What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-09-09 compared with 2020-09-10 · 730 added, 338 removed, 260 unchanged (80% of the section changed)

1 unchanged sentence

PRO-DEX, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

AND SUBSIDIARIES

INDEX TO CONSOLIDATED

FINANCIAL STATEMENTS

Balance Sheets, June 30, 2020 and 2019

Statements of Operations and Comprehensive Income, Years Ended June 30, 2020 and 2019

Statements of Shareholders Equity, Years Ended June 30, 2020 and 2019

Statements of Cash Flows, Years Ended June 30, 2020 and 2019

Notes to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Financial Statements:

Consolidated Balance Sheets, June 30, 2021 and 2020

Consolidated Statements of Operations and Comprehensive Income, Years Ended June 30, 2021 and 2020

Consolidated Statements of Shareholders’

Equity, Years Ended June 30, 2021 and 2020

Consolidated Statements of Cash Flows, Years Ended June 30, 2021 and 2020

Notes to Consolidated Financial Statements

Report of Independent

Registered Public Accounting Firm

the Shareholders and the Board of Directors

Pro-Dex, Inc.

Opinion on 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.

We have audited the accompanying consolidated

balance sheets of Pro-Dex, Inc.

and Subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements

of operations and comprehensive income, shareholders’

equity and cash flows for the years then ended, and the related notes (collectively

referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly,

in all material respects, the financial position of the Company as of June 30, 2021 and 2020, 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.

Basis for Opinion

These financial statements are the responsibility of the Companys management.

Our responsibility is to express an opinion on the Companys financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.

These consolidated financial statements are the

responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial

statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United

States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audits included performing procedures to assess

the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures

to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide

a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is

a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated

to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements, and

(2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter

in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit

matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Investment Valuation

As described in Notes 2 and 3 to the consolidated

financial statements, the Company’s consolidated investments total $2,999,000 at June 30, 2021.

Investments include the common stock

of publicly traded companies that are considered thinly traded.

We identified the valuation of thinly traded securities

as a critical audit matter.

Some of the Company’s investments represent shares that materially exceed the average daily trading

volume of the thinly traded securities, thus the Company must consider a discount due to the lack of liquidity and marketability.

Company uses a 3rd party specialist to perform the discount analysis for financial statement reporting purposes in order to comply with

the guidelines set forth in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments

Debt and Equity Securities and FASB Accounting Standards Update (ASU) No.

2016-01, Financial Instruments –

(Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities .

The discount analysis is derived using

a two-part approach.

The first analysis uses a protective put model to estimate the discount for lack of liquidity and marketability.

The second analysis is a time-adjusted analysis based on restricted stock studies, which is used to adjust the discount to reflect the

dribble-out period associated with the securities.

The determination of the discount involves significant judgment by management.

management’s judgments regarding the appropriate discount involves a high degree of subjectivity .

The primary procedures we performed to address

this critical audit matter included:

· Reviewed of the qualifications, independence,

and objectives and scope of the third-party specialist.

· Used historical average daily trading volumes

in conjunction with the estimated shares that can be transacted per day in order to determine the average expected days to sell securities,

and whether that classifies them as thinly traded.

· With the assistance of an internal valuation

specialist we tested the methodology and assumptions used in the valuation.

This includes testing of the Black-Sholes model that was used

to determine the value of the protective put model.

Specific assumptions that were tested in the Black Sholes model include the stock

price of the securities, strike price of the option, volatility of the securities, the risk-free rate of interest, and the time-to-maturity

of the option.

The assumptions used in the time-adjusted analysis include the evaluation of the restricted stock studies, including the

adjustments made to reflect the characteristics of the Company’s holdings, and historical trading data.

· Comparison of the methods and assumptions used

with those used in preceding periods.

· Testing proper classification of investment valuations

within the Fair Value Hierarchy as set forth in ASC 820.

We tested management’s analysis of the securities, which considered the

Company’s holdings relative to the average daily trading volume of the securities over a period of time to determine whether the

investment is thinly traded.

/s/ Moss Adams LLP

2 unchanged sentences

September 9, 2021

We have served as the Companys auditor since 2003.

We have served as the Company’s auditor since 2003.

PRO-DEX, INC.

BALANCE SHEETS

(In thousands, except share data)

AND SUBSIDIARIES

CONSOLIDATED BALANCE

(In thousands, except

Current assets:

4 unchanged sentences

Total current assets

Plant, equipment and leasehold improvements, net

Land and building, net

Equipment and improvements, net

Right of use asset, net

1 unchanged sentence

Deferred income taxes, net

LIABILITIES AND SHAREHOLDERS EQUITY

LIABILITIES AND SHAREHOLDERS’

Current liabilities:

2 unchanged sentences

Deferred revenue

Note payable and capital lease obligations

Notes payable

Total current liabilities

Non-current liabilities:

Deferred rent

Lease liability, net of current portion

Income taxes payable

Notes and capital lease payable, net of current portion

Notes payable, net of current portion

Total non-current liabilities

1 unchanged sentence

Commitments and Contingencies:

Shareholders equity:

Shareholders’

Common stock, no par value, 50,000,000 shares authorized;

2 unchanged sentences

Retained earnings

Total shareholders equity

Total liabilities and shareholders equity

See notes to financial statements .

