Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐Noþ☒

Indicate the number of shares outstanding of each of the ~~registrant~~’sregistrant’s classes of common stock, ~~outstanding~~ as of the latest practicable date: ~~3,648,376~~3,660,161 shares of common stock, no par value, as of ~~May 5,~~November 12, 2021.


	March 31, 2021			June 30, 2020			September 30, 2021		June 30, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	3,874		$	6,421		$	5,177	$	3,721
Investments		1,123			2,560			1,506		1,295
Accounts receivable, net of allowance for doubtful accounts of $9 and $6 at March 31, 2021 and at June 30, 2020, respectively		11,921			5,155
Accounts receivable, net of allowance for doubtful accounts of $7 and $2 at September 30, 2021 and at June 30, 2021, respectively							10,093		10,933
Deferred costs		173			155			184		193
Inventory		8,368			8,238			8,907		8,437
Prepaid expenses and other current assets		1,108			145			151		434
Total current assets		26,567			22,674			26,018		25,013
Land and building, net		6,460			—			6,413		6,437
Equipment and leasehold improvements, net		3,106			2,686			4,535		3,845
Right of use asset, net		2,692			2,943			2,518		2,605
Intangibles, net		163			162			195		186
Deferred income taxes, net		259			259			463		463
Investments		3,026			2,360			1,656		1,704
Other assets		42			42			67		67
Total assets	$	42,315		$	31,126		$	41,865	$	40,320

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,524		$	1,965		$	2,476	$	2,288
Accrued expenses		2,642			2,411			2,195		2,198
Deferred revenue		200			200			293		150
Note payable and finance lease obligations		1,110			651
Note payable							1,248		1,236
Total current liabilities		6,476			5,227			6,212		5,872
Lease liability, net of current portion		2,521			2,750			2,342		2,432
Income taxes payable		1,207			804			709		397
Notes and finance lease payable, net of current portion		11,703			3,283
Notes payable, net of current portion							11,219		11,535
Total non-current liabilities		15,431			6,837			14,270		14,364
Total liabilities		21,907			12,064			20,482		20,236
Shareholders’ equity:
Common shares; no par value; 50,000,000 shares authorized; 3,700,540 and 3,811,137 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively		9,059			12,752
Accumulated other comprehensive loss		(144	)		(1,586	)

Shareholders’ Equity:
Common stock; 0 par value; 50,000,000 shares authorized; 3,666,319 and 3,645,660 shares issued and outstanding at September 30, 2021 and June 30, 2021, respectively							8,188		7,953
Retained earnings		11,493			7,896			13,195		12,131
Total shareholders’ equity		20,408			19,062			21,383		20,084
Total liabilities and shareholders’ equity	$	42,315		$	31,126		$	41,865	$	40,320

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~
~~AND COMPREHENSIVE~~ INCOME ~~(LOSS)~~


	Three Months Ended March 31,						Nine Months Ended March 31,							Three Months Ended September 30,
	2021			2020			2021			2020				2021				2020

Net sales	$	11,739		$	8,508		$	28,594		$	23,710			$	9,988			$	8,590
Cost of sales		7,354			5,298			18,138			14,855				6,560				5,115
Gross profit		4,385			3,210			10,456			8,855				3,428				3,475

Operating expenses:
Selling expenses		136			161			415			438				37				130
General and administrative expenses		1,280			725			2,922			2,052				1,093				705
Research and development costs		1,104			620			3,184			1,501				980				1,091
Total operating expenses		2,520			1,506			6,521			3,991				2,110				1,926
Operating income														1,318				1,549

Operating income		1,865			1,704			3,935			4,864
Other income (expense):
Interest and miscellaneous income														24				53
Unrealized gain (loss) on marketable equity investments														149				(107	)
Interest expense		(102	)		(58	)		(231	)		(180	)			(120	)			(54	)
Interest and other income		41			9			102			77
Gain on sale of investments		783			—			795			—
Total other expense														53				(108	)

Income before income taxes		2,587			1,655			4,601			4,761				1,371				1,441
Income tax expense		(592	)		(442	)		(1,004	)		(1,194	)
Net income	$	1,995		$	1,213		$	3,597		$	3,567
Other comprehensive income (loss), net of tax:
Unrealized income (loss) from marketable equity investments		136			(1,262	)		1,442			(613	)
Comprehensive income (loss)	$	2,131		$	(49	)	$	5,039		$	2,954

Basic net income per share:
Net income	$	0.52		$	0.31		$	0.94		$	0.90
Diluted net income per share:
Provision for income taxes														307				283
Net income	$	0.50		$	0.30		$	0.90		$	0.88			$	1,064			$	1,158

Basic and diluted income per share:
Basic net income per share													$	0.29			$	0.30
Diluted net income per share													$	0.28			$	0.29

Weighted average common shares outstanding:
Basic		3,817			3,871			3,843			3,944				3,651,334				3,850,838
Diluted		3,966			3,999			3,998			4,071				3,777,118				3,975,063
Common shares outstanding		3,701			3,837			3,701			3,837				3,666,319				3,858,251

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Three Months Ended March 31,						Nine Months Ended March 31,							Three Months Ended September 30,
	2021			2020			2021			2020				2021				2020
*Common shares:*
COMMON STOCK:
Balance, beginning of period	$	12,621		$	13,634		$	12,752		$	15,815			$	7,953			$	12,752
Share-based compensation expense		444			74			508			93				300				26
Stock option exercise														—				39
Share repurchases		(4,039	)		(761	)		(4,039	)		(2,977	)			(95	)			—
Shares withheld from common stock issued to pay employee payroll taxes		—			—			(259	)		—
Exercise of stock options		—			—			39			—
Shares withheld from common stock issued to employees to pay employee payroll taxes														—				(259	)
ESPP shares issued		33			23			58			39				30				25
Balance, at end of period	$	9,059		$	12,970		$	9,059		$	12,970
Balance, end of period													$	8,188			$	12,583

*Accumulated other comprehensive income (loss):*
RETAINED EARNINGS:
Balance, beginning of period	$	(280	)	$	100		$	(1,586	)	$	(549	)		$	12,131			$	6,310
Net change in unrealized gain (loss) from marketable securities, net of taxes		136			(1,262	)		1,442			(613	)
Balance, at end of period	$	(144	)	$	(1,162	)	$	(144	)	$	(1,162	)

*Retained earnings:*
Balance, beginning of period	$	9,498		$	4,138		$	7,896		$	1,742
Cumulative effect of change in accounting principle		—			—			—			42
Net income		1,995			1,213			3,597			3,567				1,064				1,158
Balance, at end of period	$	11,493		$	5,351		$	11,493		$	5,351			$	13,195			$	7,468
Balance, beginning of period														20,084				19,062
Net income														1,064				1,158

Total shareholders’ equity	$	20,408		$	17,159		$	20,408		$	17,159			$	21,383			$	20,051

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Nine Months Ended March 31,						Three Months Ended September 30,
	2021			2020			2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,597		$	3,567		$	1,064		$	1,158
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		502			426			184			150
Share-based compensation							300			26
Unrealized (gain) loss on marketable equity investments							(149	)		107
Non-cash lease expense							6			9
Amortization of loan fees		46			6			2			2
Share-based compensation		508			93
Non-cash lease expense		21			31
Gain on sale of investments		(795	)		—			0			(12	)
Deferred income taxes		—			207
Bad debt expense (recovery)		3			6
Bad debt expense							5			3
Changes in operating assets and liabilities:
Accounts receivable and other current receivables		(6,769	)		(76	)
Accounts receivable and other receivables							834			(986	)
Deferred costs		(18	)		39			9			13
Inventory		(130	)		(2,404	)		(470	)		(75	)
Prepaid expenses and other assets		(963	)		396			284			(198	)
Accounts payable and accrued expenses		792			(301	)		177			(767	)
Deferred revenue		—			145			143			0
Income taxes payable		403			163			312			(318	)
Net cash provided by (used in) operating activities		(2,803	)		2,298			2,701			(888	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements							(848	)		(89	)
Purchases of investments		—			(1,827	)		(14	)		(0	)
Purchases of equipment and leasehold improvements		(872	)		(422	)
Increase in intangibles							(12	)		(1	)
Proceeds from sale of investments		3,008			—			0			115
Proceeds from dividend reclassification as return of principal		—			15
Purchase of land and building		(6,499	)		—
Increase in intangibles		(12	)		(19	)
Net cash used in investing activities		(4,375	)		(2,253	)
Net cash provided by (used in) investing activities							(874	)		25

