PRO DEX INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PRO-DEX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( Moss Adams LLP , Irvine, California , Auditor ID: 659 ) 27 Financial Statements: Consolidated Balance Sheets, June 30, 2022 and 2021 29 Consolidated Income Statements, Years Ended June 30, 2022 and 2021 30 Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2022 and 2021 31 Consolidated Statements of Cash Flows, Years Ended June 30, 2022 and 2021 32 Notes to Consolidated Financial Statements 34 26 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Pro-Dex, Inc. Opinion on the Financial Statements 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 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. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Investment Valuation As described in Notes 2 and 5 to the consolidated 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. 27 We identified the valuation of thinly traded securities as a critical audit matter. 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 – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities . The discount analysis is derived using a two-part approach. The first analysis uses a protective put model to estimate the discount for lack of liquidity and marketability. The second analysis is a time-adjusted analysis based on restricted stock studies, which is used to adjust the discount to reflect the dribble-out period associated with the securities. The determination of the discount involves significant judgment by management. Auditing 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 in conjunction with the estimated shares that can be transacted per day in order to determine the average expected days to sell securities, and whether that classifies them as thinly traded. · With the assistance of an internal valuation specialist, 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 with those used in preceding periods. · Testing proper classification of investment valuations within the Fair Value Hierarchy as set forth in ASC 820. We tested management’s analysis of the securities, which considered the Company’s holdings relative to the average daily trading volume of the securities over a period of time to determine whether the investment is thinly traded. /s/ Moss Adams LLP Moss Adams LLP Irvine, California September 8, 2022 We have served as the Company’s auditor since 2003. 28 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 849 $ 3,721 Investments 755 1,295 Accounts receivable, net of allowance for doubtful accounts of $ 0 and $ 2 at June 30, 2022 and 2021, respectively 15,384 10,933 Deferred costs 710 193 Inventory 12,678 8,437 Prepaid expenses and other current assets 790 434 Total current assets 31,166 25,013 Land and building, net 6,343 6,437 Equipment and improvements, net 4,833 3,845 Right of use asset, net 2,248 2,605 Intangibles, net 118 186 Deferred income taxes, net 797 463 Investments 1,779 1,704 Other assets 42 67 Total assets $ 47,326 $ 40,320 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,761 $ 2,288 Accrued liabilities 2,751 2,198 Income taxes payable 544 397 Deferred revenue 1,013 150 Notes payable 3,285 1,236 Total current liabilities 11,354 6,269 Non-current liabilities: Lease liability, net of current portion 2,054 2,432 Notes payable, net of current portion 10,250 11,535 Total non-current liabilities 12,304 13,967 Total liabilities 23,658 20,236 Commitments and Contingencies: 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 7,682 7,953 Retained earnings 15,986 12,131 Total shareholders’ equity 23,668 20,084 Total liabilities and shareholders’ equity $ 47,326 $ 40,320 See notes to consolidated financial statements . 29 PRO-DEX, INC. CONSOLIDATED INCOME STATEMENTS (In thousands, except share and per share data) Years Ended June 30, 2022 2021 Net sales $ 42,041 $ 38,029 Cost of sales 28,909 24,454 Gross profit 13,132 13,575 Operating expenses: Selling expenses 91 590 General and administrative expenses 4,903 4,076 Loss on disposal of equipment 35 — Research and development costs 2,980 4,384 Total operating expenses 8,009 9,050 Operating income 5,123 4,525 Other income (expense): Interest and dividend income 76 126 Unrealized gain (loss) on marketable equity investments ( 57 ) 1,371 Gain on sale of investments 28 1,327 Interest expense ( 464 ) ( 352 ) Total other income (expense) ( 417 ) 2,472 Income before income taxes 4,706 6,997 Income tax expense 851 1,176 Net income $ 3,855 $ 5,821 Basic & Diluted income per share: Basic net income per share $ 1.06 $ 1.53 Diluted net income per share $ 1.02 $ 1.48 Weighted-average common shares outstanding: Basic 3,635,894 3,796,516 Diluted 3,763,345 3,936,194 See notes to consolidated financial statements . 