PRO DEX INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) September 30, 2023 June 30, 2023 ASSETS Current Assets: Cash and cash equivalents $ 1,904 $ 2,936 Investments 1,010 1,134 Accounts receivable, net of allowance for credit losses of $ 0 at September 30, 2023 and at June 30, 2023, respectively 11,034 9,952 Deferred costs 591 494 Income taxes receivable 420 — Inventory 16,264 16,167 Prepaid expenses and other current assets 201 296 Total current assets 31,424 30,979 Land and building, net 6,226 6,249 Equipment and leasehold improvements, net 4,952 5,079 Right-of-use asset, net 1,774 1,872 Intangibles, net 75 81 Investments 5,092 7,521 Other assets 42 42 Total assets $ 49,585 $ 51,823 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 2,740 $ 2,261 Accrued liabilities 2,701 3,135 Income taxes payable — 453 Notes payable 2,840 3,827 Total current liabilities 8,281 9,676 Lease liability, net of current portion 1,529 1,638 Deferred income taxes, net 8 8 Notes payable, net of current portion 8,572 8,911 Total non-current liabilities 10,109 10,557 Total liabilities 18,390 20,233 Shareholders’ Equity: Common stock; no par value; 50,000,000 shares authorized; 3,547,330 and 3,545,309 shares issued and outstanding at September 30, 2023 and June 30, 2023, respectively 6,987 6,767 Retained earnings 24,208 24,823 Total shareholders’ equity 31,195 31,590 Total liabilities and shareholders’ equity $ 49,585 $ 51,823 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share and per share amounts) Three Months Ended September 30, 2023 2022 (as restated) Net sales $ 11,938 $ 11,087 Cost of sales 8,280 8,131 Gross profit 3,658 2,956 Operating expenses: Selling expenses 25 53 General and administrative expenses 995 1,024 Research and development costs 805 929 Total operating expenses 1,825 2,006 Operating income 1,833 950 Other income (expense): Interest and dividend income 24 218 Realized gain on sale of marketable equity investments — 6 Unrealized gain (loss) on investments ( 2,553 ) 425 Interest expense ( 133 ) ( 130 ) Total other income (loss) ( 2,662 ) 519 Income (loss) before income taxes ( 829 ) 1,469 Provision for income taxes ( 214 ) 266 Net income (loss) $ ( 615 ) $ 1,203 Basic and diluted net income per share: Basic net income (loss) per share $ ( 0.17 ) $ 0.33 Diluted net income (loss) per share $ ( 0.17 ) $ 0.33 Weighted-average common shares outstanding: Basic 3,546,737 3,616,392 Diluted 3,546,737 3,694,959 Common shares outstanding 3,547,330 3,606,422 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (In thousands) Three Months Ended September 30, 2023 2022 COMMON STOCK: Balance, beginning of period $ 6,767 $ 7,682 Share-based compensation expense 188 207 Stock option exercise — 8 Share repurchases — ( 354 ) Shares withheld from common stock issued to employees to pay employee payroll taxes — ( 223 ) ESPP shares issued 32 34 Balance, end of period $ 6,987 $ 7,354 RETAINED EARNINGS: Balance, beginning of period $ 24,823 $ 17,749 Net income (loss) ( 615 ) 1,203 Balance, at end of period $ 24,208 $ 18,952 Balance, beginning of period 31,590 — Net income (loss) ( 615 ) 1,203 Total shareholders’ equity $ 31,195 $ 26,306 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: (as restated) Net income (loss) $ ( 615 ) $ 1,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 282 193 Share-based compensation 189 207 Unrealized (gain) loss on marketable equity investments 2,553 ( 425 ) Non-cash lease expense ( 2 ) 2 Amortization of loan fees 4 2 Gain on sale of investments — ( 6 ) Deferred income taxes — 80 Credit loss expense — 2 Changes in operating assets and liabilities: Accounts receivable and other receivables ( 1,082 ) 4,337 Deferred costs ( 97 ) 123 Inventory ( 97 ) ( 2,986 ) Prepaid expenses 95 ( 138 ) Accounts payable and accrued expenses 35 273 Deferred revenue — ( 162 ) Income taxes ( 873 ) 187 Net cash provided by operating activities 392 2,892 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and improvements ( 126 ) ( 178 ) Proceeds from sale of investments — 88 Net cash used in investing activities ( 126 ) ( 90 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable ( 1,330 ) ( 1,318 ) Proceeds from Minnesota Bank & Trust loans, net of origination fees — 1,000 Proceeds from stock option exercises and ESPP contributions 32 42 Payments of employee taxes on net issuance of common stock — ( 223 ) Repurchases of common stock — ( 354 ) Net cash used in financing activities ( 1,298 ) ( 853 ) Net increase (decrease) in cash and cash equivalents ( 1,032 ) 1,949 Cash and cash equivalents, beginning of period 2,936 849 Cash and cash equivalents, end of period $ 1,904 $ 2,798 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Three Months Ended September 30, 2023 2022 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 140 $ 89 Income taxes, net of refunds $ 660 $ 241 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED 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 with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the financial statements presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 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, 2023. Recently Adopted Accounting Pronouncements In March 2022, the FASB issued Accounting Standards Update (“ASU”) No 2022-02 (Topic 326) Financial Instruments – Credit Losses to create a new model for credit losses that reflects current expected credit