What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-06 compared with 2021-02-04 · 185 added, 169 removed, 427 unchanged (45% of the section changed)

5 unchanged sentences

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts of $4 and $6 at December 31, 2020 and at June 30, 2020, respectively

Accounts receivable, net of allowance for doubtful accounts of $9 and $6 at March 31, 2021 and at June 30, 2020, respectively

Deferred costs

11 unchanged sentences

Deferred revenue

Note payable and capital lease obligations

Note payable and finance lease obligations

Total current liabilities

1 unchanged sentence

Income taxes payable

Notes and capital leases payable, net of current portion

Notes and finance lease payable, net of current portion

Total non-current liabilities

4 unchanged sentences

50,000,000 shares authorized;

3,860,639 and 3,811,137 shares issued and outstanding at December 31, 2020 and June 30, 2020, respectively

Accumulated other comprehensive income (loss)

3,700,540 and 3,811,137 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively

Accumulated other comprehensive loss

Retained earnings

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of sales

8 unchanged sentences

Gain on sale of investments

Income from operations before income taxes

Income before income taxes

Income tax expense

Other comprehensive income, net of tax:

Unrealized income from marketable equity investments

Comprehensive income

Other comprehensive income (loss), net of tax:

Unrealized income (loss) from marketable equity investments

Comprehensive income (loss)

Basic net income per share:

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Three and Six Months Ended December 31, 2020 and 2019

For the Three and Nine Months Ended March 31, 2021 and 2020

(In thousands)

Three Months Ended

Six Months Ended

Nine Months Ended

Common shares:

8 unchanged sentences

Balance, beginning of period

Net change in unrealized gain from marketable securities, net of taxes

Net change in unrealized gain (loss) from marketable securities, net of taxes

Balance, at end of period

8 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

Amortization of loan fees

Share-based compensation

Non-cash lease expense

Amortization of loan fees

Gain on sale of investments

8 unchanged sentences

Income taxes payable

Net cash provided by operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

2 unchanged sentences

Proceeds from sale of investments

Proceeds from dividend reclassification as return of principal

Purchase of land and building

6 unchanged sentences

Proceeds from Minnesota Bank & Trust long-term debt, net of fees

Principal payments on notes payable and capital lease

Principal payments on notes payable and finance lease

Net cash provided by (used in) financing activities

6 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

Supplemental disclosures of cash flow information:

18 unchanged sentences

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.

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

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

DESCRIPTION OF BUSINESS

12 unchanged sentences

Total inventory

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments are stated at market value and consist of the following (in thousands):

2 unchanged sentences

Total marketable equity securities

Investments at December 31, 2020 and June 30, 2020 had an aggregate cost basis of $6,380,000 and $6,483,000, respectively.

The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities we may not be able to sell our position within one year.

At December 31, 2020, the investments included net unrealized losses of $258,000 (gross unrealized losses of $789,000 offset by gross unrealized gains of $531,000).

During the quarter ended December 31, 2020, we incurred net unrealized gains of $1,413,000.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments at March 31, 2021 and June 30, 2020, had an aggregate cost basis of $4,270,000 and $6,483,000, respectively.

At March 31, 2021, the investments included net unrealized losses of $121,000 (gross unrealized losses of $443,000 offset by gross unrealized gains of $322,000).

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 marketable equity securities at December 31, 2020 and June 30, 2020, $1,510,000 and $847,000, respectively, represent an investment in the common and preferred stock of Air T, Inc.

Of the total marketable equity securities at March 31, 2021 and June 30, 2020, $1,272,000 and $847,000, 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.

1 unchanged sentence

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

The common stock was purchased through 10b5-1 Plans, and the preferred stock was purchased through the exercise of issued warrants and, in both cases, in accordance with our internal policies regarding the approval of related party transactions, the purchases were approved by our three Board members that are not affiliated with Air T, Inc.

Another of our Board members is employed by Air T as its Chief of Staff.

The common stock was purchased through 10b5-1 Plans, and the purchased preferred stock was purchased through the exercise of issued warrants and in both cases, in accordance with our internal policies regarding the approval of related-party transactions, purchases were approved by our three Board members that are not affiliated with Air T, Inc.

We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr.

11 unchanged sentences

On November 6, 2020 we acquired the Franklin Property for a total purchase price of $6.5 million, of which we paid $1.3 million in cash and the balance of $5.2 we financed through Minnesota Bank & Trust (MBT) (see Note 9).

As of the date of this filing, we are continuing our build-out of the property, which we expect to complete in the fourth quarter of this fiscal year.

As of the date of this filing, we are continuing our build-out of the property, which we expect to complete in the first quarter of next fiscal year.

The building is being amortized on a straight-line basis over a period of 30 years.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangibles consist of the following (in thousands):

3 unchanged sentences

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 balance sheets.

As of December 31 and June 30, 2020, the warranty reserve amounted to $347,000 and $213,000, respectively.

As of March 31, 2021 and June 30, 2020, the warranty reserve amounted to $308,000 and $213,000, respectively.

Warranty expenses are included in cost of sales in the accompanying 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.

