What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-09-09 compared with 2020-09-10 · 359 added, 183 removed, 102 unchanged (84% of the section changed)

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted under the symbol PDEX on the automated quotation system of the Nasdaq Capital Market (NASDAQ).

The following table sets forth for the quarters indicated the high and low sales prices of our common stock as reported by NASDAQ.

The quotations reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions.

On September 4, 2020, the last sale price of our common stock as reported by NASDAQ was $28.69 per share.

Our common stock is quoted under

the symbol “PDEX”

on the automated quotation system of the Nasdaq Capital Market (“NASDAQ”).

The following table

sets forth for the quarters indicated the high and low sales prices of our common stock as reported by NASDAQ.

The quotations reflect

inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions.

3, 2021, the last sale price of our common stock as reported by NASDAQ was $26.00 per share.

Year ended June 30, 2021:

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Fourth Quarter

As of September 4, 2020, there were 99 holders of record of our common stock.

This number does not include beneficial owners including holders whose shares are held in nominee, or street, name.

We have never paid a cash dividend with respect to our common stock.

The current policy of our Board of Directors is to retain any future earnings to provide funds for the operation and expansion of our business.

As of September 3, 2021, there

were 114 holders of record of our common stock.

This number does not include beneficial owners including holders whose shares are held

in nominee, or “street,”

We have never paid a cash dividend

with respect to our common stock.

The current policy of our Board of Directors is to retain any future earnings to provide funds for the

operation and expansion of our business.

Any determinations to pay dividends in the future will be at the discretion of our Board of Directors.

During the fourth quarter of fiscal 2020 and 2019, we repurchased 26,353 and 96,700 shares, respectively, at an aggregate cost of $411,000 and $1.3 million, respectively, through Board approved prearranged share repurchase plans intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

SELECTED FINANCIAL DATA

Not applicable.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and the Notes thereto contained elsewhere in this report, as well as the Risk Factors included in Item 1A of this report.

During the fourth quarter of

fiscal 2021 and 2020, we repurchased 54,880 and 26,353 shares of our common stock, respectively, at an aggregate cost of $1.5 million

and $411,000, respectively, through Board approved prearranged share repurchase plans intended to qualify for the safe harbor under Rule

10b5-1 under the Securities Exchange Act of 1934, as amended.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of

operations should be read in conjunction with our Financial Statements and the Notes thereto contained elsewhere in this report, as well

as the Risk Factors included in Item 1A of this report.

The following discussion contains forward-looking statements.

(See Cautionary Note Regarding Forward-Looking Statements included in Part 1 of this report.)

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and financial condition for the fiscal years ended June 30, 2020 and 2019.

The Company, headquartered in Irvine, California, specializes 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.

Additionally, we provide engineering, quality, and regulatory consulting services to our customers.

(See “Cautionary

Note Regarding Forward-Looking Statements”

included in Part I of this report.)

following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our

results of operations and financial condition for the fiscal years ended June 30, 2021 and 2020.

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 CMF markets.

Additionally, we provide engineering, quality, and regulatory consulting

services to our customers.

We also sell rotary air motors.

Our products are found in hospitals, medical engineering labs, scientific research facilities, and high-tech manufacturing operations around the world.

Our products are found in hospitals, medical engineering labs, scientific

research facilities, and high-tech manufacturing operations around the world.

We are headquartered in Irvine, California.

COVID-19 Pandemic

We are continuing our business operations under the California exemption for essential critical infrastructure sectors based on our determination that we fall within the Healthcare and Public Health Sector exemption.

As we continue to operate, we have adjusted certain policies and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time, including:

Non-essential employees that are able to work remotely are doing so;

We have adjusted certain policies

and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time,

in order to effectively manage our business during the pandemic, including:

· Non-essential employees that are able to work remotely did so during most of fiscal 2021;

· Increased frequency of disinfectant cleanings, especially for high-touch surfaces;

· Curtailed business travel;

Multiple, staggered work shifts have been implemented in order to achieve effective social distancing;

Provided training, education and appropriate personal protective equipment.

