What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-09-08 compared with 2021-09-09 · 536 added, 444 removed, 546 unchanged (64% of the section changed)

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FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( Moss Adams LLP , Irvine, California , Auditor ID:

Financial Statements:

Consolidated Balance Sheets, June 30, 2022 and 2021

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 Income Statements, Years

Ended June 30, 2022 and 2021

Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2022 and 2021

Consolidated Statements of Cash Flows, Years Ended June 30, 2022 and 2021

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Opinion on the Financial Statements

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.

We have audited the accompanying consolidated balance

sheet s of Pro-Dex, Inc.

and Subsidiaries (the “Company”) as of June 30, 2022 and 2021, the related consolidated income

statements, 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 consolidated financial position of the Company as of June 30, 2022 and 2021, and the consolidated 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 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.

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 audit s 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.

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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

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

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As described in Notes 2 and 5 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.

financial statements, the Company’s consolidated investments total $2,534,000 at June 30, 2022.

Both current and long-term 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

The Company’s current and long-term 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.

The Company uses a third-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 –

2016-01, Financial Instruments – Overall

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

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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.

management’s judgments regarding the appropriate discount involves a high degree of subjectivity, including the use of professionals

with specialized skill and knowledge.

The primary procedures we performed to address this

critical audit matter included:

· Reviewed the qualifications, independence, and

objectives and scope of the third-party specialist.

· Used historical average daily trading volumes

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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.

· With the assistance of an internal valuation specialist, tested the methodology

and assumptions used in the valuation.

This includes testing of the protective put model.

Specific assumptions that were tested in the

model include the stock price of the securities, volatility of the securities, the risk-free rate of interest, and the illiquidity horizons.

· Comparison of the methods and assumptions used

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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

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.

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September 8, 2022

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

PRO-DEX, INC.

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Deferred income taxes, net

LIABILITIES AND SHAREHOLDERS’

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

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Accrued liabilities

Income taxes payable

Deferred revenue

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Lease liability, net of current portion

Income taxes payable

Notes payable, net of current portion

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Commitments and Contingencies:

Shareholders’

Shareholders’ equity:

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

3,596,131 and 3,645,660 shares issued and outstanding at June 30, 2022 and 2021, respectively

Accumulated other comprehensive loss

Retained earnings

Total shareholders’

Total liabilities and shareholders’

Total shareholders’ equity

Total liabilities and shareholders’ equity

See notes to consolidated financial statements .

PRO-DEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

CONSOLIDATED INCOME STATEMENTS

(In thousands, except share and per share data)

Ended June 30,

Years Ended June 30,

Cost of sales

Operating (income) expenses:

Operating expenses:

Selling expenses

General and administrative expenses

Gain on disposal of equipment

Loss on disposal of equipment

Research and development costs

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Interest and dividend income

Unrealized gain (loss) on marketable equity investments

Gain on sale of investments

Interest expense

Total other income

Total other income (expense)

Income before income taxes

Income tax expense

Other comprehensive loss, net of tax:

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

Comprehensive income

Basic & Diluted income per share:

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

For The Years Ended June 30, 2022 and 2021

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Number of Shares

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Balance at June 30, 2020

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

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 (1)

Share-based compensation

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Balance at June 30, 2021

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

Exercise of stock options (2)

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Balance at June 30, 2022

(1) Excludes 112 shares forfeited to affect a cashless exercise.

(2) Excludes 1,855 shares forfeited to affect a cashless exercise.

See notes to consolidated financial statements .

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CASH FLOWS FROM OPERATING ACTIVITIES:

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

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization

Gain on collection of note receivable

Unrealized (gain) loss on marketable equity investments

Gain on sale of investments

Impairment of long-lived assets

Non-cash lease expense

Gain on sale or disposal of equipment

Loss on sale or disposal of equipment

Amortization of loan fees

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Deferred income taxes

Bad debt expense

Bad debt expense (recovery)

Changes in operating assets and liabilities:

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Prepaid expenses and other assets

Accounts payable, accrued expenses and deferred rent

Accounts payable and accrued expenses

Deferred revenue

Income taxes payable

Net cash provided by (used in) operating activities

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of equipment and leasehold improvements

Purchases of equipment and improvements

Purchase of land and building

Proceeds from dividend reclassified as return of principal

Proceeds from sale of equipment

Proceeds from collection of notes receivable

Proceeds from sale of investments

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Years Ended June 30,

disclosures of cash flow information:

Supplemental disclosures of cash flow information:

Non-cash investing and financing activity:

Cashless stock option exercise

during the period for:

taxes, net of refunds

Cash paid during the period for:

Income taxes, net of refunds

See notes to consolidated financial statements .