Total shareholders’

Total liabilities and shareholders’

See notes to consolidated financial statements .

PRO-DEX, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

Years Ended June 30,

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

(In thousands, except share and per share data)

Ended June 30,

Cost of sales

14 unchanged sentences

Other comprehensive loss, net of tax:

Unrealized loss from marketable equity investments, net of income taxes

Unrealized gain (loss) from marketable equity investments, net of income taxes

Comprehensive income

3 unchanged sentences

Weighted-average common shares outstanding:

See notes to financial statements .

See notes to consolidated financial statements .

PRO-DEX, INC.

STATEMENTS OF SHAREHOLDERS EQUITY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

For The Years Ended June 30, 2021 and 2020

1 unchanged sentence

Common Shares

Accumulated Other

Number of Shares

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Comprehensive

Income (Loss)

Balance at June 30, 2019

Exercise of stock options

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

3 unchanged sentences

ESPP shares issued

Cumulative effect of change in accounting principle

Shares issued in connection with performance award vesting

Shares withheld from common stock issued to pay employee payroll taxes

Exercise of stock options

Share-based compensation

1 unchanged sentence

Balance at June 30, 2021

See notes to financial statements .

See notes to consolidated financial statements .

PRO-DEX, INC.

STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

1 unchanged sentence

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

6 unchanged sentences

Deferred income taxes

Bad debt expense (recovery)

Bad debt expense

Changes in operating assets and liabilities:

5 unchanged sentences

Income taxes payable

Net cash provided by operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of equipment and leasehold improvements

Purchase of land and building

Proceeds from dividend reclassified as return of principal

6 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments on capital lease and note payable

Principal payments on notes payable

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

3 unchanged sentences

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

See notes to financial statements .

See notes to consolidated financial statements .

PRO-DEX, INC.

STATEMENTS OF CASH FLOWS - CONTINUED

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(In thousands)

Years Ended June 30,

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Income taxes, net of refunds

See notes to financial statements .

disclosures of cash flow information:

Non-cash investing and financing activity:

Cashless stock option exercise

during the period for:

taxes, net of refunds

See notes to consolidated financial statements .

PRO-DEX, INC.

1 unchanged sentence

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, thoracic, 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.

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, thoracic, and craniomaxillofacial markets.

We have patented adaptive torque-limiting technology 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.

In August 2020, we formed a

wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial

building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued

growth of our business.

The consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant

inter-company accounts and transactions have been eliminated.

This subsidiary has no separate operations.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist the reader in understanding our financial statements.

Such financial statements and related notes are the representations of management, who is responsible for their integrity and objectivity.

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

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

summary of significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial

Such consolidated 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 (“U.S.

GAAP”) in all material respects and have been consistently applied in preparing the

accompanying consolidated financial statements.

Revenue Recognition

Revenue from product sales is recognized as promulgated by the Financial Accounting Standards Board (FASB) in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers once our contract(s) with a customer and the performance obligations in the contract have been identified, and the transaction price has been allocated to the performance obligations and revenue is recorded when (or as) we satisfy each performance obligation, generally upon shipment.

Revenue from services, typically non-recurring engineering services related to the design or customization of a medical device, is typically recognized over-time.

Returns of our product for credit are minimal;

Revenue from product sales is

recognized as promulgated by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Update (“ASU”)

2014-09, Revenue from Contracts with Customers once our contract(s) with a customer and the performance obligations in the contract

have been identified, and the transaction price has been allocated to the performance obligations and revenue is recorded when (or as)

we satisfy each performance obligation, generally upon shipment.

During fiscal 2021, in conjunction with a contract amendment with our

largest customer, we began accruing for estimated customer rebates in the amount of $394,000, which amounts are included in accrued expenses.

from services, typically non-recurring engineering services related to the design or customization of a medical device, is typically recognized

Returns of our product for credit

accordingly, we do not establish a reserve for product returns at the time of sale.

Estimated Losses on Product Development Services

Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated quarterly.

and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated

An expected loss on development service contracts is recognized immediately in cost of sales.

Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment.

It is based upon the knowledge and experience of our project managers, engineers, and finance professionals.

Factors that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts include 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.

Certain of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale.

At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return rates and repair costs, which factors are reviewed quarterly.

The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses, and is included in accrued expenses in the accompanying balance sheets.

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.

Losses recorded in fiscal 2021

and 2020 related to these services totaled $71,000 and $370,000, respectively.

to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment.

upon the knowledge and experience of our project managers, engineers, and finance professionals.

