PRO DEX INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) December 31, 2023 June 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 1,289 $ 2,936 Investments 5,803 1,134 Accounts receivable, net of allowance for expected credit losses of $ 0 at December 31, 2023 and at June 30, 2023, respectively 13,169 9,952 Deferred costs 412 494 Inventory 15,026 16,167 Prepaid expenses and other current assets 901 296 Total current assets 36,600 30,979 Land and building, net 6,202 6,249 Equipment and leasehold improvements, net 5,331 5,079 Right-of-use asset, net 1,675 1,872 Intangibles, net 68 81 Investments 1,509 7,521 Other assets 42 42 Total assets $ 51,427 $ 51,823 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,909 $ 2,261 Accrued liabilities 2,846 3,135 Income taxes payable 389 453 Notes payable 3,846 3,827 Total current liabilities 9,990 9,676 Lease liability, net of current portion 1,415 1,638 Deferred income taxes, net 8 8 Notes payable, net of current portion 8,228 8,911 Total non-current liabilities 9,651 10,557 Total liabilities 19,641 20,233 Shareholders’ equity: Common stock; no par value; 50,000,000 shares authorized; 3,541,045 and 3,545,309 shares issued and outstanding at December 31, 2023 and June 30, 2023, respectively 7,078 6,767 Retained earnings 24,708 24,823 Total shareholders’ equity 31,786 31,590 Total liabilities and shareholders’ equity $ 51,427 $ 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 per share amounts) Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (restated) (restated) Net sales $ 12,588 $ 11,282 $ 24,526 $ 22,369 Cost of sales 9,786 8,659 18,066 16,791 Gross profit 2,802 2,623 6,460 5,578 Operating expenses: Selling expenses 37 68 63 122 General and administrative expenses 1,200 951 2,195 1,975 Research and development costs 788 467 1,593 1,395 Total operating expenses 2,025 1,486 3,851 3,492 Operating income 777 1,137 2,609 2,086 Interest expense ( 139 ) ( 128 ) ( 271 ) ( 258 ) Unrealized gain (loss) on marketable equity investments ( 40 ) 2,740 ( 2,593 ) 3,165 Interest and other income 22 7 46 225 Gain on sale of investments — — — 7 Income (loss) before income taxes 620 3,756 ( 209 ) 5,225 Income tax benefit (expense) ( 120 ) ( 1,004 ) 94 ( 1,270 ) Net income (loss) $ 500 $ 2,752 $ ( 115 ) $ 3,955 Basic net income (loss) per share: Net income (loss) $ 0.14 $ 0.77 $ ( 0.03 ) $ 1.10 Diluted net income (loss) per share: Net income (loss) $ 0.14 $ 0.75 $ ( 0.03 ) $ 1.08 Weighted-average common shares outstanding: Basic 3,547 3,574 3,547 3,595 Diluted 3,612 3,652 3,547 3,672 Common shares outstanding 3,541 3,554 3,541 3,554 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 December 31, Six Months Ended December 31, 2023 2022 2023 2022 Common stock (restated) (restated) Balance, beginning of period $ 6,987 $ 7,354 $ 6,767 $ 7,682 Share-based compensation expense 198 171 386 378 Share repurchases ( 107 ) ( 995 ) ( 107 ) ( 1,349 ) Shares withheld from common stock issued to employees to pay employee payroll taxes — — — ( 223 ) Exercise of stock options — 3 — 11 ESPP shares issued — — 32 34 Balance, end of period 7,078 6,533 7,078 6,533 Retained earnings: Balance, beginning of period 24,208 18,952 24,823 17,749 Net income (loss) 500 2,752 ( 115 ) 3,955 Balance, end of period 24,708 21,704 24,708 21,704 Balance, beginning of period — — 31,590 — Net income (loss) 500 2,752 ( 115 ) 3,955 Total shareholders’ equity $ 31,786 $ 28,237 $ 31,786 $ 28,237 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) Six Months Ended December 31, 2023 2022 (restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 115 ) $ 3,955 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 568 384 Share-based compensation 386 378 Unrealized (gain) loss on marketable equity investments 2,593 ( 3,165 ) Non-cash lease expense (recovery) ( 7 ) 1 Amortization of loan fees, net — 4 Gain on sale of investments — ( 7 ) Deferred income taxes — 790 Credit loss expense — 2 Changes in operating assets and liabilities: Accounts receivable ( 3,217 ) 3,187 Deferred costs 82 ( 167 ) Inventory 1,141 ( 2,457 ) Prepaid expenses and other assets ( 605 ) ( 874 ) Accounts payable and accrued expenses 340 147 Deferred revenue — ( 162 ) Income taxes payable ( 64 ) 481 Net cash provided by operating activities 1,102 2,497 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments ( 1,250 ) — Purchases of equipment and improvements ( 759 ) ( 687 ) Proceeds from sale of investments — 89 Net cash used in investing activities ( 2,009 ) ( 598 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock ( 107 ) ( 1,349 ) Proceeds from exercise of options and ESPP contributions 32 45 Payment of employee payroll taxes on net issuance of common stock — ( 223 ) Proceeds from Minnesota Bank & Trust revolving loan 2,000 1,800 Principal payments on notes payable and revolving loan ( 2,665 ) ( 2,639 ) Net cash used in financing activities ( 740 ) ( 2,366 ) Net decrease in cash and cash equivalents ( 1,647 ) ( 467 ) Cash and cash