Pro-Dex(PDEX) - 2023 Q4 - Annual Report

Explanatory Note This section explains the restatement of the company's financial statements for fiscal years 2022 and 2021, and interim periods from Q1 2021 through Q3 2023, due to an understatement in the fair value of the Monogram Warrant - The company restated its consolidated financial statements for fiscal years 2022 and 2021, and all interim periods from September 30, 2020, through March 31, 2023[14] - The restatement was caused by a material understatement of the estimated fair value of a warrant to purchase up to 5% of Monogram Orthopaedics Inc.'s outstanding stock[15] - As a result of the error, management and the Audit Committee concluded that the previously issued financial statements should no longer be relied upon[16] - Management identified a material weakness in internal control over financial reporting related to its application of ASC 815, Derivatives and Hedging, concerning the Monogram Warrant[17] Part I This section outlines the company's core business, key operational risks, and property holdings Business Pro-Dex, Inc. specializes in designing and manufacturing powered surgical drivers and shavers for orthopedic, thoracic, and craniomaxillofacial (CMF) markets, with most revenue from medical devices sold to OEMs - The company specializes in designing, developing, and manufacturing autoclavable, battery-powered, and electric multi-function surgical drivers and shavers for orthopedic, thoracic, and CMF markets[23] Sales by Type (Fiscal Years 2023 vs. 2022) | Product/Service Type | FY 2023 Sales (in thousands) | % of Revenue | FY 2022 Sales (in thousands) | % of Revenue | | :--- | :--- | :--- | :--- | :--- | | Medical devices | $30,740 | 66% | $34,004 | 81% | | Repairs | $12,617 | 27% | $6,610 | 16% | | NRE & Prototypes | $2,695 | 6% | $1,014 | 2% | | Industrial and scientific | $865 | 2% | $919 | 2% | | Dental and component | $257 | 1% | $465 | 1% | - Customer concentration is high, with the top three customers accounting for 92% of sales in fiscal 2023, up from 88% in fiscal 2022, and the largest single customer accounted for 67% of sales in FY2023[30] - The company's backlog increased significantly to $41.6 million at June 30, 2023, from $16.5 million at June 30, 2022, with $31.4 million expected to be delivered in fiscal 2024[35] - Research and development expenses were $2.8 million in fiscal 2023 and $3.0 million in fiscal 2022[41] Risk Factors The company faces significant risks, primarily stemming from its heavy reliance on a few major customers, intense competition, potential product obsolescence, cybersecurity threats, and debt obligations - A substantial portion of revenue is derived from a few customers, with the top three accounting for 92% of sales in fiscal 2023, and the largest customer representing 67%[56] - The medical device market is characterized by rapid technological change, which could render existing products obsolete if the company fails to innovate in a timely manner[65] - The company's ability to service its debt obligations depends on its ability to generate cash, which is subject to many factors beyond its control[73] - The company's operations are subject to complex government regulations, particularly from the FDA, and non-compliance could have a material adverse effect on the business[88] - A material weakness was discovered in internal control over financial reporting during the preparation of the FY2023 financial statements, which has been time-consuming and costly[98] Properties Pro-Dex operates from two main facilities in California, including a leased manufacturing site in Irvine and an owned assembly and repairs facility in Tustin - The company leases a 28,000 sq. ft. facility in Irvine, CA for its executive offices and manufacturing, with the lease expiring in September 2027[103] - The company owns a 25,000 sq. ft. facility in Tustin, CA (the "Franklin Property"), purchased in November 2020, which is used for assembly and repairs[104] Part II This section details the company's stock market information, financial performance analysis, and audited financial statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Capital Market under "PDEX", has never paid a cash dividend, and did not repurchase shares in Q4 FY2023 - The company's common stock is traded on the Nasdaq Capital Market under the symbol "PDEX"[110] - The company has never paid a cash dividend and its current policy is to retain earnings for business operations and expansion[113] - In Q4 FY2023, the company did not repurchase any shares of its common stock, whereas in Q4 FY2022, it repurchased 22,532 shares for $350,000[114] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2023, Pro-Dex saw a 10% increase in net sales to $46.1 million, driven by a surge in repair and NRE revenue, despite a decline in medical device sales, leading to a significant increase in net income Results of Operations Comparing fiscal 2023 to 2022, net sales increased 10% to $46.1 million, primarily due to a 91% increase in repair revenue and a 166% increase in NRE services, partially offset by a 10% decrease in medical device sales Financial Performance Summary (FY2023 vs. FY2022 Restated) | Metric | FY 2023 (in thousands) | FY 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $46,087 | $42,041 | 10% | | Gross Profit | $12,749 | $13,132 | (3%) | | Operating Income | $5,762 | $5,123 | 12% | | Net Income | $7,074 | $4,572 | 55% | Net Sales Breakdown (FY2023 vs. FY2022) | Sales Type | FY 2023 (in thousands) | FY 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Medical devices | $30,740 | $34,004 | (10%) | | Repairs | $12,617 | $6,610 | 91% | | NRE & Prototype services | $2,695 | $1,014 | 166% | | Industrial and scientific | $865 | $919 | (6%) | | Dental and component | $257 | $465 | (45%) | - The decrease in medical device sales was driven by a $2.2 million decline in orthopedic sales and a $1.8 million decline in CMF sales, while thoracic sales increased by $0.7 million[141] - Gross