Factors that are considered in estimating

the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts

include 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

AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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

At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors

as return rates and repair costs, which factors are reviewed quarterly.

The warranty accrual is based

on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the

accompanying balance sheets.

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

estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty

return rates and are included in current period warranty expense.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.

At June 30, 2020 and 2019, cash equivalents consisted of investments in money market funds.

We consider all highly liquid

investments with an original maturity of ninety days or less to be cash equivalents.

At June 30, 2021 and 2020, cash equivalents consisted

of investments in money market funds.

Accounts Receivable

Trade receivables are stated at their original invoice amounts, less an allowance for doubtful portions of such accounts.

Management determines the allowance for doubtful accounts based on facts and circumstances related to specific accounts and the age of accounts.

Trade receivables are written off when deemed uncollectible.

Trade receivables are stated

at their original invoice amounts, less an allowance for doubtful portions of such accounts.

Management determines the allowance for doubtful

accounts based on facts and circumstances related to specific accounts and the age of accounts.

Trade receivables are written off when

deemed uncollectible.

Recoveries of trade receivables previously reserved are offset against the allowance when received.

Deferred Costs

Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and/or supply contracts.

These costs get recorded to cost of sales in the period that the revenue is recognized.

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.

Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories.

Reductions to estimated market value are recorded, and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12 months from the measurement date.

On an on-going basis, we evaluate inventory for obsolescence and slow-moving items.

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

As of June 30, 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.

The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized.

Investments are marked to market at each measurement date, with unrealized gains and losses, net of income taxes, presented as adjustments to accumulated other comprehensive income or loss.

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.

Deferred costs reflect costs

incurred related to non-recurring engineering services under the terms of the related development and/or supply contracts.

get recorded to cost of sales in the period that the revenue is recognized.

Inventories are stated at the

lower of cost (first-in, first-out method) or net realizable value.

Cost includes materials, labor, and manufacturing overhead related

to the purchase and production of inventories.

Reductions to estimated market value are recorded and charged to cost of sales, when indicated

based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12 months from the

measurement date.

On an ongoing basis, we evaluate inventory for obsolescence and slow-moving items.

This evaluation includes analysis

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

As of June 30, 2021 and 2020, there was

approximately $128,000 and $303,000, respectively, of inventory in-transit.

Investments at June 30, 2021

and 2020, consist of marketable equity securities of publicly held companies.

The investments were made to realize a reasonable return,

although there is no assurance that positive returns will be realized.

Investments are marked to market at each measurement date, with

unrealized gains and losses, net of income taxes, presented as adjustments to accumulated other comprehensive income or loss.

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, 2021 and 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.

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

Three to ten years

Leasehold improvements

Shorter of the lease term or the assets estimated useful life

Intangibles consist of legal fees incurred in connection with patent applications.

Certain of our patent costs are being amortized over a period of seven years, the estimated life of the product that is currently utilizing the patented technology.

The remaining patent costs will be amortized over the estimated life of the product(s) that will be utilizing the technology or expensed immediately in the event the patent office denies the issuance of the patent.

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

We review the recoverability

of long-lived assets, consisting of the land and building that we own, equipment, and improvements, including leasehold improvements,

when events or changes in circumstances occur that indicate carrying values may not be recoverable.

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, 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.

Such determination is based on historical taxable income, with consideration given to estimates of future taxable income and the periods over which deferred tax assets will be recoverable.

We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized.

When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Uncertain Tax Positions

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our building, equipment and

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

Three to ten years

Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life

consist of legal fees incurred in connection

with patent applications.

Certain of our patent costs are being amortized over a period of seven years, the estimated life of the product

that is currently utilizing the patented technology.

The remaining patent costs will be amortized over the estimated life of the product(s)

that will be utilizing the technology or expensed immediately in the event the patent office denies the issuance of the patent.

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

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, 2021 and 2020 consisted primarily of basis

differences related to unrealized gain/loss related to investments, stock-based compensation, 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.

Such determination is based on

historical taxable income, with consideration given to estimates of future taxable income and the periods over which deferred tax assets

will be recoverable.

We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we

believe is more likely than not to be realized.

When we establish or reduce the valuation allowance against deferred tax assets, the provision

for income taxes will increase or decrease, respectively, in the period such determination is made.

Uncertain Tax

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

Payments from customers for shipping and handling are included in net sales .

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

Payments from customers for

shipping and handling are included in net sales .

Shipping expenses, consisting primarily of payments made to freight companies,

are included in cost of sales.

Concentration of Credit Risk

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade receivables.

We place our cash and cash equivalents with major financial institutions.

At June 30, 2020 and 2019, and throughout the fiscal years then ended, we had deposits in excess of federally insured limits.

Credit sales are made to original equipment manufacturers and resellers throughout the world, and sales to such customers account for a substantial portion of our trade receivables.

