PRO DEX INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) December 31, 2022 June 30, 2022 ASSETS Current assets: Cash and cash equivalents $ 382 $ 849 Investments 1,134 755 Accounts receivable, net of allowance for doubtful accounts of $ 2 and $ 0 at December 31, 2022 and at June 30, 2022, respectively 12,195 15,384 Deferred costs 877 710 Inventory 15,135 12,678 Prepaid expenses and other current assets 1,664 790 Total current assets 31,387 31,166 Land and building, net 6,296 6,343 Equipment and leasehold improvements, net 5,203 4,833 Right-of-use asset, net 2,063 2,248 Intangibles, net 98 118 Deferred income taxes, net 764 797 Investments 1,726 1,779 Other assets 42 42 Total assets $ 47,579 $ 47,326 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,364 $ 3,761 Accrued expenses 3,314 2,751 Income taxes payable 1,026 544 Deferred revenue 851 1,013 Notes payable 3,110 3,285 Total current liabilities 11,665 11,354 Lease liability, net of current portion 1,850 2,054 Notes payable, net of current portion 9,590 10,250 Total non-current liabilities 11,440 12,304 Total liabilities 23,105 23,658 Shareholders’ equity: Common shares; no par value; 50,000,000 shares authorized; 3,553,929 and 3,596,131 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively 6,533 7,682 Retained earnings 17,941 15,986 Total shareholders’ equity 24,474 23,668 Total liabilities and shareholders’ equity $ 47,579 $ 47,326 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Net sales $ 11,282 $ 10,173 $ 22,369 $ 20,161 Cost of sales 8,659 6,769 16,791 13,329 Gross profit 2,623 3,404 5,578 6,832 Operating expenses: Selling expenses 68 22 122 59 General and administrative expenses 951 1,165 1,975 2,257 Research and development costs 467 615 1,395 1,596 Total operating expenses 1,486 1,802 3,492 3,912 Operating income 1,137 1,602 2,086 2,920 Interest expense ( 128 ) ( 117 ) ( 258 ) ( 237 ) Unrealized gain (loss) on marketable equity investments 158 ( 300 ) 408 ( 152 ) Interest and other income 7 25 225 49 Gain on sale of investments — — 7 — Income before income taxes 1,174 1,210 2,468 2,580 Income tax expense ( 295 ) ( 285 ) ( 513 ) ( 592 ) Net income $ 879 $ 925 $ 1,955 $ 1,988 Basic net income per share: Net income $ 0.25 $ 0.25 $ 0.54 $ 0.54 Diluted net income per share: Net income $ 0.24 $ 0.25 $ 0.53 $ 0.53 Weighted average common shares outstanding: Basic 3,574 3,657 3,595 3,654 Diluted 3,652 3,767 3,672 3,774 Common shares outstanding 3,554 3,642 3,554 3,642 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (In thousands) Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Common stock: Balance, beginning of period $ 7,354 $ 8,188 $ 7,682 $ 7,953 Share-based compensation expense 171 275 378 575 Share repurchases ( 995 ) ( 577 ) ( 1,349 ) ( 672 ) Shares withheld from common stock issued to employees to pay employee payroll taxes — — ( 223 ) — Exercise of stock options 3 — 11 — ESPP shares issued — — 34 30 Balance, end of period 6,533 7,886 6,533 7,886 Retained earnings: Balance, beginning of period 17,062 13,194 15,986 12,131 Net income 879 925 1,955 1,988 Balance, end of period 17,941 14,119 17,941 14,119 Balance, beginning of period — — 23,668 — Net income 879 925 1,955 1,988 Total shareholders’ equity $ 24,474 $ 22,005 $ 24,474 $ 22,005 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,955 $ 1,988 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 384 366 Share-based compensation 378 575 Unrealized (gain) loss on marketable equity investments ( 408 ) 152 Non-cash lease expense 1 8 Amortization of loan fees 4 4 Gain on sale of investments ( 7 ) — Impairment of long-lived assets — 46 Deferred income taxes 33 — Bad debt expense 2 2 Changes in operating assets and liabilities: Accounts receivable 3,187 2,081 Deferred costs ( 167 ) ( 231 ) Inventory ( 2,457 ) ( 848 ) Prepaid expenses and other assets ( 874 ) ( 577 ) Accounts payable and accrued expenses 147 ( 376 ) Deferred revenue ( 162 ) 434 Income taxes payable 481 595 Net cash provided by operating activities 2,497 4,219 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments — ( 334 ) Purchases of equipment and improvements ( 687 ) ( 1,072 ) Proceeds from sale of investments 89 — Increase in intangibles — ( 24 ) Net cash used in investing activities ( 598 ) ( 1,430 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock ( 1,349 ) ( 672 ) Proceeds from exercise of options and ESPP contributions 45 30 Payment of