equivalents, beginning of period 2,936 849 Cash and cash equivalents, end of period $ 1,289 $ 382 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) Six Months Ended December 31, 2023 2022 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 272 $ 257 Income taxes $ 658 $ 841 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 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. Recent Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued ASU No 2023-09 (Topic 740) Income Taxes – Improvements to Income Tax Disclosures to enhance disclosures for the income tax rate reconciliation as well as cash income taxes paid by jurisdiction. This amendment is effective for our fiscal year ending June 30, 2025. While we are still evaluating the specifics of the adoption, we anticipate this guidance will have a significant impact on our annual income tax disclosures. Correction of Previously Reported Interim Condensed Consolidated Financial Statements As described in more detail in Note 2 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2023, the Company previously restated certain of its financial statements, including its financial statements for the three and six months ended December 31, 2022, to correct the estimated fair value of the Company’s warrant to purchase up to five percent (5%) of the outstanding capital stock of Monogram Orthopaedics Inc. (NasdaqCM: MGRM), calculated on a fully diluted basis (the “Monogram Warrant”). The restatement recorded, for all restated periods, the Monogram Warrant at its estimated fair value, an unrealized gain on investments, and the deferred income tax expense associated with the corresponding unrealized gain on investments. 7 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Presented below are the changes to each financial statement line item for the three and six months ended December 31, 2022 that were affected by the restatement (in thousands except per share amounts). Three months ended December 31, 2022 Unaudited Income Statement (Second Quarter Fiscal 2023) Schedule of changes in financial statement 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 $ 0.52 $ 0.77 Diluted income per share $ 0.24 $ 0.51 $ 0.75 (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. Six months ended December 31, 2022 Unaudited Income Statement As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ 408 $ 2,757 (a) $ 3,165 Total other income (expense) 382 2,757 3,139 Income before income taxes 2,468 2,757 5,225 Income tax expense 513 757 (b) 1,270 Net income 1,955 2,000 3,955 Basic income per share $ 0.54 $ 0.56 $ 1.10 Diluted income per share $ 0.53 $ 0.55 $ 1.08 (a) This amount represents the unrealized gain on the Monogram Warrant for the six months ended December 31, 2022. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the six months ended December 31, 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. 8 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 December 31, Six Months Ended December 31, 2023 2022 2023 2022 Net Sales: Over-time revenue recognition $ 338 $ 483 $ 528 $ 1,391 Point-in-time revenue recognition 12,250 10,799 23,998 20,978 Total net sales $ 12,588 $ 11,282 $ 24,526 $ 22,369 The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs incurred compared to the estimated total costs upon completion. During the three and six months ended December 31, 2023, we did no t record any revenue that had been included in deferred revenue in the prior year. During the three and six months ended December 31, 2022, we recorded $ 312,000 and $ 862,000 , 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. As of December 31, 2023, we do no t have any deferred revenue. 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 December 31, As of and for the Six Months Ended December 31, 2023 2022 2023 2022 Contract assets beginning balance $ 591 $ 591 $ 494 $ 714 Expenses incurred during the year 107 $ 412 $ 326 $ 746 Amounts reclassified to cost of sales ( 277 ) ( 117 ) ( 382 ) ( 566 ) Amounts allocated to discounts for standalone selling price ( 9 ) ( 9 ) ( 26 ) ( 17 ) Contract assets ending balance $ 412 $ 877 $ 412 $ 877 9 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of and for the Three Months Ended December 31, As of and for the Six Months Ended December 31, 2023 2022 2023 2022 Contract liabilities beginning balance $ — $ 851 $ — $ 1,013 Payments received from customers — $ 312 $ 43 $ 700 Amounts reclassified to revenue — ( 312 ) ( 43 ) ( 862 ) Contract liabilities ending balance $ — $ 851 $ — $ 851 NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS Inventory Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following (in thousands): Schedule of inventory December 31, 2023 June 30, 2023 Raw materials/purchased components $ 7,524 $ 8,824 Work in process 3,905 3,686 Sub-assemblies/finished components 2,721 2,387 Finished goods 876 1,270 Total inventory $ 15,026 $ 16,167 Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments December 31, 2023 