While such receivables are not collateralized, we evaluate their collectability based on several factors including customers payment histories.

Financial instruments that potentially

subject us to credit risk consist principally of cash, cash equivalents, and trade receivables.

We place our cash and cash equivalents

with major financial institutions.

At June 30, 2021 and 2020, and throughout the fiscal years then ended, we had deposits in excess

of federally insured limits.

Credit sales are made to medical device distributors, original equipment manufacturers, and resellers throughout

the world, and sales to such customers account for a substantial portion of our trade receivables.

While such receivables are not collateralized,

we evaluate their collectability based on several factors including customers’

payment histories.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Compensation Plans

We recognize compensation expense for the share-based awards that vest subject to market conditions under ASC 718, Compensation-Stock Compensation by estimating their fair value using a Monte Carlo simulation.

The fair value using a Monte Carlo simulation model is affected by assumptions regarding a number of complex judgments including expected stock price volatility, risk free interest rates, and the forecasted future value and trading volume of our stock.

The awards are considered granted for accounting purposes on the date the awards were approved by the Compensation Committee and we recognize compensation expense, based on the estimated fair value of the award, on a straight-line basis over the requisite service period.

We recognize compensation

expense for the share-based awards that vest subject to market conditions under ASC 718, Compensation-Stock Compensation by estimating

their fair value using a Monte Carlo simulation.

The fair value using a Monte Carlo simulation model is affected by assumptions regarding

a number of complex judgments including expected stock price volatility, risk free interest rates, and the forecasted future value and

trading volume of our stock.

The awards are considered granted for accounting purposes on the date the awards were approved by the Compensation

Committee of our Board of Directors and we recognize compensation expense, based on the estimated fair value of the award, on a straight-line

basis over the requisite service period.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The preparation of financial

statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

the reporting period.

Actual results could differ from those estimates.

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.

We cannot predict what impact, if any, the occurrence of these or other events might have on our operations.

Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, share-based compensation, the allowance for doubtful accounts, accrued warranty expense, inventory valuation, the carrying value of long-lived assets, the recoverability of notes receivable, and the recovery of deferred income tax assets.

Our operations are affected

by numerous factors including market acceptance of our products, changes in technologies, and new laws, effects from the COVID-19 pandemic,

government regulations, and policies.

We cannot predict what impact, if any, the occurrence of these or other events might have on our

Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, share-based

compensation, the allowance for doubtful accounts, accrued warranty expense, inventory valuation, the carrying value of long-lived assets,

and the recoverability of deferred income tax assets.

Basic and Diluted Per Share Information

Basic per share amounts are computed on the basis of the weighted-average number of common shares outstanding during each period presented.

Diluted per share amounts assume the issuance of all potential common stock equivalents, consisting of outstanding stock options and performance awards as discussed in Note 9, unless the effect of such exercise is to increase income, or decrease loss, per common share.

Basic per share amounts are

computed on the basis of the weighted-average number of common shares outstanding during each period presented.

Diluted per share amounts

assume the issuance of all potential common stock equivalents, consisting of outstanding stock options and performance awards as discussed

in Note 9, unless the effect of such exercise is to increase income, or decrease loss, per common share.

Fair Value Measurements

Fair value is measured based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value.

Fair value is measured based

on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

at the measurement date.

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair

These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable;

and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Level 2, defined as inputs

other than quoted prices in active markets that are either directly or indirectly observable;

and Level 3, defined as unobservable inputs

for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Cash and cash equivalents:

The carrying value of cash and cash equivalents is considered to be representative of their fair values based on the short-term nature of these instruments.

The carrying value of cash and cash equivalents is considered to be representative of their fair values based on the short-term nature

of these instruments.

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

Investments consist of marketable equity securities of publicly held companies.

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

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

consist of marketable equity securities of publicly held companies.

As such, most of our investments are classified within Level 1 of

the valuation hierarchy.

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.

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 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.

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.

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.

Under ASU 2014-09, (Topic 606) Revenue From Contracts with Customers , we recognize revenue from the sales of products and services by applying the following steps:

(1) identify the contract with a customer;

(2) identify the performance obligations in the contract;

(3) determine the transaction price;

(4) allocate the transaction price to each performance obligation in the contract;

and (5) recognize revenue when each performance obligation is satisfied.

We utilized the modified retrospective method of adoption and there was no impact on our financial statements as a result of adopting Topic 606 for the year ended June 30, 2019.

We primarily sell finished products and recognize revenue at point of sale or delivery and the timing of revenue recognition has not changed with the adoption of the new guidance.

However, we also perform services when we are engaged to design a product for a customer and there is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts.

In order to disclose the amount of revenue related to these services, where more judgment is required, we have added NRE & Prototypes to our net sales table included under Managements Discussion and Analysis of Financial Condition and Results of Operations of this report, which in our prior reports had been reflected in Medical device and services.