employee payroll taxes on net issuance of common stock ( 223 ) — Proceeds from Minnesota Bank & Trust revolving loan 1,800 — Principal payments on notes payable and revolving loan ( 2,639 ) ( 616 ) Net cash used in financing activities ( 2,366 ) ( 1,258 ) Net increase (decrease) in cash and cash equivalents ( 467 ) 1,531 Cash and cash equivalents, beginning of period 849 3,721 Cash and cash equivalents, end of period $ 382 $ 5,252 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PRO-DEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) (In thousands) Six Months Ended December 31, 2022 2021 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 257 $ 198 Income taxes $ 841 $ 785 Non-cash investing and financing activity: Cashless stock option exercise $ — $ 45 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PRO-DEX, INC. AND SUBSIDIARIES 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, 2022. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2022. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. We are currently reviewing this ASU and its potential impact on our consolidated financial statements. There are no other recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements. NOTE 2. DESCRIPTION OF BUSINESS We specialize in the design, development and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial markets. We have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries. In August 2020, we formed a wholly owned subsidiary, PDEX Franklin, LLC (“PDEX Franklin”), to hold title for an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”) that we acquired on November 6, 2020, in order to allow for the continued growth of our business. The condensed consolidated financial statements include the accounts of the Company and PDEX Franklin and all significant inter-company accounts and transactions have been eliminated. This subsidiary has no separate operations. 6 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 2022 2021 2022 2021 Net Sales: Over-time revenue recognition $ 483 $ 115 $ 1,391 $ 311 Point-in-time revenue recognition 10,799 10,058 20,978 19,850 Total net sales $ 11,282 $ 10,173 $ 22,369 $ 20,161 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, 2022, we recorded $ 312,000 and $ 862,000 , respectively, of revenue that had been included in deferred revenue in the prior year. During the three and six months ended December 31, 2021, we recorded $ 98,000 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 $ 851,000 at December 31, 2022, is currently expected to be recognized in the next 12 months. 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, 2022 2021 2022 2021 Contract assets beginning balance $ 591 $ 185 $ 714 $ 212 Expenses incurred during the year 412 $ 247 $ 746 $ 362 Amounts reclassified to cost of sales ( 117 ) — ( 566 ) ( 130 ) Amounts allocated to discounts for standalone selling price ( 9 ) ( 8 ) ( 17 ) ( 20 ) Contract assets ending balance $ 877 $ 424 $ 877 $ 424 7 PRO-DEX INC. AND SUBSIDIARIES 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, 2022 2021 2022 2021 Contract liabilities beginning balance $ 851 $ 293 $ 1,013 $ 150 Payments received from customers 312 $ 389 $ 700 $ 532 Amounts reclassified to revenue ( 312 ) ( 98 ) ( 862 ) ( 98 ) Contract liabilities ending balance $ 851 $ 584 $ 851 $ 584 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, 2022 June 30, 2022 Raw materials/purchased components $ 8,667 $ 6,323 Work in process 2,622 3,463 Sub-assemblies/finished components 1,880 2,118 Finished goods 1,966 774 Total inventory $ 15,135 $ 12,678 Investments Investments are stated at market value and consist of the following (in thousands): Schedule of investments December 31, 2022 June 30, 2022 Marketable equity securities - short-term $ 1,134 $ 755 Marketable equity securities - long-term 1,726 1,779 Total marketable equity securities $ 2,860 $ 2,534 Investments at December 31, 2022 and June 30, 2022 had an aggregate cost basis of $ 2,714,000 and $ 2,796,000 , respectively. The long-term investments include equity investments of thinly traded securities that we classified as long term in nature because if we decide to sell these securities, we may not be able to sell our position within one year. At December 31, 2022, the investments included net unrealized gains of $ 146,000 (gross unrealized gains of $ 243,000 offset by gross unrealized losses of $ 97,000 ). At June 30, 2022, the investments included net unrealized losses of $ 262,000 (gross unrealized losses of $ 369,000 offset by gross unrealized gains of $ 107,000 ). Of the total marketable equity securities at December 31, 2022 and June 30, 2022, $ 1,134,000 and $ 755,000 , 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. 