PRO DEX INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) March 31, 2022 June 30, 2021 ASSETS Current Assets: Cash and cash equivalents $ 4,761 $ 3,721 Investments 1,129 1,295 Accounts receivable, net of allowance for doubtful accounts of $ 0 and $ 2 at March 31, 2022 and at June 30, 2021, respectively 8,680 10,933 Deferred costs 341 193 Inventory 11,866 8,437 Prepaid expenses and other current assets 1,322 434 Total current assets 28,099 25,013 Land and building, net 6,366 6,437 Equipment and leasehold improvements, net 4,635 3,845 Right of use asset, net 2,339 2,605 Intangibles, net 162 186 Deferred income taxes, net 463 463 Investments 1,778 1,704 Other assets 42 67 Total assets $ 43,884 $ 40,320 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 3,533 $ 2,288 Accrued expenses 1,652 2,198 Deferred revenue 896 150 Note payable 1,642 1,236 Total current liabilities 7,723 5,872 Lease liability, net of current portion 2,151 2,432 Income taxes payable 1,164 397 Notes payable, net of current portion 10,575 11,535 Total non-current liabilities 13,890 14,364 Total liabilities 21,613 20,236 Shareholders’ equity: Common shares; no par value; 50,000,000 shares authorized; 3,618,663 and 3,645,660 shares issued and outstanding at March 31, 2022 and June 30, 2021, respectively 7,690 7,953 Retained earnings 14,581 12,131 Total shareholders’ equity 22,271 20,084 Total liabilities and shareholders’ equity $ 43,884 $ 40,320 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) (In thousands, except per share amounts) Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Net sales $ 9,265 $ 11,739 $ 29,426 $ 28,594 Cost of sales 6,407 7,354 19,737 18,138 Gross profit 2,858 4,385 9,689 10,456 Operating expenses: Selling expenses 20 136 79 415 General and administrative expenses 1,145 1,280 3,402 2,922 Loss on disposal of equipment 14 — 14 — Research and development costs 658 1,104 2,254 3,184 Total operating expenses 1,837 2,520 5,749 6,521 Operating income 1,021 1,865 3,940 3,935 Interest expense ( 112 ) ( 102 ) ( 349 ) ( 231 ) Unrealized gain (loss) on marketable equity investments ( 275 ) 136 ( 427 ) 1,442 Interest and other income — 41 50 102 Gain on sale of investments — 783 — 795 Income before income taxes 634 2,723 3,214 6,043 Income tax expense ( 172 ) ( 592 ) ( 764 ) ( 1,004 ) Net income $ 462 $ 2,131 $ 2,450 $ 5,039 Basic net income per share: Net income $ 0.13 $ 0.56 $ 0.67 $ 1.31 Diluted net income per share: Net income $ 0.12 $ 0.54 $ 0.65 $ 1.26 Weighted average common shares outstanding: Basic 3,626 3,817 3,645 3,843 Diluted 3,749 3,966 3,774 3,998 Common shares outstanding 3,618 3,701 3,618 3,701 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (In thousands) Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Common shares: Balance, beginning of period $ 7,886 $ 12,621 $ 7,953 $ 12,752 Share-based compensation expense 358 444 932 508 Share repurchases ( 584 ) ( 4,039 ) ( 1,255 ) ( 4,039 ) Shares withheld from common stock issued to pay employee payroll taxes — — — ( 259 ) Exercise of stock options — — — 39 ESPP shares issued 30 33 60 58 Balance, at end of period $ 7,690 $ 9,059 $ 7,690 $ 9,059 Retained earnings: Balance, beginning of period $ 14,119 $ 9,218 $ 12,131 $ 6,310 Net income 462 2,131 2,450 5,039 Balance, at end of period $ 14,581 $ 11,349 $ 14,581 $ 11,349 Balance, beginning of period — — 20,084 — Net income 462 2,131 2,450 5,039 Total shareholders’ equity $ 22,271 $ 20,408 $ 22,271 $ 20,408 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,450 $ 5,039 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 546 502 Amortization of loan fees 7 46 Share-based compensation 932 508 Unrealized (gain) loss on marketable equity investments 427 ( 1,442 ) Non-cash lease expense 10 21 Gain on sale of investments — ( 795 ) Impairment of long-lived assets 61 — Bad debt expense (recovery) ( 2 ) 3 Changes in operating assets and liabilities: Accounts receivable and other current receivables 2,255 ( 6,769 ) Deferred costs ( 148 ) ( 18 ) Inventory ( 3,429 ) ( 130 ) Prepaid expenses and other assets ( 863 ) ( 963 ) Accounts payable and accrued expenses 673 792 Deferred revenue 746 — Income taxes payable 767 403 Net cash provided by (used in) operating activities 4,432 ( 2,803 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments ( 334 ) — Purchases of equipment and improvements ( 1,270 ) ( 872 ) Proceeds from sale of investments — 3,008 Purchase of land and building — ( 6,499 ) Increase in intangibles ( 32 ) ( 12 ) Net cash used in investing activities ( 1,636 ) ( 4,375 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock ( 1,255 ) ( 4,039 ) Proceeds from exercise of options and ESPP contributions 60 97 Payment of employee payroll taxes on net issuance of common stock — ( 259 ) Proceeds from Minnesota Bank & Trust long-term debt, net of fees — 9,139 Principal payments on notes payable and finance lease ( 561 ) ( 307 ) Net cash provided by (used in) financing activities ( 1,756 ) 4,631 Net increase (decrease) in cash and cash equivalents 1,040 ( 2,547 ) Cash and cash equivalents, beginning of period 3,721 6,421 Cash and cash equivalents, end of period $ 4,761 $ 3,874 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Nine Months Ended March 31, 2022 2021 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 311 $ 190 Income taxes $ 1,025 $ 1,382 Non-cash investing and financing activity: Cashless stock option exercise $ 45 $ 4 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PRO-DEX, INC. AND SUBSIDIAIRIES NOTES TO CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,” “Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2021. Recently Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, to remove certain exceptions related to the approach for intraperiod tax allocation, recognition of deferred tax liabilities for outside basis differences and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for us beginning with fiscal year 2022. The adoption of the amendments has not had a material impact on our consolidated financial statements. NOTE 2. 