Reclassifications

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising costs are charged

to selling or general and administrative expense as incurred and amounted to $4,000 and $1,000 for the fiscal years ended June 30,

2021 and 2020, respectively.

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 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 both long-term assets and total liabilities of approximately $3.3

million as of July 1, 2019.

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

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

Marketable equity securities short-term

Marketable equity securities long-term

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

Marketable equity securities –

Total Marketable equity securities

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 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).

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.

at June 30, 2021 and 2020 had an aggregate cost basis of $3,204,000 and $6,483,000,

respectively.

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, 2021, the investments included net unrealized losses of $215,000 (gross unrealized losses of $386,000 offset by gross unrealized

gains of $171,000).

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 June 30, 2021 and 2020, $1,224,000 and $847,000, respectively, represent an investment in either the common stock or both

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.

Swenson and Cabillot, are also board members of Air T,

and both either individually or through affiliates own an equity interest in 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.

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

Van Kirk, and two non-management directors, Mr.

Swenson, our Chairman, also serves as

the chief executive officer and chairman of Air T, Inc.

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

have been purchased through 10b5-1 Plans that, in accordance with our internal policies regarding the approval of related-party transactions,

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.

Van Kirk, and two non-management directors,

Cabillot and Mr.

1 unchanged sentence

Cabillot and Mr.

Swenson are active investors with extensive portfolio management expertise.

We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds.

Swenson are active investors with extensive portfolio

management expertise.

We leverage the experience of these committee members to make investment decisions for the investment of our surplus

operating capital or borrowed funds.

Additionally, many of our securities holdings include stocks of public companies that either Messrs.

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.

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):

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Raw materials /purchased components

3 unchanged sentences

Total inventory

Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following (in thousands):

Land and Building

Land and building consist of the following (in thousands):

accumulated depreciation

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 million we financed through Minnesota Bank & Trust (“MBT”) (see Note 6).

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.

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

Equipment and Improvements

Equipment and improvements consist of the following

(in thousands):

Office furnishings and fixtures

Machinery and equipment

Leasehold improvements

accumulated depreciation and amortization

Depreciation expense for the years ended June 30, 2020 and 2019, amounted to $559,000 and $416,000, respectively.

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 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):

expense for the years ended June 30, 2021 and 2020 amounted to $609,000 and $559,000, respectively.

During fiscal 2021, fully depreciated

assets in the amount of $49,000 were retired.

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.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consist of the following (in thousands):

Patent-related costs

Less accumulated amortization

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

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

expense for the years ended June 30, 2021 and 2020 amounted to $14,000 each fiscal year.

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.

Accrued liabilities consist of the following (in thousands):

4 unchanged sentences

Current portion of lease liability

Accrued losses on development contracts

Accrued customer rebate

Accrued sales, use and excise taxes

WARRANTY ACCRUAL

Information relating to the accrual for warranty costs for the years ended June 30, 2020 and 2019, is as follows (in thousands):

Information relating

to the accrual for warranty costs for the years ended June 30, 2021 and 2020, is as follows (in thousands):

Balance at beginning of year

1 unchanged sentence

Change in estimates of prior period accruals

Warranty amortization

Warranty amortization/utilization

Balance at end of year

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 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):

Warranty expense relating to

new product sales and changes to estimates was $312,000 and $177,000, respectively, for the fiscal years ended June 30, 2021 and 2020.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The provisions of the CARES Act did materially impact our business or our tax provision.

The provision for income taxes

consists of the following amounts (in thousands):

Years Ended June 30,

Income tax expense

PRO-DEX, INC.

NOTES TO FINANCIAL STATEMENTS

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).

The effective income tax rate

from income from continuing operations differs from the United States statutory income tax rates for the reasons set forth in the table

below (in thousands, except percentages).

Years Ended June 30,

2 unchanged sentences

Income before income taxes

Computed expected income tax expense on income before income taxes

Computed “expected”

income tax expense on income before income taxes

State tax, net of federal benefit

1 unchanged sentence

Change in valuation allowance

Tax law changes

Domestic production deduction

Stock based compensation

Income tax expense

Deferred income taxes reflect the net effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of our deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income taxes reflect

the net effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial

reporting purposes and the amounts used for income tax purposes.

Significant components of our deferred tax assets and liabilities for

federal and state income taxes are as follows (in thousands):

Deferred tax assets:

Federal & state NOL carryforward

Research & other credits

Federal and state NOL carryforward

Research and other credits

Reserves and accruals

1 unchanged sentence

Unrealized losses

Other intangibles

Total gross deferred tax assets

6 unchanged sentences

Net deferred tax assets

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.

As of June 30, 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, 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.

NOTES TO FINANCIAL STATEMENTS

As of June 30, 2020, we did not have any net operating losses for federal and state income tax purposes for state jurisdictions in which we currently operate.

We have no federal research and development and alternative minimum tax credit carry forwards at June 30, 2020.

