PRO DEX INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) March 31, 2024 June 30, 2023 ASSETS Current Assets: Cash and cash equivalents $ 3,219 $ 2,936 Investments 4,577 1,134 Accounts receivable, net of allowance for expected credit losses of $ 1 and $ 0 at March 31, 2024 and at June 30, 2023, respectively 12,516 9,952 Deferred costs 331 494 Inventory 14,242 16,167 Prepaid expenses and other current assets 1,072 296 Total current assets 35,957 30,979 Land and building, net 6,179 6,249 Equipment and leasehold improvements, net 5,191 5,079 Right of use asset, net 1,575 1,872 Intangibles, net 61 81 Investments 1,543 7,521 Other assets 42 42 Total assets $ 50,548 $ 51,823 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 3,435 $ 2,261 Accrued expenses 2,701 3,135 Deferred revenue 35 — Income taxes payable 390 453 Note payable 3,858 3,827 Total current liabilities 10,419 9,676 Lease liability, net of current portion 1,299 1,638 Deferred income taxes, net 8 8 Notes payable, net of current portion 7,884 8,911 Total non-current liabilities 9,191 10,557 Total liabilities 19,610 20,233 Shareholders’ equity: Common shares; no par value; 50,000,000 shares authorized; 3,451,423 and 3,545,309 shares issued and outstanding at March 31, 2024 and June 30, 2023, respectively 5,575 6,767 Retained earnings 25,363 24,823 Total shareholders’ equity 30,938 31,590 Total liabilities and shareholders’ equity $ 50,548 $ 51,823 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) (In thousands, except per share amounts) Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 (restated) (restated) Net sales $ 14,293 $ 13,079 $ 38,819 $ 35,448 Cost of sales 10,291 9,268 28,357 26,058 Gross profit 4,002 3,811 10,462 9,390 Operating expenses: Selling expenses 17 24 79 146 General and administrative expenses 1,012 1,009 3,208 2,983 Research and development costs 760 713 2,353 2,109 Total operating expenses 1,789 1,746 5,640 5,238 Operating income 2,213 2,065 4,822 4,152 Interest expense 138 131 409 389 Unrealized gain (loss) on marketable equity investments ( 1,192 ) 242 ( 3,785 ) 3,407 Interest and other income 30 11 76 235 Gain on sale of investments — — — 7 Income before income taxes 913 2,187 704 7,412 Income tax expense 258 570 164 1,840 Net income $ 655 $ 1,617 $ 540 $ 5,572 Basic net income per share: Net income $ 0.19 $ 0.46 $ 0.15 $ 1.56 Diluted net income per share: Net income $ 0.19 $ 0.45 $ 0.15 $ 1.52 Weighted average common shares outstanding: Basic 3,451 3,548 3,531 3,580 Diluted 3,524 3,623 3,604 3,656 Common shares outstanding 3,451 3,545 3,451 3,545 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 March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Common shares: (restated) (restated) Balance, beginning of period $ 7,078 $ 6,533 $ 6,767 $ 7,682 Share-based compensation expense 201 206 588 584 Share repurchases ( 1,722 ) ( 198 ) ( 1,830 ) ( 1,547 ) Shares withheld from common stock issued to pay employee payroll taxes — — — ( 223 ) Exercise of stock options — — — 11 ESPP shares issued 18 44 50 78 Balance, at end of period $ 5,575 $ 6,585 $ 5,575 $ 6,585 Retained earnings: Balance, beginning of period $ 24,708 $ 21,704 $ 24,823 $ 17,749 Net income 655 1,617 540 5,572 Balance, at end of period $ 25,363 $ 23,321 $ 25,363 $ 23,321 Balance, beginning of period — — 31,590 — Net income (loss) 655 1,617 540 5,572 Total shareholders’ equity $ 30,938 $ 29,906 $ 30,938 $ 29,906 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) Nine Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: (restated) Net income $ 540 $ 5,572 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 854 594 Amortization of loan fees, net ( 6 ) 8 Share-based compensation 588 584 Unrealized (gain) loss on marketable equity investments 3,785 ( 3,407 ) Non-cash straight-line lease amortization ( 12 ) ( 1 ) Gain on sale of investments — ( 7 ) Deferred income taxes — 905 Bad debt expense 1 2 Changes in operating assets and liabilities: Accounts receivable and other current receivables ( 2,565 ) 4,817 Deferred costs 163 431 Inventory 1,925 ( 2,467 ) Prepaid expenses and other assets ( 776 ) ( 1,129 ) Accounts payable and accrued expenses 710 ( 1,047 ) Deferred revenue 35 ( 956 ) Income taxes payable ( 63 ) 936 Net cash provided by operating activities 5,179 4,835 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments ( 1,250 ) — Purchases of equipment and improvements ( 876 ) ( 822 ) Proceeds from sale of investments — 89 Net cash used in investing activities ( 2,126 ) ( 733 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock ( 1,830 ) ( 1,547 ) Proceeds from exercise of options and ESPP contributions 50 89 Payment of employee payroll taxes on net issuance of common stock — ( 223 ) Proceeds from Minnesota Bank & Trust revolving loan, net of fees 2,000 3,584 Principal payments on notes payable and revolving loan ( 2,990 ) ( 4,766 ) Net cash used in financing activities ( 2,770 ) ( 2,863 ) Net increase in cash and cash equivalents 283 1,239 Cash and cash equivalents, beginning of period 2,936 849 Cash and cash equivalents, end of period $ 3,219 $ 2,088 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) Nine Months Ended March 31, 2024 2023 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 409 $ 384 Income taxes $ 980 $ 1,107 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 our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2023, we previously restated certain of our financial statements, including our financial statements for the three and nine months ended March 31, 2023, to correct the estimated fair value of our 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. 