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable							(306	)		(161	)
Payment of employee payroll taxes on net issuance of common stock							0			(259	)
Proceeds from stock option exercises and ESPP contributions							30			64
Repurchases of common stock		(4,039	)		(2,977	)		(95	)		(0	)
Proceeds from exercise of options and ESPP contributions		97			39
Payment of employee payroll taxes on net issuance of common stock		(259	)		—
Proceeds from Minnesota Bank & Trust long-term debt, net of fees		9,139			—
Principal payments on notes payable and finance lease		(307	)		(471	)
Net cash provided by (used in) financing activities		4,631			(3,409	)
Net cash used in financing activities							(371	)		(356	)

Net decrease in cash and cash equivalents		(2,547	)		(3,364	)
Net increase (decrease) in cash and cash equivalents							1,456			(1,219	)
Cash and cash equivalents, beginning of period		6,421			7,742			3,721			6,421
Cash and cash equivalents, end of period	$	3,874		$	4,378		$	5,177		$	5,202

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Nine Months Ended March 31,					Three Months Ended September 30,
	2021		2020			2021			2020
Supplemental disclosures of cash flow information:

Non-cash investing and financing activity:
Cashless stock option exercise					$	45		$	0

Cash paid during the period for:
Interest	$	190	$	161		$	121		$	54
Income taxes	$	1,382	$	382

Non-cash investing and financing activity:
Cashless stock option exercise	$	4	$	—
Income taxes, net of refunds					$	0		$	747

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,” “Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020.~~2021. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, ~~2020.~~2021.

~~On July 1,~~In December 2019, ~~we adopted~~the FASB issued ASU ~~2016-02~~2019-12 Income Taxes (Topic ~~842) “Leases,” using~~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 in this update did not have a ~~modified retrospective approach through a cumulative effect adjustment to retained earnings~~material impact as of September 30, 2021 and is also not expected to have a material impact for 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 each in the amount of approximately $3.3 million as of July 1, 2019.year ending June 30, 2022.

We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.

In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The condensed consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations.

NOTE 3. REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR CORRECTION OF IMMATERIAL ERRORS

We failed to timely adopt ASU 2016-01 – Accounting for Financial Instruments – Classification and Measurement, which states in part that changes in fair value of equity investments must be recognized in net income. We have completed an evaluation of the quantitative and qualitative impact of this error in our historical financial statements and concluded that our historical financial statements are not materially misstated. 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 ASU2016-01 are included in the condensed consolidated financial statements herein. The impact to net income for the three months ended September 30, 2020 was a reduction of $107,000 with a corresponding increase in unrealized loss on marketable equity securities of $107,000, previously presented in other comprehensive income (loss). The revision resulted in a reduction to both basic and diluted earnings per share of $.03. As of June 30, 2021, the revision reclassified the remaining accumulated other comprehensive loss of $215,000 to retained earnings.

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

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


Schedule of investments
	March 31, 2021		June 30, 2020		September 30, 2021		June 30, 2021
Marketable equity securities - short-term	$	1,123	$	2,560	$	1,506	$	1,295
Marketable equity securities - long-term		3,026		2,360		1,656		1,704
Total marketable equity securities	$	4,149	$	4,920	$	3,162	$	2,999

Investments at ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021 had an aggregate cost basis of ~~$4,270,000~~$3,219,000 and ~~$6,483,000,~~$3,204,000, respectively. The long-term investments include equity investments of thinly traded securities that we classified as long-term in nature because if we decide to sell these securities we may not be able to sell our position within one year. At ~~March 31,~~September 30, 2021, the investments included unrealized losses of $66,000(gross unrealized losses of $448,000 offset by gross unrealized gains of $382,000). At June 30, 2021, the investments included net unrealized losses of ~~$121,000~~$215,000 (gross unrealized losses of ~~$443,000~~$386,000 offset by gross unrealized gains of ~~$322,000)~~$171,000). ~~At June 30, 2020, the investments included net unrealized losses of $1,563,000 (gross unrealized losses of $1,703,000 offset by gross unrealized gains of $140,000).~~

Of the total marketable equity securities at ~~March 31,~~September 30, 2021 and June 30, ~~2020, $1,272,000~~2021, $1,420,000 and ~~$847,000,~~$1,224,000, respectively, represent an investment in the common ~~and preferred~~ stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. Another of our Board members is employed by Air T as its Chief of Staff. The ~~common stock was~~shares were purchased through 10b5-1 Plans, ~~and the purchased preferred stock was purchased through the exercise of issued warrants and in both cases,~~that, in accordance with our internal policies regarding the approval of related-party transactions, ~~purchases~~ were approved by our three Board members that are not affiliated with Air T, Inc.

We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr. 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 is stated at the lower of cost (first-in, first-out) or net realizable value and ~~building~~

On November 6, 2020 we acquired the Franklin Property for a total purchase price of $6.5 million, of which we paid $1.3 million in cash and the balance of $5.2 we financed through Minnesota Bank & Trust (“MBT”) (see Note 9). As of the date of this filing, we are continuing our build-out of the property, which we expect to complete in the first quarter of next fiscal year. The building is being amortized on a straight-line basis over a period of 30 years.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Schedule of intangibles
	March 31, 2021			June 30, 2020			September 30, 2021			June 30, 2021
Patent-related costs	$	234		$	222		$	272		$	260
Less accumulated amortization		(71	)		(60	)		(77	)		(74	)
	$	163		$	162		$	195		$	186

Patent-related costs consist of legal fees incurred in connection with both patent applications and a patent issuance, and will be amortized over the estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent. Since we do not know when, or if, our patent applications will be issued, the future amortization expense is not predictable.

The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. As of ~~March 31,~~September 30, 2021 and June 30, ~~2020,~~2021, the warranty reserve amounted to ~~$308,000~~$232,000 and ~~$213,000,~~$221,000, respectively. Warranty expenses are included in cost of sales in the accompanying statements of operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 2021 and 2020, was $77,000 and $69,000, respectively, and for the nine months ended March 31, 2021 and 2020, was $330,000 and $125,000, respectively.

Information regarding the accrual for warranty costs for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021 and 2020 are as follows (in thousands):


Schedule of accrual warranty costs
	As of and for the Nine Months Ended March 31,						As of and for the Three Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	213		$	136		$	221		$	213
Accruals during the period		311			130			32			80
Changes in estimates of prior period warranty accruals		19			(5	)		(8	)		(8	)
Warranty amortization and utilization		(235	)		(88	)
Warranty amortization/utilization							(13	)		(95	)
Ending balance	$	308		$	173		$	232		$	190

The Company calculates basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. ~~The weighted-average number of common shares outstanding used in the calculation of diluted~~Diluted income per share reflects the effects of potentially dilutive securities, ~~in income generating periods,~~ which consist entirely of outstanding stock options and performance awards.

The following table presents reconciliations of the numerators and denominators of the basic and diluted ~~earnings~~income per share ~~computations for net income.~~computations. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts):


Schedule of reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss)
	Three Months Ended March 31,				Nine Months Ended March 31,					Three Months Ended September 30,
	2021		2020		2021		2020			2021			2020
Basic:
Net income	$	1,995	$	1,213	$	3,597	$	3,567		$	1,064		$	1,158
Weighted average shares outstanding		3,817		3,871		3,843		3,944
Basic income per share	$	0.52	$	0.31	$	0.94	$	0.90
Weighted-average shares outstanding										3,651			3,851
Basic earnings per share									$	0.29		$	0.30
Diluted:
Net income	$	1,995	$	1,213	$	3,597	$	3,567		$	1,064		$	1,158
Weighted average shares outstanding		3,817		3,871		3,843		3,944
Weighted-average shares outstanding										3,651			3,851
Effect of dilutive securities		149		128		155		127			126			124
Weighted average shares used in calculation of diluted earnings per share		3,966		3,999		3,998		4,071
Diluted income per share	$	0.50	$	0.30	$	0.90	$	0.88
Weighted-average shares used in calculation of diluted earnings per share										3,777			3,975
Diluted earnings per share									$	0.28		$	0.29

Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized fortemporarydifferences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax ~~basis.~~bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is ~~more-likely-than-not~~more-likely-than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income or loss, with some consideration given to our estimates of future taxable income or loss by jurisdictions in which we operate and the period over which our deferred tax assets would berecoverable.

