UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

Commission file number: 0-14942

PRO-DEX, INC.INC.

(Exact name of registrant as specified in its charter)

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2361 McGaw Avenue, Irvine, California 92614

(Address of principal executive offices and zip code)

(949) 769-3200

(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

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. Yes ☒  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). Yes ☒  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 ☐  No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 3,618,6633,545,309 shares of common stock, no par value, as of May 5, 2022.4, 2023.

PRO-DEX, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINESIX MONTHS ENDED MARCH 31, 20222023

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PRO-DEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

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

PRO-DEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

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

PRO-DEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)

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

PRO-DEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

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

PRO-DEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Unaudited)

(In thousands)

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

PRO-DEX, INC. AND SUBSIDIAIRIESSUBSIDIARIES

NOTES TO CONSDENSEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc. (“we,” “us,” “our,” “Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.2022. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2021.2022.

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Standards

In December 2019,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income TaxesNo. 2016-13, “Financial Instruments - Credit Losses (Topic 740) – Simplifying326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the Accountingdisclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods 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 areestimating expected credit losses. This guidance is effective for usfiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with fiscal year 2022. Theearly adoption permitted. We do not believe the adoption of the amendments has not hadthis ASU will have a materialsignificant impact on our consolidated financial statements.

There are no other recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements.

NOTE 2. DESCRIPTION OF BUSINESS

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

In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The 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. We concluded that our historical financial statements are not materially misstated for several reasons, including the fact that the cumulative three-year error had a negative impact to historical net income in the amount of $61,000, an amount we deem immaterial, as well as the fact that the amounts did not contain a calculation error but rather amounts were presented on an incorrect line item within the financial statements. We also considered the fact that this error did not impact cash or operating income for any historical period, which we believe is important to our investors. Accordingly, the prior year financial statements have been revised to reflect the impact of ASU 2016-1. The revised classification and reported values of our unrealized gains (losses) on marketable equity investments as accounted for under ASU 2016-01 are included in the condensed consolidated financial statements herein. The impact to net income for the three months ended March 31, 2021, was an increase of $136,000 with a corresponding decrease in unrealized gain on marketable equity securities of $136,000, previously presented in other comprehensive income (loss). The revision resulted in an increase to both basic and diluted earnings per share for the three months ended March 31, 2021, of $0.04. The impact to net income for the nine months ended March 31, 2021, was an increase of $1.4 million with a corresponding decrease in unrealized gain on marketable equity securities of $1.4 million, previously presented in other comprehensive income (loss). The revision resulted in an increase to basic earnings per share of $0.37 and diluted earnings per share of $0.36 for the nine months ended March 31, 2021. As of June 30, 2021, the revision reclassified the remaining accumulated other comprehensive loss of $215,000 to retained earnings.

NOTE 4.3. NET SALES

The following table presents the disaggregation of net sales by revenue recognition model (in thousands):

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs incurred compared to the estimated total costs upon completion. During the three and nine months ended March 31, 2023, we recorded $405,000 and $956,000, respectively, of revenue that had been included in deferred revenue in the prior year. During the three and nine months ended March 31, 2022, we did not record any revenue that had been included in deferred revenue in the prior year. The revenue recognized from the contract liabilities consisted of satisfying our performance obligations during the normal course of business. Our entire deferred revenue balance of $896,00057,000 at March 31, 2022,2023, is currently expected to be recognized in the next 12-month period.

The following tables summarize our contract assets and liability balances (in thousands):

NOTE 5.4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

Inventory

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

Investments

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

Investments at March 31, 20222023 and June 30, 2021,2022, had an aggregate cost basis of $3,538,0002,714,000 and $3,204,0002,796,000, respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities we may not be able to sell our position within one year. At March 31, 2022,2023, the investments included net unrealized losses of $632,00031,000 (gross unrealized losses of $646,000113,000 offset by gross unrealized gains of $14,00082,000). At June 30, 2021,2022, the investments included net unrealized losses of $215,000262,000 (gross unrealized losses of $386,000369,000 offset by gross unrealized gains of $171,000107,000).

Of the total marketable equity securities at March 31, 20222023 and June 30, 2021,2022, $1,058,0001,149,000 and $1,244,000755,000, respectively, represent an investment in the common stock of Air T, Inc. Two of our Board members are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Our Chairman, one of the two Board members aforementioned, also serves as the Chief Executive Officer and Chairman of Air T, Inc. Another of our Board members is employed by Air T, Inc. as its Chief of Staff. The shares were purchased through 10b5-1 Plans that, in accordance with our internal policies regarding the approval of related-party transactions, were approved by our then three Board members that are not affiliated with Air T, Inc.

We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr. Van Kirk, and two non-management directors, Mr. Cabillot and Mr. Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc.

Land and building

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

On November 6, 2020, we acquired the Franklin Property for a total purchase price of $6.5 million, of which we paid $1.3 million in cash and the balance of $5.2 million we financed through Minnesota Bank & Trust (“MBT”) (See Note 11)10). We substantially completed the build-out of the property in the first quarter of this fiscal year. Currently, we are actively engaged in various verification and validation activities andactivities. We expect that we moved certain of our employees intowill begin operations in the new buildingfacility during the thirdfourth quarter of this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years.