Warranty expense relating to new product sales and changes to estimates for the three months ended December 31, 2020 and 2019 was $182,000 and $44,000, respectively, and for the six months ended December 31, 2020 and 2019 was $254,000 and $56,000, respectively.

Information regarding the accrual for warranty costs for the three and six months ended December 31, 2020 and 2019 are as follows (in thousands):

Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 2021 and 2020, was $77,000 and $69,000, respectively, and for the nine months ended March 31, 2021 and 2020, was $330,000 and $125,000, respectively.

Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2021 and 2020, are as follows (in thousands):

As of and for the

3 unchanged sentences

Changes in estimates of prior period warranty accruals

Warranty amortization

Warranty amortization and utilization

Ending balance

As of and for the

Six Months Ended

Nine Months Ended

Beginning balance

1 unchanged sentence

Changes in estimates of prior period warranty accruals

Warranty amortization

Warranty amortization and utilization

Ending balance

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NET INCOME PER SHARE

We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period.

The weighted-average number of common shares outstanding reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.

The Company calculates basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period.

The weighted-average number of common shares outstanding used in the calculation of diluted income per share reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards.

The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for net income.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

Weighted average shares outstanding

4 unchanged sentences

Diluted income per share

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences.

5 unchanged sentences

We recognize accrued interest and penalties related to unrecognized tax benefits when applicable.

As of December 31, 2020, 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.

As of March 31, 2021, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have sufficient tax attributes available to fully offset any potential assessment of additional tax.

We are subject to U.S.

3 unchanged sentences

We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SHARE-BASED COMPENSATION

3 unchanged sentences

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 December 31, 2020, 200,000 performance awards and 310,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan.

As of March 31, 2021, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan.

Former Stock Option Plans

No options were granted under the Former Stock Option Plans during the three or six months ended December 31, 2020 and 2019.

As of December 31, 2020, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding stock options are fully vested.

As of December 31, 2020, the options outstanding had a weighted average remaining contractual life of 0.92 years and an intrinsic value of $919,000.

Following is a summary of stock option activity for the six months ended December 31, 2020 and 2019:

Six Months Ended December 31,

No options were granted under the Former Stock Option Plans during the three or nine months ended March 31, 2021 and 2020.

As of March 31, 2021, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding stock options are fully vested.

As of March 31, 2021, the options outstanding had a weighted average remaining contractual life of 0.68 years and an intrinsic value of $792,000.

Following is a summary of stock option activity for the nine months ended March 31, 2021 and 2020:

Nine Months Ended March 31,

Number of Shares

10 unchanged sentences

Stock Options Exercisable at December 31,

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Performance Awards

4 unchanged sentences

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

During the three months ended December 31, 2020 and 2019, we recorded share-based compensation expense of $21,000 and $8,000, respectively, related to outstanding performance awards.

During the six months ended December 31, 2020 and 2019, we recorded share-based compensation expense of $42,000 and $16,000, respectively, related to outstanding performance awards.

On December 31, 2020, there was approximately $202,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 3.49 years.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended March 31, 2021 and 2020, we recorded share-based compensation expense of $21,000 and $70,000, respectively, related to outstanding performance awards.

During the nine months ended March 31, 2021 and 2020, we recorded share-based compensation expense of $63,000 and $86,000, respectively, related to outstanding performance awards.

On March 31, 2021, there was approximately $181,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 3.24 years.

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

3 unchanged sentences

Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 18 months to 10.5 years at inception and the achievement of our common stock trading at certain pre-determined prices.

We recorded compensation expense of $18,000 for the three and six months ended December 31, 2020, related to these options.

We recorded compensation expense of $358,000 and $376,000 for the three and nine months ended March 31, 2021, respectively, related to these options.

The weighted average fair value of the stock option awards granted was calculated using a Monte Carlo simulation.

In February 2021, the Compensation Committee of our Board of Directors granted 62,000 stock options to our directors and certain employees under the 2016 Equity Incentive Plan.

Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 4 months to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices.

We recorded compensation expense of $59,000 for the three and nine months ended March 31, 2021, related to these options.

The weighted average fair value of the stock option awards granted was calculated using a Monte Carlo simulation.

Employee Stock Purchase Plan

In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the ESPP), which was approved by our shareholders at our 2014 Annual Meeting.

In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the ESPP), which was approved by our shareholders at the December 3, 2014 Annual Meeting.

The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period.

The Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP.

During the three months ended December 31, 2020 and 2019, we did not record any share-based compensation expense relating to the ESPP, due to the fact that no six-month offering period ended during either quarter.

During the six months ended December 31, 2020 and 2019, 1,485 and 1,292 shares of our common stock were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $16.94 and $11.76, respectively, per share.

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 under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP.

During the three months ended March 31, 2021 and 2020, we recorded share-based compensation expense in the amount of $6,000 and $4,000, respectively, and 1,192 and 1,628 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $27.12 and $14.43, respectively, per share.

During the nine months ended March 31, 2021 and 2020, we recorded share-based compensation expense in the amount of $10,000 and $7,000, respectively, relating to the ESPP.