We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of ~~March 31,~~September 30, 2021, nowe recognized accrued interest of $51,000 related to unrecognized tax benefits. No interest or penalties ~~applicable to our unrecognized tax benefits have been accrued~~were recognized as of June 30, 2021, since we ~~have~~had sufficient tax attributes available to fully offset any potential assessment of additional tax. Our effective tax rate for the three months ended September 30, 2021 and 2020, is 22% and 20%, respectively. The prior year effective tax rate is less than the current year rate due primarily to a tax benefit recognized as a result of the common stock awarded to our employees under previously granted performance awards (see Note 8).

We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, ~~2017,~~2018 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, ~~2016,~~2017 and later. However, because of research credit carryovers, substantially all of our tax years are subject to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Through ~~June~~ 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and ~~Director’s~~Directors’ Stock Option Plan were terminated in June 2014 and December 2014, respectively.

In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of ~~March 31,~~September 30, 2021, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan.

NoThere were no stock options ~~were~~ granted ~~under the Former Stock Option Plans~~ during the three ~~or nine~~ months ended ~~March 31,~~September 30, 2021 and 2020.

As of ~~March 31,~~September 30, 2021, there was no unrecognized compensation cost under ~~the~~our Former Stock Option Plans as all outstanding stock options under those plans are fully vested. As of ~~March 31,~~September 30, 2021, ~~the~~there were 6,500 options outstanding under our Former Stock Option Plans at weighted-average exercise prices of $1.82 per share. These outstanding options had a ~~weighted average~~weighted-average remaining contractual life of ~~0.68~~1.04 years and an intrinsic value of ~~$792,000. Following is a summary of stock option activity for~~$155,000. During the ~~nine months~~first quarter ended ~~March 31,~~September 30, 2021 and ~~2020:~~2020, 25,000 and 20,000 options under our Former Stock Option Plans were exercised, at exercise prices of $1.80 and $1.97 per share, respectively.

In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees under our 2016 Equity Incentive Plan, which will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. The ~~weighted average~~weighted-average fair value of the performance awards granted was $4.46, calculated using the ~~weighted average~~weighted-average fair market value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain ~~other~~ employees. The ~~weighted average~~weighted-average fair value of the performance awards ~~reallocated~~granted in 2020 was ~~$16.90,~~$16.90, calculated using the ~~weighted average~~weighted-average fair market value for each award, using a Monte Carlo simulation. ~~During the three months ended March 31, 2021 and 2020, we~~We recorded share-based compensation expense of ~~$21,000 and $70,000, respectively, related to outstanding performance awards. During~~$21,000 for each of the ~~nine~~three months ended ~~March 31,~~September 30, 2021 and 2020 ~~we recorded share-based compensation expense of $63,000 and $86,000, respectively,~~ related to ~~outstanding~~these performance awards. On ~~March 31,~~September 30, 2021, there was approximately ~~$181,000~~$139,000 of unrecognized compensation cost related to these non-vested performance awards expected to be expensed over the weighted-average period of ~~3.24~~2.73 years.

On July 1, 2020, it was determined by the Compensation Committee of our Board of Directors that the vesting of the second of five tranches of 40,000 performance awards had been achieved and participants were awarded 40,000 shares of common stock. Each participant elected a net issuance to cover their individual withholding taxes and therefore wethe Company issued 25,629 shares and paid ~~$259,000~~$259,000 of participant-related payroll tax liabilities.

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 ~~$358,000~~$274,000 and ~~$376,000~~$0 for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021 and 2020, respectively, related to these options. The ~~weighted average~~weighted-average fair value of the stock option awards granted was $16.72, calculated using a Monte Carlo simulation. As of September 30, 2021, there was approximately $3.9 million of unrecognized compensation cost related to these non-vested non-qualified stock options.

In February 2021, the Compensation Committee of our Board of Directors granted 62,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 4 months to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices. ~~We recorded compensation expense of $59,000 for~~Of these 62,000 stock options, 57,750 vested on July 1, 2021, as our common stock met the ~~three and nine months ended March 31, 2021, related to these options.~~pre-determined prices set forth in the underlying agreements. The ~~weighted average~~weighted-average fair value of the stock option awards granted was $3.16, calculated using a Monte Carlo simulation.

In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”)~~, which was approved by our shareholders at the December 3, 2014 Annual Meeting.~~. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a ~~per share~~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~~The Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options, ~~under those plans,~~ aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting.

During the ~~three months~~first quarters ended ~~March 31,~~September 30, 2021 and 2020, ~~we recorded share-based compensation expense in the amount of $6,000~~1,130 and ~~$4,000, respectively, and 1,192 and 1,628~~1,485 shares were purchased, respectively, under the ESPP and allocated to employees based upon their contributions at discount prices of ~~$27.12~~$26.17 and ~~$14.43,~~$16.94, respectively, per share. ~~During the nine months ended March 31, 2021 and 2020, we recorded share-based compensation expense in the amount of $10,000 and $7,000, respectively, relating to the ESPP.~~ On a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of ~~24,463 shares~~25,593 shares. During each of ~~our common stock.~~

~~(UNAUDITED)~~the three months ended September 30, 2021 and 2020, we recorded stock compensation expense in the amount of $5,000 relating to the ESPP.

Information with respect to customers that accounted for sales in excess of ~~10%~~10% of our total sales in either of the three-month ~~and the nine-month~~ periods ended ~~March 31,~~September 30, 2021 and 2020 is as follows (in thousands, except percentages):

Schedule of sales by major customers
												Three Months Ended September 30,
	Nine Months Ended March 31,											2021						2020
	2021					2020						Amount		Percent of Total				Amount		Percent of Total
	Amount		Percent of Total			Amount		Percent of Total

Net sales	$	28,594		100	%	$	23,710		100	%
Total revenue											$	9,988		100	%		$	8,590		100	%

Customer concentration:
Customer 1	$	16,217		57	%	$	16,440		69	%		$	6,991		70	%		$	5,169		60	%
Customer 2		7,906		28	%		3,458		15	%			879		9	%			2,171		25	%
Total	$	24,123		85	%	$	19,898		84	%		$	7,870		79	%		$	7,340		85	%

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


Schedule of accounts receivable of major customers
	March 31, 2021				June 30, 2020				September 30, 2021				June 30, 2021
Total gross accounts receivable	$	11,930	100	%	$	5,161	100	%	$	10,100	100	%	$	10,935	100	%

Customer concentration:
Customer 1	$	5,205	44	%	$	2,205	42	%	$	7,622	75	%	$	6,666	61	%
Customer 2		5,626	47	%		1,593	31	%		1,311	13	%		3,710	34	%
Customer 3		348	3	%		972	19	%
Total	$	11,179	94	%	$	4,770	92	%	$	8,933	88	%	$	10,376	95	%

During the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021 and 2020, we had three and two suppliers, respectively, that each accounted for more than 10% of ~~our~~ total inventory purchases. ~~During the three and nine months ended March 31, 2020, we had three suppliers accounting for 10% or more of total inventory purchases.~~ Amounts owed to the fiscal ~~2021~~2022 significant suppliers at ~~March 31,~~September 30, 2021 totaled $233,000, $177,000 and $306,000, respectively, and at June 30, ~~2020, is as follows (in thousands, except percentages).~~2021 totaled $184,000, $206,000 and $225,000, respectively.

On November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased ~~the Franklin Property.~~an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of ~~$5,207,472~~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%~~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~~$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~~$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 September 30, 2021 is $5,074,000.

