What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-09-10 compared with 2019-09-12 · 125 added, 158 removed, 473 unchanged (37% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

To the Shareholders and the Board of Directors

Pro-Dex, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheet s of Pro-Dex, Inc.

and Subsidiaries (the Company) as of June 30, 2019 and 2018, the related statements of operations and comprehensive income, shareholders equity and cash flows for each of the two years in the period ended June 30, 2019, and the related notes (collectively referred to as the financial statements).

We have audited the accompanying balance sheets of Pro-Dex, Inc.

(the Company) as of June 30, 2020 and 2019, the related statements of operations and comprehensive income, shareholders equity and cash flows for each of the two years in the period ended June 30, 2020, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As disclosed in Note 2 to the financial statements, the Company changed its method of accounting for leases for the year ended June 30, 2020, due to the adoption of Accounting Standards Codification Topic No.

Basis for Opinion

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Deferred costs

Notes receivable (See Note 6)

Prepaid expenses and other current assets

1 unchanged sentence

Plant, equipment and leasehold improvements, net

Right of use asset, net

Intangibles, net

Deferred income taxes, net

Notes receivable, net of current portion (See Note 6)

LIABILITIES AND SHAREHOLDERS EQUITY

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Deferred rent

Lease liability, net of current portion

Income taxes payable

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Accumulated other comprehensive loss

Retained earnings (accumulated deficit)

Retained earnings

Total shareholders equity

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General and administrative expenses

Asset impairment charges

Gain on disposal of equipment

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Common Shares

Accumulated Other

Retained Earnings/

Comprehensive

1 unchanged sentence

Balance at June 30, 2018

Net change in unrealized gain (loss) from marketable equity investments

Exercise of stock options

Net change in unrealized gain/(loss) from marketable equity investments, net of tax of $0

ESPP shares issued

Shares issued in connection with performance award vesting

Shares withheld from common stock issued to pay employee payroll taxes

Share-based compensation

Shares issued under ATM (1)

Share repurchases

Balance at June 30, 2019

Exercise of stock options

Net change in unrealized gain (loss) from marketable equity investments

Net change in unrealized gain/(loss) from marketable equity investments, net of tax of $(23)

ESPP shares issued

Shares issued in connection with performance award vesting

Shares withheld from common stock issued to pay employee payroll taxes

Cumulative effect of change in accounting principle

Share-based compensation

1 unchanged sentence

Balance at June 30, 2020

$142,000 of the proceeds raised from the ATM shares issued during fiscal 2018, were accounted for as a reduction of prepaid expenses related to establishing the ATM.

See notes to financial statements .

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Depreciation and amortization

Gain on collection of note receivable

Gain on sale of investments

Non-cash lease expense

Gain on sale or disposal of equipment

Amortization of loan fees

Asset impairment charges

Share-based compensation

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Deferred costs

Assets held for sale

Prepaid expenses and other assets

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Purchases of equipment and leasehold improvements

Purchase of notes receivable

Investment in Loan Participation (See Note 6)

Proceeds from dividend reclassified as return of principal

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Principal payments on capital lease and note payable

Proceeds from shares issued under ATM

Borrowing from Minnesota Bank & Trust, net of loan origination fees

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Proceeds from exercise of stock options and ESPP contributions

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

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Supplemental disclosures of cash flow information:

Noncash investing and financing activities:

Promissory note issued in connection with sale of Fineline

Supplemental disclosures of cash flow information:

Cash paid for income taxes, net of refunds

Cash paid for interest

Cash paid during the period for:

Income taxes, net of refunds

See notes to financial statements .

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DESCRIPTION OF BUSINESS

We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic and maxocranial facial markets.

We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors.

We also manufacture and sell rotary air motors to a wide range of industries.

Our Fineline Molds division (Fineline), acquired in fiscal 2015, manufactured plastic injection molding for a variety of industries.

As disclosed in a Form 8-K filed with the SEC on May 30, 2018, we sold substantially all of the assets of Fineline on May 23, 2018.