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. 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. NOTE 3. REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR CORRECTION OF IMMATERIAL ERRORS We failed to timely adopt ASU 2016-01 – Accounting for Financial Instruments – Classification and Measurement, which states in part that changes in fair value of equity investments must be recognized in net income. We have completed an evaluation of the quantitative and qualitative impact of this error in our historical financial statements and concluded that our historical financial statements are not materially misstated. We concluded that our historical financial statements are not materially misstated for several reasons, including the fact that the cumulative three-year error had a negative impact to historical net income in the amount of $ 61,000 , an amount we deem immaterial, as well as the fact that the amounts did not contain a calculation error but rather amounts were presented on an incorrect line item within the financial statements. We also considered the fact that this error did not impact cash or operating income for any historical period, which we believe is important to our investors. Accordingly, the prior year financial statements have been revised to reflect the impact of ASU 2016-1. The revised classification and reported values of our unrealized gains (losses) on marketable equity investments as accounted for under ASU 2016-01 are included in the condensed consolidated financial statements herein. The impact to net income for the three months ended March 31, 2021, was an increase of $136,000 with a corresponding decrease in unrealized gain on marketable equity securities of $136,000, previously presented in other comprehensive income (loss). The revision resulted in an increase to both basic and diluted earnings per share for the three months ended March 31, 2021, of $0.04. The impact to net income for the nine months ended March 31, 2021, was an increase of $1.4 million with a corresponding decrease in unrealized gain on marketable equity securities of $1.4 million, previously presented in other comprehensive income (loss). The revision resulted in an increase to basic earnings per share of $0.37 and diluted earnings per share of $0.36 for the nine months ended March 31, 2021. As of June 30, 2021, the revision reclassified the remaining accumulated other comprehensive loss of $215,000 to retained earnings. 6 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. NET SALES The following table presents the disaggregation of net sales by revenue recognition model (in thousands): Schedule of disaggregation of net sales Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Net Sales: Over-time revenue recognition $ 549 $ 55 $ 859 $ 185 Point-in-time revenue recognition 8,716 11,684 28,567 28,409 Total net sales $ 9,265 $ 11,739 $ 29,426 $ 28,594 The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. Our entire deferred revenue balance of $ 896,000 at March 31, 2022, is currently expected to be recognized in the next 12-month period. NOTE 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS Inventory Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands): Schedule of inventory March 31, 2022 June 30, 2021 Raw materials /purchased components $ 6,184 $ 3,967 Work in process 2,516 2,218 Sub-assemblies/finished components 2,655 1,738 Finished goods 511 514 Total inventory $ 11,866 $ 8,437 Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments March 31, 2022 June 30, 2021 Marketable equity securities - short-term $ 1,129 $ 1,295 Marketable equity securities - long-term 1,778 1,704 Total marketable equity securities $ 2,907 $ 2,999 Investments at March 31, 2022 and June 30, 2021, had an aggregate cost basis of $ 3,538,000 and $ 3,204,000 , respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities we may not be able to sell our position within one year. At March 31, 2022, the investments included net unrealized losses of $ 632,000 (gross unrealized losses of $ 646,000 offset by gross unrealized gains of $ 14,000 ). 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 ). Of the total marketable equity securities at March 31, 2022 and June 30, 2021, $ 1,058,000 and $ 1,244,000 , respectively, represent an investment in the common stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. Another of our Board members is employed by Air T as its Chief of Staff. The shares were purchased through 10b5-1 Plans that, in accordance with our internal policies regarding the approval of related-party transactions, were approved by our then three Board members that are not affiliated with Air T, Inc. 7 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. Cabillot and Mr. Swenson, who chairs the committee. Both Mr. 