On the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”), providing for a ~~$7,525,000~~$7,525,000 amended and restated term loan (the “Term Loan A”), a ~~$1,000,000~~$1,000,000 term loan (the “Term Loan B”), and a ~~$2,000,000~~$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~~$3,770,331 as of the Closing Date and ~~may~~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~~$3,000,000 against Term Note A for the purpose of repurchasing shares of our common ~~stock as described in Note 10.~~stock. The Term Note B had a zero balance as of the Closing Date and we borrowed the full $1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin ~~property described in Note 3.~~Property.

The Term Loan A matures on November 1, 2027 and bears interest at a fixed rate of ~~3.84%~~3.84% per annum. Initial payments on the Term Loan A of interest only ~~are~~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 ~~$109,000 (if the outstanding principal balance on June 1, 2021, is the full $7,525,000 and proportionately reduced if the principal balance is less than that amount)~~$97,000 plus any additional accrued and unpaid interest through the date of payment. The balance owed on Term Loan A as of ~~March 31,~~September 30, 2021, is ~~$6,716,000.~~$6,489,000.

The Term Loan B matures on November 1, 2027 and bears interest at a fixed rate of ~~3.84%~~3.84% per annum. Initial payments on the Term Loan B of interest only are due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan B of approximately ~~$15,000,~~$15,000, plus any additional accrued and unpaid interest through the date of payment. As of March 31, 2021, we had drawn fully against Term Note B and the balance outstanding on Term Note B was ~~$1,000,000~~$966,000 on ~~March 31,~~September 30, 2021.

The Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2021 ~~unless earlier terminated pursuant to its terms,~~, which has since been extended (See Note 14), 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 payment. Any principal on the Revolving Loan that is not previously prepaid shall be due and payable in full on the maturity date (or earlier termination of the Revolving Loan). No amounts have been drawn against the Revolving Loan.

Any payment on the Loans not made within seven days after the due date is subject to a late payment fee equal to 5% of the overdue amount. Upon the occurrence and during the continuance of an event of default, the interest rate of all Loans will be increased by 3% and MBT may, at its option, declare the Loans immediately due and payable in full.

The Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type.

In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor ~~provided by~~ Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the ~~three and nine months~~quarter ended ~~March 31,~~September 30, 2021, we repurchased ~~161,291~~3,616 shares at an aggregate cost, inclusive of fees under the plan, of ~~$4,039,000.~~$95,000. During the ~~three and nine months~~quarter ended ~~March 31,~~September 30, 2020, we did not repurchase any shares. On a cumulative basis, we have repurchased ~~48,236 and 204,921~~a total of 1,039,112 shares ~~respectively,~~under the share repurchase programs at an aggregate cost, inclusive of fees, ~~under the plan,~~ of $761,000 and $2,977,000, respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 980,616 shares under the share repurchase program at an aggregate cost of $12.6$14.1 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.

In December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM 10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, and the prearranged stock sales plan was terminated on February 11, 2021, but future sales may occur at the direction of our Board in accordance with the terms of the ATM Agreement.

Effective July 1, 2019, we adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date. In addition, we elected the practical expedient, which allowed us to carry forward the historical lease classification of our sole operating lease for our corporate office, which includes our manufacturing and research and development facilities. Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) asset and corresponding operating lease liability ~~each in the amount~~ of ~~$3.3~~$3.3 million.

Our operating lease ROU asset and long-term liability are presented separately on our ~~Condensed Consolidated Balance Sheet.~~condensed consolidated balance sheet. The current portion of our operating lease liability as of ~~March 31,~~September 30, 2021, in the amount of ~~$336,000,~~$353,000, is presented within accrued expenses on the ~~Condensed Consolidated Balance Sheet.~~condensed consolidated balance sheet.

As of ~~March 31,~~September 30, 2021, our operating lease has a remaining lease term of six 6years ~~and six months~~ and an imputed interest rate of ~~5.53%~~5.53%. Cash paid for amounts included in the lease liability was $120,000for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021, ~~was $120,000 and $355,000, respectively. Cash~~excluding $12,000 paid for ~~amounts included in~~common area maintenance charges.

As of September 30, 2021, the maturity of our lease liability ~~for the three and nine months ended March 31, 2020, was $116,000 and $345,000, respectively.~~is as follows (in thousands):

On August 24, 2021, one of our customers, through its counsel, sent notice that it is seeking indemnification from us regarding a pending complaint filed by a third-party claiming patent infringement on one of the products that we manufacture for this customer. Our assessment of the alleged claim is ongoing. As of the date of this filing, our position is that there is no infringement and/or that the patent at issue is invalid.

~~We are from time~~In addition to ~~time a party to various~~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.

On November 5, 2021, we entered into Amendment No. 1 to Amended and ~~adverse.~~Restated Credit Agreement (the “Amendment”), which amends our Amended and Restated Credit Agreement with MBT to extend the maturity date of our existing $2,000,000 revolving credit note with MBT from November 5, 2021 to November 5, 2023 and to reduce the annual interest rate 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” or “us”) for the three-month ~~and nine-month~~ periods ended ~~March 31,~~September 30, 2021 and 2020. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. This report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein.

Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities, and market factors influencing our results, ~~including uncertainties related to the COVID-19 pandemic,~~ are forward-lookingstatements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales in markets characterizedby rapid technological evolution, the impact of the COVID-19 pandemic on our suppliers, customers and us, consolidation within our target marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities. Many other economic, competitive,governmental,and technological factors could impact our ability to achieve our goals. You are urged to review the risks, uncertainties, and other cautionary language described in this report, as well as in our other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including, but not limited to, the risks, uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, ~~2020.~~2021.

We specialize in the design, development, and manufacture of ~~autoclavable, battery-powered and electric, multi-function~~powered rotary drive surgical ~~drivers and shavers~~instruments used primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.

Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet address is ~~www.pro-dex.com.~~www.pro-dex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC atwww.sec.govand company specific information at www.sec.gov/edgar/searchedgar/~~companysearch.html.~~companysearch.html.

The condensed results of ~~operations~~operation presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of ~~the~~our fiscal year ending June 30, ~~2021,~~2022, or any other interim period during such fiscal year. Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.

Our ~~consolidated~~ financial statements are prepared in accordance with ~~accounting principles generally accepted in the United States.~~U.S. GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that there have been no significant changes during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021, to the items that we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for ~~the~~our fiscal year ended June 30, ~~2020.~~2021.

Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were developed by us under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and electric, multi-function surgical drivers, and shavers. We continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customers. During the first quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply their surgical handpieces to them through calendar 2025.

Simultaneously, we are working to build top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive torque-limiting software has been very well received in the CMF ~~market~~ and ~~we have continued investment in this area with research and development focused on applying this technology most recently to~~ thoracic ~~surgical applications, and we launched our first thoracic driver in the third quarter of fiscal 2020.~~markets. Additionally, we have other significant engineering projects under way described more fully ~~in results~~below under “Results of ~~operations.~~Operations”.

~~Additionally, as previously disclosed, on~~In November 6, 2020, we purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future ~~growth.~~growth, including anticipated expanded capacity for the manufacture of batteries and new products. Currently, we are ~~continuing with~~completing our build-out of the property and performing necessary validations for both equipment and processes and have yet to transition any of our employees into the facility. We anticipate that upon completion of initial improvements, we will be able to execute on Phase I of our plan, which includes, among other things, the installation of a clean room to enable us to expand our capacity for the manufacture of batteries and new products. We expect that we will begin operations in the new facility ~~some time~~ during the ~~first quarter of next fiscal year.~~second quarter.

In summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development activities to design Pro-Dex branded drivers to leverage our torque-limiting software, ~~expand~~expansion of our manufacturing capacity through the build-out of the Franklin Property, and promoting active product development proposals to new and existing customers for both orthopedic shavers and screw drivers for a multitude of surgical applications, ~~and other medical devices,~~ while monitoring closely the progress of all these individual endeavors. Our investments in research and development ~~and general and administrative expenses~~ have ~~in recent periods,~~ increased disproportionately to our growth in revenue ~~as we focus on new product development~~ and we anticipate this to continue in the near term. These expenditures are being made in an effort to release new products and garner new customer relationships. While we expect revenue growth in the future, it may not be a consistent trajectory but rather periods of incremental growth that current expenditures are helping to create. However, there can be no assurance that we will be successful in any of these objectives.