On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 24,463 shares of our common stock.

During the six months ended December 31, 2020 and 2019, we recorded share-based compensation expense in the amount of $4,000 and $3,000, respectively, relating to the ESPP.

MAJOR CUSTOMERS AND SUPPLIERS

Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the six-month periods ended December 31, 2020 and 2019 is as follows (in thousands, except percentages):

Three Months Ended December 31,

Customer concentration:

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31,

MAJOR CUSTOMERS AND SUPPLIERS

Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the nine-month periods ended March 31, 2021 and 2020, is as follows (in thousands, except percentages):

Three Months Ended March 31,

Percent of Total

Customer concentration:

Information with respect to accounts receivable from those customers who comprised more than 10 % of our gross accounts receivable at either December 31, 2020 or June 30, 2020, is as follows (in thousands, except percentages):

December 31, 2020

Nine Months Ended March 31,

Percent of Total

Customer concentration:

Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2021 or June 30, 2020, is as follows (in thousands, except percentages):

March 31, 2021

June 30, 2020

1 unchanged sentence

Customer concentration:

During the three months ended December 31, 2020, we had three suppliers accounting for 10% or more of total inventory purchases, and during the six months ended December 31, 2020, we had two suppliers that accounted for more than 10% of our total inventory purchases.

During the three and six months ended December 31, 2019, we had two suppliers that accounted for more than 10% of our total inventory purchases.

Amounts owed to the fiscal 2021 two most significant suppliers at December 31, 2020 totaled $656,000 and $345,000, respectively, and at June 30, 2020 totaled $161,000 and $245,000, respectively.

During the three and nine months ended March 31, 2021, we had two suppliers that accounted for more than 10% of our total inventory purchases.

During the three and nine months ended March 31, 2020, we had three suppliers accounting for 10% or more of total inventory purchases.

Amounts owed to the fiscal 2021 significant suppliers at March 31, 2021 and June 30, 2020, is as follows (in thousands, except percentages).

March 31, 2021

June 30, 2020

Total accounts payable

Supplier concentration:

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES PAYABLE AND FINANCING TRANSACTIONS

4 unchanged sentences

We paid loan origination fees to MBT on the Closing Date in the amount of $26,037.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Property Loan bears interest at a fixed rate of 3.55% per annum, which is subject to a 3% increase upon an event of default.

5 unchanged sentences

The Term Note A had an outstanding principal balance of $3,770,331 as of the Closing Date and may be borrowed against through May 30, 2021 (the Commitment Period).

The Term Note B has a zero balance as of the Closing Date and may be borrowed against through the Commitment Period.

We plan to draw against the Term Note B during the Commitment Period for the purpose of making improvements to the Franklin property described in Note 3.

During the third quarter ended March 31, 2021, we borrowed an additional $3,000,000 against Term Note A for the purpose of repurchasing our common stock as described in Note 10.

The Term Note B had a zero balance as of the Closing Date and we borrowed the full $1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin property described in Note 3.

The Term Loan A matures on November 1, 2027 and bears interest at a fixed rate of 3.84% per annum.

Initial payments on the Term Loan A of interest only are due on December 1, 2020 through June 1, 2021.

Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan A of $109,168.18 (if the outstanding principal balance on June 1, 2021 is the full $7,525,000) and proportionately reduced if the principal balance is less than that amount plus any additional accrued and unpaid interest through the date of payment.

As of the date of this filing, we have not borrowed any additional amounts against Term Loan A.

The balance owed on Term Loan A as of December 31, 2020 is $3.7 million.

Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan A of approximately $109,000 (if the outstanding principal balance on June 1, 2021, is the full $7,525,000 and proportionately reduced if the principal balance is less than that amount) plus any additional accrued and unpaid interest through the date of payment.

The balance owed on Term Loan A as of March 31, 2021, is $6,716,000.

The Term Loan B matures on November 1, 2027 and bears interest at a fixed rate of 3.84% per annum.

Initial payments on the Term Loan B of interest only are due on December 1, 2020 through June 1, 2021.

Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan B of $14,507.40, (if the outstanding principal balance on June 1, 2021 is the full $1,000,000) and proportionately reduced if the principal balance is less than that amount plus any additional accrued and unpaid interest through the date of payment.

As of December 31, 2020, we had not made any draws against Term Note B.

As of March 31, 2021, we had drawn fully against Term Note B and the balance outstanding on Term Note B was $1,000,000 on March 31, 2021.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2021, unless earlier terminated pursuant to its terms, and bears interest at an annual rate equal to the greater of (a) 3.25% or (b) the prime rate as published in the Money Rates section of the Wall Street Journal.

5 unchanged sentences

The Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 the Board in 2013 was nearing completion.

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

During the three and six months ended December 31, 2020, we did not repurchase any shares under the repurchase program.

During the three and six months ended December 31, 2019, we repurchased 106,897 and 156,685 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $1,535,000 and $2,215,000, respectively.

On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 819,325 shares under the share repurchase program at an aggregate cost, inclusive of fees, of $8.5 million.