8 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors, Raymond Cabillot and Nicholas Swenson, who chairs the committee. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on, such as Air T, Inc. Land and building Land and building consist of the following (in thousands): Schedule of capital leased assets December 31, 2022 June 30, 2022 Land $ 3,684 $ 3,684 Building 2,815 2,815 Total 6,499 6,499 Less: accumulated depreciation ( 203 ) ( 156 ) Land and building $ 6,296 $ 6,343 On November 6, 2020, we acquired the Franklin Property for a total purchase price of $ 6.5 million, of which we paid $ 1.3 million in cash and the balance of $ 5.2 million we financed through Minnesota Bank & Trust (“MBT”) (See Note 10). We substantially completed the build-out of the property in the first quarter of the fiscal 2022. Currently, we are actively engaged in various verification and validation activities and we moved certain employees into the new building during the third quarter of fiscal 2022. We expect that we will begin operations in the new facility during the third quarter of this fiscal year. The building is being amortized on a straight-line basis over a period of 30 years. Intangibles Intangibles consist of the following (in thousands): Schedule of intangibles December 31, 2022 June 30, 2022 Patent-related costs $ 208 $ 208 Less accumulated amortization ( 110 ) ( 90 ) $ 98 $ 118 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 $ 21,000 for the remainder of fiscal 2023 and $ 42,000 per fiscal year through October 2025, at which time we expect these costs to be fully amortized. During the three months ended December 31, 2021, we impaired $ 46,000 in previously capitalized legal fees because although we were granted the underlying patent, in this case, we had (and continue to have) no products either in development or sold that utilize the intellectual property protected by the patent. 9 PRO-DEX INC. AND SUBSIDIARIES 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, 2022 and June 30, 2022, the warranty reserve amounted to $ 344,000 and $ 340,000 , 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, 2022 and 2021 was $ 56,000 and $ 44,000 , respectively, and for the six months ended December 31, 2022 and 2021 was $ 123,000 and $ 68,000 , respectively. Information regarding the accrual for warranty costs for the three and six months ended December 31, 2022 and 2021, 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, 2022 2021 2022 2021 Beginning balance $ 365 $ 232 $ 340 $ 221 Accruals during the period 55 33 109 64 Changes in estimates of prior period warranty accruals 1 11 14 4 Warranty amortization ( 77 ) ( 21 ) ( 119 ) ( 34 ) Ending balance $ 344 $ 255 $ 344 $ 255 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 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, net income amounts represent the numerator, and weighted average shares outstanding amounts represent the denominator (in thousands, except per share amounts): Schedule of weighted average shares outstanding calculation of basic and diluted per share Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Basic: Net income $ 879 $ 925 $ 1,955 $ 1,988 Weighted average shares outstanding 3,574 3,657 3,595 3,654 Basic income per share $ 0.25 $ 0.25 $ 0.54 $ 0.54 Diluted: Net income $ 879 $ 925 $ 1,955 $ 1,988 Weighted average shares outstanding 3,574 3,657 3,595 3,654 Effect of dilutive securities 78 110 77 120 Weighted average shares used in calculation of diluted earnings per share 3,652 3,767 3,672 3,774 Diluted income per share $ 0.24 $ 0.25 $ 0.53 $ 0.53 10 PRO-DEX INC. AND SUBSIDIARIES 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, 2022 and 2021, we recognized accrued interest of $ 54,000 and $ 61,000 , 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, 2019 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 Through June 2014, we had two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and the Amended and Restated 2004 Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”) (collectively, the “Former Stock Option Plans”). The Employee Stock Option Plan and Directors’ Stock Option Plan were terminated in June 2014 and December 2014, respectively. In September 2016, our Board approved the establishment of the 2016 Equity Incentive Plan, which was approved by our shareholders at our 2016 Annual Meeting. The 2016 Equity Incentive Plan provides for the award of up to 1,500,000 shares of our common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards. As of December 31, 2022, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive Plan. Former Stock Option Plans No options were granted under the Former Stock Option Plans during the three or six months ended December 31, 2022 and 2021. 