30 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For The Years Ended June 30, 2022 and 2021 (In thousands, except share data) Common Shares Number of Shares Amount Retained Earnings Total Balance at June 30, 2020 3,811,137 $ 12,752 $ 6,310 $ 19,062 Net income — — 5,821 5,821 ESPP shares issued 2,677 57 — 57 Shares issued in connection with performance award vesting 40,000 — — — Shares withheld from common stock issued to pay employee payroll taxes ( 14,371 ) ( 259 ) — ( 259 ) Exercise of stock options (1) 22,388 39 — 39 Share-based compensation — 901 — 901 Share repurchases ( 216,171 ) ( 5,537 ) — ( 5,537 ) Balance at June 30, 2021 3,645,660 $ 7,953 $ 12,131 $ 20,084 Net income — — 3,855 3,855 ESPP shares issued 2,576 60 — 60 Exercise of stock options (2) 23,145 — — — Share-based compensation — 1,275 — 1,275 Share repurchases ( 75,250 ) ( 1,606 ) — ( 1,606 ) Balance at June 30, 2022 3,596,131 $ 7,682 $ 15,986 $ 23,668 (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 . 31 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,855 $ 5,821 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 726 686 Unrealized (gain) loss on marketable equity investments 57 ( 1,371 ) Gain on sale of investments ( 28 ) ( 1,327 ) Impairment of long-lived assets 84 — Non-cash lease expense 13 26 Loss on sale or disposal of equipment 35 — Amortization of loan fees 9 49 Share-based compensation 1,275 901 Deferred income taxes ( 334 ) ( 181 ) Bad debt expense (recovery) ( 2 ) 5 Changes in operating assets and liabilities: Accounts receivable ( 4,449 ) ( 5,783 ) Deferred costs ( 517 ) ( 38 ) Inventory ( 4,241 ) ( 199 ) Prepaid expenses and other assets ( 331 ) ( 314 ) Accounts payable and accrued expenses 1,991 105 Deferred revenue 863 ( 50 ) Income taxes payable 147 ( 408 ) Net cash used in operating activities ( 847 ) ( 2,078 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and improvements ( 1,638 ) ( 1,769 ) Purchase of land and building — ( 6,499 ) Proceeds from sale of investments 770 4,596 Increase in intangibles ( 33 ) ( 38 ) Purchase of investments ( 334 ) — Net cash used in investing activities ( 1,235 ) ( 3,710 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable ( 1,244 ) ( 351 ) Borrowing from Minnesota Bank & Trust, net of loan origination fees 2,000 9,139 Repurchases of common stock ( 1,606 ) ( 5,537 ) Payments of employee taxes on net issuance of common stock — ( 259 ) Proceeds from exercise of stock options and ESPP contributions 60 96 Net cash provided by (used in) financing activities ( 790 ) 3,088 Net decrease in cash and cash equivalents ( 2,872 ) ( 2,700 ) Cash and cash equivalents, beginning of year 3,721 6,421 Cash and cash equivalents, end of year $ 849 $ 3,721 See notes to consolidated financial statements . 32 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In thousands) Years Ended June 30, 2022 2021 Supplemental disclosures of cash flow information: Non-cash investing and financing activity: Cashless stock option exercise $ 45 $ 4 Cash paid during the period for: Income taxes, net of refunds $ 1,565 $ 1,767 Interest $ 463 $ 330 See notes to consolidated financial statements . 33 PRO-DEX, INC. NOTES TO FINANCIAL STATEMENTS 1. 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 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary 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. Revenue from services, typically non-recurring engineering services related to the design or customization of a medical device, is typically recognized over time. 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 are minimal; accordingly, we do not establish a reserve for product returns at the time of sale. Estimated Losses on Product Development Services Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated quarterly. An expected loss on development service contracts is recognized immediately in cost of sales. Losses recorded in fiscal 2022 and 2021 related to these services totaled $ 0 and $ 71,000 , respectively. 34 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment. It is based upon the knowledge and experience of our project managers, engineers, and finance professionals. Factors that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts include the nature and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals. Warranties Certain of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale. At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return rates and repair costs, which factors are reviewed quarterly. The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. Warranty expenses are included in cost of sales in the accompanying statements of operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. 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, 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. Management determines the allowance for doubtful accounts based on facts and circumstances related to specific accounts and the age of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously reserved are offset against the allowance when received. Deferred Costs Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and/or supply contracts. These costs get recorded to cost of sales in the period that the revenue is recognized. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Reductions to estimated market value are recorded and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12 months from the measurement date. On an ongoing basis, we evaluate inventory for obsolescence and slow-moving items. This evaluation includes analysis of historical sales and usage, existing demand, as well as specific factors known to management. As of June 30, 2022 and 2021, there was approximately $ 177,000 and $ 128,000 , respectively, of inventory in-transit from suppliers. Investments 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 and 2021. 35 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Building Thirty years Equipment Three to ten years Improvements Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life Intangibles Intangibles consist of legal fees incurred in connection with patent applications. 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. Income Taxes We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating losses and tax credit carryovers. Deferred tax assets at both June 30, 2022 and 2021 consisted primarily of basis differences related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses, and inventories. Significant management judgment is required in determining the provision for income taxes and the recoverability of deferred tax assets. Such determination is based on historical taxable income, with consideration given to estimates of future taxable income and the periods over which deferred tax assets will be recoverable. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. Uncertain Tax Positions We record uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. 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. Concentration of Credit Risk Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade receivables. We place our cash and cash equivalents with major financial institutions. At June 30, 2022 and 2021, and throughout the fiscal years then ended, we had deposits in excess of federally insured limits. Credit sales are made to medical device distributors, original equipment manufacturers, and resellers throughout the world, and sales to such customers account for a substantial portion of our trade receivables. While such receivables are not collateralized, we evaluate their collectability based on several factors including customers’ payment histories. 36 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Compensation Plans We recognize compensation expense for the share-based awards that vest subject to market conditions under ASC 718, Compensation-Stock Compensation by estimating their fair value using a Monte Carlo simulation. The fair value using a Monte Carlo simulation model is affected by assumptions regarding a number of complex judgments including expected stock price volatility, risk free interest rates, and the forecasted future value and trading volume of our stock. The awards are considered granted for accounting purposes on the date the awards were approved by the Compensation Committee of our Board of Directors and we recognize compensation expense, based on the estimated fair value of the award, on a straight-line basis over the requisite service period. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 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 at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. 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. As such, cash and cash equivalents are classified within Level 1 of the valuation hierarchy. Investments: Investments consist of marketable equity securities of publicly held companies. 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. 37 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Advertising 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Recently Issued and Adopted Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, 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. The Company does not expect the adoption of this ASU to have a material impact on the consolidated financial statements. In 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 statements. In 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. 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 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. 38 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. NET SALES 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, 2022 2021 Net Sales: Over-time revenue recognition $ 1,014 $ 324 Point-in-time revenue recognition 41,027 37,705 Total net sales $ 42,041 $ 38,029 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 June 30, 2022 2021 Contract assets at beginning of year $ 193 $ 155 Expenses incurred during the year 1,319 458 Amounts reclassified to cost of sales ( 774 ) ( 395 ) Amounts allocated to discounts for standalone selling price ( 28 ) ( 25 ) Contract assets at end of year $ 710 $ 193 June 30, 2022 2021 Contract liabilities at beginning of year $ 150 $ 200 Payments received from customers 1,482 — Amounts reclassified to revenue ( 619 ) ( 50 ) Contract liabilities at end of year $ 1,013 $ 150 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments June 30, 2022 June 30, 2021 Marketable equity securities – short-term $ 755 $ 1,295 Marketable equity securities – long-term 1,779 1,704 Total Marketable equity securities $ 2,534 $ 2,999 39 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investments at June 30, 2022 and 2021 had an aggregate cost basis of $ 2,796,000 and $ 3,204,000 , respectively. Both current and long-term investments include equity securities of public companies that are thinly traded. We 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 ). 