During the three and nine months ended March 31, 2021, we repurchased 161,291 shares at an aggregate cost, inclusive of fees under the plan, of $4,039,000.

During the three and nine months ended March 31, 2020, we repurchased 48,236 and 204,921 shares, respectively, at an aggregate cost, inclusive of fees under the plan, of $761,000 and $2,977,000, respectively.

On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 980,616 shares under the share repurchase program at an aggregate cost of $12.6 million.

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

3 unchanged sentences

In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (ATM 10b5-1 Plan).

No sales of common stock have been made under the ATM Agreement as of the date of this report, but future sales may occur pursuant to the parameters of the ATM 10b5-1 Plan or otherwise at the direction of our Board in accordance with the terms of the ATM Agreement.

No sales of common stock have been made under the ATM Agreement as of the date of this report, and the prearranged stock sales plan was terminated on February 11, 2021, but future sales may occur at the direction of our Board in accordance with the terms of the ATM Agreement.

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 of $3.3 million.

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 operating lease ROU asset and long-term liability are presented separately on our Condensed Consolidated Balance Sheet.

The current portion of our operating lease liability as of December 31, 2020, in the amount of $328,000, is presented within accrued expenses on the condensed consolidated balance sheet.

As of December 31, 2020, the maturity of our lease liability is as follows:

The current portion of our operating lease liability as of March 31, 2021, in the amount of $336,000, is presented within accrued expenses on the Condensed Consolidated Balance Sheet.

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2021, the maturity of our lease liability is as follows:

Operating Lease

1 unchanged sentence

Less imputed interest:

PRO-DEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020, our operating lease has a remaining lease term of six years and nine months and an imputed interest rate of 5.53%.

Cash paid for amounts included in the lease liability for the three and six months ended December 31, 2020 totaled $120,000 and $236,000, respectively, and for December 31, 2019 totaled $116,000 and $229,000, respectively.

As of March 31, 2021, our operating lease has a remaining lease term of six years and six months and an imputed interest rate of 5.53%.

Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2021, was $120,000 and $355,000, respectively.

Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2020, was $116,000 and $345,000, respectively.

COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.

The following discussion and analysis should be read in conjunction with our unaudited interim condensed financial statements and the related notes and other financial information appearing elsewhere in this report.

COMPANY OVERVIEW

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc.

(Company, Pro-Dex, we, our, or us) for the three-month and six-month periods ended December 31, 2020 and 2019.

This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report.

(Company, Pro-Dex, we, our, or us) for the three-month and nine-month periods ended March 31, 2021 and 2020.

This discussion should be read in conjunction with the condensed financial statements and the notes thereto included elsewhere in this report.

This report contains certain forward-looking statements and information.

1 unchanged sentence

Our actual future results could differ materially from those discussed herein.

Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities, and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties.

Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities and market factors influencing our results, including uncertainties related to the COVID-19 pandemic, 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, the impact of the COVID-19 pandemic on our suppliers, customers, and us, consolidation within our target marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities.

12 unchanged sentences

Basis of Presentation

The condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2021 or any other interim period during such fiscal year.

The condensed results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2021, or any other interim period during such fiscal year.

Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31.

6 unchanged sentences

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.

Management believes that there have been no significant changes during the three and six months ended December 31, 2020 to the items that we disclosed as our critical accounting policies in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

Management believes that there have been no significant changes during the three and nine months ended March 31, 2021 to the items that we disclosed as our critical accounting policies in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

Business Strategy and Future Plans

9 unchanged sentences

Additionally, as previously disclosed, on November 6, 2020, we purchased an approximate 25,000 square foot industrial building in Tustin, California (the Franklin Property).

This building is located approximately four miles from or Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth.

This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth.

Currently, we are continuing with our build-out of the property and have yet to transition any of our employees into the facility.

We anticipate that upon completion of initial improvements, we will be able to execute on Phase I of our plan, which includes, among other things, the installation of a clean room to enable us to expand our capacity for the manufacture of batteries and new products.

We expect that we will begin operations in the new facility some time during the fourth quarter of this fiscal year.

In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, expand our manufacturing capacity through the build-out of the Franklin Property, and promoting active product development proposals to new and existing customers for orthopedic shavers, screw drivers for a multitude of surgical applications, and other medical devices, while monitoring closely the progress of all these individual endeavors.

Our investments in research and development have increased disproportionately to our growth in revenue and we anticipate this to continue in the near term.

We expect that we will begin operations in the new facility some time during the first quarter of next fiscal year.

In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, expand our manufacturing capacity through the build-out of the Franklin Property, and promoting active product development proposals to new and existing customers for both orthopedic shavers and screw drivers for a multitude of surgical applications, and other medical devices, while monitoring closely the progress of all these individual endeavors.

Our research and development and general and administrative expenses have, in recent periods, increased disproportionately to our growth in revenue as we focus on new product development and we anticipate this to continue in the near term.

These expenditures are being made in an effort to release new products and garner new customer relationships.

2 unchanged sentences

COVID-19 Pandemic

We are continuing our business operations under the California exemption for essential critical infrastructure sectors based on our determination that we fall within the Healthcare and Public Health Sector exemption.