6 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Presented below are the changes to each financial statement line item for the three and nine months ended March 31, 2023 that were affected by the restatement (in thousands except per share amounts). Three months ended March 31, 2023 Unaudited Income Statement (Third Quarter Fiscal 2023) Schedule of changes in financial statement 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. Nine months ended March 31, 2023 Unaudited Income Statement As Previously Reported Restatement As Restated Unrealized gain(loss) on investments $ 231 $ 3,176 (a) $ 3,407 Total other income (expense) 84 3,176 3,260 Income before income taxes 4,236 3,176 7,412 Income tax expense 968 872 (b) 1,840 Net income 3,268 2,304 5,572 Basic income per share $ 0.92 $ 0.64 $ 1.56 Diluted income per share $ 0.89 $ 0.63 $ 1.52 (a) This amount represents the unrealized gain on the Monogram Warrant for the nine months ended March 31, 2023. (b) This amount represents the income tax expense related to the unrealized gain on the Monogram Warrant for the nine months ended March 31, 2023. 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. 7 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Net Sales: Over-time revenue recognition $ 234 $ 970 $ 762 $ 2,361 Point-in-time revenue recognition 14,059 12,109 38,057 33,087 Total net sales $ 14,293 $ 13,079 $ 38,819 $ 35,448 The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (presented as deferred costs on our condensed consolidated balance sheets) and customer advances and deposits (presented as deferred revenue on our condensed consolidated balance sheets), where applicable. Amounts are generally billed as work progresses in accordance with agreed upon milestones. The over-time revenue recognition model consists of non-recurring engineering (“NRE”) and prototype services and typically relates to NRE services related to the evaluation, design or customization of a medical device and is typically recognized over time utilizing an input measure of progress based on costs incurred compared to the estimated total costs upon completion. During the three and nine months ended March 31, 2024, we did no t record any revenue that had been included in deferred revenue in the prior year. During the three and nine months ended March 31, 2023, we recorded $ 405,000 and $ 956,000 , respectively, of revenue that had been included in deferred revenue in the prior year. The revenue recognized from the contract liabilities consisted of satisfying our performance obligations during the normal course of business. Our entire deferred revenue balance of $ 35,000 at March 31, 2024, is currently expected to be recognized in the next 12-month period. 8 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 March 31, As of and for the Nine Months Ended March 31, 2024 2023 2024 2023 Contract assets beginning balance $ 412 $ 877 $ 494 $ 710 Expenses incurred during the year 106 362 376 1,108 Amounts reclassified to cost of sales ( 179 ) ( 935 ) ( 505 ) ( 1,497 ) Amounts allocated to discounts for standalone selling price ( 8 ) ( 25 ) ( 34 ) ( 42 ) Contract assets ending balance $ 331 $ 279 $ 331 $ 279 As of and for the Three Months Ended March 31, As of and for the Nine Months Ended March 31, 2024 2023 2024 2023 Contract liabilities beginning balance $ — $ 851 $ — $ 1,013 Payments received from customers 225 41 267 741 Amounts reclassified to revenue ( 190 ) ( 835 ) ( 232 ) ( 1,697 ) Contract liabilities ending balance $ 35 $ 57 $ 35 $ 57 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 March 31, 2024 June 30, 2023 Raw materials /purchased components $ 6,383 $ 8,824 Work in process 3,944 3,686 Sub-assemblies/finished components 2,379 2,387 Finished goods 1,536 1,270 Total inventory $ 14,242 $ 16,167 9 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments March 31, 2024 June 30, 2023 Current: Marketable equity securities – short-term $ 4,577 $ 1,134 Long-term: Warrant — 6,160 Marketable equity securities – long-term 1,543 1,361 Total Investments $ 6,120 $ 8,655 Investments at March 31, 2024 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 March 31, 2024, the investments included net unrealized gains of $ 2.2 million (gross unrealized gains of $ 2.4 million offset by gross unrealized losses of $ 253,000 ). 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 ). Of the total marketable equity securities at March 31, 2024 and June 30, 2023, $ 1 .0 million and $ 1.1 million, 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 March 31, 2024. Our Chief Executive Officer, Richard Van Kirk (“Rick”), 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, and two non-management directors, Raymond Cabillot (“Ray”) and Nicholas Swenson (“Nick”), 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 our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that Nick or Ray (or both) may own from time to time either individually or through the investment funds they manage, or other companies whose boards they sit on, such as Air T, Inc. 10 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Land and building Land and building consist of the following (in thousands): Schedule of land and building March 31, 2024 June 30, 2023 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 320 ) ( 250 ) $ 6,179 $ 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 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. For the three months ended March 31, 2024 and 2023 we recorded $ 23,000 of depreciation expense and for the nine months ended March 31, 2024 and 2023 we recorded $ 70,000 of depreciation expense. 