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. Two of our Board members, Messrs. Swenson and Cabillot, are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Mr. Swenson, our Chairman, also serves as the chief executive officer and chairman of Air T, Inc. Another of our Board members is employed by Air T as its Chief of Staff. 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, 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. 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 June 30, 2022 2021 Raw materials /purchased components $ 6,323 $ 3,967 Work in process 3,463 2,218 Sub-assemblies /finished components 2,118 1,738 Finished goods 774 514 Total inventory $ 12,678 $ 8,437 Land and Building Land and building consist of the following (in thousands): Schedule of Land and Building June 30, 2022 June 30, 2021 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 156 ) ( 62 ) $ 6,343 $ 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 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. 40 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equipment and Improvements Equipment and improvements consist of the following (in thousands): Schedule of equipment and improvements June 30, 2022 2021 Office furnishings and fixtures $ 2,224 $ 2,173 Machinery and equipment 6,661 5,895 Automobiles 21 21 Improvements 4,271 3,536 Total 13,177 11,625 Less: accumulated depreciation and amortization ( 8,344 ) ( 7,780 ) $ 4,833 $ 3,845 Depreciation expense for the years ended June 30, 2022 and 2021 amounted to $ 616,000 and $ 609,000 , respectively. 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 Intangibles consist of the following (in thousands): Schedule of intangibles June 30, 2022 June 30, 2021 Patent-related costs $ 208 $ 260 Less accumulated amortization ( 90 ) ( 74 ) $ 118 $ 186 Amortization 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 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. 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 June 30, 2022 2021 Payroll and related items $ 509 $ 505 Accrued inventory in transit 177 128 Accrued legal and professional fees 275 124 Accrued bonuses 430 300 Current portion of lease liability 379 344 Warranty 340 221 Accrued customer rebate 517 394 Other 124 182 Total accrued expenses $ 2,751 $ 2,198 41 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. WARRANTY ACCRUAL Information 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 June 30, 2022 2021 Balance at beginning of year $ 221 $ 213 Accruals during the year 177 339 Change in estimates of prior period accruals 54 ( 27 ) Warranty amortization/utilization ( 112 ) ( 304 ) Balance at end of year $ 340 $ 221 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. 7. INCOME TAXES The provision for income taxes consists of the following amounts (in thousands): Schedule of provision for income taxes Years Ended June 30, 2022 2021 Current: Federal $ 733 $ 1,040 State 451 340 Deferred: Federal ( 187 ) ( 186 ) State ( 146 ) ( 18 ) Income tax expense $ 851 $ 1,176 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, 2022 2021 Amount Percent Pretax Income Amount Percent Pretax Income Income before income taxes $ 4,706 100 % $ 6,997 100 % Computed “expected” income tax expense on income before income taxes $ 976 21 % $ 1,181 17 % State tax, net of federal benefit 202 4 % 279 4 % Tax incentives ( 205 ) ( 4 %) ( 169 ) ( 3 %) Uncertain tax position ( 76 ) ( 2 %) — — Stock based compensation — — ( 93 ) ( 1 %) Other ( 46 ) ( 1 %) ( 22 ) — Income tax expense $ 851 18 % $ 1,176 17 % 42 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands): Schedule of deferred income tax assets and liabilities June 30, 2022 2021 Deferred tax assets: Federal and state NOL carryforward $ 22 $ 20 Research and other credits 65 65 Reserves 163 120 Accruals 322 293 Stock based compensation 651 268 Unrealized losses 35 61 Lease liability 713 788 Inventory 514 371 Total gross deferred tax assets $ 2,485 $ 1,986 Less: valuation allowance ( 98 ) ( 158 ) Total deferred tax assets 2,387 1,828 Deferred tax liabilities: Property and equipment, principally due to differing depreciation methods $ ( 820 ) $ ( 523 ) Right of use asset ( 658 ) ( 740 ) Deferred state tax ( 77 ) ( 38 ) Other ( 35 ) ( 64 ) Total gross deferred tax liabilities ( 1,590 ) ( 1,365 ) Net deferred tax assets $ 797 $ 463 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 $ 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, 2022, we did not have any net operating losses for federal and state income tax purposes for state jurisdictions in which we currently operate. We have no federal 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. If we are eventually able to recognize our uncertain tax positions, our effective tax rate would be reduced. Any adjustment to our uncertain tax positions would result in an adjustment of our tax credit carryforwards rather than resulting in a cash outlay. 