PRO DEX INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PRO-DEX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Irvine, California, Auditor ID: 659 ) 27 Financial Statements: Consolidated Balance Sheets, June 30, 2023 and 2022 (Restated) 29 Consolidated Income Statements, Years Ended June 30, 2023, 2022 (Restated) and 2021 (Restated) 30 Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2023, 2022 (Restated) and 2021 (Restated) 31 Consolidated Statements of Cash Flows, Years Ended June 30, 2023, 2022 (Restated) and 2021 (Restated) 32 Notes to Consolidated Financial Statements 34 25 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Pro-Dex, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Pro-Dex Inc. (the “Company”) as of June 30, 2023 and 2022, the related consolidated income statements, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Restatement of Previously Issued Financial Statements As described in Note 2, the Company has restated its consolidated financial statements as of June 30, 2022, and for the years ended June 30, 2022 and 2021, for the correction of errors. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 26 Warrant Valuation As described in Notes 2 and Note 5 to the consolidated financial statements, the Company holds a warrant to purchase common stock of a publicly traded company, which has an estimated fair value of $6,160,000 at June 30, 2023 and resulted in an unrealized gain of $3,856,000 during the year ended June 30, 2023. The warrant was determined to be a derivative financial instrument that is subject to remeasurement at each balance sheet date with changes in fair value recognized in earnings. We identified the valuation of the warrant as a critical audit matter. See also the “Restatement of Previously Issued Financial Statements” section of our report. The estimated fair value of the warrant was determined using a Black Scholes Option Pricing (“BSOP”) model. The principal considerations for our determination that auditing the estimated fair value of the warrant is a critical audit matter are (i) the judgment required by management in the determination of the significant assumptions used, including the underlying stock price, strike price of the warrant, volatility, risk-free rate, discount for lack of marketability and time-to-maturity (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the significant assumptions used in the BSOP model; and (iii) the use of professionals with specialized skill and knowledge. The primary procedures we performed to address this critical audit matter included: reading the agreements and evaluating management’s process for determining the estimated fair value of the warrant. testing management’s process included (i) evaluating the method used by management to determine the estimated fair value of the warrant; (ii) testing the mathematical accuracy of management’s model; (iii) evaluating the reasonableness of the significant assumptions used in the model and (iv) testing the completeness and accuracy of the data used. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the BSOP model used by management to determine the estimated fair value of the warrant, and evaluating whether the significant assumptions used in the BSOP model were reasonable. /s/ Moss Adams LLP Irvine, California October 13, 2023 We have served as the Company’s auditor since 2003. 27 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, 2023 2022 ASSETS (Restated ) Current assets: Cash and cash equivalents $ 2,936 $ 849 Investments 1,134 755 Accounts receivable, net of allowance for doubtful accounts of $ 0 at June 30, 2023 and 2022 9,952 15,384 Deferred costs 494 710 Inventory 16,167 12,678 Prepaid expenses 296 790 Total current assets 30,979 31,166 Land and building, net 6,249 6,343 Equipment and improvements, net 5,079 4,833 Right of use asset, net 1,872 2,248 Intangibles, net 81 118 Deferred income taxes, net — 256 Investments 7,521 4,083 Other assets 42 42 Total assets $ 51,823 $ 49,089 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,261 $ 3,761 Accrued liabilities 3,135 2,751 Income taxes payable 453 544 Deferred revenue — 1,013 Notes payable 3,827 3,285 Total current liabilities 9,676 11,354 Non-current liabilities: Lease liability, net of current portion 1,638 2,054 Deferred income taxes, net 8 — Notes payable, net of current portion 8,911 10,250 Total non-current liabilities 10,557 12,304 Total liabilities 20,233 23,658 Commitments and Contingencies: — — Shareholders’ equity: Common stock, no par value, 50,000,000 shares authorized; 3,545,309 and 3,596,131 shares issued and outstanding at June 30, 2023 and 2022, respectively 6,767 7,682 Retained earnings 24,823 17,749 Total shareholders’ equity 31,590 25,431 Total liabilities and shareholders’ equity $ 51,823 $ 49,089 See notes to consolidated financial statements. 28 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (In thousands, except share and per share data) Years Ended June 30, 2023 2022 2021 (Restated) (Restated) Net sales $ 46,087 $ 42,041 $ 38,029 Cost of sales 33,338 28,909 24,454 Gross profit 12,749 13,132 13,575 Operating expenses: Selling expenses 155 91 590 General and administrative expenses 4,028 4,903 4,076 Loss on disposal of equipment — 35 — Research and development costs 2,804 2,980 4,384 Total operating expenses 6,987 8,009 9,050 Operating income 5,762 5,123 4,525 Other income (expense): Interest and dividend income 294 76 126 Unrealized gain on investments 3,899 931 1,990 Gain on sale of investments 6 28 1,327 Interest expense ( 533 ) ( 464 ) ( 352 ) Total other income 3,666 571 3,091 Income before income taxes 9,428 5,694 7,616 Income tax expense 2,354 1,122 1,446 Net income $ 7,074 $ 4,572 $ 6,170 Basic & Diluted income per share: Basic net income per share $ 1.98 $ 1.26 $ 1.63 Diluted net income per share $ 1.95 $ 1.21 $ 1.57 Weighted-average common shares outstanding: Basic 3,571,044 3,635,894 3,796,516 Diluted 3,636,944 3,763,345 3,936,194 See notes to consolidated financial statements. 29 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For The Years Ended June 30, 2023, 2022 (Restated) and 2021 (Restated) (In thousands, except share data) Common Shares Number of Shares Amount Retained Earnings Total Balance at June 30, 2020 3,811,137 $ 12,752 $ 6,310 $ 19,062 Cumulative effect of restatement (1) — — 697 697 Net income, restated — — 6,170 6,170 ESPP shares issued 2,677 57 — 57 Shares issued in connection with performance award vesting 40,000 — — — Shares withheld from common stock issued to pay employee payroll taxes ( 14,371 ) ( 259 ) — ( 259 ) Exercise of stock options (2) 22,388 39 — 39 Share-based compensation — 901 — 901 Share repurchases ( 216,171 ) ( 5,537 ) — ( 5,537 ) Balance at June 30, 2021 3,645,660 $ 7,953 $ 13,177 $ 21,130 Net income, restated — 4,572 4,572 ESPP shares issued 2,576 60 — 60 Exercise of stock options (3) 23,145 — — — Share-based compensation — 1,275 — 1,275 Share repurchases ( 75,250 ) ( 1,606 ) — ( 1,606 ) Balance at June 30, 2022 3,596,131 $ 7,682 $ 17,749 $ 25,431 Net income — — 7,074 7,074 ESPP shares issued 5,459 77 — 77 Shares issued in connection with performance award vesting 37,500 — — — Shares withheld from common stock issued to pay employee payroll taxes ( 13,859 ) ( 223 ) — ( 223 ) Exercise of stock options 6,500 12 — 12 Share-based compensation — 766 — 766 Share repurchases ( 86,422 ) ( 1,547 ) — ( 1,547 ) Balance at June 30, 2023 3,545,309 $ 6,767 $ 24,823 $ 31,590 (1) This is the estimated fair value of the Monogram Warrant as of June 30, 2020. (See Note 2) (2) Excludes 112 shares forfeited to affect a cashless exercise. (3) Excludes 1,855 shares forfeited to affect a cashless exercise. See notes to consolidated financial statements . 30 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended June 30, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) (Restated) Net income $ 7,074 $ 4,572 $ 6,170 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 857 726 686 Unrealized gain on investments ( 3,899 ) ( 931 ) ( 1,990 ) Gain on sale of investments ( 6 ) ( 28 ) ( 1,327 ) Impairment of long-lived assets — 84 — Non-cash lease expense (recovery) ( 2 ) 13 26 Loss on sale or disposal of equipment — 35 — Amortization of loan fees 12 9 49 Share-based compensation 766 1,275 901 Deferred income taxes 264 ( 63 ) 89 Bad debt expense (recovery) — ( 2 ) 5 Changes in operating assets and liabilities: Accounts receivable 5,432 ( 4,449 ) ( 5,783 ) Deferred costs 216 ( 517 ) ( 38 ) Inventory ( 3,489 ) ( 4,241 ) ( 199 ) Prepaid expenses 494 ( 331 ) ( 314 ) Accounts payable and accrued expenses ( 1,153 ) 1,991 105 Deferred revenue ( 1,013 ) 863 ( 50 ) Income taxes payable ( 91 ) 147 ( 408 ) Net cash provided by (used in) operating activities 5,462 ( 847 ) ( 2,078 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and improvements ( 974 ) ( 1,638 ) ( 1,769 ) Purchase of land and building — — ( 6,499 ) Proceeds from sale of investments 89 770 4,596 Increase in intangibles — ( 33 ) ( 38 ) Purchase of investments — ( 334 ) — Net cash used in investing activities ( 885 ) ( 1,235 ) ( 3,710 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable ( 6,093 ) ( 1,244 ) ( 351 ) Borrowing from revolving loan, net of loan origination fees 5,284 2,000 9,139 Repurchases of common stock ( 1,547 ) ( 1,606 ) ( 5,537 ) Payments of employee taxes on net issuance of common stock ( 223 ) — ( 259 ) Proceeds from exercise of stock options and ESPP contributions 89 60 96 Net cash provided by (used in) financing activities ( 2,490 ) ( 790 ) 3,088 Net increase (decrease) in cash and cash equivalents 2,087 ( 2,872 ) ( 2,700 ) Cash and cash equivalents, beginning of year 849 3,721 6,421 Cash and cash equivalents, end of year $ 2,936 $ 849 $ 3,721 See notes to consolidated financial statements . 