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 March 31, 2024 June 30, 2023 Patent-related costs $ 208 $ 208 Less accumulated amortization ( 147 ) ( 127 ) $ 61 $ 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. For the three months ended March 31, 2024, and 2023 we recorded $ 7,000 and $ 10,000 of amortization expense, respectively, and for the nine months ended March 31, 2024 and 2023 we recorded $ 21,000 and $ 31,000 of depreciation expense, respectively. Future amortization expense is expected to be $ 7,000 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. 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 March 31, 2024 and June 30, 2023, the warranty reserve amounted to $ 273,000 and $ 200,000 , respectively. Warranty expenses are included in cost of sales in the accompanying condensed consolidated income statements. Changes in estimates to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return rates and are included in current period warranty expense. Warranty expense relating to new product sales and changes to estimates for the three months ended March 31, 2024 and 2023, was $ 102,000 and $ ( 77,000 ), respectively, and for the nine months ended March 31, 2024 and 2023, was $ 162,000 and $ 46,000 , respectively. 11 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Information regarding the accrual for warranty costs for the three and nine months ended March 31, 2024 and 2023, are as follows (in thousands): Schedule of accrual warranty costs As of and for the Three Months Ended March 31, 2024 2023 Beginning balance $ 194 $ 344 Accruals during the period 102 26 Changes in estimates of prior period warranty accruals — ( 103 ) Warranty amortization and utilization ( 23 ) ( 15 ) Ending balance $ 273 $ 252 As of and for the Nine Months Ended March 31, 2024 2023 Beginning balance $ 200 $ 340 Accruals during the period 155 135 Changes in estimates of prior period warranty accruals 7 ( 89 ) Warranty amortization and utilization ( 89 ) ( 134 ) Ending balance $ 273 $ 252 NOTE 6. NET INCOME 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. The weighted-average number of common shares outstanding used in the calculation of diluted income per share reflects the effects of potentially dilutive securities, in income generating periods, which consist entirely of outstanding stock options and performance awards. The following table presents reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for net income. In the tables below, income amounts represent the numerator, and share amounts represent the denominator (in thousands, except per share amounts): Schedule of net income per share Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Basic: (restated) (restated) Net income $ 655 $ 1,617 $ 540 $ 5,572 Weighted average shares outstanding 3,451 3,548 3,531 3,580 Basic income per share $ 0.19 $ 0.46 $ 0.15 $ 1.56 12 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Diluted: Net income $ 655 $ 1,617 $ 540 $ 5,572 Weighted average shares outstanding 3,451 3,548 3,531 3,580 Effect of dilutive securities 73 75 73 76 Weighted average shares used in calculation of diluted earnings per share 3,524 3,623 3,604 3,656 Diluted income per share $ 0.19 $ 0.45 $ 0.15 $ 1.52 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 March 31, 2024 and 2023, we recognized accrued interest of $ 69,000 and $ 59,000 , 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, 2019 and later. However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to audit. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. NOTE 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 the three months ended March 31, 2024 and 2023, we recorded share-based compensation expense of $ 31,000 and $ 30,000 , respectively, related to outstanding performance awards. During the nine months ended March 31, 2024 and 2023, we recorded share-based compensation expense of $ 76,000 and $ 91,000 , respectively, related to outstanding performance awards. On March 31, 2024, there was approximately $ 86,000 of unrecognized compensation cost related to non-vested performance awards expected to be expensed over the weighted-average period of 1.23 years. 13 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 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 options granted 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 at a weighted average fair value of $ 6.69 calculated using a Monte Carlo simulation. During each of the three months ended March 31, 2024 and 2023, we recorded compensation expense of $ 168,000 related to these stock options. During the nine months ended March 31, 2024 and 2023, we recorded compensation expense of $ 503,000 and $ 479,000 , respectively, related to these stock options. As of March 31, 2024, none of these stock options have vested and there was approximately $ 1.8 million of unrecognized compensation cost related to these non-vested non-qualified stock options. Employee Stock Purchase Plan In September 2014, our Board approved the establishment of an Employee Stock Purchase Plan (the “ESPP”), which was approved by our shareholders at our 2014 Annual Meeting. The ESPP conforms to the provisions of Section 423 of the Internal Revenue Code, has coterminous offering and purchase periods of six months, and bases the pricing to purchase shares of our common stock on a formula so as to result in a per share purchase price that approximates a 15% discount from the market price of a share of our common stock at the end of the purchase period . Our Board of Directors also approved that 704,715 shares, be reserved for issuance pursuant to the ESPP. 