Management reviewed ASU 2014-08 Reporting Discontinued Operations and Disposals of Components of an Entity and concluded that the sale of Fineline does not require treatment as a discontinued operation because it is was not a material part of our operations.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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 financial statements.

In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America (U.S.

GAAP) in all material respects, and have been consistently applied in preparing the accompanying financial statements.

Revenue Recognition

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Factors that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts include the nature and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

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.

3 unchanged sentences

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.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Cash and Cash Equivalents

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This evaluation includes analysis of historical sales and usage, existing demand, as well as specific factors known to management.

As of June 30, 2019, there was approximately $276,000 of inventory in-transit.

As of June 30, 2020 and 2019, there was approximately $303,000 and $276,000, respectively, of inventory in-transit.

Investments at June 30, 2020 and 2019, consist of marketable equity securities of publicly held companies.

1 unchanged sentence

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.

During fiscal 2019, we invested in the common stock of a public company that is listed on the Over-the-Counter market and is thinly traded.

This investment was subject to an independent valuation as of June 30, 2019.

Our long-term investments consist of common stocks of public companies that are thinly traded.

These investments were subject to an independent valuation as of June 30, 2020.

Long-lived Assets

We review the recoverability of long-lived assets, consisting of equipment and leasehold improvements, when events or changes in circumstances occur that indicate carrying values may not be recoverable.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Equipment and leasehold improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods:

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The expense associated with the amortization of the patent costs is recognized in research and development costs.

Notes Receivable

Notes receivable are stated at unpaid principal balance and are subject to impairment losses.

Management considers a note impaired when either i) 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 or ii) the fair market of the underlying collateral securing the note is less than the book value of the note receivable.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

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, 2019 and 2018 consisted primarily of basis differences related to research and development tax credit utilization, accrued expenses, inventories and intangible assets.

Deferred tax assets at both June 30, 2020 and 2019, consisted primarily of basis differences related to unrealized gain/loss related to investments, fixed assets, accrued expenses, and inventories.

Significant management judgment is required in determining the provision for income taxes and the recoverability of deferred tax assets.

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Uncertain Tax Positions

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

We record uncertain tax positions in accordance with Accounting Standards Codification (ASC) 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Shipping and Handling

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Shipping expenses, consisting primarily of payments made to freight companies, are included in cost of sales.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Concentration of Credit Risk

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Actual results could differ from those estimates.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Our operations are affected by numerous factors including market acceptance of our products, changes in technologies, and new laws, government regulations, and policies.

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As such, cash and cash equivalents are classified within Level 1 of the valuation hierarchy.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Investments consist of marketable equity securities of publicly held companies.

As such, most of our investments are classified within Level 1 of the valuation hierarchy.

One of our marketable securities is an investment of common stock of a publicly traded company that is listed on the Over-the-Counter market and is thinly traded.

Due to the thinly traded nature of this stock it is classified within Level 2 of the valuation hierarchy.

The fair value of this investment was based upon an independent valuation.

Notes receivable:

This investment was classified within Level 3 of the valuation hierarchy for purposes of evaluating potential impairment of these assets as of June 30, 2018.

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 collateral.

Our long-term marketable securities consist of investments of common stock of publicly traded companies that are thinly traded.

Due to the thinly traded nature of these stocks they are classified within Level 2 of the valuation hierarchy.

The fair value of these investments was based upon an independent valuation.

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 costs are charged to selling or general and administrative expense as incurred and amounted to $1,000 and $2,000 for the fiscal years ended June 30, 2020 and 2019, respectively.

Recent Accounting Standards

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.

However, the FASB issued ASU 2018-11 on July 30, 2018, which allows entities to apply the provisions of ASC 842 at the effective date without adjusting comparative periods.

We have completed the assessment of our leases and we expect our July 1, 2019 adoption will lead to an approximate $3.3 million increase in the assets and liabilities recorded on our balance sheet.