While we have yet to see any decline in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders.

We provide our largest customer with a device used primarily in elective surgeries and although this customer has not requested a reduction or delay to their planned shipments, if this pandemic continues to adversely impact the United States and other markets where our products are sold, coupled with the recommended deferrals of elective procedures by governments and other authorities, we would expect to see a decline in demand from our principal customer.

We are focused on the health and safety of all those we serve our customers, our communities, our employees, and our suppliers.

We are supporting our customers according to their priorities and working with them to the degree that we can offer relief in the form of delayed shipments.

We are focused on continuity of supply by working with our suppliers.

To date, a total of six of our employees including one temporary agency worker have tested positive for COVID-19 and all of them have made full recoveries and returned to work as of August 18, 2020.

While the COVID-19 pandemic did not materially adversely affect our financial results and business operations in our fiscal year ended June 30, 2020, economic and health conditions in the United States and across much of the globe have changed rapidly since the end of the quarter, and we cannot predict the full impact of the COVID-19 pandemic on our business.

· Multiple, staggered work shifts have been implemented

in order to achieve effective social distancing;

· Provided training, education and appropriate

personal protective equipment;

· Implemented quarterly, then monthly, company-wide

COVID-19 testing through June 2021;

· Daily temperature screenings and personal affidavits

While we have yet to see any

decline in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders.

provide our largest customer with a device used primarily in elective surgeries and although this customer has not requested a reduction

or delay to their planned shipments, if this pandemic continues to adversely impact the United States and other markets where our products

are sold, coupled with the recommended deferrals of elective procedures by governments and other authorities, we would expect to see a

decline in demand from our principal customer.

are focused on the health and safety of all those we serve –

our customers, our communities, our employees, and our suppliers.

are supporting our customers according to their priorities and working with them to the degree that we can offer relief in the form of

delayed shipments.

We are focused on continuity of supply by working with our suppliers, some of whom have delivered our orders late and

are quoting longer lead times.

While the COVID-19 pandemic

did not materially adversely affect our financial results and business operations in our fiscal year ended June 30, 2021, economic and

health conditions in the United States and across much of the globe have changed rapidly since the end of the quarter, and we cannot predict

the full future impact of the COVID-19 pandemic on our business.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S.

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures.

We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

financial statements are prepared in accordance with U.S.

The preparation of our financial statements requires management to make

estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures.

our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results

of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other

Actual results may differ from these estimates.

Revenue Recognition

Effective July 1, 2018, we adopted new revenue recognition guidance issued by the Financial Accounting Standards Board (FASB) related to contracts with customers.

Under Accounting Standards Update (ASU) 2014-09, (Topic 606) Revenue From Contracts with Customers , we recognize revenue from the sales of products and services by applying the following steps:

Under Accounting Standards Update

(“ASU”) 2014-09, (Topic 606) “

Revenue From Contracts with Customers ,”

we recognize revenue from the sales

of products and services by applying the following steps:

(1) identify the contract with a customer;

(2) identify the performance obligations in the contract;

(2) identify the performance obligations

in the contract;

(3) determine the transaction price;

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and (5) recognize revenue when each performance obligation is satisfied.

We utilized the modified retrospective method of adoption and there was no impact on our financial statements as a result of adopting Topic 606 for the year ended June 30, 2019.

We primarily sell finished products and recognize revenue at point of sale or delivery and the timing of revenue recognition has not changed with the adoption of the new guidance.

However, we also perform services when we are engaged to design a product for a customer and there is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts.

In fiscal 2020, the revenue from NRE and Prototypes represents approximately 2% of total revenue.

Returns of our product for credit are not material;

We primarily sell finished products and recognize revenue at

point of sale or delivery.

However, we also perform services when we are engaged to design a product for a customer and there is more

judgment involved in determining the amount and timing of revenue recognition under those types of contracts.

In fiscal 2021, the revenue

from NRE and Prototype services represents approximately 1% of total revenue.

Returns of our product for credit

are not material;

accordingly, we do not establish a reserve for product returns at the time of sale.