As we continue to operate, we have adjusted certain policies and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time, including:

We have adjusted certain policies and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time, in order to effectively manage our business during the pandemic, including:

Non-essential employees that are able to work remotely are doing so;

5 unchanged sentences

Daily temperature screenings and personal affidavits of wellness.

While we have yet to see any significant decline in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders.

We provide our largest customer with a device used primarily in elective surgeries and although this customer has not requested a reduction or delay to their planned shipments, if this pandemic continues to adversely impact the United States and other markets where our products are sold, coupled with the recommended deferrals of elective procedures by governments and other authorities, we would expect to see a decline in demand from certain of our customers, including our principal customer.

While we have yet to see any decline in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders.

We are focused on the health and safety of all those we serve our customers, our communities, our employees, and our suppliers.

1 unchanged sentence

We are focused on continuity of supply by working with our suppliers.

While the COVID-19 pandemic has not materially adversely affected our financial results and business operations thus far, economic and health conditions in the United States and across much of the globe have changed rapidly since the end of our fiscal 2021 second quarter, and we cannot predict the full impact of the COVID-19 pandemic on our business.

While the COVID-19 pandemic did not materially adversely affect our financial results and business operations thus far, economic and health conditions in the United States and across much of the globe have changed rapidly since March 2020, and we cannot predict the full impact of the COVID-19 pandemic on our business.

Description of Business Operations

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Medical device products

1 unchanged sentence

Dental and component

NRE & Prototype

NRE & Proto-type

Repairs and other

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Medical device sales:

Sales of our medical device products increased $0.3 million, or 4%, for the three months ended December 31, 2020 and increased $1.6 million, or 14%, for the six months ended December 31, 2020 compared to the corresponding periods of the prior fiscal year.

The majority, or $2.4 million, of our increase in medical device sales for the six months ended December 31, 2020 relates to sales of our first thoracic driver as well as related accessories that were not sold during the corresponding period of the prior fiscal year.

Offsetting this increase, revenue to two of our legacy medical device customers decreased approximately $524,000 and $352,000, respectively, for the six months ended December 31, 2020 compared to the corresponding period of the prior fiscal year.

Sales of our compact pneumatic air motors, reported as Industrial and scientific sales above, increased $39,000, or 21%, and $40,000, or 12% for the three and six months ended December 31, 2020 compared to the corresponding periods of the prior fiscal year.

Sales of our medical device products increased $4.0 million, or 60%, and $5.6 million, or 31%, for the three and nine months ended March 31, 2021, compared to the corresponding periods of the prior fiscal year.

Our medical device revenue to our largest customer, included in orthopedic sales above, increased $615,000 and $563,000, respectively, for the three and nine months ended March 31, 2021 compared to the corresponding periods of the prior fiscal year, due to volume increases offset by contractual price concessions.

Our thoracic sales revenue increased $2.6 million and $4.9 million for the three and nine months ended March 31, 2021, compared to the corresponding periods of the prior fiscal year.

As previously discussed, we completed the private-label effort for our thoracic driver and launched initial shipments in the amount of $1.5 million to our customer in the third quarter of fiscal 2020.

The increase in thoracic revenue during fiscal 2021, represents additional follow-on orders from that customer.

Additionally, recurring revenue from distributors of CMF drivers increased $923,000 and $627,000, respectively, for the three and nine months ended March 31, 2021, compared to the corresponding periods of the prior fiscal year and includes $220,000 of revenue from our latest CMF driver, which we sell to our existing largest customer under a distribution agreement executed earlier this fiscal year.

Sales of our compact pneumatic air motors, reported as industrial and scientific sales above, increased $68,000, or 49%, and $108,000, or 22%, respectively, for the three and nine months ended March 31, 2021, compared to the corresponding periods of the prior fiscal year.

The revenue increase relates to a continued interest in these legacy products but is not due to any substantive marketing efforts.

Sales of our dental products and components continued to decline for the three and six months ended December 31, 2020 compared to the corresponding periods of the prior fiscal year and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.

Repair revenue remained flat and increased $131,000 for the three and six months ended December 31, 2020, respectively, compared to the corresponding periods of the prior fiscal year due almost exclusively to repairs of handpieces for our largest customer.

Typically, upon initial product launch, repair revenue is minimal as most repairs are typically covered under warranty, but as the products mature in the marketplace and after a certain number of routine duty cycles in the operating room, repairs generally increase.

We expect repair revenue for the remaining quarters of fiscal 2021 to decrease to some degree based upon a downward trend we have seen in repair units of the orthopedic handpiece we sell to our largest customer, coupled with price concessions that went into effect on January 1, 2021.

At December 2020, we had a backlog of approximately $16.6 million, of which $15.9 million is scheduled to be delivered in the third and fourth quarters of fiscal 2021 and the balance is scheduled to be delivered next fiscal year.

Sales of our dental products and components declined for the three and nine months ended March 31, 2021, compared to the corresponding periods of the prior fiscal year and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.