Recently Adopted Accounting Standards

On July 1, 2019, we adopted ASU 2016-02, (Topic 842) Leases , using a modified retrospective approach through a cumulative effect adjustment to retained earnings in the amount of $42,000 as of the beginning of fiscal 2020.

The impact of adoption was an increase to long-term assets and total liabilities of approximately $3.3 million as of July 1, 2019.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Effective July 1, 2018, we adopted new revenue recognition guidance issued by the FASB related to contracts with customers.

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Reclassifications

We have reclassified our income taxes payable, which consists of uncertain tax positions, from current liabilities to non-current liabilities as prescribed by GAAP.

We have reclassified certain of our marketable equity securities from current to long-term, to conform to the current year presentation, as we have concluded that these marketable securities are thinly traded.

This balance sheet reclassification had no impact on our net income.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

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Investments at June 30, 2020 and 2019, had an aggregate cost basis of $6,483,000 and $3,780,000, respectively.

The long-term investments include an equity security purchased during the third quarter of fiscal 2019 that is thinly traded and therefore we classified the asset as long term in nature because even if we decide to sell the stock we may not be able to sell our position within one year.

At June 30, 2019, the investments included gross unrealized losses of $549,000 and no unrealized gains.

The long-term investments include equity securities of public companies that are thinly traded and therefore we classified the assets as long term in nature because even if we decide to sell the stocks we may not be able to sell our position within one year.

At June 30, 2020, the investments included net unrealized losses of $1,563,000 (gross unrealized losses of $1,703,000 offset by gross unrealized gains of 140,000).

Of the total short-term marketable equity securities at June 30, 2019 and 2018, $938,000 and $285,000, respectively, represent an investment in the common and preferred stock of Air T, Inc.

Two of our Board members are also board members of Air T, Inc.

At June 30, 2019, the investments included gross unrealized losses of $549,000 and no unrealized gains.

Of the total long-term marketable equity securities at June 30, 2020 and 2019, $847,000 and $938,000, respectively, represent an investment in the common and preferred stock of Air T, Inc.

Two of our Board members Messrs.

Swenson and Cabillot, are also Board members of Air T, Inc.

and both either individually or through affiliates own an equity interest in Air T, Inc.

Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc.

Swenson, our Chairman, also serves as the chief executive officer and chairman of Air T, Inc.

The shares have been purchased through 10b5-1 Plans, which in accordance with our internal policies regarding the approval of related-party transactions, was approved by our three Board members that are not affiliated with Air T, Inc.

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Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands):

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Total inventory

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Equipment and Leasehold Improvements

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During fiscal 2020, fully depreciated assets in the amount of $58,000 were retired and an additional $39,000 of fully depreciated assets were sold.

During fiscal 2018, assets in the amount of approximately $1.2 million were retired and an additional $359,000 of fully depreciated assets were sold.

During fiscal 2019, fully depreciated assets in the amount of $103,000 were retired and an additional $280,000 of fully depreciated assets were sold.

Intangibles consist of the following (in thousands):

Covenant not to compete

Patent-related costs

Total intangibles

Less accumulated amortization

Amortization expense for the years ended June 30, 2020 and 2019, amounted to $14,000 and $22,000, respectively.

The covenant not to compete related to assets acquired in conjunction with a business acquisition.

The covenant not to compete and related accumulated amortization were retired during the second quarter of fiscal 2019.

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.

Since we do not know when, or if, our patent applications will be issued, the future amortization expense is not predictable.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Accrued Liabilities

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Accrued bonuses

Current portion of lease liability

Accrued losses on development contracts

Accrued sales, use and excise taxes

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

WARRANTY ACCRUAL

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Warranty expense relating to new product sales and changes to estimates was $177,000 and $101,000, respectively, for the fiscal years ended June 30, 2020 and 2019.

On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted into law.

The new legislation represents a fundamental and dramatic shift in US taxation.

The new legislation contained several key tax provisions that impacted us including the reduction of the corporate income tax rate to 21% effective January 1, 2018.