Estimated Losses on Product Development Services

Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated quarterly.

and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated

An expected loss on development service contracts is recognized immediately in cost of sales.

Owing to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment.

It is based upon the knowledge and experience of our project managers, engineers, and finance professionals.

Factors that are considered in estimating the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts include the nature and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals.

Most of our products are sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale.

At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return rates and repair costs, which factors are reviewed quarterly.

Warranty expenses, including changes of estimates, are included in cost of sales in our statements of operations.

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.

Reductions to estimated net realizable value are recorded, and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the ensuing 12 months from the measurement date.

Losses recorded in fiscal 2021

and 2020 related to these services totaled $71,000 and $370,000, respectively.

to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment.

upon the knowledge and experience of our project managers, engineers, and finance professionals.

Factors that are considered in estimating

the cost of work to be completed and ultimate profitability of the fixed price product development portion of development and supply contracts

include the nature and complexity of the work to be performed, availability and productivity of labor, the effect of change orders, the

availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals.

Most of our products are sold

with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale.

At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return

rates and repair costs, which factors are reviewed quarterly.

Warranty expenses, including

changes of estimates, are included in cost of sales in our statements of operations.

Inventories are stated at the

lower of cost (first-in, first-out method) or net realizable value.

Reductions to estimated net realizable value are recorded, and charged

to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over

the ensuing 12 months from the measurement date.

Accounts Receivable

Trade receivables are stated at their original invoice amounts, less an allowance for doubtful portions of such accounts.

Management determines the allowance for doubtful accounts based on facts and circumstances related to specific accounts, and on historical experience related to the age of accounts.

Trade receivables are written off when deemed uncollectible.

Recoveries of trade receivables previously reserved are offset against the allowance when received.

Trade receivables are stated

at their original invoice amounts, less an allowance for doubtful portions of such accounts.

Management determines the allowance for doubtful

accounts based on facts and circumstances related to specific accounts, and on historical experience related to the age of accounts.

receivables are written off when deemed uncollectible.

Recoveries of trade receivables previously reserved are offset against the allowance

when received.

Deferred Costs

Deferred costs reflect costs incurred related to non-recurring engineering services under the terms of the related development and supply contracts.

These costs get recorded to cost of sales in the period that the revenue is recognized.

Investments consist of marketable equity securities of publicly held companies.

The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized.

Investments are marked to market at each measurement date, with unrealized gains and losses, net of income taxes, presented as adjustments to accumulated other comprehensive income or loss.

We hold investments in the common stock of public companies that are thinly traded.

Deferred costs reflect costs

incurred related to non-recurring engineering services under the terms of the related development and supply contracts.

These costs get

recorded to cost of sales in the period that the revenue is recognized.

Investments consist of marketable

equity securities of publicly held companies.

The investments were made to realize a reasonable return, although there is no assurance

that positive returns will be realized.

Investments are marked to market at each measurement date, with unrealized gains and losses, net

of income taxes, presented as adjustments to accumulated other comprehensive income or loss.

Some of our investments include the common

stock of public companies that are thinly traded.

These investments are classified as long-term in nature, as we may not be able to liquidate

the investments in a timely manner even if we wish to sell them.

These investments were subject to an independent valuation as of June

30, 2021 and 2020.

Long-lived Assets

We review the recoverability of long-lived assets, consisting of equipment and leasehold improvements, when events or changes in circumstances occur that indicate carrying values may not be recoverable.

Equipment and leasehold improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods:

We review the recoverability

of long-lived assets, consisting of building, equipment, and improvements, when events or changes in circumstances occur that indicate

carrying values may not be recoverable.

Building, equipment, and improvements

are recorded at historical cost and depreciation is provided using the straight-line method over the following periods:

Three to ten years

Leasehold improvements

Shorter of the lease term or the assets estimated useful life

Other intangibles consist of legal fees incurred in connection with patent applications.

The legal fees will be amortized over the estimated life of the product(s) that will be utilizing the technology, or expensed immediately in the event the patent office denies the issuance of the patent.