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DESCRIPTION OF BUSINESS

We specialize in the design,

development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily

in the orthopedic, 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

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.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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

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.

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.

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.

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

The customer funding for costs incurred for non-recurring engineering services is deferred and subsequently recognized as revenue

as under-lying products or services are delivered to the customers.

Additionally, expenses incurred, up to the customer agreed funding

amount, are deferred as an asset and recognized as cost of sales when the under-lying products or services are delivered to the customer.

The deferred customer funding and costs result in recognition of deferred costs (asset) and deferred revenue (liability) on our consolidated

balance sheets.

One of our customer contracts can

give rise to variable consideration due to volume rebates.

We estimate variable consideration at the most likely amount we will receive

from our customer.

Our estimates of variable consideration are based on an assessment of our anticipated performance and all information

(historical, current, and forecasted) that is reasonably available to us.

Returns of our product for credit

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and 2021 related to these services totaled $ 0 and $ 71,000 , respectively.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals.

PRO-DEX, INC.

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.

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.

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.

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.

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, 2021 and 2020, 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, 2022 and 2021, 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.

Trade receivables are stated at

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

Management determines the allowance for doubtful

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Deferred Costs

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.

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

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As of June 30, 2022 and 2021, 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 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.

approximately $ 177,000 and $ 128,000 , respectively, of inventory in-transit from suppliers.

Investments at June 30, 2022 and

2021, 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 presented separately within other income and expense on the consolidated income statement.

Certain investments consist

of common stocks of public companies that are thinly traded.

These investments were subject to a valuation analysis as of June 30, 2022

PRO-DEX, INC.

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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:

Long-lived Assets

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.

Our building, equipment and improvements

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

Schedule of building, equipment and improvements

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.

Our patent costs are being amortized over a period of four 4 to 7 seven years.

The expense associated with

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

We recognize deferred tax assets

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

Uncertain Tax

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

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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

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While such receivables are not collateralized,

we evaluate their collectability based on several factors including customers’

payment histories.

we evaluate their collectability based on several factors including customers’ payment histories.

PRO-DEX, INC.

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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

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.

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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

Actual results could differ from those estimates.

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.

Our operations are affected by numerous

factors including market acceptance of our products, supply chain disruptions, 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 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, investments, 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 11, 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

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.

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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.

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.

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.

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.

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 all of our investments at June 30, 2022 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.

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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,

Advertising costs are charged to

selling or general and administrative expense as incurred and amounted to $ 1,000 and $ 4,000 for the fiscal years ended June 30, 2022

and 2021, 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.

Reclassifications

prior year amounts have been reclassified to conform to the current year presentation.

Recently Issued and Adopted Accounting Standards

June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

Financial Instruments—Credit Losses (Topic 326).

ASU 2016-13 revises the impairment model to utilize an expected loss methodology

in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments,

including, but not limited to, available for sale debt securities and accounts receivable.

The guidance is effective for the Company’s

annual reporting period beginning after December 15, 2022 and interim reporting periods within that annual reporting period.

does not expect the adoption of this ASU to have a material impact on the consolidated financial statements.

December 2019, the FASB issued 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

October 2020, the FASB issued ASU No.

2020-10, Codification Improvements, which updates various codification topics by clarifying disclosure

requirements to align with the SEC's regulations.

The guidance is effective for the Company’s annual reporting period beginning

after December 15, 2020 and interim reporting periods within the annual period beginning after December 15, 2020.

The adoption of the

amendments has not had a material impact on the consolidated financial statements or related footnote disclosures.

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.

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.

classification and reported values of our unrealized gains (losses) on marketable equity investments as accounted for under ASU 2016-01

are included in the consolidated financial statements herein.

The impact to net income for the year ended June 30, 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 $0.36 and diluted earnings per

share of $0.35 for the year ended June 30, 2021.

As of June 30, 2021, the revision reclassified the remaining accumulated other comprehensive

loss of $215,000 to retained earnings.