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. 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. Land and building Land and building consist of the following (in thousands): Schedule of Capital Leased Assets March 31, 2022 June 30, 2021 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 133 ) ( 62 ) Land and building $ 6,366 $ 6,437 On November 6, 2020, we acquired the Franklin Property for a total purchase price of $ 6.5 million, of which we paid $ 1.3 million in cash and the balance of $ 5.2 we financed through Minnesota Bank & Trust (“MBT”) (See Note 11). We substantially completed the build-out of the property in the first quarter of this fiscal year. Currently, we are actively engaged in various verification and validation activities and we moved certain of our employees into the new building during the third quarter of this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years. Intangibles Intangibles consist of the following (in thousands): Schedule of intangibles March 31, 2022 June 30, 2021 Patent-related costs $ 247 $ 260 Less accumulated amortization ( 85 ) ( 74 ) $ 162 $ 186 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. NOTE 6. WARRANTY The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. As of March 31, 2022 and June 30, 2021, the warranty reserve amounted to $ 328,000 and $ 221,000 , respectively. Warranty expenses are included in cost of sales in the accompanying income statements. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 2022 and 2021, was $ 102,000 and $ 77,000 , respectively, and for the nine months ended March 31, 2022 and 2021, was $ 170,000 and $ 330,000 , respectively. 8 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2022 and 2021, are as follows (in thousands): Schedule of Product Warranty Liability As of and for the Three Months Ended March 31, 2022 2021 Beginning balance $ 255 $ 347 Accruals during the period 52 57 Changes in estimates of prior period warranty accruals 50 20 Warranty amortization and utilization ( 29 ) ( 116 ) Ending balance $ 328 $ 308 As of and for the Nine Months Ended March 31, 2022 2021 Beginning balance $ 221 $ 213 Accruals during the period 117 311 Changes in estimates of prior period warranty accruals 53 19 Warranty amortization and utilization ( 63 ) ( 235 ) Ending balance $ 328 $ 308 NOTE 7. NET INCOME PER SHARE The Company calculates basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average number of common shares outstanding used in the calculation of diluted income per share reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards. The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for net income. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts): Schedule of reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss) Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Basic: Net income $ 462 $ 2,131 $ 2,450 $ 5,039 Weighted average shares outstanding 3,626 3,817 3,645 3,843 Basic income per share $ 0.13 $ 0.56 $ 0.67 $ 1.31 Diluted: Net income $ 462 $ 2,131 $ 2,450 $ 5,039 Weighted average shares outstanding 3,626 3,817 3,645 3,843 Effect of dilutive securities 123 149 129 155 Weighted average shares used in calculation of diluted earnings per share 3,749 3,966 3,774 3,998 Diluted income per share $ 0.12 $ 0.54 $ 0.65 $ 1.26 9 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. INCOME TAXES Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more - likely - than - not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our estimates of future taxable income by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable. We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of March 31, 2022, we recognized accrued interest of $ 70,000 related to unrecognized tax benefits. No interest or penalties were recognized as of June 30, 2021, since we had 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 multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2018, and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2017, and later. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. NOTE 9. SHARE-BASED COMPENSATION Through June 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. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of March 31, 2022, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan. Former Stock Option Plans No options were granted under the Former Stock Option Plans during the three or nine months ended March 31, 2022 and 2021. 10 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of March 31, 2022, there was no unrecognized compensation cost under the Former Stock Option Plans, as all outstanding stock options are fully vested. As of March 31, 2022, the options outstanding under the Former Stock Option Plans had a weighted average remaining contractual life of 0.54 years and an intrinsic value of $ 96,000 . The following is a summary of stock option activity for the nine months ended March 31, 2022 and 2021: Share-based Payment Arrangement, Option, Activity Nine Months Ended March 31, 2022 2021 Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Outstanding at July 1, 31,500 $ 1.81 54,000 $ 1.86 Options granted — — — — Options exercised ( 25,000 ) 1.80 ( 22,500 ) 1.94 Options forfeited — — — — Outstanding at end of period 6,500 $ 1.82 31,500 $ 1.81 Stock Options Exercisable at March 31, 6,500 $ 1.82 31,500 $ 1.81 Performance Awards In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees, which will generally be paid in shares of our common stock. 