June 30, 2023 Current: Marketable equity securities – short-term $ 5,803 $ 1,134 Long-term: Warrant — 6,160 Marketable equity securities – long-term 1,509 1,361 Total Investments $ 7,312 $ 8,655 Investments at December 31, 2023 and June 30, 2023 had an aggregate cost basis of $ 3,964,000 and $ 2,714,000 , respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities, we may not be able to sell our position within one year. At December 31, 2023, the investments included net unrealized gains of $ 3.3 million (gross unrealized gains of $ 3.8 million offset by gross unrealized losses of $ 482,000 ). At June 30, 2023, the investments, excluding the Monogram Warrant, included net unrealized losses of $ 219,000 (gross unrealized losses of $ 286,000 offset by gross unrealized gains of $ 67,000 ). 10 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Of the total marketable equity securities at December 31, 2023 and June 30, 2023, $ 763,000 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. On October 6, 2023, in conjunction with the execution of a supply agreement with Monogram, we exercised the Monogram Warrant in full in cash totaling $ 1,250,000 and received 1,828,551 shares of Monogram common stock (NasdaqCM: MGRM). On the date of exercise our unrealized loss on the investment was approximately $ 38,000 . The fair value of the Monogram common stock is reflected in marketable equity securities – short term in the table above as of December 31, 2023. Our Chief Executive Officer, Richard (“Rick”) Van Kirk, is also a Monogram board member. We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, 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. Land and building Land and building consist of the following (in thousands): Schedule of land and building December 31, 2023 June 30, 2023 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 297 ) ( 250 ) $ 6,202 $ 6,249 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 10). We substantially completed the build-out of the property in the first quarter of fiscal 2022. We began operations in the new facility during the fourth quarter of fiscal 2023. The building is being amortized on a straight-line basis over a period of 30 years. Intangibles Intangibles consist of the following (in thousands): Schedule of intangibles December 31, 2023 June 30, 2023 Patent-related costs $ 208 $ 208 Less: accumulated amortization ( 140 ) ( 127 ) $ 68 $ 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 expected to be $ 14,000 for the remainder of fiscal 2024 and $ 28,000 per fiscal year through fiscal 2026, at which time we expect these costs to be fully amortized. 11 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 December 31, 2023 and June 30, 2023, the warranty reserve amounted to $ 194,000 and $ 200,000 , respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated statements of income. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended December 31, 2023 and 2022 was $ 37,000 and $ 56,000 , respectively, and for the six months ended December 31, 2023 and 2022 was $ 60,000 and $ 123,000 , respectively. Information regarding the accrual for warranty costs for the three and six months ended December 31, 2023 and 2022, are as follows (in thousands): Schedule of accrual warranty costs As of and for the Three Months Ended December 31, As of and for the Six Months Ended December 31, 2023 2022 2023 2022 Beginning balance $ 189 $ 365 $ 200 $ 340 Accruals during the period 29 $ 55 $ 53 $ 109 Changes in estimates of prior period warranty accruals 8 1 7 14 Warranty amortization ( 32 ) ( 77 ) ( 66 ) ( 119 ) Ending balance $ 194 $ 344 $ 194 $ 344 NOTE 6. NET INCOME (LOSS) PER SHARE We calculate basic net income (loss) per share by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The weighted-average number of common shares outstanding reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards. The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for net income (loss). Because we incurred a net loss for the six months ended December 31, 2023, basic and diluted loss were the same as the inclusion of 64,800 common shares potentially issuable under the terms of outstanding performance awards would have had an anti-dilutive effect. In the tables below, net income amounts represent the numerator, and weighted average shares outstanding amounts represent the denominator (in thousands, except per share amounts): Schedule of net income (loss) per share Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Basic: (restated) (restated) Net income (loss) $ 500 $ 2,752 $ ( 115 ) $ 3,955 Weighted average shares outstanding 3,547 3,574 3,547 3,595 Basic income (loss) per share $ 0.14 $ 0.77 $ ( 0.03 ) $ 1.10 Diluted: Net income (loss) $ 500 $ 2,752 $ ( 115 ) $ 3,955 Weighted average shares outstanding 3,547 3,574 3,547 3,595 Effect of dilutive securities 65 78 — 77 Weighted average shares used in calculation of diluted earnings per share 3,612 3,652 3,547 3,672 Diluted income (loss) per share $ 0.14 $ 0.75 $ ( 0.03 ) $ 1.08 12 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based primarily on our historical taxable income, with some consideration given to our estimates of future taxable income by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable. We recognize accrued interest and penalties related to unrecognized tax benefits when applicable. As of December 31, 2023 and 2022, we recognized accrued interest of $ 61,000 and $ 54,000 , respectively, related to unrecognized tax benefits. 