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

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

We are focused on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers. We are supporting our customers according to their priorities and working with them to the degree that we can offer relief in the form of delayed shipments. We are focused on continuity of supply by working with our ~~suppliers.~~suppliers, some of whom have delivered our orders late and are quoting longer lead times.

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

The following tables set forth results from continuing operations for the three months ended September 30, 2021 and 2020 (in thousands, except percentages):

The majority of our revenue is derived from designing, developing, and manufacturing surgical ~~devices~~devices. We continue to sell our rotary air motors for ~~the~~industrial and scientific applications, but our focus remains in medical ~~device industry.~~devices. The proportion of total sales by type is as follows (in thousands, except percentages):

Certain of our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements. All of our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California ~~facility, as are our industrial products.~~facility. Details of our medical device sales by type is as follows (in thousands, except percentages):

																						Three Months Ended September 30,											Increase (Decrease) From 2020 To 2021
	Three Months Ended March 31,										Nine Months Ended March 31,											2021						2020
	2021					2020					2021					2020						Dollars in thousands
			% of Total					% of Total					% of Total					% of Total						% of Med Device Sales						% of Med Device Sales
Medical device sales:
Orthopedic	$	4,534		43	%	$	4,027		61	%	$	12,664		53	%	$	12,628		70	%		$	5,706		69	%		$	3,689		55	%		55	%
CMF		2,066		19	%		1,143		17	%		4,661		20	%		4,034		22	%			2,387		29	%			1,525		22	%		57	%
Thoracic		4,045		38	%		1,486		22	%		6,432		27	%		1,486		8	%			191		2	%			1,526		23	%		(88	%)
Total	$	10,645		100	%	$	6,656		100	%	$	23,757		100	%	$	18,148		100	%
																					$	8,284		100	%		$	6,740		100	%		23	%

~~Sales of our~~Our medical device ~~products~~revenue increased ~~$4.0~~$1.5 million, or ~~60%~~23%, ~~and $5.6 million, or 31%, for~~in the ~~three and nine months ended March 31, 2021,~~first quarter of fiscal 2022 compared to the corresponding ~~periods~~period of the prior fiscal ~~year.~~year. Our ~~medical device revenue~~orthopedic sales include the surgical handpiece that we sell to our largest customer ~~included~~which increased $2.0 million in ~~orthopedic sales above,~~the current year due to a supply disruption in the first quarter of the prior year that did not recur in the current year. Sales of our CMF products increased ~~$615,000 and $563,000, respectively, for~~$862,000 in the ~~three and nine months ended March 31, 2021~~first quarter of fiscal 2022 compared to the corresponding ~~periods~~period of the prior fiscal year due ~~to volume increases offset by contractual price concessions. Our thoracic sales revenue increased $2.6 million and $4.9 million for the three and nine months ended March 31, 2021, compared~~in part to the ~~corresponding periods~~launch of a new driver to our existing largest customer during the third quarter of the prior fiscal year. ~~As previously discussed, we completed the private-label effort for~~Sales of our thoracic ~~driver and launched initial shipments~~drivers decreased $1.3 million in the ~~amount of $1.5 million to our customer in the third~~first quarter of fiscal 2020. The increase in thoracic revenue during fiscal 2021, represents additional follow-on orders from that customer. Additionally, recurring revenue from distributors of CMF drivers increased $923,000 and $627,000, respectively, for the three and nine months ended March 31, 2021,2022 compared to the corresponding ~~periods~~period of the prior fiscal year ~~and includes $220,000~~due primarily as a result of ~~revenue from~~ our ~~latest CMF driver, which we sell to our existing largest~~ customer ~~under a~~filling the near-term requirements of its distribution ~~agreement executed earlier this fiscal year.~~network.

Sales of our compact pneumatic air motors ~~reported as industrial and scientific sales above,~~ increased ~~$68,000,~~$52,000, or ~~49%~~32%, ~~and $108,000, or 22%, respectively, for~~in the ~~three and nine months ended March 31, 2021,~~first quarter of fiscal 2022 compared to the corresponding ~~periods~~period of the prior fiscal year. The revenue increase relates to a continued interest in these legacy products but is not due to any substantive marketing ~~efforts.~~

efforts. Sales of our dental products and components ~~declined for~~remained flat in the ~~three and nine months ended March 31, 2021,~~first quarter of fiscal 2022 compared to the corresponding ~~periods~~quarter of the prior fiscal ~~year and we expect~~year. We will continue to experience future declines in this area as we are no longer manufacturing dental products, but rather ~~are~~ simply selling remaining ~~component~~ inventory. ~~As previously discussed,~~Our non-recurring engineering (“NRE”) and proto-type revenue increased $186,000 in ~~January 2018, we sent notification to our dental product customers that we were discontinuing~~ the ~~manufacture~~first quarter of these products. The cessation of our dental line of products did not have a material impact on our financial position or results of operations and reflected a conscious decision to increase capacity for our medical device products.

~~Repair revenue decreased $624,000, or 44%, and $474,000, or 11%, for the three and nine months ended March 31, 2021, respectively,~~fiscal 2022 compared to the corresponding ~~periods~~period of the prior fiscal year, due to increased billable contracts in the current fiscal first quarter. Our NRE and proto-type revenue is typically a small percentage of our total revenue and can vary significantly from quarter to quarter.

Repair revenue decreased by $168,000 in the first quarter of fiscal 2022 compared to the corresponding period of the prior fiscal year, due to decreased repairs of the orthopedic handpiece we sell to our largest customer. ~~We expect~~Typically, upon initial product launch, repair revenue ~~to continue to decrease based upon a downward trend we have seen~~is minimal as most repairs are typically covered under warranty, but as the products mature in the marketplace and after a certain number of routine duty cycles in the operating room, repairs generally increase.

Discounts and other increased by $216,000 in the first quarter of fiscal 2022 compared to the corresponding period of the prior fiscal year, due to volume ~~of repairs of this~~rebates related to the orthopedic ~~handpiece.~~handpiece we sell to our largest customer which they negotiated in conjunction with our contract extension through 2025.

At ~~March 31,~~September 30, 2021, we had a backlog of approximately ~~$11.6~~$12.8 million, of which ~~$7.9~~$12.6 million is ~~scheduled to be delivered in~~scheduled for delivery during the ~~fourth quarter~~remainder of fiscal ~~2021 and the balance is scheduled to be delivered next fiscal year.~~2022. Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts. Wemayexperience variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches and customer planned inventory builds. However, we do not typically experience seasonal fluctuations in our shipments and revenues.

Cost of Sales and Gross Margin
~~(in thousands except percentages)~~

																								Three Months Ended September 30,											Increase (Decrease) From 2020 To 2021
	Three Months Ended March 31,											Nine Months Ended March 31,												2021						2020
	2021					2020						2021					2020							Dollars in thousands
			% of Total						% of Total					% of Total						% of Total						% of Net Sales						% of Net Sales
Cost of sales:
Product cost	$	7,000		95	%	$	5,284			99	%	$	17,120		94	%	$	14,781			99	%
Under(over)-absorption of manufacturing costs		118		2	%		(53	)		—			470		3	%		(51	)		—
Product costs																							$	6,632		66	%		$	4,915		58	%		35	%
Under-(over) absorption of manufacturing costs																								(146	)	(1	%)			94		1	%		(255	%)
Inventory and warranty charges		236		3	%		67			1	%		548		3	%		125			1	%			74		1	%			106		1	%		(30	%)
Total cost of sales	$	7,354		100	%	$	5,298			100	%	$	18,138		100	%	$	14,855			100	%		$	6,560		66	%		$	5,115		60	%		28	%
Gross profit and gross margin																							$	3,428		34	%		$	3,475		40	%		(1	%)

Cost of sales for the ~~three months~~three-month period ended ~~March 31,~~September 30, 2021 increased ~~$2.1~~by $1.4 million, or ~~39%~~28%, compared to the corresponding period of the prior fiscal year. ~~The~~Although some of the increase in ~~total costs~~cost of sales ~~was caused by~~is consistent with the ~~38%~~16% increase in revenue for the same ~~period. Under-absorption~~period, some of ~~manufacturing~~the increase relates to the change in product mix from the first quarter of fiscal 2021 to 2022. Product costs increased by ~~$171,000 for~~35% during the three months ended March 31, 2021, compared to the corresponding period of the prior fiscal year due in part to COVID-19 related absences. We have incurred paid absences in our machine shop, assembly and quality operations that reduce our ability to absorb our fixed costs because total production hours are reduced. Costs relating to inventory and warranty charges increased $169,000 for the third quarter ended March 31, 2021 compared to the third quarter of the prior fiscal year.