31 PRO-DEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In thousands) Years Ended June 30, 2023 2022 2021 Supplemental disclosures of cash flow information: Non-cash investing and financing activity: Cashless stock option exercise $ — $ 45 $ 4 Cash paid during the period for: Income taxes, net of refunds $ 1,655 $ 1,565 $ 1,767 Interest $ 521 $ 463 $ 330 See notes to consolidated financial statements . 32 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and craniomaxillofacial markets. We have patented adaptive torque-limiting technology and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries. In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations. 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS The Company has restated its consolidated financial statements as of and for the years ended June 30, 2022 and 2021 and as of and for the first three quarters of fiscal 2021, 2022 and 2023. The restatement corrects the error related to the fair value of the Monogram Warrant which had been understated (See Note 5). The restatement records the investment at its estimated fair value for all restated periods, records the unrealized gain on investments for each restated period, and records the deferred income tax expense associated with the corresponding unrealized gain on investments. The restatement does not impact previously reported revenues, operating income, cash or cash flows for any previous periods. Presented below are the changes to each financial statement line item which changed as a result of the restatement. June 30, 2022 Balance Sheet Schedule of changes to each financial statement line item which changed as a result of restatement As Previously Reported Restatement As Restated Deferred income taxes, net $ 797 $ ( 541 ) (a) $ 256 Investments 1,779 2,304 (b) 4,083 Total assets 47,326 1,763 49,089 Retained earnings 15,986 1,763 17,749 Total liabilities and shareholders’ equity 47,326 1,763 49,089 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at June 30, 2022. Fiscal 2022 Income Statement As Previously Reported Restatement As Restated Unrealized gain (loss) on investments $ ( 57 ) $ 988 (a) $ 931 Total other income (loss) ( 417 ) 988 571 Income before income taxes 4,706 988 5,694 Income tax expense 851 271 (b) 1,122 Net income 3,855 717 4,572 Basic income per share $ 1.06 $ 0.20 $ 1.26 Diluted income per share $ 1.02 $ 0.19 $ 1.21 (a) This amount represents the unrealized gain on the Monogram Warrant for the fiscal year 2022. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the fiscal year 2022. 33 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal 2021 Income Statement As Previously Reported Restatement As Restated Unrealized gain on investments $ 1,371 $ 619 (a) $ 1,990 Total other income 2,472 619 3,091 Income before income taxes 6,997 619 7,616 Income tax expense 1,176 270 (b) 1,446 Net income 5,821 349 6,170 Basic income per share $ 1.53 $ 0.10 $ 1.63 Diluted income per share $ 1.48 $ 0.09 $ 1.57 (a) This amount represents the unrealized gain on the Monogram Warrant for the fiscal year 2021. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the fiscal year 2021. Fiscal 2023 Unaudited Quarterly Periods September 30, 2022 December 31, 2022 March 31, 2023 Net income, as previously reported $ 1,076 $ 879 $ 1,313 Adjustments to net income: Unrealized gain on investments (a) 175 2,582 419 Income tax expense (b) 48 709 115 Net income, as restated $ 1,203 $ 2,752 $ 1,617 Basic & Diluted income per share as previously reported: Basic net income per share $ 0.30 $ 0.25 $ 0.37 Diluted net income per share $ 0.29 $ 0.24 $ 0.36 Basic & Diluted income per share as restated: Basic net income per share $ 0.33 $ 0.80 $ 0.46 Diluted net income per share $ 0.33 $ 0.79 $ 0.45 Weighted-average common shares outstanding: Basic 3,616,000 3,574,000 3,548,000 Diluted 3,695,000 3,652,000 3,623,000 (a) This amount represents the unrealized gain on the Monogram Warrant. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant. 34 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal 2022 Unaudited Quarterly Periods September 30, 2021 December 31, 2021 March 31, 2022 June 30, 2022 Net income as previously reported $ 1,064 $ 925 $ 462 $ 1,405 Adjustments to net income: Unrealized gain on investments (a) 22 216 155 595 Income tax expense (b) 6 59 43 163 Net income as restated $ 1,080 1,082 $ 574 1,837 Basic & Diluted income per share as previously reported Basic net income per share $ 0.29 $ 0.25 $ 0.13 $ 0.39 Diluted net income per share $ 0.28 $ 0.25 $ 0.12 $ 0.38 Basic & Diluted income per share as restated Basic net income per share $ 0.30 $ 0.30 $ 0.16 $ 0.51 Diluted net income per share $ 0.29 $ 0.29 $ 0.15 $ 0.49 Weighted-average common shares outstanding: Basic 3,651,000 3,657,000 3,626,000 3,609,000 Diluted 3,777,000 3,767,000 3,749,000 3,731,000 (a) This amount represents the unrealized gain on the Monogram Warrant. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant. Fiscal 2021 Unaudited Quarterly Periods September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 Net income as previously reported $ 1,158 $ 1,750 $ 2,131 $ 782 Adjustments to net income: Unrealized loss on investments (a) ( 59 ) 51 42 585 Income tax (benefit) expense (b) ( 16 ) 14 12 260 Net income as restated $ 1,115 1,787 $ 2,161 1,107 Basic & Diluted income per share as previously reported Basic net income per share $ 0.30 $ 0.45 $ 0.56 $ 0.23 Diluted net income per share $ 0.29 $ 0.44 $ 0.54 $ 0.22 Basic & Diluted income per share as restated Basic net income per share $ 0.29 $ 0.46 $ 0.57 $ 0.29 Diluted net income per share $ 0.28 $ 0.45 $ 0.54 $ 0.28 Weighted-average common shares outstanding: Basic 3,851,000 3,861,000 3,817,000 3,656,000 Diluted 3,975,000 4,012,000 3,966,000 3,796,000 (a) This amount represents the unrealized gain on the Monogram Warrant. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant. 35 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 Unaudited Balance Sheet (First Quarter Fiscal 2021) As Previously Reported Restatement As Restated Deferred income taxes, net $ 259 $ 16 (a) $ 275 Investments 2,309 638 (b) 2,947 Total assets 30,797 654 31,451 Retained earnings 7,468 654 8,122 Total liabilities and shareholders’ equity 30,797 654 31,451 (a) This amount represents the income tax benefit associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at September 30, 2020. First Quarter Fiscal 2021 Unaudited Income Statement – Three months ended September 30, 2020 As Previously Reported Restatement As Restated Unrealized gain (loss) on investments $ ( 107 ) $ ( 59 ) (a) $ ( 166 ) Total other income (expense) ( 108 ) ( 59 ) ( 167 ) Income before income taxes 1,441 ( 59 ) 1,382 Income tax expense 283 ( 16 ) (b) 267 Net income 1,158 ( 43 ) 1,115 Basic income per share $ 0.30 $ ( 0.01 ) $ 0.29 Diluted income per share $ 0.29 $ ( 0.01 ) $ 0.28 (a) This amount represents the unrealized loss on the Monogram Warrant for the three months ended September 30, 2020. (b) This amount represents the income tax benefit related to the unrealized loss on the Monogram Warrant for the three months ended September 30, 2020. December 31, 2020 Unaudited Balance Sheet (Second Quarter Fiscal 2021) As Previously Reported Restatement As Restated Deferred income taxes, net $ 259 $ 2 (a) $ 261 Investments 3,238 689 (b) 3,927 Total assets 38,372 691 39,063 Retained earnings 9,218 691 9,909 Total liabilities and shareholders’ equity 38,372 691 39,063 (a) This amount represents the income tax benefit associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at December 31, 2020. 36 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three months ended December 31, 2020 Unaudited Income Statement (Second Quarter Fiscal 2021) As Previously Reported Restatement As Restated Unrealized gain (loss) on investments $ 1,413 $ 51 (a) $ 1,464 Total other income (expense) 1,358 51 1,409 Income before income taxes 1,879 51 1,930 Income tax expense 129 14 (b) 143 Net income 1,750 37 1,787 Basic income per share $ 0.45 $ 0.01 $ 0.46 Diluted income per share $ 0.44 $ 0.01 $ 0.45 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended December 31, 2020. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended December 31, 2020. March 31, 2021 Unaudited Balance Sheet (Third Quarter Fiscal 2021) As Previously Reported Restatement As Restated Deferred income taxes, net $ 259 $ ( 9 ) (a) $ 250 Investments 3,026 731 (b) 3,757 Total assets 42,315 722 43,037 Retained earnings 11,349 722 12,071 Total liabilities and shareholders’ equity 42,315 722 43,037 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at March 31, 2021. Three months ended March 31, 2021 Unaudited Income Statement (Third Quarter Fiscal 2021) As Previously Reported Restatement As Restated Unrealized gain (loss) on investments $ 136 $ 42 (a) $ 178 Total other income (expense) 858 42 900 Income before income taxes 2,723 42 2,765 Income tax expense 592 12 (b) 604 Net income 2,131 30 2,161 Basic income per share $ 0.56 $ 0.01 $ 0.57 Diluted income per share $ 0.54 $ 0.01 $ 0.54 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended March 31, 2021. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended March 31, 2021. 37 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 Unaudited Balance Sheet (First Quarter Fiscal 2022) As Previously Reported Restatement As Restated Deferred income taxes, net $ 463 $ ( 276 ) (a) $ 187 Investments 1,656 1,338 (b) 2,994 Total assets 41,865 1,062 42,927 Retained earnings 13,195 1,062 14,257 Total liabilities and shareholders’ equity 41,865 1,062 42,927 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at September 30, 2021. First Quarter Fiscal 2022 Unaudited Income Statement – Three months ended September 30, 2021 As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ 149 $ 22 (a) $ 171 Total other income (expense) 53 22 75 Income before income taxes 1,371 22 1,393 Income tax expense 307 6 (b) 313 Net income 1,064 16 1,080 Basic income per share $ 0.29 $ 0.01 $ 0.30 Diluted income per share $ 0.28 $ 0.01 $ 0.29 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended September 30, 2021. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended September 30, 2021. December 31, 2021 Unaudited Balance Sheet (Second Quarter Fiscal 2022) As Previously Reported Restatement As Restated Deferred income taxes, net $ 463 $ ( 335 ) (a) $ 128 Investments 1,940 1,554 (b) 3,494 Total assets 42,114 1,219 43,333 Retained earnings 14,119 1,219 15,338 Total liabilities and shareholders’ equity 42,114 1,219 43,333 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at December 31, 2021. 38 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three months ended December 31, 2021 Unaudited Income Statement (Second Quarter Fiscal 2022) As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ ( 300 ) $ 216 (a) $ ( 84 ) Total other income (expense) ( 392 ) 216 ( 176 ) Income before income taxes 1,210 216 1,426 Income tax expense 285 59 (b) 344 Net income 925 157 1,082 Basic income per share $ 0.25 $ 0.05 $ 0.30 Diluted income per share $ 0.25 $ 0.04 $ 0.29 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended December 31, 2021. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended December 31, 2021. March 31, 2022 Unaudited Balance Sheet (Third Quarter Fiscal 2022) As Previously Reported Restatement As Restated Deferred income taxes, net $ 463 $ ( 378 ) (a) $ 85 Investments 1,778 1,709 (b) 3,487 Total assets 43,884 1,331 45,215 Retained earnings 14,581 1,331 15,912 Total liabilities and shareholders’ equity 43,884 1,331 45,215 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at March 31, 2022. Three months ended March 31, 2022 Unaudited Income Statement (Third Quarter Fiscal 2022) As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ ( 275 ) $ 155 (a) $ ( 120 ) Total other income (expense) ( 387 ) 155 ( 232 ) Income before income taxes 634 155 789 Income tax expense 172 43 (b) 215 Net income 462 112 574 Basic income per share $ 0.13 $ 0.03 $ 0.16 Diluted income per share $ 0.12 $ 0.03 $ 0.15 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended March, 31, 2022. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended March 31, 2022. 39 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 Unaudited Balance Sheet (First Quarter Fiscal 2023) As Previously Reported Restatement As Restated Deferred income taxes, net $ 764 $ ( 589 ) (a) $ 175 Investments 1,889 2,479 (b) 4,368 Total assets 47,965 1,890 49,855 Retained earnings 17,062 1,890 18,952 Total liabilities and shareholders’ equity 47,965 1,890 49,855 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at September 30, 2022. First Quarter Fiscal 2023 Unaudited Income Statement – Three months ended September 30, 2022 As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ 250 $ 175 (a) $ 425 Total other income (expense) 344 175 519 Income before income taxes 1,294 175 1,469 Income tax expense 218 48 (b) 266 Net income 1,076 127 1,203 Basic income per share $ 0.30 $ 0.03 $ 0.33 Diluted income per share $ 0.29 $ 0.04 $ 0.33 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended September 30, 2022. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended September 30, 2022. December 31, 2022 Unaudited Balance Sheet (Second Quarter Fiscal 2023) As Previously Reported Restatement As Restated Deferred income taxes, net $ 764 $ ( 764 ) (a) $ — Investments 1,726 5,061 (b) 6,787 Total assets 47,579 4,297 51,876 Deferred income taxes — 534 534 Total liabilities 23,105 534 23,639 Retained earnings 17,941 3,763 21,704 Total liabilities and shareholders’ equity 47,579 4,297 51,876 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at December 31, 2022. 40 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three months ended December 31, 2022 Unaudited Income Statement (Second Quarter Fiscal 2023) As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ 158 $ 2,582 (a) $ 2,740 Total other income (expense) 37 2,582 2,619 Income before income taxes 1,174 2,582 3,756 Income tax expense 295 709 (b) 1,004 Net income 879 1,873 2,752 Basic income per share $ 0.25 $ 0.55 $ 0.80 Diluted income per share $ 0.24 $ 0.55 $ 0.79 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended December 31, 2022. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended December 31, 2022. March 31, 2023 Unaudited Balance Sheet (Third Quarter Fiscal 2023) As Previously Reported Restatement As Restated Deferred income taxes, net $ 764 $ ( 764 ) (a) $ — Investments 1,534 5,480 (b) 7,014 Total assets 46,975 4,716 51,691 Deferred income taxes — 649 649 Total liabilities 21,136 649 21,785 Retained earnings 19,254 4,067 23,321 Total liabilities and shareholders’ equity 46,975 4,716 51,691 (a) This amount represents the income tax expense associated with the Monogram Warrant. (b) This amount represents the estimated fair value of the Monogram Warrant at March 31, 2023. Three months ended March 31, 2023 Unaudited Income Statement (Third Quarter Fiscal 2023) As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ ( 177 ) $ 419 (a) $ 242 Total other income (expense) ( 297 ) 419 122 Income before income taxes 1,768 419 2,187 Income tax expense 455 115 (b) 570 Net income 1,313 304 1,617 Basic income per share $ 0.37 $ 0.09 $ 0.46 Diluted income per share $ 0.36 $ 0.09 $ 0.45 (a) This amount represents the unrealized gain on the Monogram Warrant for the three months ended March 31, 2023. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the three months ended March 31, 2023. 41 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial statements. Such consolidated financial statements and related notes are the representations of management, who is responsible for their integrity and objectivity. In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) in all material respects and have been consistently applied in preparing the accompanying consolidated financial statements. Net Sales Net sales consists of the sale of products and services, as well as shipping and handling costs billed to our customers and is net of volume rebates and discounts and excludes sales tax. Revenue Recognition Revenue from product sales is recognized as promulgated by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers once our contract(s) with a customer and the performance obligations in the contract have been identified, and the transaction price has been allocated to the performance obligations and revenue is recorded when (or as) we satisfy each performance obligation, generally upon shipment. Revenue from services, typically non-recurring engineering services related to the design or customization of a medical device, is typically recognized over time. The customer funding for costs incurred for non-recurring engineering services is deferred and subsequently recognized as revenue as under-lying products or services are delivered to the customers. Additionally, expenses incurred, up to the customer agreed funding amount, are deferred as an asset and recognized as cost of sales when the under-lying products or services are delivered to the customer. The deferred customer funding and costs result in recognition of deferred costs (asset) and deferred revenue (liability) on our consolidated balance sheets. One of our customer contracts can give rise to variable consideration due to volume rebates. We estimate variable consideration at the most likely amount we will receive from our customer. Our estimates of variable consideration are based on an assessment of our anticipated performance and all information (historical, current, and forecasted) that is reasonably available to us. Returns of our product for credit are minimal; accordingly, we do not establish a reserve for product returns at the time of sale. Cost of Sales Cost of sales consists primarily of the purchase price of goods and cost of services rendered including freight costs. Cost of sales also includes production labor and overhead costs for all of our manufacturing and assembly operations, which overhead includes all indirect labor and expenses associated with our inspection, warehousing, material planning and quality departments. Estimated Losses on Product Development Services Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated quarterly. An expected loss on development service contracts is recognized immediately in cost of sales. Losses recorded in fiscal 2023 and 2022 related to these services totaled $ 108,000 and $ 0 , respectively. Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment. It is based upon the knowledge and experience of our project managers, engineers, and finance professionals. Factors that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts include the nature and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals. 42 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warranties Certain of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale. At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return rates and repair costs, which factors are reviewed quarterly. The warranty accrual is based on historical costs of warranty repairs and expected future identifiable warranty expenses and is included in accrued expenses in the accompanying balance sheets. Warranty expenses are included in cost of sales in the accompanying statements of operations. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. At June 30, 2023 and 2022, cash equivalents consisted of investments in money market funds. Accounts Receivable Trade receivables are stated at their original invoice amounts, less an allowance for doubtful portions of such accounts. Management determines the allowance for doubtful accounts based on facts and circumstances related to specific accounts and the age of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously reserved are offset against the allowance when received. Deferred Costs Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and/or supply contracts. These costs get recorded to cost of sales in the period that the revenue is recognized. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Reductions to estimated market value are recorded and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12 months from the measurement date. On an ongoing basis, we evaluate inventory for obsolescence and slow-moving items. This evaluation includes analysis of historical sales and usage, existing demand, as well as specific factors known to management. As of June 30, 2023 and 2022, there was approximately $ 637,000 and $ 177,000 , respectively, of inventory in-transit from suppliers. Investments Investments at June 30, 2023 and 2022, consist of marketable equity securities of publicly held companies as well as a warrant to purchase common stock of a company whose common stock first became publicly traded in May 2023. The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized. Investments are marked to market at each measurement date, with unrealized gains and losses presented separately within other income and expense on the consolidated income statement. Certain investments consist of common stocks of public companies that are thinly traded. These investments were subject to a valuation analysis as of June 30, 2023 and 2022. Long-lived Assets We review the recoverability of long-lived assets, consisting of the land and building that we own, equipment, and improvements, including leasehold improvements, when events or changes in circumstances occur that indicate carrying values may not be recoverable. Our building, equipment and improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods: Schedule of building, equipment and improvements Building Thirty years Equipment Three to ten years Improvements Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life 43 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangibles Intangibles consist of legal fees incurred in connection with patent applications. Our patent costs are being amortized over a period of four to seven years. The expense associated with the amortization of the patent costs is recognized in research and development costs. Income Taxes We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating losses and tax credit carryovers. Net deferred tax assets or liabilities at both June 30, 2023 and 2022 consisted primarily of basis differences related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses, and inventories. Our fiscal 2023 deferred tax assets also includes capitalization of our research expenditures as prescribed by the Tax Cuts and Jobs Act. Significant management judgment is required in determining the provision for income taxes, the recoverability of deferred tax assets, and the extinguishment of deferred tax liabilities. Such determination is based on historical taxable income, with consideration given to estimates of future taxable income and the periods over which deferred tax assets will be recoverable and deferred tax liabilities will be extinguished. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. Uncertain Tax Positions We record uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Shipping and Handling Payments from customers for shipping and handling are included in net sales . Shipping expenses, consisting primarily of payments made to freight companies, are included in cost of sales. Concentration of Credit Risk Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents, and trade receivables. We place our cash and cash equivalents with major financial institutions. At June 30, 2023 and 2022, and throughout the fiscal years then ended, we had deposits in excess of federally insured limits. Credit sales are made to medical device distributors, original equipment manufacturers, and resellers throughout the world, and sales to such customers account for a substantial portion of our trade receivables. While such receivables are not collateralized, we evaluate their collectability based on several factors including customers’ payment histories. Compensation Plans We recognize compensation expense for the share-based awards that vest subject to market conditions under ASC 718, Compensation-Stock Compensation by estimating their fair value using a Monte Carlo simulation. The fair value using a Monte Carlo simulation model is affected by assumptions regarding a number of complex judgments including expected stock price volatility, risk free interest rates, and the forecasted future value and trading volume of our stock. The awards are considered granted for accounting purposes on the date the awards were approved by the Compensation Committee of our Board of Directors and we recognize compensation expense, based on the estimated fair value of the award, on a straight-line basis over the requisite service period. 44 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our operations are affected by numerous factors including market acceptance of our products, supply chain disruptions, changes in technologies, and new laws, effects from the COVID-19 pandemic, government regulations, and policies. We cannot predict what impact, if any, the occurrence of these or other events might have on our operations. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, share-based compensation, the allowance for doubtful accounts, accrued warranty expense, investments, inventory valuation, the carrying value of long-lived assets, and the recoverability/extinguishment of deferred income tax assets and liabilities. Basic and Diluted Per Share Information Basic per share amounts are computed on the basis of the weighted-average number of common shares outstanding during each period presented. Diluted per share amounts assume the issuance of all potential common stock equivalents, consisting of outstanding stock options and performance awards as discussed in Note 13, unless the effect of such exercise is to increase income, or decrease loss, per common share. Fair Value Measurements Fair value is measured based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. Cash and cash equivalents: The carrying value of cash and cash equivalents is considered to be representative of their fair values based on the short-term nature of these instruments. As such, cash and cash equivalents are classified within Level 1 of the valuation hierarchy. Investments: Investments consist of marketable equity securities of publicly held companies as well as a warrant to purchase outstanding stock of a publicly traded company. Due to the thinly traded nature of these stocks and the lack of an active market for the warrant, all of our investments are classified within Level 2 of the valuation hierarchy. The estimated fair value of the warrant is measured using pricing models with no observable inputs and is therefore considered a Level 3 measurement within the valuation hierarchy. The fair value of all of our investments at June 30, 2023 and 2022 was based upon a valuation analysis. Although the methods above may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values, we believe our valuation methods are appropriate. Advertising Advertising costs are charged to selling or general and administrative expense as incurred and amounted to $ 4,000 and $ 1,000 for the fiscal years ended June 30, 2023 and 2022, respectively. Recently Issued and Not Yet Adopted Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). ASU 2016-13 revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The guidance is effective for the Company’s annual reporting period beginning after December 15, 2022 and interim reporting periods within that annual reporting period. The Company does not expect the adoption of this ASU to have a material impact on the consolidated financial statements. 45 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. NET SALES The following table presents the disaggregation of net sales by revenue recognition model (in thousands): Schedule of disaggregation of net sales Year ended June 30, 2023 2022 Net Sales: Over-time revenue recognition $ 2,695 $ 1,014 Point-in-time revenue recognition 43,392 41,027 Total net sales $ 46,087 $ 42,041 The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs incurred compared to the estimated total costs upon completion. During the fiscal years ended June 30, 2023 and 2022, we recorded $ 1 .0 million and $ 98,000 , respectively, of revenue that had been included in deferred revenue in the prior year. The revenue recognized from the contract liabilities consisted of satisfying our performance obligations during the normal course of business. The following tables summarize our contract assets and liability balances (in thousands): Schedule of contract assets and liability June 30, 2023 2022 Contract assets at beginning of year $ 710 $ 193 Expenses incurred during the year 1,545 1,319 Amounts reclassified to cost of sales ( 1,710 ) ( 774 ) Amounts allocated to discounts for standalone selling price ( 51 ) ( 28 ) Contract assets at end of year $ 494 $ 710 June 30, 2023 2022 Contract liabilities at beginning of year $ 1,013 $ 150 Payments received from customers 781 1,482 Amounts reclassified to revenue ( 1,794 ) ( 619 ) Contract liabilities at end of year $ — $ 1,013 46 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments Years Ended June 30, 2023 2022 Current: (Restated) Marketable equity securities – short-term $ 1,134 $ 755 Long-term: Warrant 6,160 2,304 Marketable equity securities – long-term 1,361 1,779 Total Investments $ 8,655 $ 4,838 Marketable equity securities at June 30, 2023 and 2022 had an aggregate cost basis of $ 2,714,000 and $ 2,796,000 , respectively. Both current and long-term marketable equity securities include equity securities of public companies that are thinly traded. We classified certain investments as long term in nature because even if we decide to sell the stocks we may not be able to sell our position within one year. At June 30, 2023, the investments included net unrealized losses of $ 219,000 (gross unrealized losses of $ 286,000 offset by gross unrealized gains of $ 67,000 ). At June 30, 2022, the investments included net unrealized losses of $ 262,000 (gross unrealized losses of $ 369,000 offset by gross unrealized gains of $ 107,000 ). Of the total marketable equity securities at June 30, 2023 and 2022, $ 1,134,000 and $ 755,000 , respectively, represent an investment in the common stock of Air T, Inc. Two of our Board members, Messrs. Swenson and Cabillot, are also board members of Air T, Inc. and both either individually or through affiliates own an equity interest in Air T, Inc. Mr. Swenson, our Chairman, also serves as the chief executive officer and chairman of Air T, Inc. Another of our Board members is employed by Air T as its Chief of Staff. The shares have been purchased through 10b5-1 Plans that, in accordance with our internal policies regarding the approval of related-party transactions, were approved by our then three Board members that are not affiliated with Air T, Inc. The warrant represents our right to purchase up to 5% of the outstanding stock of Monogram Orthopaedics Inc. (“Monogram”) which we were granted on December 18, 2018. By way of background, we invested in Monogram, a medical device start-up specializing in precision, patient specific implants in fiscal 2017, by making an $ 800,000 loan to Monogram pursuant to a promissory note in the same amount. At that time, our Chief Executive Officer, Mr. Van Kirk, was appointed to Monogram’s board of directors, a position he has held through the date of this filing. We impaired our entire $ 800,000 investment in the fourth quarter of fiscal 2018 due to indications that Monogram had exhausted its cash and had been unable to obtain additional financing to enable continued research to commercialize their technology. In fiscal 2019, we modified the promissory note to allow Monogram more time to re-pay the note and, concurrently, we were issued the warrant, with an exercise price of $ 1,250,000 , which at the time we deemed of de minimis value. During the fourth quarter of fiscal 2020, Monogram repaid the promissory note with interest, but at that time and through the end of the third quarter of fiscal 2023, we considered the warrant to be of little value and therefore did not record it as an investment on our consolidated balance sheet. In May of 2023, Monogram raised funds through a Regulation A+ offering filed with the Securities and Exchange Commission and contemporaneously converted all of its outstanding preferred stock to common shares and publicly listed its common shares on the NASDAQ under the ticker symbol MGRM. The valuation of the warrant for all prior periods is the subject of the restatement of our previous financial statements because the value of $0 we had ascribed to the Monogram Warrant in previous periods want not based on its estimated fair value (See Note 2). 47 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 2023 and 2022, the warrant was exercisable into a total of 1,823,058 and 783,386 shares of Monogram’s outstanding stock. The estimated fair value of the warrant at June 30, 2023 and 2022 was $ 6,160,000 and $ 2,304,000 , respectively, using a Black-Scholes valuation model with the following assumptions: Schedule of assumptions used June 30, 2023 June 30, 2022 Stock Price (common) $ 3.98 $ 3.02 Strike Price (common) $ .69 $ 1.60 Time until expiration (years) 2.48 3.48 Volatility 60.0 % 60.0 % Risk-free interest rate 4.68 % 3.00 % We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Mr. Van Kirk, and two non-management directors, Mr. Cabillot and Mr. Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc. Inventory Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands): Schedule of inventory June 30, 2023 2022 Raw materials /purchased components $ 8,824 $ 6,323 Work in process 3,686 3,463 Sub-assemblies /finished components 2,387 2,118 Finished goods 1,270 774 Total inventory $ 16,167 $ 12,678 Land and Building Land and building consist of the following (in thousands): Schedule of land and building June 30, 2023 June 30, 2022 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 250 ) ( 156 ) $ 6,249 $ 6,343 On November 6, 2020, we acquired the Franklin Property for a total purchase price of $ 6.5 million, of which we paid $ 1.3 million in cash and the balance of $ 5.2 million we financed through Minnesota Bank & Trust (“MBT”) (see Note 8). We substantially completed the build-out of the property in the first quarter of fiscal 2022. In the fourth quarter of fiscal 2023 we substantially completed all of our validation activities, and we moved our repairs and assembly departments to the new facility. The building is being amortized on a straight-line basis over a period of 30 years. 