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, 2020 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. NOTE 8. SHARE-BASED COMPENSATION Our 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 December 31, 2023, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan. Performance Awards In October 2023, the Compensation Committee reallocated an additional 15,200 previously forfeited awards, having the same remaining terms and conditions, to other employees. The weighted average fair value of the performance awards reallocated in 2023 was $ 10.17 , calculated using the weighted average fair market value for each award, using a Monte Carlo simulation. During each of the three months ended December 31, 2023, and 2022, we recorded share-based compensation expense of $ 30,000 related to outstanding performance awards. During the six months ended December 31, 2023, and 2022, we recorded share-based compensation expense of $ 45,000 and $ 60,000 , respectively, related to outstanding performance awards. On December 31, 2023, there was approximately $ 136,000 of unrecognized compensation cost related to non-vested performance awards, which is expected to be expensed over the weighted-average period of 1.50 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. 13 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 from the date of grant and the achievement of our common stock trading at certain pre-determined prices. The weighted average fair value of the stock option awards granted in fiscal 2021 was $ 16.72 , calculated using a Monte Carlo simulation. In December 2021, the Compensation Committee reallocated 5,000 previously forfeited non-qualified stock options, having the same remaining terms and conditions, to another employee. The weighted average fair value of the stock option awards granted in fiscal 2022 was $ 6.69 , calculated using a Monte Carlo simulation. During the three months ended December 31, 2023 and 2022, we recorded compensation expense of $ 168,000 and $ 140,000 , respectively, related to these options. During the six months ended December 31, 2023 and 2022, we recorded compensation expense of $ 335,000 and $ 312,000 , respectively, related to these options. As of December 31, 2023, none of these stock options had vested and there was approximately $ 2 .0 million of unrecognized compensation cost related to these stock options. 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 that 704,715 shares be reserved for issuance pursuant to the ESPP. The ESPP was approved by our shareholders at our 2014 Annual Meeting. An amendment to the ESPP to extend its term for an additional ten years (through 2035) was approved by our Board in October 2023 and by our shareholders at our 2023 Annual Meeting. During the three months ended December 31, 2023 and 2022, we did no t record any share-based compensation expense relating to the ESPP, due to the fact that no six-month offering period ended during either quarter. During the six months ended December 31, 2023 and 2022, 2,021 and 2,503 shares of our common stock were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $ 15.82 and $ 13.52 , respectively, per share. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 34,519 shares of our common stock. During each of the six months ended December 31, 2023 and 2022, we recorded share-based compensation expense in the amount of $ 6,000 relating to the ESPP. 14 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9. MAJOR CUSTOMERS AND SUPPLIERS Information with respect to customers that accounted for sales in excess of 10% of our total sales in either of the three-month and the six-month periods ended December 31, 2023 and 2022, is as follows (in thousands, except percentages): Schedule of sales by major customers Three Months Ended December 31, 2023 2022 Amount Percent of Total Amount Percent of Total Net sales $ 12,588 100 % $ 11,282 100 % Customer concentration: Customer 1 $ 8,437 67 % $ 7,475 66 % Customer 2 1,494 12 % 1,697 15 % Customer 3 1,313 10 % 1,400 12 % Total $ 11,244 89 % $ 10,572 93 % Six Months Ended December 31, 2023 2022 Amount Percent of Total Amount Percent of Total Net sales $ 24,526 100 % $ 22,369 100 % Customer concentration: Customer 1 16,812 69 % 14,957 67 % Customer 2 2,703 11 % 3,852 17 % Customer 3 1,965 8 % 2,317 10 % Total $ 21,480 88 % $ 21,126 94 % Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either December 31, 2023 or June 30, 2023, is as follows (in thousands, except percentages): Schedule of accounts receivable December 31, 2023 June 30, 2023 Total gross accounts receivable $ 13,169 100 % $ 9,952 100 % Customer concentration: Customer 1 $ 9,693 74 % $ 7,231 73 % Customer 2 1,716 13 % 1,951 19 % Total. $ 11,409 87 % $ 9,182 92 % During the three months ended December 31, 2023 and 2022 we had four suppliers accounting for 10 % or more of total inventory purchases, and during the six months ended December 31, 2023 and 2022, we had three suppliers that accounted for more than 10 % of our total inventory purchases. Amounts owed to the fiscal 2024 three most significant suppliers at December 31, 2023, totaled $ 1.2 million, $ 300,000 and $ 115,000 , respectively, and at June 30, 2023, totaled $ 621,000 , $ 158,000 and $ 41,000 , respectively. 15 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS Minnesota Bank & Trust On November 6, 2020 (the “Closing Date”), PDEX Franklin, a wholly owned subsidiary of the Company, purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). A portion of the purchase price was financed by a loan from MBT to PDEX Franklin in the principal amount of 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 December 31, 2023 is $ 4,649,000 . 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, 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 under the Amended Credit Agreement 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 shares of our common stock. The Term Note B had a zero balance as of the Closing Date and we borrowed the full $ 1,000,000 during the third quarter ended March 31, 2021, for the purpose of making improvements to the Franklin Property. 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 December 31, 2023, is $ 4,337,000 . 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. The balance owing on Term Note B was $ 646,000 on December 31, 2023. 16 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 current maturity date of December 29, 2025, on the terms set forth in the Amended Credit Agreement. As of December 31, 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 current maturity date of December 29, 2025, on the terms set forth in the Amended Credit Agreement. On December 29, 2023, we entered into Amendment No. 3 to the Agreement to amend the termination date of the Supplemental Loan and Amended Revolving Loan from December 29, 2024, to December 29, 2025. As of December 31, 2023, we had drawn $ 2,500,000 against the Amended Revolving Loan. Loan origination fees in the amount of $ 16,000 each were paid to MBT in conjunction with the Revolving Loan and the Supplemental Loan in conjunction with both the Amendment on December 29, 2022 and on December 29, 2023. 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. 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 December 31, 2023, but there can be no assurance that we will remain in compliance for the duration of the term of these loans. 17 PRO-DEX, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11. COMMON STOCK Share Repurchase Program In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock, as the prior repurchase plan authorized by our Board in 2013 was nearing completion. In accordance with, and as part of, these share repurchase programs, our Board approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan” or “Plan”). During both the three and six months ended December 31, 2023, we repurchased 6,285 shares at an aggregate cost, inclusive of fees under the Plan, of $ 107,000 . During the three and six months ended December 31, 2022, we repurchased 53,993 and 74,846 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ 995,000 and $ 1.3 million, respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,203,453 shares under the share repurchase program at an aggregate cost, inclusive of fees, of $ 17.3 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 December 31, 2023, in the amount of $ 435,000 , is presented within accrued expenses on the condensed consolidated balance sheet. As of December 31, 2023, our operating lease has a remaining lease term of three years and nine months and an imputed interest rate of 5.53 %. Cash paid for amounts included in the lease liability for the three and six months ended December 31, 2023 totaled $ 131,000 and $ 258,000 , respectively, and for December 31, 2022 totaled $ 127,000 and $ 250,000 , respectively. As of December 31, 2023, the maturity of our lease liability is as follows (in thousands): Schedule of maturity of lease liability Fiscal Year: 2024 $ 261 2025 535 2026 551 2027 567 2028 143 Total lease payments 2,057 Less imputed interest: ( 207 ) Total $ 1,850 NOTE 13. COMMITMENTS AND CONTINGENCIES Legal Matters We may be involved from time to time in various 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 and adverse. NOTE 14. SUBSEQUENT EVENTS We have evaluated subsequent events through the date of this filing. There were no subsequent events that require disclosure. 18