losses (“CECL”) over the lifetime of the underlying accounts receivable. The CECL methodology is applicable to our trade accounts receivable and our deferred costs. We adopted ASU 2022-02 effective July 1, 2023, and the adoption did not have a material impact on our financial statements for the three months ended September 30, 2023. Correction of Previously Reported Interim Condensed Consolidated Financial Statements As previously disclosed, the Company restated its 2023 financial statements, which were presented in Note 2 to the audited consolidated financial statements for Company’s fiscal year 2023 Form 10-K filed with the Securities and Exchange Commission (“SEC”) on October 13, 2023. The restatement corrected the error related to the understated fair value of the Monogram warrant. The restatement recorded the investment at its estimated fair value for all restated periods, recorded an unrealized gain on investments and recorded the deferred income tax expense associated with the corresponding unrealized gain on investments. Presented below are the changes to each financial statement line item which changed as a result of the restatement. First Quarter Fiscal 2023 Unaudited Income Statement – Three months ended September 30, 2022 Schedule of changes in financial statement 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. 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. NET SALES The following table presents the disaggregation of net sales by revenue recognition model (in thousands): Schedule of disaggregation of net sales Three months ended September 30, 2023 2022 Net Sales: Over-time revenue recognition $ 190 $ 907 Point-in-time revenue recognition 11,748 10,180 Total net sales $ 11,938 $ 11,087 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 months ended September 30, 2023 and 2022, we recorded $ 0 and $ 551,000 , 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. 6 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following tables summarize our contract assets and liability balances (in thousands): Schedule of contract assets and liability As of and for the Three Months Ended September 30, 2023 2022 Contract assets beginning balance $ 494 $ 710 Expenses incurred during the year 219 333 Amounts reclassified to cost of sales ( 105 ) ( 448 ) Amounts allocated to discounts for standalone selling price ( 17 ) ( 8 ) Contract assets ending balance $ 591 $ 587 As of and for the Three Months Ended September 30, 2023 2022 Contract liabilities beginning balance $ — $ 1,013 Payments received from customers 43 389 Amounts reclassified to revenue ( 43 ) ( 551 ) Contract liabilities ending balance $ — $ 851 NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS Investments Investments are stated at fair market value and consist of the following (in thousands): Schedule of investments September 30, 2023 June 30, 2023 Current: Marketable equity securities – short-term $ 1,010 $ 1,134 Long-term: Warrant 3,670 6,160 Marketable equity securities – long-term 1,422 1,361 Total Investments $ 6,102 $ 8,655 Investments at September 30, 2023 and June 30, 2023 had an aggregate cost basis of $ 2,714,000 . We classified certain investments 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 September 30, 2023, the investments, excluding the warrant (“Monogram Warrant”), included unrealized gains of $ 200,000 (gross unrealized gains of $ 362,000 offset by gross unrealized losses of $ 162,000 ) . At June 30, 2023, the investments, excluding the Monogram Warrant, included net unrealized losses of $219,000 ( 219,000 (gross unrealized losses of $ 286,000 offset by gross unrealized gains of $ 67,000 ). 7 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Of the total marketable equity securities at September 30, 2023 and June 30, 2023, $ 1,010,000 and $ 1,134,000 , 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. The Monogram 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. On October 6, 2023, in conjunction with the execution of a supply agreement with Monogram, 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. At September 30, 2023 and June 30, 2023, the Monogram Warrant was exercisable into a total of 1,825,405 and 1,823,058 shares of Monogram’s outstanding stock, respectively. The estimated fair value of the warrant at September 30, 2023 and June 30, 2023 was $ 3,670,000 and $ 6,160,000 , respectively, using a Black-Scholes valuation model with the following assumptions: Schedule of assumptions used September 30, 2023 June 30, 2023 Stock Price (common) $ 2.60 $ 3.98 Strike Price (common) $ .68 $ .69 Time until expiration (years) 2.22 2.48 Volatility 60.0 % 60.0 % Risk-free interest rate 5.03 % 4.68 % We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Richard (“Rick”) Van Kirk, and two non-management directors, Raymond (“Ray”) Cabillot and Nicholas (“Nick”) Swenson, who chairs the committee. Both Nick and Ray 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 Nick or Ray 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 September 30, 2023 June 30, 2023 Raw materials/purchased components $ 7,964 $ 8,824 Work in process 4,516 3,686 Sub-assemblies/finished components 2,146 2,387 Finished goods 1,638 1,270 Total inventory $ 16,264 $ 16,167 8 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Intangibles Intangibles consist of the following (in thousands): Schedule of intangibles September 30, 2023 June 