Gross profit increased by approximately $1.2 million, or 37%, for the three months ended March 31, 2021, compared to the corresponding period of the prior fiscal year, consistent with the overall increase in revenue. Gross margin as a percentage of sales decreased by approximately 1 percentage point compared to the corresponding period of the prior fiscal year due primarily to the increases in inventory and warranty charges, which often increase in periods of high product development.

Cost of sales for the nine months ended March 31, 2021 increased by $3.3 million, or 22%, compared to the corresponding period of the prior fiscal year, consistent with the increased revenue of 21% for the same period, the reasons for which are discussed above. Additionally, total cost of sales reflects a $521,000 increase in under-absorbed manufacturing costs due to reduced production hours resulting in part from paid absences related to COVID-19. Inventory and warranty charges increased by approximately $423,000, or 338%, for the nine months ended March 31,September 30, 2021, compared to the corresponding period of the prior fiscal year, due to ~~increased scrap~~both higher material costs and ~~inventory charges~~higher direct costs in our machine shop, materials, assembly and quality departments. During the first quarter of fiscal 2022 we experienced $146,000 of over-absorbed manufacturing costs compared to an under-absorption of $94,000 in the ~~amount~~first quarter of ~~$152,000 and increased warranty expenses~~fiscal 2021, primarily due to actual production hours exceeding the corresponding period of ~~$271,000. Both~~the prior fiscal year. Costs related to inventory and warranty ~~related expenses tend~~charges decreased $32,000 in the first quarter of fiscal 2022 compared to ~~increase~~the corresponding quarter of fiscal 2021, due primarily to a prior year accrual for the replacement cost of batteries owed to one of our customers. No similar costs were incurred in ~~periods~~the first quarter of ~~higher volume sales and in periods with higher product development activity.~~fiscal 2022.

Gross profit ~~increased~~decreased by ~~$1.6 million,~~approximately $47,000, or ~~18%~~1%, for the ~~nine~~three months ended ~~March 31,~~September 30, 2021 compared to the corresponding period of the prior fiscal year, and gross margin as a percentage of sales decreased by approximately six percentage points between such periods, primarily as a result of ~~the increase in revenue discussed above. Gross margin for the nine months ended March 31, 2021, remained flat, at 37%, compared to the corresponding period of the prior fiscal year.~~product mix.

																											Three Months Ended September 30,										Increase (Decrease) From 2019 To 2020
	Three Months Ended March 31,										Nine Months Ended March 31,										Year over Year % Change						2021					2020
	2021					2020					2021					2020					Three Months			Nine Months			Dollars in thousands
			% of Net Sales					% of Net Sales					% of Net Sales					% of Net Sales											% of Net Sales					% of Net Sales
Operating expenses:
Selling expenses	$	136		1	%	$	161		2	%	$	415		2	%	$	438		2	%		(16	%)		(5	%)	$	37		—		$	130		1	%		(72	%)
General and administrative expenses		1,280		11	%		725		9	%		2,922		10	%		2,052		9	%		77	%		42	%		1,093		11	%		705		8	%		55	%
Research and development costs		1,104		10	%		620		7	%		3,184		11	%		1,501		6	%		78	%		112	%		980		10	%		1,091		13	%		(10	%)
	$	2,520		22	%	$	1,506		18	%	$	6,521		23	%	$	3,991		17	%		67	%		63	%	$	2,110		21	%	$	1,926		22	%		10	%

Selling expenses consist of salaries and other personnel-related expenses ~~for our~~in support of business development, ~~department,~~ as well as trade show attendance, advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021 decreased ~~$25,000,~~$93,000, or ~~16%~~72%, ~~and $23,000, or 5%, respectively,~~ compared to the corresponding ~~periods of fiscal 2020. These decreases relate~~year-earlier period. The decrease is primarily due to ~~reduced bonus compensation~~decreased personnel and ~~reduced travel~~related expenses due to combining our Director of Business Development position with our Director of Engineering in the ~~COVID-19 pandemic.~~first quarter of fiscal 2022.

General and administrative expenses (“G&A”) ~~consists~~consist of salaries and other personnel-related expenses of our accounting, finance, and human ~~resource~~resources personnel, ~~as well as costs for outsourced information technology services,~~ professional fees, directors’ fees, and other costs and expenses attributable to being a public company. G&A increased ~~$555,000 and $870,000, respectively, during~~by $388,000, or 55%, for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2021, when compared to the corresponding ~~periods~~period of the prior fiscal year. The ~~increases relate~~increase in total G&A expenses was primarily related to ~~higher stock~~non-cash compensation expense related to the non-qualified stock options ~~awarded~~granted in the ~~current~~prior fiscal year, relocation and operating expenses of the Franklin Property, increased legal fees related to intellectual property matters and our debt refinancing in combination with our Property Loan, increased personnel-related expenses including bonus accruals, as well as higher insurance expense.year.

Research and development costs generally consist of ~~salaries, employer-paid benefits,~~compensation and other ~~personnel- related~~personnel-related costs of our engineering and support personnel, ~~as well as allocated facility and information technology costs,~~related professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products. Research and development costs decreased $111,000, or 10%, for the ~~three and nine months~~quarter ended ~~March 31,~~September 30, 2021, ~~increased $484,000 and $1.7 million, respectively,~~ compared to the corresponding ~~periods~~prior year period. The decrease is due primarily to a decrease in the amount of $51,000 in engineering projects for new product development as well as an increase of $58,000 relating to billable non-recurring engineering, which amount has been reclassified to cost of sales in the ~~prior fiscal year. These increases are primarily due to increased personnel-related expense and increased spending on internal development projects.~~condensed consolidated statement of income.

Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products. ~~The research~~Research and development costs represent between ~~38%~~46% and ~~49%~~57% of total operating expenses for all periods presented and are expected to increase in the future as we continue to invest in ~~the business.~~ product development.

The amount spent on projects under development, along with the current estimated commercial launch date and estimated recurring annual revenue, is summarized below (in thousands):

As we introduce new products into the market, we expect to see an increase in sustaining and other engineering expenses. Typical examples of sustaining engineering activities include, but are not limited to, end-of- life component replacement, especially in electronic components found in our printed circuit board assemblies, analysis of customer complaint data to improve process and design, replacement and enhancement of tooling and fixtures used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put. Additionally, these costs include development projects that may be in their infancy and may or may not result in a full-fledged product development effort.

~~Interest income for~~The interest expense recorded during the ~~three and nine months~~quarters ended ~~March 31,~~September 30, 2021 and 2020 ~~includes~~relates to our Minnesota Bank and Trust (“MBT”) loan described more fully in Note 10 to the condensed consolidated financial statements contained elsewhere in this report. The unrealized gain (loss) on marketable securities for the quarters ended September 30, 2021 and 2020 relates to our portfolio of investments described more fully in Note 4 to the condensed consolidated financial statements contained elsewhere in this report. The interest and miscellaneous income recorded during the quarters ended September 30, 2021 and 2020, consists primarily of interest and dividends from our investments and money market accounts ~~and investment portfolio. During~~as well as $12,000 of realized gains from the ~~nine months~~sale of marketable securities during the quarter ended ~~March 31, 2020, we also recorded $17,000 of miscellaneous income related to cash collected related to note receivable extensions granted on a note we previously wrote off.~~September 30, 2020.