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the

disaggregation of net sales by revenue recognition model (in thousands):

Schedule of disaggregation of net sales

Year ended June 30,

Over-time revenue recognition

Point-in-time revenue recognition

Total net sales

The timing of revenue recognition,

billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our consolidated

balance sheets) and customer advances and deposits (presented as deferred revenue on our consolidated balance sheets), where applicable.

Amounts are generally billed as work progresses in accordance with agreed upon milestones.

The over-time revenue recognition model consists

of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation,

design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs

incurred compared to the estimated total costs upon completion.

During the fiscal years ended June 30, 2022 and 2021, we recorded $ 98,000

and $ 50,000 , respectively, of revenue that had been included in deferred revenue in the prior year.

The revenue recognized from the contract

liabilities consisted of satisfying our performance obligations during the normal course of business.

Our entire deferred revenue balance

of $ 1.0 million at June 30, 2022, is currently expected to be recognized in the next 12-months.

The following tables summarize our

contract assets and liability balances (in thousands):

Schedule of contract assets and liability

Contract assets at beginning of year

Expenses incurred during the year

Amounts reclassified to cost of sales

Amounts allocated to discounts for standalone selling price

Contract assets at end of year

Contract liabilities at beginning of year

Payments received from customers

Amounts reclassified to revenue

Contract liabilities at end of year

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

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

Marketable equity securities –

Schedule of investments

Marketable equity securities – short-term

Marketable equity securities – long-term

Total Marketable equity securities

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

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

at June 30, 2022 and 2021 had an aggregate cost basis of $ 2,796,000

and $ 3,204,000 ,

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

Both current and long-term investments include equity securities of public companies that are thinly traded.

classified certain investments 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, 2022, the investments included net unrealized losses of $ 262,000

(gross unrealized losses of $ 369,000

offset by gross unrealized gains of $ 107,000 ).

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,

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.

At June 30, 2021, the investments included net unrealized losses of $ 205,000

(gross unrealized losses of $ 376,000

offset by gross unrealized gains of $ 171,000 ).

Of the total marketable equity securities

at June 30, 2022 and 2021, $ 755,000 and $ 847,000 , respectively, represent an investment in the common stock of Air T, Inc.

Board members, Messrs.

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

and both either

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

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.

The shares 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 then 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,

9 unchanged sentences

whose boards they sit on, such as Air T, Inc.

PRO-DEX, INC.

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):

Schedule of inventory

Raw materials /purchased components

4 unchanged sentences

Land and Building

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

Land and building consist of the

following (in thousands):

Schedule of Land and Building

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.

and the balance of $ 5.2 million we financed through Minnesota Bank & Trust (“MBT”) (see Note 8).

We substantially completed

the build-out of the property in the first quarter of fiscal 2022.

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 fiscal 2022.

The building is being

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

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equipment and Improvements

Equipment and improvements consist of the following

(in thousands):

Equipment and improvements consist

of the following (in thousands):

Schedule of equipment and improvements

Office furnishings and fixtures

2 unchanged sentences

expense for the years ended June 30, 2022 and 2021 amounted to $ 616,000 and $ 609,000 , 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):

During fiscal 2022, $ 87,000 of assets

were retired either due to physical disposal or major part replacement with a net book value of $ 35,000 recorded as a loss on disposal

of equipment in our consolidated income statement.

During fiscal 2021, fully depreciated assets in the amount of $ 49,000 were retired.

Intangibles consist

of the following (in thousands):

Schedule of intangibles

Patent-related costs

Less accumulated amortization

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

expense for the years ended June 30, 2022 and 2021 amounted to $ 16,000 and $ 14,000 , 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

costs consist of legal fees incurred in connection with both patent applications and patent issuances, 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):

During fiscal 2022, we impaired $ 84,000 of previously capitalized legal fees due to uncertainty relating to

future benefit.

This impairment expense is included in research and development costs in our consolidated income statement.

Future amortization

expense is estimated to be no more than $ 30,000 per year and all remaining costs are expected to be fully amortized within four years.