As previously discussed, in January 2018, we sent notification to our dental product customers that we were discontinuing the manufacture of these products.

The cessation of our dental line of products did not have a material impact on our financial position or results of operations and reflected a conscious decision to increase capacity for our medical device products.

Repair revenue decreased $624,000, or 44%, and $474,000, or 11%, for the three and nine months ended March 31, 2021, respectively, compared to the corresponding periods of the prior fiscal year due to decreased repairs of the orthopedic handpiece we sell to our largest customer.

We expect repair revenue to continue to decrease based upon a downward trend we have seen in the volume of repairs of this orthopedic handpiece.

At March 31, 2021, we had a backlog of approximately $11.6 million, of which $7.9 million is scheduled to be delivered in the fourth quarter of fiscal 2021 and the balance is scheduled to be delivered next fiscal year.

Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts.

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of sales:

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Year over Year

Cost of sales for the three months ended December 31, 2020 increased $572,000 or 11% compared to the corresponding period of the prior fiscal year.

While revenue increased 4% during this same period, the increase in total cost of sales is primarily related to increased under-absorption of manufacturing costs and inventory and warranty charges.

Under-absorption of manufacturing costs increased by $261,000 for the three months ended December 31, 2020 compared to the corresponding period of the prior fiscal year due in part to COVID-19 related payroll costs.

Cost of sales for the three months ended March 31, 2021, increased $2.1 million, or 39%, compared to the corresponding period of the prior fiscal year.

The increase in total costs of sales was caused by the 38% increase in revenue for the same period.

Under-absorption of manufacturing costs increased by $171,000 for the three months ended March 31, 2021, compared to the corresponding period of the prior fiscal year due in part to COVID-19 related absences.

We have incurred paid absences in our machine shop, assembly and quality operations that reduce our ability to absorb our fixed costs because total production hours are reduced.

Costs relating to inventory and warranty charges increased by $150,000 for the second quarter ended December 31, 2020 compared to the second quarter of the prior fiscal year due to higher warranty accruals for two significant products.

Gross profit decreased by $268,000, or 9%, for the three months ended December 31, 2020 compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in under-absorption of manufacturing costs and inventory and warranty charges discussed above.

Gross margin as a percentage of sales decreased by approximately 5 percentage points compared to the corresponding period of the prior fiscal year due primarily to the increased cost of sales, which are higher than the corresponding increase in revenue for the reasons described above.

Cost of sales for the six months ended December 31, 2020 increased by $1.2 million, or 13%, compared to the corresponding period of the prior fiscal year, consistent with the increased revenue of 11% for the same period, the reasons for which are discussed above.

Additionally, total cost of sales reflects a $351,000 increase in under-absorbed manufacturing costs and a $253,000 increase in inventory and warranty charges due to reduced production hours resulting in part from paid absences related to COVID-19 and additional warranty accruals for several isolated warranty issues.

Gross profit increased by $427,000, or 8%, for the six months ended December 31, 2020 compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in thoracic driver and accessory sales discussed above.

Gross margin for the six months ended December 31, 2020 decreased to 36% compared to 37% for the corresponding period of the prior fiscal year.

Costs relating to inventory and warranty charges increased $169,000 for the third quarter ended March 31, 2021 compared to the third quarter of the prior fiscal year.

Gross profit increased by approximately $1.2 million, or 37%, for the three months ended March 31, 2021, compared to the corresponding period of the prior fiscal year, consistent with the overall increase in revenue.

Gross margin as a percentage of sales decreased by approximately 1 percentage point compared to the corresponding period of the prior fiscal year due primarily to the increases in inventory and warranty charges, which often increase in periods of high product development.

Cost of sales for the nine months ended March 31, 2021 increased by $3.3 million, or 22%, compared to the corresponding period of the prior fiscal year, consistent with the increased revenue of 21% for the same period, the reasons for which are discussed above.

Additionally, total cost of sales reflects a $521,000 increase in under-absorbed manufacturing costs due to reduced production hours resulting in part from paid absences related to COVID-19.

Inventory and warranty charges increased by approximately $423,000, or 338%, for the nine months ended March 31, 2021, compared to the corresponding period of the prior fiscal year, due to increased scrap and inventory charges in the amount of $152,000 and increased warranty expenses of $271,000.

Both inventory and warranty related expenses tend to increase in periods of higher volume sales and in periods with higher product development activity.

Gross profit increased by $1.6 million, or 18%, for the nine months ended March 31, 2021, compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in revenue discussed above.

Gross margin for the nine months ended March 31, 2021, remained flat, at 37%, compared to the corresponding period of the prior fiscal year.

Operating Expenses

2 unchanged sentences

Three Months Ended

Six Months Ended

Year over Year

Nine Months Ended

Year over Year % Change

% of Net Sales

Operating expenses:

3 unchanged sentences

Selling expenses consist of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships.

Selling expenses for the three and six months ended December 31, 2020 increased $15,000, or 11%, and $3,000, or 1%, compared to the corresponding periods of fiscal 2020.

These increases relate primarily to personnel-related expenses and consulting expenses offset by reduced travel expenses due to the COVID-19 pandemic.

