012 and June 30, 2012, we maintained a valuation allowance against the entire balance of our deferred tax assets, net of deferred tax liabilities.
Description of Business
The majority of our revenue is derived from designing, developing and manufacturing surgical devices for the medical device and dental industries and motion control software and hardware for industrial and scientific applications. The proportion of total sales by customer type is as follows:
Three months ended September 30, | ||||||||||||||||
Customer type |
2012 | 2011 | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Medical |
$ | 2,369 | 68 | % | $ | 4,121 | 82 | % | ||||||||
Industrial |
761 | 22 | % | 643 | 13 | % | ||||||||||
Dental |
206 | 6 | % | 205 | 4 | % | ||||||||||
Government and other |
125 | 4 | % | 76 | 1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total sales |
$ | 3,461 | 100 | % | $ | 5,045 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
Our medical device products utilize proprietary designs developed by us under exclusive design and supply agreements and are manufactured in our Irvine, California facility, as are our dental products, which are sold primarily to original equipment manufacturers and dental product distributors. We design and manufacture embedded multi-axis motion controllers in our facility in Beaverton, Oregon.
At September 30, 2012, we had a backlog of $6.9 million. 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.
16
Table of Contents
RESULTS OF OPERATIONS
Comparison of the three-month periods ended September 30, 2012 and 2011
The following table sets forth financial data and the percentage of net sales regarding our financial position and operating results:
Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Dollars in thousands | ||||||||||||||||
Net sales |
$ | 3,461 | 100 | % | $ | 5,045 | 100 | % | ||||||||
Cost of sales |
2,225 | 64 | % | 2,937 | 58 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
1,236 | 36 | % | 2,108 | 42 | % | ||||||||||
Selling expenses |
274 | 8 | % | 374 | 8 | % | ||||||||||
General and administrative expenses |
608 | 18 | % | 816 | 16 | % | ||||||||||
Research and development costs |
406 | 12 | % | 561 | 11 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from operations |
(52 | ) | -2 | % | 357 | 7 | % | |||||||||
Interest expense and other, net |
(6 | ) | 0 | % | (10 | ) | 0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before provision for income taxes |
(58 | ) | -2 | % | 347 | 7 | % | |||||||||
Provision for income taxes |
1 | 0 | % | 1 | 0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
(59 | ) | -2 | % | 346 | 7 | % | |||||||||
Income from discontinued operations |
42 | 1 | % | 100 | 2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (17 | ) | -1 | % | $ | 446 | 9 | % | |||||||
|
|
|
|
|
|
|
|
Net sales for the three months ended September 30, 2012 decreased $1.6 million, or 31%, to $3.5 million from $5.0 million for the three months ended September 30, 2011. Medical device sales decreased $1.8 million, or 43%, due primarily to a decrease of $2.3 million in sales to our former largest medical device customer, which was partially offset by net increased sales of $548,000 from our Irvine, California facility, primarily to the rest of our medical device customer base, and $138,000 of our motion control product line.
Gross profit for the three months ended September 30, 2012 decreased $872,000, or 41%, compared to the corresponding period in 2011, resulting primarily from $626,000 related to the sales volume decrease discussed above and the remainder attributable to the related effects on manufacturing at lower sales volumes. As a percentage of sales, gross margin decreased to 36% for the three months ended September 30, 2012 from 42% for the corresponding period in 2011, due primarily to the effects on manufacturing at lower sales volumes.
Selling expenses decreased $100,000, or 27%, to $274,000 for the three months ended September 30, 2012, from $374,000 for the corresponding period in 2011. This decrease is attributable primarily to decreases in advertising and market research expenses of $60,000 and in payroll and bonus expenses of $23,000.
General and administrative expenses decreased $208,000, or 26%, to $608,000 for the three months ended September 30, 2012, from $816,000 for the corresponding period in 2011, due primarily to decreases in 2012 related to employee training, payroll and bonus expenses of $105,000, and in legal expenses of $77,000.
Research and development costs decreased $155,000, or 28%, to $406,000 for the three months ended September 30, 2012, from $561,000 for the three months ended September 30, 2011, due primarily to decreases in project costs of $82,000 and in payroll and bonus expenses of $43,000.
Net interest expense for the three months ended September 30, 2012 was $6,000, which was not materially changed from $10,000 for the three months ended September 30, 2011.
The provision for income taxes for the three months ended September 30, 2012 and 2011 consisted primarily of state franchise taxes resulting in effective tax rates of 1.7% and 0.3%, respectively. In 2012, the effective rate differed from marginal statutory tax rates due to our inability to recognize the benefits of federal and state loss carryforwards prior to their utilization. In 2011, the effective tax rate was lower than marginal statutory rates due to the utilization of tax credits, previously established as deferred tax assets, to reduce the current tax provision. Because our deferred tax assets are fully reserved by a valuation allowance, realization of such deferred tax assets triggered a corresponding reduction in the valuation allowance, thus resulting in no deferred tax provision. (See Note 7 of Notes to Condensed Consolidated Financial Statements.)
17
Table of Contents
As a result of the foregoing, loss from continuing operations for the three months ended September 30, 2012 was $59,000, as compared to income from continuing operations of $346,000 for the three months ended September 30, 2011.