11 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The last remaining stock options outstanding under the Former Stock Option Plans were exercised during the six months ended December 31, 2022. As such, as of December 31, 2022, there was no unrecognized compensation cost under the Former Stock Option Plans as there are no options outstanding. The following is a summary of stock option activity under the Former Stock Option Plans for the six months ended December 31, 2022 and 2021: Schedule of stock option activity Six Months Ended December 31, 2022 2021 Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Outstanding at July 1, 6,500 $ 1.82 31,500 $ 1.81 Options granted — — — — Options exercised ( 6,500 ) 1.82 ( 25,000 ) 1.80 Options forfeited — — — — Outstanding at end of period — $ — 6,500 $ 1.82 Stock Options Exercisable at December 31, — $ — 6,500 $ 1.82 Performance Awards In December 2017, the Compensation Committee of our Board of Directors granted 200,000 performance awards to our employees under 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. During the three months ended December 31, 2022, and 2021, we recorded share-based compensation expense of $ 30,000 and $ 21,000 , respectively, related to outstanding performance awards. During the six months ended December 31, 2022 and 2021, we recorded share-based compensation expense of $ 60,000 and $ 42,000 , respectively, related to outstanding performance awards. On December 31, 2022, there was approximately $ 262,000 of unrecognized compensation cost related to non-vested performance awards, which is expected to be expensed over the weighted-average period of 2.50 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. 12 PRO-DEX INC. AND SUBSIDIARIES 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. 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. During the three months ended December 31, 2022 and 2021, we recorded compensation expense of $ 140,000 and $ 254,000 , respectively, related to these options. During the six months ended December 31, 2022 and 2021, we recorded compensation expense of $ 312,000 and $ 527,000 , 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 December 31, 2022, none of these stock options had vested and there was approximately $2.7 million of unrecognized compensation cost related to these 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. 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 three months ended December 31, 2022 and 2021, 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, 2022 and 2021, 2,503 and 1,130 shares of our common stock were purchased under the ESPP, respectively, and allocated to employees based upon their contributions at prices of $ 13.52 and $ 26.17 , respectively, per share. On a cumulative basis, since the inception of the ESPP, employees have purchased a total of 29,542 shares of our common stock. During the six months ended December 31, 2022 and 2021, we recorded share-based compensation expense in the amount of $ 6,000 and $ 5,000 , respectively, relating to the ESPP. 13 PRO-DEX INC. AND SUBSIDIARIES 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, 2022 and 2021, is as follows (in thousands, except percentages): Schedule of sales by major customers Three Months Ended December 31, 2022 2021 Amount Percent of Total Amount Percent of Total Net sales $ 11,282 100 % $ 10,173 100 % Customer concentration: Customer 1 $ 7,475 66 % $ 6,723 66 % Customer 2 1,697 15 % 1,249 12 % Customer 3 1,400 12 % 1,090 11 % Total $ 10,572 93 % $ 9,062 89 % Six Months Ended December 31, 2022 2021 Amount Percent of Total Amount Percent of Total Net sales $ 22,369 100 % $ 20,161 100 % Customer concentration: Customer 1 $ 14,957 67 % $ 13,714 68 % Customer 2 3,852 17 % 2,189 11 % Customer 3 2,317 10 % 1,970 10 % Total $ 