Selling expenses for the three and nine months ended March 31, 2021, decreased $25,000, or 16%, and $23,000, or 5%, respectively, compared to the corresponding periods of fiscal 2020.

These decreases relate primarily to reduced bonus compensation and reduced travel expenses due to the COVID-19 pandemic.

General and administrative expenses (G&A) consists of salaries and other personnel-related expenses of our accounting, finance and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors fees, and other costs and expenses attributable to being a public company.

G&A increased $272,000 and $314,000, respectively, during the three and six months ended December 31, 2020 when compared to the corresponding periods of the prior fiscal year.

The increases relate primarily to relocation and operating expenses of the Franklin Property, increased legal fees related to intellectual property matters and our debt refinancing in combination with our Property Loan, increased personnel-related expenses including bonus accruals, as well as higher insurance expense, and stock compensation expense.

G&A increased $555,000 and $870,000, respectively, during the three and nine months ended March 31, 2021, when compared to the corresponding periods of the prior fiscal year.

The increases relate primarily to higher stock compensation expense related to the stock options awarded in the current fiscal year, relocation and operating expenses of the Franklin Property, increased legal fees related to intellectual property matters and our debt refinancing in combination with our Property Loan, increased personnel-related expenses including bonus accruals, as well as higher insurance expense.

Research and development costs generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel, as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products.

Research and development costs for the three and six months ended December 31, 2020 increased $592,000 and $1.2 million, respectively, compared to the corresponding periods of the prior fiscal year.

Research and development costs for the three and nine months ended March 31, 2021, increased $484,000 and $1.7 million, respectively, compared to the corresponding periods of the prior fiscal year.

These increases are primarily due to increased personnel-related expense and increased spending on internal development projects.

Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products.

The research and development costs represent between 33% and 52% of total operating expenses for all periods presented and are expected to increase in the future as we continue to invest in our business.

The research and development costs represent between 38% and 49% of total operating expenses for all periods presented and are expected to increase in the future as we continue to invest in the business.

The amount spent on projects under development is summarized below (in thousands):

Three and Six Months ended

December 31, 2020

Three and Six Months ended

December 31, 2019

Three and Nine Months Ended March 31, 2021

Three and Nine Months Ended March 31, 2020

Market Launch (1)

Est Annual Revenue

Total Research & Development costs:

2 unchanged sentences

Sustaining & Other

Recently completed products:

Customer CMF Driver (2)

Represents the calendar quarter of expected market launch.

Costs incurred related to customer contracts are included in costs of sales and deferred costs and are not included in research and development costs.

This project was completed in the prior fiscal year and the product initially shipped in the fourth quarter of fiscal 2020.

We are nearing completion of an additional round of verification and validation of a new CMF driver, which we will be selling to our existing largest customer under a distribution agreement that we executed in the first quarter of fiscal 2021.

Additionally, as previously disclosed, we anticipate the release to manufacture of a new ENT Shaver in the fall of 2021 and our Director of Business Development is working with a promising medical device distributor to potentially commercialize this product.

The CMF Driver was completed in the third quarter of fiscal 2021 and shipped to our existing largest customer under a distribution agreement we executed in the first quarter of fiscal 2021.

We generated revenue of $220,000 related to these initial shipments during the third quarter ended March 31, 2021.

This project is now complete and future engineering expenses related to this project will be included in sustaining and other.

Interest & Other Income

Interest income for the three and six months ended December 31, 2020 and 2019 includes interest and dividends from our money market accounts and investment portfolio.

During the three and six months ended December 31, 2019, we also recorded $8,500 and $17,000, respectively, of miscellaneous income related to cash collected related to note receivable extensions granted on a note we previously wrote off.

Interest income for the three and nine months ended March 31, 2021 and 2020, includes interest and dividends from our money market accounts and investment portfolio.

During the nine months ended March 31, 2020, we also recorded $17,000 of miscellaneous income related to cash collected related to note receivable extensions granted on a note we previously wrote off.

Interest Expense

1 unchanged sentence

Gain on Sale of Investments

During the quarter ended March 31, 2021, we sold several of the stocks in our portfolio of equity investments receiving proceeds of $2.9 million and recording a gain on the sale in the amount of $783,000.

During the quarter ended September 30, 2020, we liquidated two of the stocks in our portfolio of equity investments, receiving proceeds of $115,000 and recording a gain on the sale in the amount of $12,000.

Income Tax Expense

The effective tax rate for the three and six months ended December 31, 2020 and 2019 is slightly less than our combined expected federal and applicable state corporate income tax rates due to federal and state research credits, as well as a tax benefit recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal 2021 as described more fully in Note 7 to the condensed consolidated financial statements contained elsewhere in this report.

The effective tax rate for the three and nine months ended March 31, 2021 and 2020, is slightly less than our combined expected federal and applicable state corporate income tax rates due to federal and state research credits, as well as a tax benefit recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal 2021 as described more fully in Note 7 to the condensed consolidated financial statements contained elsewhere in this report.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2020 decreased $0.9 million to $5.5 million as compared to $6.4 million at June 30, 2020.