43 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information with respect to our accrual for unrecognized tax benefits is as follows (in thousands): Schedule of accrual unrecognized tax benefits June 30, 2022 2021 Unrecognized tax benefits: Beginning balance $ 550 $ 524 Additions based on federal tax positions related to the current year 33 30 Additions based on state tax positions related to the current year 26 20 Additions for tax positions of prior years 9 6 Reductions due to lapses in statutes of limitation ( 109 ) ( 30 ) Ending balance $ 509 $ 550 Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examinations, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when applicable. As of June 30, 2022, no interest or penalties applicable to our unrecognized tax benefits have been accrued since we have sufficient tax attributes available to fully offset any potential assessment of additional tax. We are subject to U.S. federal income tax, as well as income tax of California, 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. 8. 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 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 June 30, 2022 is $ 4,935,000 . 44 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 our common stock as described in Note 14. The Term Note B had a zero balance as of the Closing Date and we borrowed the full $ 1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin property described in Note 5. 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 June 30, 2022, is $ 5,792,000 . 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 $ 862,000 on June 30, 2022. The 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) 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 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. 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. 45 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Scheduled 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 Term Loan Principal Payments Fiscal Year: 2023 $ 3,293 2024 1,344 2025 1,397 2026 1,451 2027 1,508 Thereafter 4,597 Total principal payments $ 13,590 9. LEASES 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. As of June 30, 2022, the maturity of our lease liability is as follows: Schedule of Maturities of Lease Liabilities Operating Lease Fiscal Year: 2023 $ 504 2024 519 2025 535 2026 551 2027 567 Thereafter 143 Total lease payments 2,819 Less imputed interest: ( 386 ) Total $ 2,433 As of June 30, 2022, our operating 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 the lease liability for the fiscal years ended June 30, 2022 and 2021 was $ 489,000 and $ 475,000 , respectively. 10. COMMITMENTS AND CONTINGENCIES Leases We lease our office, production, and warehouse facility in Irvine, California (our “corporate office”) under an agreement that expires in September 2027. Our corporate office lease requires us to pay insurance, taxes, and other expenses related to the leased space. Rent expense in fiscal 2022 and 2021 was $ 559,000 and $ 558,000 , respectively. 46 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Compensation Arrangements Retirement Savings 401(k) Plan The Pro-Dex, Inc. Retirement Savings 401(k) Plan (the “401(k) Plan”) is a defined contribution plan we administer that covers substantially all our employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Employees are eligible to participate in the 401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter. Participants are eligible to receive non-discretionary matching contributions by the Company equal to 25 % of their contributions up to 5 % of eligible compensation. For the fiscal years ended June 30, 2022 and 2021, we recognized compensation expense amounting to $ 72,000 and $ 81,000 , respectively, in connection with the 401(k) Plan. During our fiscal years ended June 30, 2022 and 2021, we used approximately $ 25,000 and $ 17,000 , respectively, of forfeited match contributions to reduce our match expense. 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 claiming patent infringement on one of the products which we manufacture for this 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, we may be involved in 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 or adverse. 11. SHARE-BASED COMPENSATION Stock Option Plans Through 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and 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. Former Stock Option Plans 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, there was no unrecognized compensation cost under the Former Stock Option Plans as all outstanding stock options are fully vested. The intrinsic value of stock options outstanding and exercisable at June 30, 2022, was approximately $ 92,000 with a weighted-average remaining contractual term of 0.29 years at June 30, 2022. 