The new legislation also included a variety of other changes including but not limited to a limitation on the deductibility of interest expense, acceleration of business asset expensing and reduction in the amount of executive pay that could qualify as a tax deduction.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property (QIP).

Under ASC 740, the effects of new legislation are recognized upon enactment.

As of June 30, 2020, we have, as a result of the technical amendments made by the CARES Act to QIP, accelerated tax depreciation expenses of approximately $94,000, which represents favorable temporary book-to-tax timing differences (i.e., no effective tax rate impact) for income tax purposes and are recorded as components within our deferred income tax assets and income tax receivable, included in prepaid expenses and other current assets, on our balance sheets.

We do not expect the other provisions of the CARES Act to materially impact our business or our tax provision.

The provision for income taxes consists of the following amounts (in thousands):

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NOTES TO FINANCIAL STATEMENTS

Section 15 of the Internal Revenue Code stipulated that our fiscal year ended June 30, 2018 have a blended federal statutory tax rate of 27.55%, which was based on the applicable tax rates before and after the effectiveness of the Tax Act and the number of days in the year.

The effective income tax rate from income (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).

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Stock based compensation

Unrealized losses

Other intangibles

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As of June 30, 2020, our deferred tax asset valuation allowance primarily consists of unrealized capital loss for investments held and the state net operating loss carryforwards for states in which we have filed a final return.

For the year ended June 30, 2019, we recorded a net valuation allowance of $109,000, on the basis of managements reassessment of the amount of our deferred tax assets that are more likely than not to be realized.

For the year ended June 30, 2020, we recorded a net increase to our valuation allowance of $66,000, on the basis of managements reassessment of the amount of our deferred tax assets that are more likely than not to be realized.

PRO-DEX, INC.

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Additions for tax positions of prior years

Reductions for tax positions of prior years

Reductions due to lapses in statutes of limitation

Ending balance

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We are subject to U.S.

federal income tax, as well as income tax of California and Colorado.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30,

2016 and later.

However, because of net operating losses and research credit carryovers, substantially all of our tax years are open to audit.

NOTES RECEIVABLE

Loan Participation note receivable short-term

On September 20, 2017 (the Closing Date), we entered into a Participation Agreement with FS Special Opportunities I, L.P., a Minnesota limited partnership (Principal), pursuant to which we paid Principal $1,150,000 in cash to purchase a 50% (Participation Percentage) undivided interest (the Loan Participation) in Principals $2,300,000 loan (the Loan) to 414 New York LLC, a New York limited liability company (Borrower).

The Loan Participation constituted the purchase by us of a property interest in the Loan from Principal and did not create a creditor-debtor relationship between us and Borrower.

Borrower used the proceeds from the Loan to acquire a leasehold interest in certain real estate operated as a hotel in Manhattan, New York.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Pursuant to the loan agreement entered into on the Closing Date between Principal and Borrower, the Loan initially bore interest at a fixed rate of 22% per annum, with payments of all accrued and unpaid interest due monthly commencing on October 1, 2017 and on the first day of each month thereafter.

If the principal balance of the Loan was not paid in full by September 30, 2018, commencing on October 1, 2018 and continuing on the first day of the next 83 months thereafter, Borrower would, in addition to the aforementioned monthly interest payments, pay installments of principal equal to 1/84 th of the principal balance outstanding under the Loan as of September 30, 2018.

During the first quarter ended September 30, 2018, however, the Principal extended interest only payments to Borrower for an additional period of up to two months and continued to grant subsequent extensions.

During the third quarter ended March 31, 2019, the Borrower repaid the loan in full.

Additionally, we received payments in the amount of $35,000 representing the value of warrants issued to us in conjunction with the loan extensions, recorded in other income in the statement of operations and comprehensive income.

Cabillot, a director of the Company, is the managing partner of Farnam Street Capital, Inc.

(Farnam) and Farnam is the founding partner of the Principal.