margin fell from 31% in FY2022 to 28% in FY2023, as cost of sales increased 15% to $33.3 million, outpacing the 10% sales growth, due to higher material costs and $1.7 million in under-absorption of manufacturing costs[138][147] - General and administrative (G&A) expenses decreased by $875,000, primarily due to reduced legal/settlement expenses and lower non-cash stock compensation[149] Liquidity and Capital Resources The company's financial position strengthened in fiscal 2023, with working capital increasing to $21.3 million and cash provided by operating activities significantly improving to $5.5 million Summary of Cash Flows (in thousands) | Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Cash from Operating Activities | $5,462 | $(847) | | Cash used in Investing Activities | $(885) | $(1,235) | | Cash used in Financing Activities | $(2,490) | $(790) | | Cash and cash equivalents, end of year | $2,936 | $849 | - Working capital increased to $21.3 million as of June 30, 2023, from $19.8 million at the end of fiscal 2022[158] - During fiscal 2023, the company repurchased 86,422 shares of its common stock for an aggregate cost of $1.5 million[170] - The company has a $7.0 million Amended Revolving Loan with MBT, with an availability of $4.5 million as of June 30, 2023, to supplement liquidity if needed[166] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years ended June 30, 2023 and 2022, and the accompanying notes, highlighting the restatement due to the Monogram Warrant valuation error Report of Independent Registered Public Accounting Firm Moss Adams LLP issued an opinion that the consolidated financial statements are fairly presented, noting the restatement of prior periods and identifying the Monogram Warrant valuation as a Critical Audit Matter - The auditor, Moss Adams LLP, issued an opinion that the financial statements are fairly presented in conformity with U.S. GAAP[176] - The report highlights the restatement of previously issued financial statements for fiscal years 2022 and 2021 due to the correction of errors[177] - The valuation of the Monogram Warrant was identified as a Critical Audit Matter, requiring a high degree of auditor judgment and the use of specialists to evaluate the Black-Scholes Option Pricing model and its assumptions[183][184] Consolidated Financial Statements The consolidated financial statements show total assets grew to $51.8 million in FY2023, total liabilities decreased, and shareholders' equity increased, with net income rising to $7.1 million for FY2023 Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | June 30, 2022 (Restated) | | :--- | :--- | :--- | | Total Current Assets | $30,979 | $31,166 | | Total Assets | $51,823 | $49,089 | | Total Current Liabilities | $9,676 | $11,354 | | Total Liabilities | $20,233 | $23,658 | | Total Shareholders' Equity | $31,590 | $25,431 | Consolidated Income Statement Highlights (in thousands) | Account | FY 2023 | FY 2022 (Restated) | FY 2021 (Restated) | | :--- | :--- | :--- | :--- | | Net Sales | $46,087 | $42,041 | $38,029 | | Gross Profit | $12,749 | $13,132 | $13,575 | | Operating Income | $5,762 | $5,123 | $4,525 | | Net Income | $7,074 | $4,572 | $6,170 | Notes to Consolidated Financial Statements The notes detail the basis of the financial statements, including the restatement's impact, investment valuations, debt agreements, and significant customer concentration - Note 2 explains that the financial statements for FY2022 and FY2021 were restated to correct an error in the fair value of the Monogram Warrant, which had been understated[205] - Note 5 details the company's investments, valued at $8.7 million at June 30, 2023, including the Monogram Warrant, valued at $6.16 million using a Black-Scholes model[306][311] - Note 8 describes multiple loans with Minnesota Bank & Trust (MBT) secured by company assets, with total scheduled principal payments of $12.8 million[332][345] - Note 12 reveals high customer concentration, with Customer 1 accounting for 67% of sales and 73% of accounts receivable in FY2023, while Customer 2 accounted for 16% of sales and 19% of receivables[367] - Note 15 (Subsequent Events) discloses that on October 6, 2023, the company exercised its Monogram Warrant in full for $1.25 million in cash, receiving 1,828,551 shares of Monogram common stock[372] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were not effective as of June 30, 2023, due to a material weakness in valuing level 3 financial instruments - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2023[374] - Management concluded that internal control over financial reporting was not effective as of June 30, 2023, due to a material weakness[375] - The material weakness relates to a deficiency in the design of internal controls for the valuation and disclosure of level 3 financial instruments, specifically the Monogram Warrant[380] - The company is implementing remediation measures to improve the design of its control related to the valuation and disclosure of level 3 financial instruments[381] Part III Part III of the report incorporates information by reference from the company's definitive Proxy Statement for its 2023 Annual Meeting of Shareholders, covering directors, executive compensation, security ownership, and related party transactions - Information for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) is incorporated by reference from the company's definitive Proxy Statement[388][389][390][391][392] Part IV This section lists all financial statements, schedules, and exhibits filed as part of the annual report, including required certifications Exhibits, Financial Statement Schedules This section lists all exhibits filed with the annual report, including corporate governance documents, material contracts, and required certifications from the CEO and CFO - Lists all financial statements, schedules, and exhibits filed as part of the Form 10-K[395] - Includes required certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act[399]