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 other employees. The weighted average fair value of the performance awards reallocated in 2020 was $ 16.90 , calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated an additional 17,500 previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2021 was $ 20.34 , calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During the three months ended March 31, 2022 and 2021, we recorded share-based compensation expense of $ 81,000 and $ 21,000 , respectively, related to outstanding performance awards. During the nine months ended March 31, 2022 and 2021, we recorded share-based compensation expense of $ 123,000 and $ 63,000 , respectively, related to outstanding performance awards. On March 31, 2022, there was approximately $ 393,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 2.22 years. On July 1, 2020, it was determined by the Compensation Committee of our Board of Directors that the second of five tranches of 40,000 performance awards had been achieved and participants were awarded 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding taxes and, therefore, we issued 25,629 shares and paid $ 259,000 of participant-related payroll tax liabilities. 11 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 from the date of grant and the achievement of our common stock trading at certain pre-determined prices. The weighted average fair value of the stock option awards granted was $16.72, calculated using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated 5,000 previously forfeited non-qualified stock options, having the same remaining terms and conditions, to another employee at a weighted average fair value of $6.69 calculated using a Monte Carlo simulation. During the three months ended March 31, 2022 and 2021, we recorded compensation expense of $ 271,000 and $ 358,000 , respectively, related to these options. During the nine months ended March 31, 2022 and 2021, we recorded compensation expense of $ 799,000 and $ 376,000 , respectively, related to these options. As of March 31, 2022, none of these non-qualified options have vested and there was approximately $ 3.4 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 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 stock options, 4,250 were forfeited and the remaining 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 $59,000 for the three and nine months ended March 31, 2021, related to these options. The weighted fair value of the stock option awards granted was $3.16, calculated using a Monte Carlo simulation. Employee Stock Purchase Plan In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our 2014 Annual Meeting. 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 under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP. During the three months ended March 31, 2022 and 2021, we recorded ESPP share-based compensation expense in the amount of $ 5,000 and $ 6,000 , respectively, and 1,446 and 1,192 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $ 21.11 and $ 27.12 , respectively, per share. During the nine months ended March 31, 2022 and 2021, we recorded ESPP share-based compensation expense in the amount of $ 11,000 and $ 10,000 , respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 27,039 shares of our common stock. 12 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10. MAJOR CUSTOMERS AND SUPPLIERS Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the nine-month periods ended March 31, 2022 and 2021, is as follows (in thousands, except percentages): Schedule of sales by major customers Three Months Ended March 31, 2022 2021 Amount Percent of Total Amount Percent of Total Net sales $ 9,265 100 % $ 11,739 100 % Customer concentration: Customer 1 $ 5,007 54 % $ 5,238 45 % Customer 2 2,429 26 % 4,514 38 % Total $ 7,436 80 % $ 9,752 83 % Nine Months Ended March 31, 2022 2021 Amount Percent of Total Amount Percent of Total Net sales $ 29,426 100 % $ 28,594 100 % Customer concentration: Customer 1 $ 18,721 64 % $ 16,217 57 % Customer 2 4,617 16 % 7,906 28 % Total $ 23,338 80 % $ 24,123 85 % Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2022 or June 30, 2021, is as follows (in thousands, except percentages): Schedule of accounts receivable, inventory purchases and accounts payable of major customers and suppliers March 31, 2022 June 30, 2021 Total gross accounts receivable $ 8,680 100 % $ 10,935 100 % Customer concentration: Customer 1 $ 5,029 58 % $ 6,666 61 % Customer 2 2,761 32 % 3,710 34 % Total $ 7,790 90 % $ 10,376 95 % During the three and nine months ended March 31, 2022, we had three and four suppliers, respectively, accounting for 10 % or more of total inventory purchases. During the three and nine months ended March 31, 2021, we had two suppliers that accounted for more than 10 % of our total inventory purchases. Amounts owed to the significant suppliers who comprised more than 10 % of