30, 2023 Patent-related costs $ 208 $ 208 Less accumulated amortization ( 133 ) ( 127 ) $ 75 $ 81 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. Future amortization expense is estimated to be $ 27,000 for fiscal 2024 and annually through fiscal 2026. All remaining costs are expected to be fully amortized by June 30, 2026. NOTE 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 September 30, 2023 and June 30, 2023, the warranty reserve amounted to $ 189,000 and $ 200,000 , respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated 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. Information regarding the accrual for warranty costs for the three months ended September 30, 2023 and 2022 are as follows (in thousands): Schedule of accrual warranty costs As of and for the Three Months Ended September 30, 2023 2022 Beginning balance $ 200 $ 340 Accruals during the period 24 54 Changes in estimates of prior period warranty accruals ( 2 ) 14 Warranty amortization/utilization ( 33 ) ( 42 ) Ending balance $ 189 $ 366 9 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6. NET INCOME (LOSS) PER SHARE We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted income per share reflects the effects of potentially dilutive securities, 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 income per share computations. For the three months ended September 30, 2023, 64,800 dilutive securities, consisting exclusively of performance awards, were excluded from the diluted loss per share because the impact would be anti-dilutive. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts): Schedule of net income (loss) per share Three Months Ended September 30, 2023 2022 Basic: (as restated) Net income (loss) $ ( 615 ) $ 1,203 Weighted-average shares outstanding 3,547 3,616 Basic earnings (loss) per share $ ( 0.17 ) $ 0.33 Diluted: Net income (loss) $ ( 615 ) $ 1,203 Weighted-average shares outstanding 3,547 3,616 Effect of dilutive securities — 79 Weighted-average shares used in calculation of diluted earnings per share 3,547 3,695 Diluted earnings (loss) per share $ ( 0.17 ) $ 0.33 NOTE 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 bases. 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 or loss, with some consideration given to our estimates of future taxable income or loss by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable. We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of September 30, 2023 and 2022, we recognized accrued interest of $ 7,000 and $ 48,000 , respectively, related to unrecognized tax benefits. Our effective tax rate for the three months ended September 30, 2023 and 2022, is 26 % and 18 %, respectively. The prior year effective tax rate is less than the current year rate due primarily to a tax benefit recognized as a result of the common stock awarded to our employees under previously granted performance awards (see Note 8). We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended June 30, 2020 and later. Our state income tax returns are open to audit under the statute of limitations for the years ended June 30, 2019 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. 10 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. SHARE-BASED COMPENSATION 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 Directors’ Stock Option Plan were terminated in June 2014 and December 2014, respectively and there are no remaining options outstanding under either of these Former Stock Option Plans. 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 September 30, 2023, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan. Performance Awards In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees under our 2016 Equity Incentive Plan, which will generally be paid in shares of our common stock. Whether any performance awards vest, and the amount that does vest, is tied to the completion of service periods that range from 7 months to 9.5 years at inception and the achievement of our common stock trading at certain pre-determined prices. The weighted-average 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 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. We recorded share-based compensation expense of $ 15,000 and $ 30,000 for the three months ended September 30, 2023 and 2022, respectively, related to these performance awards. On September 30, 2023, there was approximately $ 83,000 of unrecognized compensation cost related to these non-vested performance awards, which is expected to be expensed over the weighted-average period of 1.74 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. 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. The vesting of these stock options 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 $ 168,000 and $ 171,000 for the three months ended September 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 September 30, 2023, none of these stock options had vested and there was approximately $ 2.2 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. The vesting of these stock options 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 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 and the required service periods were already satisfied. The weighted-average fair value of the stock option awards granted was $ 3.16 , calculated using a Monte Carlo simulation. 