In accordance with our internal policies regarding the approval of related party transactions, the Loan Participation was approved by our four Board members that are not affiliated with Farnam.

Fineline note receivable

On May 23, 2018, we completed the sale of substantially all of the assets of Fineline, which was engaged in the manufacture of plastic injection molds serving customers in a variety of industries.

The aggregate purchase price was $310,000, of which $30,000 was paid in cash at closing and the balance of $280,000 was to be paid to us under the terms of a five-year promissory note, which bore interest at 4% per annum and required sixty equal monthly payments of principal and accrued interest in the amount of approximately $5,000 each, beginning February 15, 2019.

We determined that there was uncertainty regarding the collectability of this note.

Therefore, during fiscal 2018 we offset the gain on the sale of the division in the amount of approximately $211,000, against the impairment of the note receivable because we believed that the fair market value of the collateral securing the note was less than the face amount of the note.

During the third quarter ended March 31, 2019, the loan fell into default.

During the fourth quarter ended June 30, 2019 we sold the collateral securing the loan for $75,000 cash, eliminated the note receivable balance and recorded approximately $10,000, the amount in excess of the note receivable balance, to other income in our statement of operations and comprehensive income.

federal income tax, as well as income tax of California, Maryland, Massachusetts, and Colorado.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2017, and later.

However, because of our prior net operating losses and research credit carryovers, substantially all of our tax years are open to audit.

NOTES PAYABLE AND FINANCING TRANSACTIONS

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We paid loan origination fees to MBT in the amount of $60,000, which is being amortized to loan fees over the term of the underlying debt.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

The Term Loan matures on October 1, 2025, and bears interest at a fixed rate of 5.53% per annum.

1 unchanged sentence

Commencing November 1, 2018 and continuing on the first day of each subsequent month thereafter until the maturity date, we are required to make payments of principal and interest on the Term Loan of approximately $72,000, plus any additional accrued and unpaid interest through the date of payment.

The balance owed on the Term Loan at June 30, 2019 is $4.6 million.

The Revolving Loan matures on September 6, 2019 unless earlier terminated pursuant to its terms and bears interest at the greater of (a) 4.5% or (b) the difference of the prime rate as published in the Money Rates section of the Wall Street Journal minus 0.50%.

The balance owed on the Term Loan at June 30, 2020, is $3.9 million, net of unamortized loan fees.

The Revolving Loan matures on November 6, 2020, unless earlier terminated pursuant to its terms and bears interest at the greater of (a) 4.5% or (b) the difference of the prime rate as published in the Money Rates section of the Wall Street Journal minus 0.50%.

Commencing on the first day of each month after we initially borrow against the Revolving Loan, which we have yet to do, and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of payment.

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The Credit Agreement and Security Agreement contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Scheduled maturities of our Term Loan for future fiscal years ending June 30 are as follows (in thousands):

Scheduled maturities of our Term Loan, exclusive of unamortized loan origination fees, for future fiscal years ending June 30 are as follows (in thousands):

Term Loan Payments

Total principal payments

Farmers & Merchants Bank of Long Beach

On April 19, 2017, we entered into a Business Loan Agreement, dated effective March 28, 2017, with Farmers & Merchants Bank of Long Beach (FMB), providing for a $500,000 revolving loan facility (the Revolving Loan Facility).

The Revolving Loan Facility was secured by substantially all of our assets and bore interest at prime plus 2 percent and matured on March 28, 2018.

During the initial loan period, we did not borrow any funds.

As disclosed in a Form 8-K filed with the SEC on April 17, 2018, we entered into a Change in Terms Agreement and an Amendment #1 to Business Loan Agreement, each dated effective April 6, 2018, which extended the maturity date of the Revolving Loan Facility to March 28, 2019.

This loan was terminated by us on September 4, 2018 in conjunction with the MBT Loans described above.

Jules & Associates/Hitachi Capital America Corporation

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to lease a specific machine used in our inspection process.