Accrued Liabilities

Accrued liabilities consist of the

following (in thousands):

Schedule of accrued liabilities

Payroll and related items

4 unchanged sentences

Accrued customer rebate

Accrued sales, use and excise taxes

Total accrued expenses

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WARRANTY ACCRUAL

Information relating

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

relating to the accrual for warranty costs for the years ended June 30, 2022 and 2021, is as follows (in thousands):

Schedule of accrual warranty costs

Balance at beginning of year

3 unchanged sentences

Balance at end of year

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):

Warranty expense relating to new product sales and changes

to estimates was $ 231,000 and $ 312,000 , respectively, for the fiscal years ended June 30, 2022 and 2021.

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

Schedule of provision for income taxes

Years Ended June 30,

Income tax expense

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).

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).

Schedule of reconciliation federal statutory income tax rates

Years Ended June 30,

Percent Pretax Income

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

Tax incentives

Change in valuation allowance

Uncertain tax position

Stock based compensation

3 unchanged sentences

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

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.

1 unchanged sentence

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

Schedule of deferred income tax assets and liabilities

Deferred tax assets:

1 unchanged sentence

Research and other credits

Reserves and accruals

Stock based compensation

Unrealized losses

Lease liability

Total gross deferred tax assets

3 unchanged sentences

Property and equipment, principally due to differing depreciation methods

Right of use asset

Deferred state tax

1 unchanged sentence

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, 2021, our deferred

tax asset valuation allowance primarily consists of unrealized capital loss for investments held and the state net operating loss carryforwards

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, 2022, 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, 2022, 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

allowance of $ 60,000 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

As of June 30, 2022, we did not

have any net operating losses for federal and state income tax purposes for state jurisdictions in which we currently operate.

no federal or state research and development and alternative minimum tax credit carry forwards at June 30, 2022.

As of June 30, 2022, we have

accrued $ 509,000 of unrecognized tax benefits related to federal and state income tax matters that would reduce our income tax expense

if recognized.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information with respect to our accrual for unrecognized tax benefits

is as follows (in thousands):

Information with respect to our

accrual for unrecognized tax benefits is as follows (in thousands):

Schedule of accrual unrecognized tax benefits

Unrecognized tax benefits:

9 unchanged sentences

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.

We recognize accrued interest and

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

As of June 30, 2022, no interest or penalties

2 unchanged sentences

We are subject to U.S.

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.

federal income

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

We are currently open to audit under the statute of limitations

by the Internal Revenue Service for the years ended June 30, 2019, and later.

However, because of our prior net operating losses

and research credit carryovers, our tax years from June 30, 2007, years are open to audit.

NOTES PAYABLE AND FINANCING TRANSACTIONS

Minnesota Bank & Trust

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

$ 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”).

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 .

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.

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 June 30, 2022 is $ 4,935,000 .

2 unchanged sentences

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 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

5 unchanged sentences

Initial payments on the Term Loan A of

interest only are due on December 1, 2020 through June 1, 2021.

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

5 unchanged sentences

Initial payments on the Term Loan B of

interest only are due on December 1, 2020 through June 1, 2021.

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

4 unchanged sentences

Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2023 , 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.

to its terms, 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).

During the fourth quarter of fiscal 2022 we borrowed $ 2,000,000 against the Revolving

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.

3 unchanged sentences

negative and financial covenants, and events of default that are customary for loans of this type.

As of June 30, 2022, we failed one

of the financial covenants required by our Amended Credit Agreement, but we obtained a waiver of default from MBT.

Although there can

be no assurances, we anticipate that we will be in compliance with our debt covenants for at least the next fiscal year, and therefore

we do not believe we will require any future waivers of default from MBT.

PRO-DEX, INC.

1 unchanged sentence

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

principal maturities of our loans, exclusive of unamortized loan origination fees in the amount of $ 55,000 , for future fiscal years ending

June 30 are as follows (in thousands):

Schedule of Maturities of Term Loan for Future Fiscal Years

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

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, 2022, in the amount of $ 379,000 , is presented within accrued expenses on the balance sheet.

30, 2022, the maturity of our lease liability is as follows:

Schedule of Maturities of Lease Liabilities

Total lease payments

1 unchanged sentence

As of June 30, 2022, our operating

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

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

Cash paid for amounts included in

2 unchanged sentences

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.

Rent expense in fiscal 2022 and

2021 was $ 559,000 and $ 558,000 , respectively.

PRO-DEX, INC.

4 unchanged sentences

The Pro-Dex, Inc.

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.

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

7 unchanged sentences

Legal Matters

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

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.

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.

On August 26, 2022, the third-party

voluntarily dismissed all of its claims with prejudice.