total account payable at March 31, 2022 and June 30, 2021, is as follows (in thousands, except percentages). March 31, 2022 June 30, 2021 Total accounts payable $ 3,533 100 % $ 2,288 100 % Supplier concentration: Supplier 1 $ 464 13 % $ 225 10 % Supplier 2 631 18 % 206 9 % Total $ 1,095 31 % $ 431 19 % 13 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11. NOTES PAYABLE AND FINANCING TRANSACTIONS Minnesota Bank & Trust On November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased an approximate 25,000 square foot industrial building in Tustin, California (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 of $26,037. The Property Loan bears interest at a fixed rate of 3.55% per annum, which is subject to a 3% increase upon an event of default. Accrued interest was paid 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 March 31, 2022, is $4,981,000. On 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. The Loans 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 shares of our common stock. 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. The Term Loan A matures on November 1, 2027 , and bears interest at a fixed rate of 3.84 % per annum. Initial payments on the Term Loan A of interest only were 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 March 31, 2022, is $ 6,026,000 . The Term Loan B matures on November 1, 2027 , and bears interest at a fixed rate of 3.84 % per annum. Initial payments on the Term Loan B of interest only were 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 $ 897,000 on March 31, 2022. 14 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2023 , and bears interest at an annual rate equal to the greater of (a) 2.75 % or (b) the prime rate minus 0.5% 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 payment. 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. 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 all Loans will be increased by 3% and MBT may, at its option, declare the Loans immediately due and payable in full. The Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type. NOTE 12. 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 three and nine months ended March 31, 2022, we repurchased 24,766 and 52,718 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ 584,000 and $ 1,255,000 , respectively. During the three and nine months ended March 31, 2021, we repurchased 161,291 shares at an aggregate cost, inclusive of fees under the Plan, of $ 4,039,000 . On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,088,214 shares under the share repurchase program at an aggregate cost of $ 15.3 million. All repurchases under the 10b5-1 Plans were administered through an independent broker. At The Market Offering Agreement In December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM 10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, and the ATM 10b5-1 Plan was terminated on February 11, 2021, but future sales may occur at the direction of our Board in accordance with the terms of the ATM Agreement. NOTE 13. LEASES 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 that 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 condensed consolidated balance sheet. The current portion of our operating lease liability as of March 31, 2022, in the amount of $ 370,000 , is presented within accrued expenses on the condensed consolidated balance sheet. 15 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of March 31, 2022, the maturity of our lease liability is as follows: Schedule of Maturities of Lease Liabilities Operating Lease Fiscal Year: 2022 $ 123 2023 504 2024 519 2025 535 2026 551 Thereafter 710 Total lease payments 2,942 Less imputed interest: ( 421 ) Total $ 2,521 As of March 31, 2022, our operating lease has a remaining lease term of five 5 years and six months and an imputed interest rate of 5.53 %. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2022, was $ 123,000 and $ 366,000 , respectively. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2021, was $ 120,000 and $ 355,000 , respectively. NOTE 14. COMMITMENTS AND CONTINGENCIES Legal Matters On August 24, 2021, one of our customers, through its counsel, sent notice that it is seeking indemnification from us regarding a pending complaint filed by a third-party claiming patent infringement on one of the products that we manufacture for this customer. As of the date of this filing, our position is that there is no infringement and/or that the patent at issue is invalid. We have not accrued any amounts related to this claim and we intend to defend the claim, which we believe may take two years or more to resolve. On October 12, 2021, we received a letter from an attorney representing a former employee, alleging, among other things, wrongful termination, failure to accommodate, and intentional infliction of emotional distress. The parties settled this matter upon the conclusion of a mediation hearing held on February 23, 2022. In addition to the above matters, we are from time to time a party to various legal proceedings arising either in the ordinary course of our business or 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. NOTE 15. SUBSEQUENT EVENTS We have evaluated subsequent events through the date of this filing. There were no subsequent events that require disclosure. 16