~~Interest expense consists~~The effective tax rate for the three months ended September 30, 2021 and 2020 is 22% and 20%, respectively. The prior year effective tax rate is less than the current year rate due primarily to a tax benefit recognized as a result of ~~interest expense related~~the common stock awarded to ~~the notes payable~~our employees described more fully in Note 98 to the condensed consolidated financial statements contained elsewhere in this report.

During the quarter ended March 31, 2021, we sold several of the stocks in our portfolio of equity investments receiving proceeds of $2.9 million and recording a gain on the sale in the amount of $783,000. During the quarter ended September 30, 2020, we liquidated two of the stocks in our portfolio of equity investments, receiving proceeds of $115,000 and recording a gain on the sale in the amount of $12,000.

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

Cash and cash equivalents at ~~March 31,~~September 30, 2021 ~~decreased $2.5~~increased $1.5 million to ~~$3.9~~$5.2 million as compared to ~~$6.4~~$3.7 million at June 30, ~~2020.~~2021. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.


	As of and For the Nine Months Ended March 31,							As of and For the Three Months Ended September 30,
	2021			2020				2021				2020
	(in thousands)							(in thousands)
Cash provided by (used in):
Operating activities	$	(2,803	)	$	2,298			$	2,701			$	(888	)
Investing activities	$	(4,375	)	$	(2,253	)		$	(874	)		$	25
Financing activities	$	4,631		$	(3,409	)		$	(371	)		$	(356	)

Cash and Working Capital:
Cash and cash equivalents	$	3,874		$	4,378			$	5,177			$	5,202
Working Capital	$	20,091		$	16,140
Working capital							$	19,806			$	18,087

Net cash used in operating activities was $2.8 million for the nine months ended March 31, 2021, primarily due to net income of $3.6 million and non-cash deprecation and amortization of $502,000 and share-based compensation of $508,000 offset by an increase in accounts receivable in the amount of $6.8 million due to our largest customer changing their payment terms from net 30 to net 90 in conjunction with a contract extension. Additionally, our net income included $795,000 of realized gains from the sales of stock in our marketable securities portfolio.

Net cash provided by operating activities ~~was $2.3 million~~during the three months ended September 30, 2021 totaled $2.7 million. The primary sources of cash arose from (a) our net income for the ~~nine~~quarter of $1.1 million, as well as non-cash share-based compensation and depreciation and amortization of $300,000 and $184,000, respectively, (b) a decrease of $834,000 in accounts receivable due to more timely collection of receivables from our largest customer, and (c) a decrease in prepaid expenses and other current assets of $284,000. Uses of cash arose primarily from an increase in inventory of $470,000 primarily related to timing of various components and advance procurement of long-lead time items.

Net cash used by operating activities during the three months ended ~~March 31,~~September 30, 2020 ~~primarily due to~~totaled $888,000. The primary sources of cash arose from our net income for the quarter of ~~$3.6 million and~~$1,158,000, as well as non-cash depreciation and amortization of ~~$426,000. Our inventory increased~~$150,000, offset by ~~$2.4 million primarily related~~an increase in accounts receivable of $986,000 due to ~~the thoracic driver that we began shipping during~~extended payment terms from our ~~third quarter ended March 31, 2020,~~largest customers, a decrease in accounts payable and accrued expenses of $767,000, as well as ~~another customer CMF driver under development, which launched~~payments for income taxes in the ~~third quarter ended March 31, 2021.~~amount of $747,000.

Net cash used in investing activities for the nine months ended March 31, 2021, was $4.4 million and related primarily to the purchase of the Franklin Property acquired during the second quarter of fiscal 2021 for a purchase price of $6.5 million as well as expenditures related to machinery and equipment totaling $872,000. Offsetting these uses of cash, we sold some of our marketable securities during the nine months ended March 31, 2021 for $3.0 million.

Net cash used in investing activities for the ~~nine~~three months ended ~~March 31, 2020,~~September 30, 2021 was ~~$2.3 million~~$874,000 and related primarily to ~~investments in marketable equity securities~~the purchase of ~~publicly traded companies~~manufacturing equipment and improvements at the Franklin Property in the amount of ~~$1.8 million and purchases of machinery and equipment in the amount of $422,000.~~

Net cash provided by investing activities for the three months ended September 30, 2020 was $25,000 and related primarily to the sale of marketable equity securities in the amount of $115,000 offset by the purchase of capitalized equipment and software in the amount of $89,000.

Net cash used in financing activities for the ~~nine~~three months ended ~~March 31,~~September 30, 2021 ~~totaled $4.6 million and~~ included ~~$9.1 million in various~~the repurchase of $95,000 of common stock pursuant to our share repurchase program, as well as payments of $306,000 on our loans from ~~Minnesota Bank and Trust (“MBT”)~~MBT more fully described in Note 910 to the condensed consolidated financial statements contained elsewhere in this ~~report, offset by $4.0 million related to~~report.

Net cash used in financing activities for the ~~repurchase~~three months ended September 30, 2020 included payments of ~~161,291 shares of our common stock pursuant to our share repurchase program, $307,000 of principal payments~~$161,000 on our ~~loans with~~existing term loan from MBT as well as ~~payment of~~ $259,000 of employee payroll taxes related to the award of 40,000 shares of common stock to employees under previously granted performance awards.

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

Financing Facilities & Liquidity Requirements for the ~~next twelve months~~Next Twelve Months

As of ~~March 31,~~September 30, 2021, our working capital was ~~$20.0~~$19.8 million. We currently believe that our existing cash and cash equivalent balances together with our ~~accounts~~account receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows from operations. We may also borrow against our $2.0 million Revolving Loan with MBT, which we have recently renewed. (See ~~Note 9~~Notes 10 and 14 to condensed consolidated financial statements contained elsewhere in this ~~report).~~report.)

We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability. As we execute on our current strategy, however, we may require debt and/or equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes. In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject to extensive variability. We believe that if we need ~~to raise~~ additional capital to fund our operations, we can ~~do so by selling~~borrow against our revolving loan with MBT, or sell additional shares of our common stock under ~~the~~our previously disclosed ATM ~~Agreement.~~

~~We invest surplus cash from time to time through our Investment Committee,~~Agreement, 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. The Investment Committee approved each of the investments comprising the $4.1 million of marketable public equity securities held at March 31, 2021.currently suspended.

Our Chief Executive Officer (our principal executive officer) and Chief Financial Officer ~~(the~~(our principal ~~executive~~financial officer and principal ~~financial officer, respectively) conducted an~~accounting officer) have concluded based on their evaluation as of ~~the design and operation of~~September 30, 2021, that our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). were not effective because of the identification of a material weakness. A material weakness is a deficiency in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected in a timely manner. The material weakness we discovered relates to a lack of controls surrounding analysis of appropriate accounting pronouncements, in this case ASU 2016-01 Accounting for Financial Instruments – Classification and Measurement. We have since put in place a system to monitor and evaluate any new financial statement line item above a certain threshold to ensure that a thorough review of the accounting treatment and disclosure is documented. While this planned action is intended to assist management with identifying financial accounting standards that may pertain to our business and our operations, we remain committed to the continuous improvement of our internal control over financial reporting and may implement further changes intended to enhance our internal control over financial reporting.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the ~~Company~~company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial ~~officers,~~officer and principal accounting officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of March 31, 2021, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that:

During the three months ended ~~March 31,~~September 30, 2021, ~~there~~in addition to the material weakness described above, our human resources director began a leave of absence and since that time the accounting department has been performing the human resources job functions. Additionally, three months ended September 30, 2021, our Director of Operations retired and that position’s responsibilities are primarily being assumed by our Chief Executive Officer. As a small company, these changes in personnel and reallocation of duties can have an impact on our internal controls. There were no other changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

See Note 1213 of Notes to condensed financial statements contained elsewhere in this report.