Cash and cash equivalents at March 31, 2021, decreased $2.5 million to $3.9 million as compared to $6.4 million at June 30, 2020.

The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.

As of and For the Six Months Ended December 31,

As of and For the Nine Months Ended March 31,

(in thousands)

7 unchanged sentences

Operating Activities

Net cash provided by operating activities was $1.1 million for the six months ended December 31, 2020 primarily due to net income of $1.6 million and non-cash depreciation and amortization of $320,000 offset by an increase in inventory of $913,000, reflecting purchases for existing demand as well as long-lead time parts for products in development.

Net cash provided by operating activities was $2.6 million for the six months ended December 31, 2019 primarily due to net income of $2.4 million and non-cash depreciation and amortization of $282,000.

Although we experienced an influx of cash in the amount of $1.4 million in collections from receivables during the six months ended December 31, 2019, our inventory increased by $1.6 million primarily related to the thoracic driver that we launched in the third quarter of fiscal 2020.

Net cash used in operating activities was $2.8 million for the nine months ended March 31, 2021, primarily due to net income of $3.6 million and non-cash deprecation and amortization of $502,000 and share-based compensation of $508,000 offset by an increase in accounts receivable in the amount of $6.8 million due to our largest customer changing their payment terms from net 30 to net 90 in conjunction with a contract extension.

Additionally, our net income included $795,000 of realized gains from the sales of stock in our marketable securities portfolio.

Net cash provided by operating activities was $2.3 million for the nine months ended March 31, 2020, primarily due to net income of $3.6 million and non-cash depreciation and amortization of $426,000.

Our inventory increased by $2.4 million primarily related to the thoracic driver that we began shipping during our third quarter ended March 31, 2020, as well as another customer CMF driver under development, which launched in the third quarter ended March 31, 2021.

Investing Activities

During the second quarter ended December 31, 2020, we closed on our acquisition of the Franklin Property.

We are currently investing in the build-out of the necessary improvements and expect to transfer some of our employees from our corporate headquarters to this new facility in the fourth quarter of fiscal 2021.

In addition to our acquisition of the Franklin Property, we also invested $316,000 in machinery and equipment during the six months ended December 31, 2020.

Net cash used in investing activities for the six months ended December 31, 2019 was $1.6 million and related to an investment in marketable securities of $1.3 million and machinery and equipment of $317,000.

Net cash used in investing activities for the nine months ended March 31, 2021, was $4.4 million and related primarily to the purchase of the Franklin Property acquired during the second quarter of fiscal 2021 for a purchase price of $6.5 million as well as expenditures related to machinery and equipment totaling $872,000.

Offsetting these uses of cash, we sold some of our marketable securities during the nine months ended March 31, 2021 for $3.0 million.

Net cash used in investing activities for the nine months ended March 31, 2020, was $2.3 million and related to investments in marketable equity securities of publicly traded companies in the amount of $1.8 million and purchases of machinery and equipment in the amount of $422,000.

Financing Activities

Net cash provided by financing activities for the six months ended December 31, 2020 included proceeds of $5.2 million from a Property Loan with MBT, offset by $261,000 of principal payments on our term loan with MBT more fully described in Note 9 to the condensed consolidated financial statements contained elsewhere in this report, as well as payment of $259,000 of employee payroll taxes related to the award of 40,000 shares of common stock to employees under previously granted performance awards.

Net cash used in financing activities for the six months ended December 31, 2019 totaled $2.5 million and related primarily to the $2.2 million repurchase of 156,685 shares of our common stock pursuant to our share repurchase program as well as $314,000 of principal payments on our term loan from MBT.

Net cash provided by financing activities for the nine months ended March 31, 2021, totaled $4.6 million and included $9.1 million in various loans from Minnesota Bank and Trust (MBT) more fully described in Note 9 to the condensed consolidated financial statements contained elsewhere in this report, offset by $4.0 million related to the repurchase of 161,291 shares of our common stock pursuant to our share repurchase program, $307,000 of principal payments on our loans with MBT, as well as payment of $259,000 of employee payroll taxes related to the award of 40,000 shares of common stock to employees under previously granted performance awards.

Net cash used in financing activities for the nine months ended March 31, 2020, totaled $3.4 million and related primarily to the $3.0 million repurchase of 204,921 shares of our common stock pursuant to our share repurchase program as well as $471,000 of principal payments on our term loan from MBT more fully described in Note 9 to the condensed consolidated financial statements contained elsewhere in this report.

Financing Facilities & Liquidity Requirements for the next twelve months

As of December 31, 2020, our working capital was $17.8 million.

As of March 31, 2021, our working capital was $20.0 million.

We currently believe that our existing cash and cash equivalent balances together with our accounts receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months.

15 unchanged sentences

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.

The Investment Committee approved each of the investments comprising the $6.1 million of marketable public equity securities that we held at December 31, 2020.

The Investment Committee approved each of the investments comprising the $4.1 million of marketable public equity securities held at March 31, 2021.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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-Q

Item 1. Financial Statements