Intangibles

Intangibles consist of the following (in thousands):

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. Future amortization expense is expected to be $7,000 for the remainder of fiscal 2023 and $27,000 per fiscal year through fiscal 2026, at which time we expect these costs to be fully amortized. During the three months ended December 31, 2021, we impaired $46,000 in previously capitalized legal fees because although we were granted the underlying patent, in this case, we had (and continue to have) no products either in development or sold that utilize the intellectual property protected by the patent.

NOTE 6.5. WARRANTY

The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying condensed consolidated balance sheets. As of March 31, 20222023 and June 30, 2021,2022, the warranty reserve amounted to $328,000252,000 and $221,000340,000, respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated income statements. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 20222023 and 2021,2022, was $102,000(77,000) and $77,000102,000, respectively, and for the nine months ended March 31, 20222023 and 2021,2022, was $170,00046,000 and $330,000170,000, respectively.

Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2023 and 2022, are as follows (in thousands):

Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2022 and 2021, are as follows (in thousands):

NOTE 7.6. NET INCOME PER SHARE

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

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

NOTE 8.7. INCOME TAXES

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

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

We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of March 31, 2023 and 2022, we recognized accrued interest of $59,000 and $70,000, respectively, related to unrecognized tax benefits. NaN interest or penalties were recognized as of June 30, 2021, since we had sufficient tax attributes available to fully offset any potential assessment of additional tax.

We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2018,2019 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2017,2019 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

NOTE 9.8. SHARE-BASED COMPENSATION

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

In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of March 31, 2022,2023, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan.

Former Stock Option Plans

No options were granted under the Former Stock Option Plans during the three or nine months ended March 31, 20222023 and 2021.2022.

As of March 31, 2022,2023, there was no unrecognized compensation cost under the Former Stock Option Plans, as all remaining outstanding stock options are fully vested. As of March 31, 2022, the options outstanding under the Former Stock Option Plans had a weighted average remaining contractual life of 0.54 years and an intrinsic value of $96,000. have been exercised during fiscal 2023. The following is a summary of stock option activity for the nine months ended March 31, 20222023 and 2021:2022:

Performance Awards

In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees, which will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. The weighted average fair value of the performance awards granted was $4.46,$4.46, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain other employees. The weighted average fair value of the performance awards reallocated in 2020 was $16.90, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated an additional 17,500 previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2021 was $20.34, calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During the three months ended March 31, 20222023 and 2021,2022, we recorded share-based compensation expense of $81,00030,000 and $21,00081,000, respectively, related to outstanding performance awards. During the nine months ended March 31, 20222023 and 2021,2022, we recorded share-based compensation expense of $123,00091,000 and $63,000123,000, respectively, related to outstanding performance awards. On March 31, 2022,2023, there was approximately $393,000232,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 2.222.25 years.

On July 1, 2020,2022, it was determined by the Compensation Committee of our Board of Directors that the secondvesting of five tranches of 40,000 performance awards had been achieved and participants were awardedfor 40,00037,500 shares of common stock.stock had been achieved. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 25,62923,641 shares and paid $259,000223,000 of participant-related payroll tax liabilities.

Non-Qualified Stock Options

In December 2020, the Compensation Committee of our Board of Directors granted 310,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 18 months to 10.5 years from the date of grant and the achievement of our common stock trading at certain pre-determined prices. The weighted average fair value of the stock option awards granted was $16.72,$16.72, calculated using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated 5,000 previously forfeited non-qualified stock options, having the same remaining terms and conditions, to another employee at a weighted average fair value of $6.69$6.69 calculated using a Monte Carlo simulation. During the three months ended March 31, 20222023 and 2021,2022, we recorded compensation expense of $271,000168,000 and $358,000271,000, respectively, related to these options. During the nine months ended March 31, 20222023 and 2021,2022, we recorded compensation expense of $799,000479,000 and $376,000799,000, respectively, related to these options. As of March 31, 2022,2023, none of these non-qualified options have vested and there was approximately $3.42.5 million of unrecognized compensation cost related to these non-vested non-qualified stock options.

In February 2021, the Compensation Committee of our Board of Directors granted 62,000 stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 4 months to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices. Of these stock options, 4,250 were forfeited and the remaining 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements. We recorded compensation expense of $59,000$59,000 for the three and nine months ended March 31, 2021, related to these options. The weighted fair value of the stock option awards granted was $3.16,$3.16, calculated using a Monte Carlo simulation.

Employee Stock Purchase Plan

In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our 2014 Annual Meeting. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period. Our Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options under those plans, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP.

During the three months ended March 31, 20222023 and 2021,2022, we recorded ESPP share-based compensation expense in the amount of $5,0008,000 and $6,0005,000, respectively, and 1,4462,956 and 1,1921,446 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $21.1114.79 and $27.1221.11, respectively, per share. During the nine months ended March 31, 20222023 and 2021,2022, we recorded ESPP share-based compensation expense in the amount of $11,000 14,000and $10,00011,000, respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 27,03932,249 shares of our common stock.

NOTE 10.9. MAJOR CUSTOMERS AND SUPPLIERS

Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the nine-month periods ended March 31, 20222023 and 2021,2022, is as follows (in thousands, except percentages):

Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 20222023 or June 30, 2021,2022, is as follows (in thousands, except percentages):