State tax research credit carry forwards at June 30, 2020, amount to $65,000, the majority of which do not expire.

As of June 30, 2020, we have accrued $524,000 of unrecognized tax benefits related to federal and state income tax matters that would reduce our income tax expense if recognized.

Realization of our deferred

tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.

As of June 30, 2021, 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 fiscal year ended June 30, 2021, we recorded a net decrease to our valuation

allowance of $385,000 on the basis of management’s reassessment of the amount of our deferred tax assets that are more likely than

not to be realized.

As of June 30, 2021, we did

not have any net operating losses for federal and state income tax purposes for state jurisdictions in which we currently operate.

have no federal or state research and development and alternative minimum tax credit carry forwards at June 30, 2021.

As of June 30, 2021, we

have accrued $550,000 of unrecognized tax benefits related to federal and state income tax matters that would reduce our income tax expense

if recognized.

If we are eventually able to recognize our uncertain tax positions, our effective tax rate would be reduced.

Any adjustment to our uncertain tax positions would result in an adjustment of our tax credit carryforwards rather than resulting in a cash outlay.

Information with respect to our accrual for unrecognized tax benefits is as follows (in thousands):

Any adjustment

to our uncertain tax positions would result in an adjustment of our tax credit carryforwards rather than resulting in a cash outlay.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information with respect to our accrual for unrecognized tax benefits

is as follows (in thousands):

Unrecognized tax benefits:

5 unchanged sentences

Ending balance

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examinations, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months.

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

As of June 30, 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.

Although it is reasonably possible

that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examinations, settlement activities,

expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published

tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve

We recognize accrued interest

and penalties related to unrecognized tax benefits in income tax expense when applicable.

As of June 30, 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.

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.

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

We are currently open to audit under the statute

of limitations by the Internal Revenue Service for the years ended June 30, 2018, 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

Minnesota Bank & Trust

On September 6, 2018, we entered into a Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (MBT), providing for a $5,000,000 term loan (the Term Loan) as well as a $2,000,000 revolving loan (the Revolving Loan and together with the Term Loan, collectively the Loans), evidenced by a Term Note A and a Revolving Credit Note made by us in favor of MBT.

The Loans are secured by substantially all of our assets pursuant to a Security Agreement entered into on September 6, 2018, between us and MBT.

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.

November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased the

Franklin Property.

A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of approximately

$5.2 million (the “Property Loan”) pursuant to a Loan Agreement, dated as of the Closing Date, between PDEX Franklin and MBT

(the “Property Loan Agreement”) and corresponding Term Note (the “Property Note”) issued by PDEX Franklin in favor

of MBT on the Closing Date.

The Property Loan is secured by the Franklin Property pursuant to a Deed of Trust with Assignment of Leases

and Rents, Security Agreement and Fixture Filing in favor of MBT (the “Deed”) and by an Assignment of Leases and Rents by

PDEX Franklin in favor of MBT (the “Rents Assignment”).

We paid loan origination fees to MBT on the Closing Date in the amount

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.

Accrued interest

is payable monthly beginning on December 1, 2020, and both principal and interest in the amount of approximately $30,000 are due and payable

on the first day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time

a balloon payment in the amount of $3.1 million is due.

Any prepayment of the Property Loan (other than monthly scheduled interest and

principal payments), is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first

or second year, 3% of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount

prepaid for any prepayment made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during

the seventh or eighth year.

The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties,

covenants, and events of default that are customary for a loan of this type.

The balance owed on the Property Loan at June 30, 2021 is

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.

An initial payment of interest only in the amount of $18,433 was paid on October 1, 2018.

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, 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.

Any principal on the Revolving Loan that is not previously prepaid shall be due and payable on the maturity date (or earlier termination of the Revolving Loan).

Any payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5% of the overdue amount.

Upon the occurrence and during the continuance of an event of default, the interest rate of both Loans will be increased by 3% and MBT may, at its option, declare the Loans immediately due and payable in full.

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.

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

Jules & Associates/Hitachi Capital America Corporation

On July 21, 2016, we entered a master equipment lease agreement with Jules and Associates, Inc.

to lease a specific machine used in our inspection process.

The cost of the equipment was approximately $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 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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”),

providing for a $7,525,000 amended and restated term loan (the “Term Loan A”), a $1,000,000 term loan (the “Term Loan

B”), and a $2,000,000 amended and restated revolving loan (the “Revolving Loan”

and, together with the Term Loan A and

the Term Loan B, collectively, the “Loans”), evidenced by an Amended and Restated Term Note A (“Term Note A”),

a Term Note B, and an Amended and Restated Revolving Credit Note (the “Revolving Note”) made by us in favor of MBT.

are secured by substantially all of the Company’s assets pursuant to a Security Agreement entered into on September 6, 2018 between

the Company and MBT.