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 March 31, 2024 and 2023, we recorded ESPP share-based compensation expense in the amount of $ 3,000 and $ 8,000 , respectively. During the three months ended March 31, 2024 and 2023, 983 and 2,956 shares were purchased, respectively, and allocated to employees based upon their contributions at prices of $ 18.32 and $ 14.79 , respectively, per share. During the nine months ended March 31, 2024 and 2023, we recorded ESPP share-based compensation expense in the amount of $ 9,000 and $ 14,000 , respectively. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 35,502 shares of our common stock. 14 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 nine-month periods ended March 31, 2024 and 2023, is as follows (in thousands, except percentages): Schedule of sales by major customers Three Months Ended March 31, 2024 2023 Amount Percent of Total Amount Percent of Total Net sales $ 14,293 100 % $ 13,079 100 % Customer concentration: Customer 1 $ 10,679 75 % $ 8,622 66 % Customer 2 1,385 10 % 2,059 16 % Total $ 12,064 85 % $ 10,681 82 % Nine Months Ended March 31, 2024 2023 Amount Percent of Total Amount Percent of Total Net sales $ 38,819 100 % $ 35,448 100 % Customer concentration: Customer 1 $ 27,491 71 % $ 23,578 66 % Customer 2 4,087 10 % 5,912 17 % Total $ 31,578 81 % $ 29,490 83 % Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either March 31, 2024 or June 30, 2023, is as follows (in thousands, except percentages): Schedule of accounts receivable March 31, 2024 June 30, 2023 Total gross accounts receivable $ 12,517 100 % $ 9,952 100 % Customer concentration: Customer 1. $ 10,117 81 % $ 7,231 73 % Customer 2. 1,625 13 % 1,951 19 % Total. $ 11,742 94 % $ 9,182 92 % 15 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) During the three and nine months ended March 31, 2024 and 2023, we had two and three suppliers, respectively, accounting for 10% or more of total inventory purchases. Amounts owed to the suppliers who comprised more than 10% of total accounts payable at either March 31, 2024 or June 30, 2023, is as follows (in thousands, except percentages). Schedule of accounts payable March 31, 2024 June 30, 2023 Total accounts payable $ 3,435 100 % $ 2,261 100 % Supplier concentration: Supplier 1. $ 1,014 29 % $ 620 27 % Supplier 2. 365 11 % 158 7 % Supplier 3. 349 10 % 41 2 % Total. $ 1,728 50 % $ 819 36 % NOTE 10. NOTES PAYABLE AND FINANCING TRANSACTIONS Minnesota Bank & Trust On November 6, 2020 (the “Closing Date”), PDEX Franklin, our wholly owned subsidiary, 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 March 31, 2024 is $ 4,599,000 . 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 our assets pursuant to a Security Agreement entered into on September 6, 2018, between us 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. 16 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 March 31, 2024, is $ 4,086,000 . 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 $ 608,000 on March 31, 2024. 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 March 31, 2024, 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 March 31, 2024, 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 March 31, 2024, 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 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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 the three and nine months ended March 31, 2024, we repurchased 90,605 and 96,890 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ 1,723,000 and $ 1,830,000 , respectively. During the three and nine months ended March 31, 2023, we repurchased 11,576 and 86,422 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ 198,000 and $ 1,547,000 , respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,293,338 shares under the share repurchase program at an aggregate cost of $ 19 .0 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 March 31, 2024, in the amount of $ 445,000 , is presented within accrued expenses on the condensed consolidated balance sheet. As of March 31, 2024, the maturity of our lease liability is as follows (in thousands): Schedule of maturity of lease liability Operating Lease Fiscal Year: 2024 $ 130 2025 535 2026 551 2027 567 2028 143 Total lease payments 1,926 Less imputed interest: ( 181 ) Total $ 1,745 As of March 31, 2024, the operating lease for our Irvine, California headquarters has a remaining lease term of three years and six months and an imputed interest rate of 5.53 %. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2024, was $ 143,000 and $ 425,000 , respectively. Cash paid for amounts included in the lease liability for the three and nine months ended March 31, 2023, was $ 139,000 and $ 418,000 , respectively. 18 PRO-DEX, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) 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. 19