21,126 94 % $ 17,873 89 % Information with respect to accounts receivable from those customers who comprised more than 10% of our gross accounts receivable at either December 31, 2022 or June 30, 2022, is as follows (in thousands, except percentages): Schedule of accounts receivable of major customers December 31, 2022 June 30, 2022 Total gross accounts receivable $ 12,197 100 % $ 15,384 100 % Customer concentration: Customer 1 $ 9,028 74 % $ 11,551 75 % Customer 2 2,213 18 % 2,152 14 % Total $ 11,241 92 % $ 13,703 89 % During the three months ended December 31, 2022, we had four suppliers accounting for 10 % or more of total inventory purchases, and during the six months ended December 31, 2022, we had three suppliers that accounted for more than 10 % of our total inventory purchases. During the three and six months ended December 31, 2021, we had two suppliers accounting for 10 % or more of total inventory purchases. Amounts owed to the fiscal 2023 three most significant suppliers at December 31, 2022, totaled $1.5 million, $53,000 and $166,000, respectively, and at June 30, 2022, totaled $721,000, $430,000 and $372,000, respectively. 14 PRO-DEX INC. AND SUBSIDIARIES 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 newly created 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, 2022 is $ 4,842,000 . 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, 2022, is $ 5,317,000 . 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 $ 792,000 on December 31, 2022. 15 PRO-DEX INC. AND SUBSIDIARIES 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 maturity date of December 29, 2024 , on the terms set forth in the Amended Credit Agreement. As of December 31, 2022, 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 of the 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 December 31, 2022, we had drawn $ 1,800,000 against the Amended Revolving Loan. Loan origination fees in the amount of $ 16,000 are payable to MBT in conjunction with the 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. 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, 2022, 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 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 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. During the three and six months ended December 31, 2021, we repurchased 24,336 and 27,952 shares, respectively, at an aggregate cost, inclusive of fees under the Plan, of $ 577,000 and $ 672,000 , respectively. On a cumulative basis, since implementation of the share repurchase program in 2013, we have repurchased a total of 1,185,582 shares under the share repurchase program at an aggregate cost, inclusive of fees, of $ 17.0 million. All repurchases under the 10b5-1 Plans were administered through an independent broker. 16 PRO-DEX INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) At The Market Offering Agreement In December 2020, our Board approved an ATM Agreement with Ascendiant Capital Markets, LLC (“Ascendiant”). The ATM Agreement allows us to sell shares of our common stock in transactions that are deemed to be “at-the-market” equity offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on Nasdaq. In connection with the ATM Agreement, we entered into a prearranged stock sales plan with Ascendiant, which is intended to qualify for the safe harbor under Rule 10b5-1 under the Exchange Act (“ATM 10b5-1 Plan”). No sales of common stock have been made under the ATM Agreement as of the date of this report, but future sales may occur pursuant to the parameters of the ATM 10b5-1 Plan or otherwise at the direction of our Board in accordance with the terms of the ATM Agreement. 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, 2022, in the amount of $ 397,000 , is presented within accrued expenses on the condensed consolidated balance sheet. As of December 31, 2022, our operating lease has a remaining lease term of four 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, 2022 totaled $ 127,000 and $ 250,000 , respectively, and for December 31, 2021 totaled $ 123,000 and $ 243,000 , respectively. As of December 31, 2022, the maturity of our lease liability is as follows: Schedule of Maturities of Lease Liabilities Operating Lease Fiscal Year: 2023 $ 254 2024 519 2025 535 2026 551 2027 567 Thereafter 142 Total lease payments 2,568 Less imputed interest: ( 321 ) Total $ 2,247 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. 17