The Term Note A had an outstanding principal balance of $3,770,331 as of the Closing Date and could be borrowed against

through May 30, 2021 (the “Commitment Period”).

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 12.

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.

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 approximately $97,000 plus any additional accrued and unpaid interest through the date of payment.

The balance owed on Term Loan

A as of June 30, 2021, is $6,716,000.

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 approximately $15,000,

plus any additional accrued and unpaid interest through the date of payment.

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 June 30, 2021.

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.

Commencing on the first day of each month after we initially borrow against the Revolving Loan and

each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the date of

Any principal on the Revolving Loan that is not previously prepaid shall be due and payable in full on the maturity date (or

earlier termination of the Revolving Loan).

No amounts have been drawn against the Revolving Loan.

payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5% of the overdue amount.

Upon the occurrence and during the continuance of an event of default, the interest rate of all Loans will be increased by 3% and MBT

may, at its option, declare the Loans immediately due and payable in full.

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 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:

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

principal maturities of our loans, exclusive of unamortized loan origination fees, for future fiscal years ending June 30 are as follows

(in thousands):

Principal Payments

Total principal payments

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.

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 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, 2021, in the amount of $344,000, is presented within accrued expenses on the balance sheet.

June 30, 2021, the maturity of our lease liability is as follows:

Operating Lease

1 unchanged sentence

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

As of June 30, 2021, our operating

lease has a remaining lease term of six years and three months and an imputed interest rate of 5.3%.

Cash paid for amounts included in

the lease liability for the fiscal years ended June 30, 2021 and 2020 was $475,000 and $461,000, respectively.

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.

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.

We lease our office, production,

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

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

Rent expense in fiscal 2021

and 2020 was $558,000 and $561,000, respectively.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Compensation Arrangements

1 unchanged sentence

The Pro-Dex, Inc.

Retirement Savings 401(k) Plan (the 401(k) Plan) is a defined contribution plan we administer that covers substantially all our employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.

Employees are eligible to participate in the 401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter.

Participants are eligible to receive non-discretionary 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, 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

Savings 401(k) Plan (the “401(k) Plan”) is a defined contribution plan we administer that covers substantially all our employees

and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.

Employees are eligible to participate

in the 401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter.

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

5% of eligible compensation.

For the fiscal years ended June 30, 2021 and 2020, we recognized compensation expense amounting to $81,000

and $67,000, respectively, in connection with the 401(k) Plan.

During our fiscal years ended June 30, 2021 and 2020, we used approximately

$17,000 and $7,000, respectively, of forfeited match contributions to reduce our match expense.

Legal Matters

We are from time to time a party to various legal proceedings incidental to our business.

There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.

On August 24, 2021, one of our

customers, through its counsel, sent notice that it is seeking indemnification from Pro-Dex regarding a pending complaint filed by a third-party

claiming patent infringement on one of the products which we manufacture for this customer.

As of the date of this filing, we have not

accrued any losses relating to this matter nor have we completed our assessment of the claims made against our customer.

In addition to the above matter,

we may be involved in legal proceedings arising either in the ordinary course of our business or incidental to our business.

be no certainty, however, that we may not ultimately incur liability or that such liability will not be material or adverse.

SHARE-BASED COMPENSATION

Stock Option Plans

Through 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the Employee Stock Option Plan) and the Amended and Restated 2004 Directors Stock Option Plan (the Directors Stock Option Plan) (collectively, the Former Stock Option Plans).

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 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.

Stock Options

There were no stock options granted during the fiscal years ended June 30, 2020 and 2019.

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, 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:

Through 2014, we had

two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and

the Amended and Restated 2004 Directors’

Stock Option Plan (the “Directors’

Stock Option Plan”) (collectively,

the “Former Stock Option Plans”).

The Employee Stock Option Plan and Director’s 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 our 2016 Annual Meeting.

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.

Former Stock Option Plans

No options were granted under

the Former Stock Option Plans during the fiscal years ended June 30, 2021 and 2020.

As of June 30,

2021, 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, 2021, was approximately $906,000

with a weighted-average remaining contractual term of 0.43 years at June 30, 2021.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of stock option activity under the Former

Stock Option Plans for the fiscal years ended June 30, 2021 and 2020:

Number of Shares

11 unchanged sentences

Performance Awards

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.

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.

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 fiscal 2020 was $16.90, calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation.

recorded share-based compensation expense of $84,000 and $279,000 for the fiscal years ended June 30, 2021 and 2020, respectively, related

to these performance awards.

On June 30, 2021, there was approximately $160,000 of unrecognized compensation cost related to these non-vested

performance awards expected to be expensed over the weighted-average period of 2.98 years.

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 in the amount of $259,000

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.

Non-Qualified Stock Options

In December 2020, the Compensation

Committee of our Board of Directors granted 310,000 non-qualified 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 18 months to 10.5 years at inception and the achievement of our common stock trading at certain pre-determined prices.

compensation expense of $624,000 for the fiscal year ended June 30, 2021, related to these options.