The cost of the equipment was approximately $106,000 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 cost of the equipment was approximately $106,000 and the lease provided 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, 2019 is approximately $6,000.

The lease was paid off in full during the first quarter of fiscal 2020.

Effective July 1, 2019, we adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date.

In addition, we elected the practical expedient which allowed us to carry forward the historical lease classification of our sole operating lease for our corporate office, which includes our manufacturing and research and development facilities.

Adoption of this standard resulted in the recording of net operating lease right-of-use (ROU) asset and corresponding operating lease liability each in the amount of $3.3 million.

Our financial position for reporting periods beginning on or after July 1, 2019, is presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Our operating lease ROU asset and long-term liability are presented separately on our balance sheet.

The current portion of our operating lease liability, exclusive of imputed interest, as of June 30, 2020, in the amount of $339,000, is presented within accrued expenses on the balance sheet.

As of June 30, 2020, the maturity of our lease liability is as follows:

Operating Lease

Total lease payments

Less imputed interest:

As of June 30, 2020, our operating lease has a remaining lease term of seven years and three months and an imputed interest rate of 5.3%.

Cash paid for amounts included in the lease liability for the year ended June 30, 2020, was $461,000.

As previously disclosed in our 2019 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for our only operating lease having an initial or remaining noncancellable lease term in excess of one year would have been as follows:

Operating Leases at June 30, 2020

Total minimum lease payments

COMMITMENTS AND CONTINGENCIES

We lease our office, production and warehouse facility in Irvine, California, (our corporate office) under an agreement that expires in September 2027.

We leased our former San Dimas, California office until the sale of our Fineline division in May 2018 at which time it terminated.

Our corporate office lease requires us to pay insurance, taxes, and other expenses related to the leased space.

Rent expense in fiscal 2020 and 2019 was $561,000 and $548,000, respectively.

Minimum lease payments for future fiscal years ending June 30 are as follows (in thousands):

Total minimum lease payments

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Compensation Arrangements

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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.

Participants are eligible to receive non-discretionary matching contributions by the Company equal to 25% of their contributions up to 5% of eligible compensation.

For the fiscal years ended June 30, 2020 and 2019, we recognized compensation expense amounting to $67,000 and $42,000, respectively, in connection with the 401(k) Plan.

During our fiscal year ended June 30, 2019, we used approximately $16,000 of forfeited match contributions to reduce our match expense.

During our fiscal year ended June 30, 2020 and 2019, we used approximately $7,000 and $16,000, respectively, of forfeited match contributions to reduce our match expense.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Legal Matters

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The Employee Stock Option Plan and Directors Stock Option Plan were terminated in June 2014 and December 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.

In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our, 2016 Annual Meeting.

The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards.

As of June 30, 2019, 200,000 performance awards have been granted under the 2016 Equity Incentive Plan.

Stock Options

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As of June 30, 2020, there was no unrecognized compensation cost under the Former Stock Option Plans as all outstanding stock options are fully vested.

The intrinsic value of stock options outstanding and exercisable at June 30, 2019 was approximately $600,000.

The intrinsic value of stock options outstanding and exercisable at June 30, 2020, was approximately $862,000 with a weighted-average remaining contractual term of 1.03 years at June 30, 2020.

The following is a summary of stock option activity under the stock option plans for the fiscal years ended June 30, 2020 and 2019:

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Stock Options Exercisable at June 30,

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Performance Awards

In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees which will generally be paid in shares of our common stock.

In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees, which upon vesting, will generally be paid in shares of our common stock.

Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices.

The weighted-average fair value of the performance awards granted was $4.46, calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation.

In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain current employees.

The weighted average fair value of the performance awards granted in 2020 was $16.90, calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation.

We recorded share-based compensation expense of $279,000 and $33,000 for the fiscal years ended June 30, 2020 and 2019, respectively, related to these performance awards.

On June 30, 2020, there was approximately $244,000 of unrecognized compensation cost related to these non-vested performance awards expected to be expensed over the weighted-average period of 2.86 years.