Our business, future financial condition, and results of operations are subject to a number of factors, risks, and uncertainties, which are disclosed in Item 1A, entitled “Risk ~~Factors”~~ Factors,” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, ~~2020,~~2021, as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2021. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed ~~consolidated~~ financial statements included elsewhere in this report and in Part I, Item 2, of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations” in Part I of this report.~~Operations.” The risks and uncertainties disclosed in our Form 10-K , our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect our business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020, except as provided in any amendments thereto and those set forth below.~~2021.

Borrowings that we made under our credit facility with MBT in the third quarter of fiscal 2021 make it more difficult to satisfy various financial covenants under that credit facility, and a breach of those financial covenants could have a material adverse effect on our business.

The amended credit agreement that we entered into with MBT in the second quarter of fiscal 2021 contains various covenants, including, among other covenants, a quarterly fixed charge coverage ratio and debt service coverage ratio. As discussed elsewhere in this report, during the third quarter of fiscal 2021, we borrowed an additional $4,000,000 under the MBT credit facility ($3,000,000 under the Term Note A and $1,000,000 under the Term Note B). These additional borrowings make it more difficult for us to satisfy the facility’s quarterly fixed charge coverage ratio and debt service coverage ratio. As disclosed in Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2020, a breach of any of the covenants or restrictions under our debt obligations could result in a default under those obligations and the lender could proceed against us and our assets that serve as collateral for the debt. We could also be forced to take remedial actions such as restructuring or refinancing our debt, seeking additional debt or equity capital, reducing or delaying our business activities, or selling assets. There can be no assurance that any such measures would be successful.

Repurchases by usthe Company of ~~our~~its common stock during the quarter ended ~~March 31,~~September 30, 2021 were as follows:

All repurchases were made pursuant to ~~our~~the Company’s previously announced repurchase ~~programs.~~program. For information concerning the Company’s repurchase program, please see the discussion under the caption “Share Repurchase Program” in Note 10 to the condensed consolidated financial statements included elsewhere in this report.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

☒
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ~~MARCH 31,~~SEPTEMBER 30, 2021
OR
¨ ☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

colorado	84-1261240
~~COLORADO~~	~~84-1261240~~
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	PDEX	NASDAQ Capital Market


Large accelerated filer ¨ ☐	Accelerated filer ¨ ☐
Non-accelerated filerþ ☒	Smaller reporting company þ ☒
	Emerging growth company ¨ ☐

		Page
	~~Page~~
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)	1

Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2021 and June 30, ~~2020~~ 2021	1
Condensed Consolidated Statements of ~~Operations and Comprehensive~~ Income ~~(Loss)~~ for the Three ~~and Nine~~ Months Ended ~~March 31,~~September 30, 2021 and 2020	2
Condensed Consolidated Statements of Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~March 31,~~September 30, 2021 and 2020	3
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~March 31, 2021and~~September 30, 2021 and 2020	4
Notes to Condensed Consolidated Financial Statements	6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22 23

ITEM 4. CONTROLS AND PROCEDURES	23

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	24 25

ITEM 1A. RISK FACTORS	24 25

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24 25

ITEM 6. EXHIBITS	25 26

SIGNATURES	26 27


	March 31, 2021		June 30, 2020
Raw materials /purchased components	$	4,555	$	4,241
Work in process		1,901		2,339
Sub-assemblies/finished components		1,661		1,438
Finished goods		251		220
Total inventory	$	8,368	$	8,238

Schedule of inventory
	September 30, 2021		June 30, 2021
Raw materials/purchased components	$	3,856	$	3,967
Work in process		2,833		2,218
Sub-assemblies/finished components		1,791		1,738
Finished goods		427		514
Total inventory	$	8,907	$	8,437


	March 31, 2021			June 30, 2020
Land	$	3,684		$	—
Building		2,815			—
Total		6,499			—
Less: accumulated depreciation		(39	)		—
	$	6,460		$	—


	As of and for the Three Months Ended March 31,
	2021			2020
Beginning balance	$	347		$	141
Accruals during the period		57			77
Changes in estimates of prior period warranty accruals		20			(8	)
Warranty amortization and utilization		(116	)		(37	)
Ending balance	$	308		$	173


	Three Months Ended March 31,
	2021					2020
	Amount		Percent of Total			Amount		Percent of Total

Net sales	$	11,739		100	%	$	8,508		100	%

Customer concentration:
Customer 1	$	5,238		45	%	$	5,373		63	%
Customer 2		4,514		39	%		2,337		28	%
Total	$	9,752		84	%	$	7,710		91	%


	March 31, 2021				June 30, 2020
Total accounts payable	$	2,524	100	%	$	1,965	100	%

Supplier concentration:
Supplier 1	$	321	13	%	$	245	13	%
Supplier 2		193	8	%		161	8	%
Total	$	514	21	%	$	406	21	%


	Operating Lease
Fiscal Year:
2021	$	120
2022		489
2023		504
2024		519
2025		535
Thereafter		1,261
Total lease payments		3,428
Less imputed interest:		(571	)
Total	$	2,857

Schedule of Maturities of Lease Liabilities
	Operating Lease
Fiscal Year:
2022	$	369
2023		504
2024		519
2025		535
2026		551
Thereafter		710
Total lease payments		3,188
Less imputed interest		(493	)
Total	$	2,695


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

	·	Implemented quarterly ~~now monthly,~~ company-wide COVID-19 ~~testing; and~~
	·	~~Daily temperature screenings and personal affidavits of wellness.~~ testing.


	Three Months Ended March 31,						Nine Months Ended March 31,						Year over Year ppt Change
	2021			2020			2021			2020			Three Months			Nine Months

Gross margin		37	%		38	%		37	%		37	%		(1	)		—


	Three and Nine Months Ended March 31, 2021				Three and Nine Months Ended March 31, 2020				Market Launch ⁽¹⁾		Est Annual Revenue
Total Research & Development costs:	$	1,104	$	3,184	$	620	$	1,501

Products in development:
ENT Shaver		192		450		136		291		Q4 2021	$	1,000
Vital Ventilator		26		91		—		—		Q1 2022	$	1,500
CMF Driver		263		731		60		106		(2)	$	1,000
Sustaining & Other		623		1,912		424		1,104
Total	$	1,104	$	3,184	$	620	$	1,501

	For the Three Months Ended September 30,
	2021		2020		Market Launch⁽¹⁾			Est. Annual Revenue
Total Research & Development costs:	$	980	$	1,091

Products in development:
ENT Shaver	$	232	$	183		Q4 2021		$	1,000
VITAL Ventilator		115		57		Q1 2022		$	1,500
CMF Driver		—		189		(2	)	$	1,000
Sustaining & Other		633		662
Total.	$	980	$	1,091


⁽¹⁾	Represents the calendar quarter of expected market launch.


	~~(1)~~	~~pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;~~
	~~(2)~~	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
	~~(3)~~	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. 23


Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2021 to January 31, 2021	—	—	—	951,894
February 1, 2021 to February 28, 2021	49,870	$26.17	49,870	902,024
March 1, 2021 to March 31, 2021	111,421	$24.54	111,421	790,603

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2021 to July 31, 2021	–	–	–	790,603
August 1, 2021 to August 31, 2021	–	–	–	790,603
September 1, 2021 to September 30, 2021	3,616	$26.18	3,616	786,987

Exhibit
~~Exhibit~~		Description
~~31.1~~ 10.1		Amendment No. 1 to Amended and Restated Credit Agreement dated November 5, 2021 by and between Pro-Dex, Inc. and Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 9, 2021)
10.2		Amended and Restated Revolving Credit Note dated November 5, 2021 made by Pro-Dex in favor of Minnesota Bank & Trust (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed November 9, 2021)
31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

		PRO-DEX, INC.
	~~PRO-DEX, INC.~~
Date: November 15, 2021	By:
~~Date: May 6, 2021~~	~~By:~~	/s/ Richard L. Van Kirk
		Richard L. Van Kirk
		Chief Executive Officer (principal executive officer)

	Date: November 15, 2021
~~Date: May 6, 2021~~ By:	~~By:~~	/s/ Alisha K. Charlton
		Alisha K. Charlton
		Chief Financial Officer (principal financial officer and principal accounting officer)