48 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equipment and Improvements Equipment and improvements consist of the following (in thousands): Schedule of equipment and improvements June 30, 2023 2022 Office furnishings and fixtures $ 1,957 $ 2,224 Machinery and equipment 6,675 6,661 Automobiles 21 21 Improvements 4,737 4,271 Total 13,390 13,177 Less: accumulated depreciation and amortization ( 8,311 ) ( 8,344 ) $ 5,079 $ 4,833 Depreciation expense for the years ended June 30, 2023 and 2022 amounted to $ 727,000 and $ 616,000 , respectively. During fiscal 2023, fully depreciated assets in the amount of $ 760,000 were retired. During fiscal 2022, $ 87,000 of assets were retired either due to physical disposal or major part replacement with a net book value of $ 35,000 recorded as a loss on disposal of equipment in our consolidated income statement. Intangibles Intangibles consist of the following (in thousands): Schedule of intangibles June 30, 2023 June 30, 2022 Patent-related costs $ 208 $ 208 Less accumulated amortization ( 127 ) ( 90 ) $ 81 $ 118 Amortization expense for the years ended June 30, 2023 and 2022 amounted to $ 37,000 and $ 16,000 , respectively. Patent-related costs consist of legal fees incurred in connection with both patent applications and patent issuances, and will be amortized over the estimated life of the product(s) that is or will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent. During fiscal 2022, we impaired $ 84,000 of previously capitalized legal fees due to uncertainty relating to future benefit. This impairment expense was included in research and development costs in our consolidated income statement. Future amortization expense is estimated to be no more than $ 30,000 per year and all remaining costs are expected to be fully amortized within three years. 49 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accrued Liabilities Accrued liabilities consist of the following (in thousands): Schedule of accrued liabilities June 30, 2023 2022 Payroll and related items $ 650 $ 509 Accrued inventory in transit 637 177 Accrued legal and professional fees 216 275 Accrued bonuses 400 430 Current portion of lease liability 416 379 Warranty 200 340 Accrued customer rebate 480 517 Other 136 124 Total accrued expenses $ 3,135 $ 2,751 6. WARRANTY ACCRUAL Information relating to the accrual for warranty costs for the years ended June 30, 2023 and 2022, is as follows (in thousands): Schedule of accrual warranty costs June 30, 2023 2022 Balance at beginning of year $ 340 $ 221 Accruals during the year 161 177 Change in estimates of prior period accruals ( 109 ) 54 Warranty amortization/utilization ( 192 ) ( 112 ) Balance at end of year $ 200 $ 340 Warranty expense relating to new product sales and changes to estimates was $ 52,000 and $ 231,000 , respectively, for the fiscal years ended June 30, 2023 and 2022. 7. INCOME TAXES The provision for income taxes consists of the following amounts (in thousands): Schedule of provision for income taxes Years Ended June 30, 2023 2022 (Restated) Current: Federal $ 1,745 $ 733 State 345 451 Deferred: Federal 6 23 State 258 ( 85 ) Income tax expense $ 2,354 $ 1,122 50 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective income tax rate from income from continuing operations differs from the United States statutory income tax rates for the reasons set forth in the table below (in thousands, except percentages). Schedule of reconciliation federal statutory income tax rates Years Ended June 30, 2023 2022 (Restated) Amount Percent Pretax Income Amount Percent Pretax Income Income before income taxes $ 9,428 100 % $ 5,694 100 % Computed “expected” income tax expense on income before income taxes $ 1,979 21 % $ 1,183 21 % State tax, net of federal benefit 672 7 % 266 5 % Tax incentives ( 229 ) ( 2 %) ( 205 ) ( 4 %) Uncertain tax position ( 119 ) ( 1 %) ( 76 ) ( 1 %) Stock based compensation ( 114 ) ( 1 %) — — Other 165 1 % ( 46 ) ( 1 %) Income tax expense $ 2,354 25 % $ 1,122 20 % Deferred income taxes reflect the net effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands): Schedule of deferred income tax assets and liabilities June 30, 2023 2022 (Restated) Deferred tax assets: Federal and state NOL carryforward $ 22 $ 22 Research and other credits 65 65 Reserves 122 163 Accruals 267 322 Stock based compensation 814 651 Unrealized losses — 35 Section 174 capitalization 830 — Lease liability 599 713 Inventory 351 514 Deferred state tax 31 — Total gross deferred tax assets $ 3,101 $ 2,485 Less: valuation allowance ( 91 ) ( 98 ) Total deferred tax assets 3,010 2,387 Deferred tax liabilities: Property and equipment, principally due to differing depreciation methods $ ( 767 ) $ ( 820 ) Right of use asset ( 546 ) ( 658 ) Deferred state tax — ( 77 ) Unrealized gains ( 1,705 ) ( 541 ) Other — ( 35 ) Total gross deferred tax liabilities ( 3,018 ) ( 2,131 ) Net deferred tax assets (liabilities) $ ( 8 ) $ 256 Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. As of June 30, 2023, our deferred tax asset valuation allowance primarily consists and the state net operating loss carryforwards for states in which we have filed a final return. For the fiscal year ended June 30, 2023, we recorded a net decrease to our valuation allowance of $ 7,000 on the basis of management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized. 51 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of June 30, 2023, we did not have any net operating losses for federal and state income tax purposes for state jurisdictions in which we currently operate. We have no federal or state research and development and alternative minimum tax credit carry forwards at June 30, 2023. As of June 30, 2023, we have accrued $ 345,000 of unrecognized tax benefits related to federal and state income tax matters that would reduce our income tax expense if recognized. If we are eventually able to recognize our uncertain tax positions, our effective tax rate would be reduced. Any adjustment to our uncertain tax positions would result in an adjustment of our tax credit carryforwards rather than resulting in a cash outlay. Information with respect to our accrual for unrecognized tax benefits is as follows (in thousands): Schedule of accrual unrecognized tax benefits June 30, 2023 2022 Unrecognized tax benefits: Beginning balance $ 509 $ 550 Additions based on federal tax positions related to the current year 16 33 Additions based on state tax positions related to the current year 19 26 Additions (reductions) for tax positions of prior years ( 95 ) 9 Reductions due to lapses in statutes of limitation ( 104 ) ( 109 ) Ending balance $ 345 $ 509 Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examinations, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when applicable. As of June 30, 2023, $ 45,000 of interest applicable to our unrecognized tax benefits have been accrued. We are subject to U.S. federal income tax, as well as income tax of California, Colorado, and Massachusetts. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2020, and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2008, are open to audit. 8. NOTES PAYABLE AND FINANCING TRANSACTIONS Minnesota Bank & Trust On November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased the Franklin Property. A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of approximately $ 5.2 million (the “Property Loan”) pursuant to a Loan Agreement, dated as of the Closing Date, between PDEX Franklin and MBT (the “Property Loan Agreement”) and corresponding Term Note (the “Property Note”) issued by PDEX Franklin in favor of MBT on the Closing Date. The Property Loan is secured by the Franklin Property pursuant to a Deed of Trust with Assignment of Leases and Rents, Security Agreement and Fixture Filing in favor of MBT (the “Deed”) and by an Assignment of Leases and Rents by PDEX Franklin in favor of MBT (the “Rents Assignment”). We paid loan origination fees to MBT on the Closing Date in the amount of $ 26,037 . The Property Loan bears interest at a fixed rate of 3.55 % per annum, which is subject to a 3% increase upon an event of default. Accrued interest was paid on December 1, 2020, and both principal and interest in the amount of approximately $ 30,000 are due and payable on the first day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time a balloon payment in the amount of $ 3.1 million is due. Any prepayment of the Property Loan (other than monthly scheduled interest and principal payments), is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first or second year, 3% of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount prepaid for any prepayment made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during the seventh or eighth year. The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties, covenants, and events of default that are customary for a loan of this type. The balance owed on the Property Loan at June 30, 2023 is $ 4,746,000 . 