Liquidity and Capital Resources
The following table presents selected financial information as of September, 30 2012 and June 30, 2012:
September 30, 2012 | June 30, 2012 | |||||||
Cash and cash equivalents |
$ | 3,125,000 | $ | 4,112,000 | ||||
Working capital |
$ | 6,739,000 | $ | 6,618,000 | ||||
Cash and cash equivalents, net of bank debt |
$ | 3,125,000 | $ | 3,338,000 |
Net cash used in operating activities during the three months ended September 30, 2012 amounted to $172,000. Our operations, excluding the balance sheet changes discussed below in this paragraph, provided cash amounting to $158,000 after adjustment for non-cash items. Uses of cash arose from an increase in accounts receivable amounting to $212,000, due primarily to the timing of sales by us and related payments to us within the three-month period, and an increase in inventories of $691,000, primarily due to the purchase of components required to fulfill firm customer purchase orders in backlog as well as repair and warranty orders, and to build our stock of components related to certain of our products with the objective of shortening lead times when forecasted purchase orders are received. Partially offsetting these cash uses were sources of cash from increases in accounts payable and accrued liabilities of $511,000, resulting primarily of growth in accounts payable that correlates with the increase in inventories discussed above in this paragraph, and a reduction in income taxes receivable of $42,000 (representing a refund of taxes paid in the prior year).
Net cash provided by operating activities during the three months ended September 30, 2011 amounted to $349,000. Our operations, excluding the balance sheet changes discussed below in this paragraph, provided cash amounting to $628,000 after adjustment for non-cash item. The primary source of cash arose from a decrease in receivables of $785,000, resulting primarily from the lower level of sales in the three-month period ended September 30, 2011, relative to the three months ended June 30, 2011 (thus resulting in a lower level of accounts receivable at September 30, 2011), and from the collection during the three-month period ended September 30, 2011 of accounts receivable during the period from sales to our then-largest customer in June 2011.
Net cash used in investing activities for the three months ended September 30, 2012 and 2011 was $41,000 and $42,000, respectively, and consisted primarily of capital expenditures for manufacturing equipment.
Net cash used in financing activities for the three months ended September 30, 2012 was $774,000 as compared to $89,000 in the corresponding 2011 period. This increase reflects our payment, in September 2012, of the remaining balance due, amounting to $685,000, on the Union Bank term loan, fully retiring such indebtedness (see Note 5 of Notes to Condensed Consolidated Financial Statements and Changes in Bank Debt and Credit Facilities below).
We believe that existing cash balances and cash flows from operations will be sufficient to fund operations for the next twelve months.
Reduction in Large Customer Orders
In December 2009, our largest customer informed us that it was in the process of developing, and planned to eventually manufacture, its own surgical devices which were functionally comparable to the products we provided to the customer at that time. We had been the exclusive manufacturer of these products since they were developed. The resulting reduction in orders from our largest customer and its expected future impact on our business is more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements.
18
Table of Contents
Changes in Bank Debt and Credit Facilities
As more fully described in Note 5 of Notes to Condensed Consolidated Financial Statements, on February 4, 2011, we entered into a credit facility agreement with Union Bank that provided for (a) a revolving credit line of up to $1.5 million, (b) a non-revolving credit line of up to $350,000 for the purchase of equipment, and (c) a term loan of $1.25 million. The proceeds of the term loan were used to pay off in full the Wells Fargo term loan previously outstanding.
The credit facility agreements contained various covenants, including certain covenants measured annually based on fiscal year results, concerning our financial performance. At June 30, 2012, we were in violation of profitability-based covenants, for which the bank had the right to declare us in default of the bank credit facility agreements and the entire amount owing under the facility, consisting of the term loan, to become immediately due and payable.
On August 30, 2012, we notified the bank of our intent to terminate the credit facility agreements and repay the term loan in full, on or before September 30, 2012. By letter to us dated September 4, 2012, the bank waived, through October 1, 2012, the rights it otherwise would have had pursuant to the covenant violations described above. In conformity with the correspondence described in this paragraph, on September 24, 2012, we repaid the entire principal balance of the term loan, amounting to $685,000 and the credit facility agreements were terminated.
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 SECs 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 companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation as of September 30, 2012, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2012, 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
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.
19
Table of Contents
OTHER INFORMATION
Item 1. | Legal Proceedings. |
In February 2011, we became aware of a report entitled Site Discovery Report, Southeast Santa Ana Project DTSC Cypress Region, dated February 2010 (the Report), that was prepared by the Cypress regional office of the Cal/EPA Department of Toxic Substances Control (DTSC) for Region 9 of the U.S. Environmental Protection Agency (USEPA) under an agreement between the two agencies. The purpose of the Report was to identify sites within an area of southeast Santa Ana, California that may be sources of groundwater contamination previously detected in that area. The Report identified 25 sites, including our former Santa Ana site, for further screening by DTSC staff over the next two years. DTSC has informed us that no further evaluation of our former site took place during either fiscal year 2011 or 2012. It is uncertain whether future developments, if any, from DTSCs screening process would have any application to our former site.
In general, we are from time to time a party to various legal proceedings incidental to our business, none of which we consider may be material. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.
Item 1A. | Risk Factors. |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended June 30, 2012 and in our subsequent quarterly reports on Form 10-Q. The risks discussed in our Annual Report on Form 10-K and in our subsequent quarterly reports on Form 10-Q could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K and in our subsequent quarterly reports on Form 10-Q are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
20
Table of Contents
Item 6. | Exhibits. |
Exhibits: | ||
31.1 | Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
** | Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability. |
21
Table of Contents
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2012 | Date: November 8, 2012 | |
PRO-DEX INC. | PRO-DEX INC. | |
By: / s / Michael J. Berthelot | By: / s / Harold A. Hurwitz | |
Michael J. Berthelot | Harold A. Hurwitz | |
Chief Executive Officer (Principal Executive Officer) |
Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) |
22