The weighted average fair value of

the stock option awards granted was $16.72, calculated using a Monte Carlo simulation.

As of June 30, 2021 there was approximately $4.2

million of unrecognized compensation cost related to these non-vested non-qualified stock options.

In February 2021, the Compensation

Committee of our Board of Directors granted 62,000 non-qualified 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.

Of these 62,000

stock options, 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements.

We recorded compensation expense of $182,000 for the fiscal year ended June 30, 2021 related to these options.

The weighted average fair

value of the stock option awards granted was $3.16, calculated using a Monte Carlo simulation.

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of non-qualified stock option activity under

the 2016 Equity Incentive Plan for the fiscal year ended June 30, 2021:

Number of Shares

Weighted-Average

Exercise Price

Outstanding at July 1,

Options granted

Options exercised

Options forfeited

Outstanding at end of period

Stock Options Exercisable at June 30,

Employee Stock Purchase Plan

In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the ESPP).

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

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 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.

During the fiscal years ended June 30, 2020 and 2019, shares totaling 2,920 and 2,743, respectively, were purchased pursuant to the ESPP and allocated to participating employees based upon their contributions at weighted- average prices of $13.25 and $8.02, respectively.

On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 21,786 shares.

During the fiscal years ended June 30, 2020 and 2019, we recorded stock compensation expense in the amount of $7,000 and $4,000, respectively, relating to the ESPP.

In September 2014, our Board

approved the establishment of an Employee Stock Purchase Plan (the “ESPP”).

The ESPP conforms to the provisions of Section

423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing at which participant’s

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.

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 our 2014 Annual

On February 2, 2015, the Company filed a Registration Statement on Form S-8 registering the 704,715 shares issuable under the

ESPP under the Securities Act of 1933.

During the fiscal years ended

June 30, 2021 and 2020, shares totaling 2,677 and 2,920, respectively, were purchased pursuant to the ESPP and allocated to participating

employees based upon their contributions at weighted- average prices of $21.47 and $13.25, respectively.

On a cumulative basis, since

the inception of the ESPP, employees have purchased a total of 24,463 shares.

During the fiscal years ended June 30, 2021 and 2020, we

recorded stock compensation expense in the amount of $10,000 and $7,000, respectively, relating to the ESPP.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAJOR CUSTOMERS & SUPPLIERS

Customers that accounted for sales in excess of 10% of our total sales in either of fiscal year 2020 or 2019, is as follows (in thousands, except percentages):

Customers that

accounted for more than 10% of our total sales in either

of fiscal year 2021 or 2020, is as follows (in thousands, except percentages):

Years Ended June 30,

Percent of Total

Total revenue

Customer concentration:

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):

Information with respect to

accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either June 30, 2021 or June

30, 2020 is as follows (in thousands, except percentages):

June 30, 2021

2 unchanged sentences

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):

During fiscal 2021 and 2020,

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

June 30, 2021

2 unchanged sentences

Supplier concentration:

Fischer Connectors Inc.

Information with respect to accounts payable due to the suppliers who comprised more than 10% of our accounts payable at either June 30, 2020 or June 30, 2019, is as follows (in thousands, except percentages):

Information with respect to

accounts payable due to these suppliers at June 30, 2021 and June 30, 2020 is as follows (in thousands, except percentages):

June 30, 2021

2 unchanged sentences

Supplier concentration:

Fischer Connectors Inc.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NET INCOME PER SHARE

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

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

Diluted earnings per share reflects the effects of potentially dilutive securities.

The summary of the basic and diluted earnings per share calculations for the years ended June 30, 2020 and 2019, is as follows (in thousands, except per share data):

The summary of the basic and diluted earnings per

share calculations for the years ended June 30, 2021 and 2020 is as follows (in thousands, except per share data):

Years Ended June 30,

2 unchanged sentences

Weighted-average shares outstanding

Effect of dilutive securities stock options & performance awards

Effect of dilutive securities –

stock options & performance awards

Weighted-average shares used in calculation of diluted earnings per share

Diluted earnings per share

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.

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.

COMMON STOCK –

Share Repurchase Program

In December 2019, our Board

approved a new share repurchase program authorizing us to repurchase up to one 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, 2021, we repurchased 216,171 shares at an aggregate cost, inclusive of fees under the Plan, of $5.5 million.

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.

cumulative basis, we have repurchased a total of 1,035,496 shares under the share repurchase programs at an aggregate cost, inclusive

of fess under the Plan, of $14.0 million.

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

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.

On August 24, 2021, one of our

customers, through its counsel, sent notice that it is seeking indemnification from Pro-Dex regarding a pending complaint filed by a third-party

claiming patent infringement on one of the products which we manufacture for this customer.

As of the date of this filing, we have not

accrued any losses relating to this matter nor have we completed our assessment of the claims made against our customer.

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