47 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of stock option activity under the Former Stock Option Plans for the fiscal years ended June 30, 2022 and 2021: Schedule of summary of stock option activity 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 June 30, 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 upon vesting will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. The weighted-average fair value of the performance awards granted was $ 4.46 , calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain current employees. The weighted average fair value of the performance awards granted in fiscal 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. 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. On June 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 by the Compensation Committee that the second of five tranches of the performance awards had been achieved and participants were awarded 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding taxes in the amount of $ 259,000 and therefore we issued 25,629 shares with an effective date of July 16, 2020, coinciding with the pay date that included July 1, 2020. 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 2022 2021 Number of Shares Weighted-Average Grant Date Fair Value Number of Shares Weighted-Average Grant Date Fair Value Outstanding at July 1, 105,000 $ 8.73 160,000 $ 8.19 Granted 17,500 20.34 — — Vested — — ( 40,000 ) 8.19 Forfeited ( 5,000 ) 4.46 ( 15,000 ) 4.46 Outstanding at end of period 117,500 $ 10.64 105,000 $ 8.73 48 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Non-Qualified Stock Options In December 2020, the Compensation Committee of our Board of Directors granted 310,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 18 months to 10.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. We recorded 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 Committee of our Board of Directors granted 62,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, 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. Of these 62,000 stock options, 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements. We recorded compensation expense of $ 182,000 for the fiscal year ended June 30, 2021 related to these options. The weighted average fair value of the stock option awards granted was $ 3.16 , calculated using a Monte Carlo simulation. 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 2022 2021 Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Outstanding at July 1, 346,500 $ 41.83 — $ — Options granted 5,000 44.70 372,000 41.83 Options exercised — — — — Options forfeited ( 5,000 ) 44.70 ( 25,500 ) 41.83 Outstanding at end of period 346,500 $ 41.83 346,500 $ 41.83 Stock Options Exercisable at June 30, 57,750 $ 27.50 — — 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 purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period. Our Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting. On February 2, 2015, the Company filed a Registration Statement on Form S-8 registering the 704,715 shares issuable under the ESPP under the Securities Act of 1933. During the fiscal years ended June 30, 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. 49 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. MAJOR CUSTOMERS & SUPPLIERS Customers 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, 2022 2022 Amount Percent of Total Amount Percent of Total Net sales $ 42,041 100 % $ 38,029 100 % Customer concentration: Customer 1 $ 27,686 66 % $ 22,163 58 % Customer 2 5,788 14 % 10,122 27 % Total $ 33,474 80 % $ 32,285 85 % 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 June 30, 2021 Total gross accounts receivable $ 15,384 100 % $ 10,935 100 % Customer concentration: Customer 1 $ 11,551 75 % $ 6,666 61 % Customer 2 2,152 14 % 3,710 34 % Total $ 13,703 89 % $ 10,376 95 % 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 June 30, 2021 Total inventory purchases $ 19,640 100 % $ 13,844 100 % Supplier concentration: Supplier 1 $ 2,735 14 % $ 2,238 16 % Supplier 2 2,335 12 % 2,159 16 % Supplier 3 2,199 11 % 1,318 9 % Supplier 4 2,587 13 % 856 6 % Total $ 9,856 50 % $ 6,571 47 % 50 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 June 30, 2021 Total accounts payable $ 3,761 100 % $ 2,288 100 % Supplier concentration: Supplier 1 $ 721 19 % $ 225 10 % Supplier 4 430 11 % 153 7 % Supplier 2 372 10 % 206 9 % Total $ 1,523 40 % $ 584 26 % 13. NET INCOME PER SHARE We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. The summary of the basic and diluted earnings per share calculations for the years ended June 30, 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, 2022 2021 Basic: Net income $ 3,855 $ 5,821 Weighted-average shares outstanding 3,636 3,797 Basic earnings per share $ 1.06 $ 1.53 Diluted: Net income $ 3,855 $ 5,821 Weighted-average shares outstanding 3,636 3,797 Effect of dilutive securities – stock options & performance awards 127 139 Weighted-average shares used in calculation of diluted earnings per share 3,763 3,936 Diluted earnings per share $ 1.02 $ 1.48 14. 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, 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. 15. SUBSEQUENT EVENTS We have evaluated subsequent events through the date of this filing. There were no subsequent events that require disclosure. 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.