52 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”), providing for a $ 7,525,000 amended and restated term loan (the “Term Loan A”), a $ 1,000,000 term loan (the “Term Loan B”), and a $ 2,000,000 amended and restated revolving loan (the “Revolving Loan” and, together with the Term Loan A and the Term Loan B, collectively, the “Loans”), evidenced by an Amended and Restated Term Note A (“Term Note A”), a Term Note B, and an Amended and Restated Revolving Credit Note (the “Revolving Note”) made by us in favor of MBT. The Loans are secured by substantially all of the Company’s assets pursuant to a Security Agreement entered into on September 6, 2018 between the Company and MBT. The Term Note A had an outstanding principal balance of $ 3,770,331 as of the Closing Date and could be borrowed against through May 30, 2021 (the “Commitment Period”). During the third quarter ended March 31, 2021, we borrowed an additional $ 3,000,000 against Term Note A for the purpose of repurchasing our common stock as described in Note 13. 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 4. The Term Loan A matures on November 1, 2027 and bears interest at a fixed rate of 3.84 % per annum. Initial payments on the Term Loan A of interest only were due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan A of approximately $ 97,000 plus any additional accrued and unpaid interest through the date of payment. The balance owed on Term Loan A as of June 30, 2023, is $ 4,832,000 . The Term Loan B matures on November 1, 2027 and bears interest at a fixed rate of 3.84 % per annum. Initial payments on the Term Loan B of interest only were due on December 1, 2020 through June 1, 2021. Commencing July 1, 2021 and continuing on the first day of each month thereafter until the maturity date, we are required to make payments of principal and interest on Term Loan B of approximately $ 15,000 , plus any additional accrued and unpaid interest through the date of payment. As of March 31, 2021, we had drawn fully against Term Note B and the balance outstanding on Term Note B was $ 719,000 on June 30, 2023. On December 29, 2022 (the “Amendment Date”), we entered into Amendment No. 2 to Amended and Restated Credit Agreement (the “Amendment”) with MBT, which amends the Amended Credit Agreement and provides for a supplemental line of credit in the amount of $ 3,000,000 (the “Supplemental Loan”). The Supplemental Loan is evidenced by a Supplemental Revolving Credit Note (the “Supplemental Note”) made by us in favor of MBT. The purpose of the Supplemental Loan is for financing acquisitions and repurchasing shares of our common stock. The Supplemental Loan may be borrowed against from time to time through its maturity date of December 29, 2024 , on the terms set forth in the Amended Credit Agreement. As of June 30, 2023, no amounts have been drawn against the Supplemental Loan. The Revolving Loan was also amended (the “Amended Revolving Loan”) in connection with the Amendment to extend the maturity date from November 5, 2023 to December 29, 2024 , to increase the Revolving Loan facility from $ 2,000,000 to $ 7,000,000 , and to increase the interest rate on the Revolving Loan (as described below), evidenced by an Amended and Restated Revolving Credit Note (the “Amended Revolving Note”) made by us in favor of MBT. The Amended Revolving Loan may be borrowed against from time to time by us through its maturity date on the terms set forth in the Amended Credit Agreement. As of June 30, 2023, we had drawn $ 2,500,000 against the Amended Revolving Loan. Loan origination fees in the amount of $ 16,000 were paid to MBT in conjunction with the Amended Revolving Loan and the Supplemental Loan. The Amended Revolving Loan and Supplemental Loan bear interest at an annual rate equal to the greater of (a) 5.0 % or (b) SOFR for a one-month period from the website of the CME Group Benchmark Administration Limited plus 2.5% (the “Adjusted Term SOFR Rate”). Commencing on the first day of each month after we initially borrow against the Amended Revolving Loan and/or the Supplemental Loan and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Amended Revolving Loan and Supplemental Loan through the date of payment. Any principal on the Amended Revolving Loan and/or Supplemental Loan that is not previously prepaid shall be due and payable in full on the maturity date (or earlier termination of the Amended Revolving Loan and/or Supplemental Loan). 53 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Any payment on the Term Loan A, the Term Loan B, the Amended Revolving Loan or the Supplemental Loan (collectively, 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 all of the Loans immediately due and payable in full. The Amended Credit Agreement, Amended Security Agreement, Term Note A, Term Note B, Amended Revolving Note and Supplemental Note contain representations and warranties, affirmative, negative and financial covenants, and events of default that are customary for loans of this type. We believe that we are in compliance with all of our debt covenants as of June 30, 2023, but there can be no assurance that we will remain in compliance for the duration of the term of these loans. Scheduled principal maturities of our loans, assuming repayment of our revolver in full next fiscal year and exclusive of unamortized loan origination fees in the amount of $ 59,000 , for future fiscal years ending June 30 are as follows (in thousands): Schedule of maturities of term loan for future fiscal years Term Loan Principal Payments Fiscal Year: 2024 $ 3,844 2025 1,397 2026 1,451 2027 1,508 2028 908 Thereafter 3,689 Total principal payments $ 12,797 9. LEASES Our operating lease ROU asset and long-term liability are presented separately on our balance sheet. The current portion of our operating lease liability, exclusive of imputed interest, as of June 30, 2023, in the amount of $ 416,000 , is presented within accrued expenses on the balance sheet. As of June 30, 2023, the maturity of our lease liability is as follows: Schedule of maturities of lease liabilities Operating Lease Fiscal Year: 2024 $ 519 2025 535 2026 551 2027 567 2028 143 Total lease payments 2,315 Less imputed interest: ( 261 ) Total $ 2,054 As of June 30, 2023, our operating lease has a remaining lease term of four years and three months and an imputed interest rate of 5.3 %. Cash paid for amounts included in the lease liability for the fiscal years ended June 30, 2023 and 2022 was $ 504,000 and $ 489,000 , respectively. 54 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. COMMITMENTS AND CONTINGENCIES Leases We lease our office, production, and warehouse facility in Irvine, California (our “corporate office”) under an agreement that expires in September 2027. Our corporate office lease requires us to pay insurance, taxes, and other expenses related to the leased space. Rent expense in fiscal 2023 and 2022 was $ 563,000 and $ 559,000 , respectively. Compensation Arrangements Retirement Savings 401(k) Plan The Pro-Dex, Inc. Retirement Savings 401(k) Plan (the “401(k) Plan”) is a defined contribution plan we administer that covers substantially all our employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Employees are eligible to participate in the 401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter. Participants are eligible to receive non-discretionary matching contributions by the Company equal to 25 % of their contributions up to 5 % of eligible compensation through December 15, 2022 and 50 % of their contributions up to 5 % of eligible compensation thereafter. For the fiscal years ended June 30, 2023 and 2022, we recognized compensation expense amounting to $ 164,000 and $ 72,000 , respectively, in connection with the 401(k) Plan. During our fiscal years ended June 30, 2023 and 2022, we used approximately $ 13,000 and $ 25,000 , respectively, of forfeited match contributions to reduce our match expense. Legal Matters We may be involved in legal proceedings arising either in the ordinary course of our business or incidental to our business. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material or adverse. 11. SHARE-BASED COMPENSATION Stock Option Plans Through 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and Director’s Stock Option Plan were terminated in June 2014 and December 2014, respectively. In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. Former Stock Option Plans No options were granted under the Former Stock Option Plans during the fiscal years ended June 30, 2023 and 2022. As of June 30, 2023, there was no unrecognized compensation cost under the Former Stock Option Plans and all remaining outstanding stock options were exercised during fiscal 2023 . 