In addition to the above matter,

4 unchanged sentences

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

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

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.

Former Stock Option Plans

No options were granted under

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

No options were granted under the

Former Stock Option Plans during the fiscal years ended June 30, 2022 and 2021.

As of June 30, 2022,

6 unchanged sentences

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

The following is a summary of stock

option activity under the Former Stock Option Plans for the fiscal years ended June 30, 2022 and 2021:

Schedule of summary of stock option activity

Weighted-Average

Exercise Price

Number of Shares

Weighted-Average

18 unchanged sentences

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.

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.

We recorded share-based compensation expense

of $ 194,000 and $ 84,000 for the fiscal years ended June 30, 2022 and 2021, respectively, related to these performance awards.

30, 2022, there was approximately $ 322,000 of unrecognized compensation cost related to these non-vested performance awards expected to

be expensed over the weighted-average period of 1.97 years.

On July 1, 2020, it was determined

3 unchanged sentences

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.

The following is a summary of performance

awards activity for the fiscal years ended June 30, 2022 and 2021:

Schedule of summary of stock option activity

Weighted-Average

Outstanding at July 1,

Outstanding at end of period

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Qualified Stock Options

4 unchanged sentences

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.

compensation expense of $ 1,070,000 and $ 624,000 for the fiscal year ended June 30, 2022 and 2021, respectively, 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,

2022, there was approximately $ 3.1 million of unrecognized compensation cost related to these non-vested non-qualified stock options.

In February 2021, the Compensation

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Incentive Plan.

Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range

Whether any stock options vest, and the amount that does vest, was tied to the completion of service periods that ranged

from 4 months to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices.

4 unchanged sentences

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

PRO-DEX, INC.

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

In December 2021 the Compensation Committee

of our Board of Directors granted, 5,000 previously forfeited non-qualified stock options to another employee.

The following is a summary of non-qualified

stock option activity under the 2016 Equity Incentive Plan for the fiscal year ended June 30, 2022 and 2021:

Schedule of summary of stock option activity

Weighted-Average

Exercise Price

Weighted-Average

Exercise Price

Outstanding at July 1,

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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 at which participant’s

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

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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.

During the fiscal years ended June

30, 2022 and 2021, shares totaling 2,576 and 2,677 , respectively, were purchased pursuant to the ESPP and allocated to participating employees

based upon their contributions at weighted- average prices of $ 23.33 and $ 21.47 , respectively.

On a cumulative basis, since the inception

of the ESPP, employees have purchased a total of 27,039 shares.

During the fiscal years ended June 30, 2022 and 2021, we recorded stock

compensation expense in the amount of $ 11,000 and $ 10,000 , respectively, relating to the ESPP.

PRO-DEX, INC.

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MAJOR CUSTOMERS & SUPPLIERS

Customers that

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

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

of fiscal year 2022 or 2021, is as follows (in thousands, except percentages):

Schedule of sales by major customers

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, 2021 or June

Information with respect to accounts

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

June 30, 2022

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Customer concentration:

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):

During fiscal 2022 and 2021, we had

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

June 30, 2022

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Supplier concentration:

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):

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information with respect to accounts

payable due to those suppliers who comprised more than 10% of our accounts payable at either June 30, 2022 or June 30, 2021 is as follows

(in thousands, except percentages):

June 30, 2022

2 unchanged sentences

Supplier concentration:

PRO-DEX, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NET INCOME PER SHARE

3 unchanged sentences

share calculations for the years ended June 30, 2022 and 2021 is as follows (in thousands, except per share data):

Schedule of weighted average shares outstanding calculation of basic and diluted per share

Years Ended June 30,

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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 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.

COMMON STOCK – Share Repurchase Program

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, 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.

SUBSEQUENT EVENT

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.

year ended June 30, 2022, we repurchased 75,250 shares at an aggregate cost, inclusive of fees under the Plan ,

of $ 1.6 million.

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.

On a cumulative basis, we have repurchased a total of 1,110,746 shares under the share repurchase programs

at an aggregate cost, inclusive of fess under the Plan, of $ 15.7 million.

All repurchases under the 10b5-1 Plans were administered through

an independent broker.

SUBSEQUENT EVENTS

We have evaluated subsequent events

through the date of this filing.

There were no subsequent events that require disclosure.

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