On July 1, 2018, it was determined by the Compensation Committee of our Board of Directors that the first of five tranches of the performance awards had been achieved and participants were awarded 40,000 shares of common stock.

Each participant elected a net issuance to cover their individual withholding taxes and therefore the Company issued 24,727 shares.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

On July 1, 2018, it was determined by the Compensation Committee that the first of five tranches of the performance awards had been achieved and participants were awarded 40,000 shares of common stock.

Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 24,727 shares.

On July 1, 2020, it was determined by the Compensation Committee that the second of five tranches of the performance awards had been achieved and participants were awarded 40,000 shares of common stock.

Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 25,629 shares with an effective date of July 16, 2020, coinciding with the pay date that included July 1, 2020.

Employee Stock Purchase Plan

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Our 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.

The ESPP was approved by our shareholders at our 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.

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Years Ended June 30,

Percent of Total

Total revenue

Customer concentration:

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either June 30, 2020 or June 30, 2019, is as follows (in thousands, except percentages):

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Customer concentration:

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

During fiscal 2020 and 2019, we had two suppliers that accounted for more than 10% of total inventory purchases, as follows (in thousands, except percentages):

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Diluted earnings per share

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

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 fiscal year ended June 30, 2018, we repurchased 33,026 shares at an aggregate cost, inclusive of fees under the Plan, of $220,000.

COMMON STOCK Share Repurchase Program

In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion.

In accordance with, and as part of, these share repurchase programs, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (10b5-1 Plan or Plan).

During the fiscal year ended June 30, 2020, we repurchased 231,274 shares at an aggregate cost, inclusive of fees under the Plan, of $3.4 million.

On a cumulative basis, we have repurchased a total of 588,051 shares under the share repurchase program at an aggregate cost, inclusive of fess under the Plan, of $5.1 million.

During the fiscal year ended June 30, 2019, we repurchased 322,068 shares at an aggregate cost, inclusive of fees under the Plan, of $4.0 million.

On a cumulative basis, we have repurchased a total of 819,325 shares under the share repurchase programs at an aggregate cost, inclusive of fess under the Plan, of $8.5 million.

All repurchases under the 10b5-1 Plans were administered through an independent broker.

At The Market Offering Agreement

In February 2017, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (Ascendiant).

The ATM Agreement allows us to sell shares of our common stock pursuant to specific parameters defined by us as well as those defined by the SEC and the ATM Agreement.

During the fiscal year ended June 30, 2017, we sold 8,276 shares of common stock at average prices of $6.04 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.

During the fiscal year ended June 30, 2018, during periods when we did not have a 10b5-1 Plan in place, we sold 332,189 shares of common stock under the ATM at average prices of $7.02 per share, resulting in proceeds to us of $2.3 million, net of commissions and fees.

From the inception of the ATM in February 2017 through December 31, 2017, we sold 340,465 shares of common stock for gross proceeds of $2,311,000 net of commissions and fees paid to Ascendiant totaling $72,000.

In December 2017, our Board suspended the ATM indefinitely.

Our Board has the discretion to reactivate the ATM prior to February 16, 2020, the expiration of the ATM Agreement, unless earlier terminated by Ascendiant or us.

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

SUBSEQUENT EVENT

As reported in our Current Report filed with the SEC on September 8, 2020, we executed a Standard Offer, Agreement and Escrow Instructions For Purchase of Real Estate (the Purchase Agreement) for the purchase of an approximate 25,230 square foot industrial building located at 14401 Franklin Avenue, Tustin CA 92780 on September 2, 2020.

The aggregate purchase price is $6,509,340.

The initial deposit in the amount of $75,000 was made on September 3, 2020.

Pursuant to the terms of the Purchase Agreement, we have 30 days to obtain financing of up to 90% of the purchase price.

The deposit is refundable to us during the up to 30-day due diligence period.

We plan to use this facility to expand our operations to satisfy requirements of our expected future growth.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data