55 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of stock option activity under the Former Stock Option Plans for the fiscal years ended June 30, 2023 and 2022: Schedule of summary of stock option activity 2023 2022 Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Outstanding at July 1, 6,500 $ 1.82 31,500 $ 1.81 Options granted — — — — Options exercised ( 6,500 ) 1.82 ( 25,000 ) 1.80 Options forfeited — — — — Outstanding at end of period — $ — 6,500 $ 1.82 Stock Options Exercisable at June 30, — $ — 6,500 $ 1.82 Performance Awards In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees under the 2016 Equity Incentive Plan, which upon vesting will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices . The weighted-average fair value of the performance awards granted was $ 4.46 , calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation. In February 2020, the Compensation Committee reallocated 48,000 previously forfeited awards, having the same remaining terms and conditions, to certain current employees. The weighted average fair value of the performance awards granted in fiscal 2020 was $ 16.90 , calculated using the weighted-average fair market value for each award, using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated an additional 17,500 previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2021 was $ 20.34 , calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. We recorded share-based compensation expense of $ 106,000 and $ 194,000 for the fiscal years ended June 30, 2023 and 2022, respectively, related to these performance awards. On June 30, 2023, there was approximately $ 98,000 of unrecognized compensation cost related to these non-vested performance awards expected to be expensed over the weighted-average period of 2.0 years. On July 1, 2022, it was determined by the Compensation Committee of our Board of Directors that the vesting of performance awards for 37,500 shares of common stock had been achieved. Each participant elected a net issuance to cover their individual withholding taxes and therefore we issued 23,641 shares and paid $ 223,000 of participant-related payroll tax liabilities. The following is a summary of performance awards activity for the fiscal years ended June 30, 2023 and 2022: Schedule of summary of stock option activity 2023 2022 Number of Shares Weighted-Average Grant Date Fair Value Number of Shares Weighted-Average Grant Date Fair Value Outstanding at July 1, 117,500 $ 8.52 105,000 $ 6.95 Granted — — 17,500 20.34 Vested ( 37,500 ) 7.84 — — Forfeited ( 15,200 ) 16.54 ( 5,000 ) 16.90 Outstanding at end of period 64,800 $ 7.03 117,500 $ 8.52 56 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Non-Qualified Stock Options In December 2020, the Compensation Committee of our Board of Directors granted 310,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, is tied to the completion of service periods that range from 18 months to 10.5 years at inception and the achievement of our common stock trading at certain pre-determined prices . We recorded compensation expense of $ 647,000 and $ 1,070,000 for the fiscal year ended June 30, 2023 and 2022, respectively, related to these options. The weighted average fair value of the stock option awards granted was $ 16.72 , calculated using a Monte Carlo simulation. As of June 30, 2023, there was approximately $ 2.4 million of unrecognized compensation cost related to these non-vested non-qualified stock options. In February 2021, the Compensation Committee of our Board of Directors granted 62,000 non-qualified stock options to our directors and certain employees under the 2016 Equity Incentive Plan. Whether any stock options vest, and the amount that does vest, was tied to the completion of service periods that ranged from 4 months to 1.3 years at inception and the achievement of our common stock trading at certain pre-determined prices . Of these 62,000 stock options, 57,750 vested on July 1, 2021, as our common stock met the pre-determined prices set forth in the underlying agreements. We recorded compensation expense of $ 182,000 for the fiscal year ended June 30, 2021 related to these options. The weighted average fair value of the stock option awards granted was $ 3.16 , calculated using a Monte Carlo simulation. In December 2021 the Compensation Committee of our Board of Directors granted, 5,000 previously forfeited non-qualified stock options to another employee. The following is a summary of non-qualified stock option activity under the 2016 Equity Incentive Plan for the fiscal year ended June 30, 2023 and 2022: Schedule of summary of stock option activity 2023 2022 Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Outstanding at July 1, 346,500 $ 41.83 346,500 $ 41.83 Options granted — — 5,000 44.70 Options exercised — — — — Options forfeited ( 47,563 ) 39.60 ( 5,000 ) 44.70 Outstanding at end of period 298,937 $ 42.19 346,500 $ 41.83 Stock Options Exercisable at June 30, 57,750 $ 27.50 57,750 $ 27.50 Employee Stock Purchase Plan In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”). The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing at which participant’s purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period . Our Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting. On February 2, 2015, the Company filed a Registration Statement on Form S-8 registering the 704,715 shares issuable under the ESPP under the Securities Act of 1933. During the fiscal years ended June 30, 2023 and 2022, shares totaling 5,459 and 2,576 , respectively, were purchased pursuant to the ESPP and allocated to participating employees based upon their contributions at weighted- average prices of $ 14.21 and $ 23.33 , respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 32,498 shares. During the fiscal years ended June 30, 2023 and 2022, we recorded stock compensation expense in the amount of $ 14,000 and $ 11,000 , respectively, relating to the ESPP. 57 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. MAJOR CUSTOMERS & SUPPLIERS Customers that accounted for more than 10% of our total sales in either of fiscal year 2023 or 2022, is as follows (in thousands, except percentages): Schedule of sales by major customers Years Ended June 30, 2023 2022 Amount Percent of Total Amount Percent of Total Net sales $ 46,087 100 % $ 42,041 100 % Customer concentration: Customer 1 $ 30,892 67 % $ 27,686 66 % Customer 2 7,583 16 % 5,788 14 % Total $ 38,475 83 % $ 33,474 80 % Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either June 30, 2023 or June 30, 2022 is as follows (in thousands, except percentages): Schedule of accounts receivable, inventory purchases and accounts payable of major customers and suppliers June 30, 2023 June 30, 2022 Total gross accounts receivable $ 9,952 100 % $ 15,384 100 % Customer concentration: Customer 1 $ 7,231 73 % $ 11,551 75 % Customer 2 1,951 19 % 2,152 14 % Total. $ 9,182 92 % $ 13,703 89 % During fiscal 2023 and 2022, we had four suppliers that accounted for more than 10% of total inventory purchases, as follows (in thousands, except percentages): June 30, 2023 June 30, 2022 Total inventory purchases $ 19,835 100 % $ 19,640 100 % Supplier concentration: Supplier 1 $ 4,595 23 % $ 2,735 14 % Supplier 2 2,406 12 % 2,335 12 % Supplier 3 2,135 11 % 2,199 11 % Supplier 4 2,059 10 % 2,587 13 % Total. $ 11,195 56 % $ 9,856 50 % 58 PRO-DEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information with respect to accounts payable due to those suppliers who comprised more than 10% of our accounts payable at either June 30, 2023 or June 30, 2022 is as follows (in thousands, except percentages): June 30, 2023 June 30, 2022 Total accounts payable $ 2,261 100 % $ 3,761 100 % Supplier concentration: Supplier 1 $ 620 27 % $ 721 19 % Supplier 4 — — 430 11 % Supplier 2 41 2 % 372 10 % Total. $ 661 29 % $ 1,523 40 % 13. NET INCOME PER SHARE We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the effects of potentially dilutive securities. The summary of the basic and diluted earnings per share calculations for the years ended June 30, 2023 and 2022 is as follows (in thousands, except per share data): Schedule of net income per share Years Ended June 30, 2023 2022 Basic: (Restated) Net income $ 7,074 $ 4,572 Weighted-average shares outstanding 3,571 3,636 Basic earnings per share $ 1.98 $ 1.26 Diluted: Net income $ 7,074 $ 4,572 Weighted-average shares outstanding 3,571 3,636 Effect of dilutive securities – stock options & performance awards 66 127 Weighted-average shares used in calculation of diluted earnings per share 3,637 3,763 Diluted earnings per share $ 1.95 $ 1.21 14. COMMON STOCK – Share Repurchase Program In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these shares repurchase programs, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the fiscal year ended June 30, 2023, we repurchased 86,422 shares at an aggregate cost, inclusive of fees under the Plan, of $ 1.5 million. During the fiscal year ended June 30, 2022, we repurchased 75,250 shares at an aggregate cost, inclusive of fees under the Plan, of $ 1.6 million. On a cumulative basis, we have repurchased a total of 1,197,168 shares under the share repurchase programs at an aggregate cost, inclusive of fess under the Plan, of $ 17.2 million. All repurchases under the 10b5-1 Plans were administered through an independent broker. 15. SUBSEQUENT EVENTS On October 6, 2023, in conjunction with the execution of a supply agreement, we exercised our Monogram Warrant in full in cash totaling $ 1,250,000 and have received 1,828,551 shares of Monogram common stock (NasdaqCM: MGRM). The closing price of Monogram stock on October 6, 2023, was $ 2.67 per share. 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.