11 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 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. The Board of Directors also approved the provision that shares formerly reserved for issuance under the Former Stock Option Plans in excess of shares issuable pursuant to outstanding options, aggregating 704,715 shares, be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting. During the first quarters ended September 30, 2023 and 2022, 2,021 and 2,503 shares were purchased, respectively, under the ESPP and allocated to employees based upon their contributions at discount prices of $ 15.82 and $ 13.52 , respectively, per share. As of September 30, 2023, on a cumulative basis, since the inception of the ESPP plan, employees have purchased a total of 34,519 shares. During each of the three months ended September 30, 2023 and 2022, we recorded stock compensation expense in the amount of $ 6,000 relating to the ESPP. NOTE 9. MAJOR CUSTOMERS & SUPPLIERS Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month periods ended September 30, 2023 and 2022 is as follows (in thousands, except percentages): Schedule of sales by major customers Three Months Ended September 30, 2023 2022 Amount Percent of Total Amount Percent of Total Total revenue $ 11,938 100 % $ 11,087 100 % Customer concentration: Customer 1 $ 8,375 70 % $ 7,481 68 % Customer 2 1,209 10 % 2,156 19 % Customer 3 1,165 10 % 120 1 % Total $ 10,749 90 % $ 9,757 88 % 12 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Information with respect to accounts receivable from those customers that comprised more than 10% of our gross accounts receivable at either September 30, 2023 and June 30, 2023 is as follows (in thousands, except percentages): Schedule of accounts receivable September 30, 2023 June 30, 2023 Total gross accounts receivable $ 11,034 100 % $ 9,952 100 % Customer concentration: Customer 1. $ 7,900 72 % $ 7,231 73 % Customer 2. 2,347 21 % 1,951 19 % Total. $ 10,247 93 % $ 9,182 92 % During the three months ended September 30, 2023 and 2022, we had three suppliers that each accounted for more than 10 % of total inventory purchases. Amounts owed to the fiscal 2023 significant suppliers at September 30, 2023 totaled $ 1.1 million , $ 181,000 and $ 137,000 , respectively, and at June 30, 2023 totaled $ 621,000 , $ 158,000 and $ 41,000 , respectively. NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS Minnesota Bank & Trust (“MBT”) 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 September 30, 2023 is $ 4,698,000 . On the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”), providing for a $ 7,525,000 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 11. 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. 13 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 September 30, 2023, is $ 4,586,000 . 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 $ 683,000 on September 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 September 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 September 30, 2023, we had drawn $ 1,500,000 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). 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. 14 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. In October 2023, we obtained a waiver from MBT extending the deadline to provide our audited financial statements for the fiscal year ended June 30, 2023 to November 15, 2023. We provided our audited financial statements to MBT on October 13, 2023. We believe that we are in compliance with all of our debt covenants as of September 30, 2023, except for the aforementioned covenant for which we obtained and complied with a waiver, but there can be no assurance that we will remain in compliance for the duration of the term of these loans. NOTE 11. COMMON STOCK Share Repurchase Program In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During the quarter ended September 30, 2023 we did not repurchase any shares. During the quarter ended September 30, 2022, we repurchased 20,853 shares at an aggregate cost, inclusive of fees under the plan, of $ 354,000 . On a cumulative basis since 2013, we have repurchased a total of 1,197,168 shares under the share repurchase programs at an aggregate cost, inclusive of fees, of $ 17.2 million. All repurchases under the 10b5-1 Plans were administered through an independent broker. NOTE 12. LEASES Our operating lease right-of-use asset and long-term liability are presented separately on our condensed consolidated balance sheet. The current portion of our operating lease liability as of September 30, 2023, in the amount of $ 425,000 , is presented within accrued expenses on the condensed consolidated balance sheet. As of September 30, 2023, our operating lease has a remaining lease term of four years and an imputed interest rate of 5.53 %. Cash paid for amounts included in the lease liability was $ 127,000 for the three months ended September 30, 2023, excluding $ 12,000 paid for common area maintenance charges. As of September 30, 2023, the maturity of our lease liability is as follows (in thousands): Schedule of maturities of lease liability Operating Lease Fiscal Year: 2024 $ 392 2025 535 2026 551 2027 567 2028 143 Total lease payments 2,188 Less imputed interest ( 233 ) Total $ 1,955 15 PRO-DEX INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 13. COMMITMENTS AND CONTINGENCIES Legal Matters We may be involved from time to time 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. 16