The expense associated with the amortization of the patent costs is recognized in research and development costs.

We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.

Deferred tax assets at June 30, 2020 and 2019, consisted primarily of basis differences related to unrealized gain/loss related to investments, fixed assets, accrued expenses and inventories.

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 on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which deferred tax assets will be recoverable.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, and results of recent operations.

The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business.

In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

Results of Operations for the Fiscal Year Ended June 30, 2020 Compared to the Fiscal Year Ended June 30, 2019

The following tables set forth results from continuing operations for the fiscal years ended June 30, 2020 and 2019:

Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life

intangibles consist of legal fees incurred in connection

with patent applications.

The legal fees will be amortized over the estimated life of the product(s) that will be utilizing the technology

or expensed immediately in the event the patent office denies the issuance of the patent.

The expense associated with the amortization

of the patent costs is recognized in research and development costs.

We recognize deferred tax assets

and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along

with net operating loss and tax credit carryovers.

Deferred tax assets at June 30, 2021 and 2020 consisted primarily of basis differences

related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses and inventories.

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

on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which deferred

tax assets will be recoverable.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative

evidence, including reversals of deferred tax liabilities, projected future taxable income, and results of recent operations.

The assumptions

about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying

In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income

Results of Operations for the Fiscal Year Ended June 30, 2021

Compared to the Fiscal Year Ended June 30, 2020

The following tables set forth results from continuing operations for

the fiscal years ended June 30, 2021 and 2020:

Years Ended June 30,

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Income tax expense

The majority of our revenue is derived from designing, developing, and manufacturing powered surgical instruments for medical device original equipment manufacturers and rotary air motors.

The proportion of total sales by product/service type is as follows:

majority of our revenue is derived from designing, developing, and manufacturing powered

surgical instruments for medical device original equipment manufacturers.

We also manufacture and

sell rotary air motors to a wide range of industries.

The proportion of total sales by product/service

type is as follows:

Years Ended June 30,

(Decrease) From 2019 To 2020

Dollars in thousands

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Discounts & Other

Net sales in fiscal 2020 increased by $7.7 million, or 28%, as compared to fiscal 2019, due primarily to an increase in repair revenue of $5.2 million generated mostly from our largest customer.

During fiscal 2020, sales to our largest customer increased by $5.6 million to $22.7 million, up from $17.1 million in fiscal 2019.

We manufacture a surgical handpiece designed to be used in orthopedic surgery applications for this customer and we have continued to see increased demand from this customer.

Sales of our industrial and scientific products, which consists primarily of our compact pneumatic air motors, decreased $153,000, or 16% for fiscal 2020 compared to fiscal 2019.

The revenue decline relates to a lack of marketing efforts for these legacy products.

Our dental and component revenue is generated from sales to many distributors and end-users whose purchasing activity can vary widely from year to year.

These are legacy products which have not had a product line refresh in several years.

In January 2018, we sent notifications to our dental product customers that we were discontinuing the manufacture of these products and that same month we accepted final purchase orders to be fulfilled over the next six months.

At this point we are focusing our product development and sales efforts almost exclusively on our medical device products, which prompted our decision to terminate the sales of our dental products.

Sales of our dental products and components have declined as we are no longer manufacturing this line of products, but rather are simply selling remaining component inventory.

The cessation of our dental line of products is not expected to have a material impact on our financial position or results of operations.

Our fiscal 2020 repair revenue has increased approximately $5.2 million, or 458%, over fiscal 2019 to $6.3 million, due largely to repairs of the orthopedic device we sell to our largest customer.

Typically, upon initial product launch, repair revenue is minimal as most repairs are typically covered under warranty, but as the products mature in the marketplace and after a certain number of routine duty cycles in the operating room, repairs generally increase.

We expect similar repair revenue in fiscal 2021.

At June 30, 2020, we had a backlog of $7.0 million compared with a backlog of $17.7 million at June 30, 2019.

Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts.

Our entire backlog at June 30, 2020, as well as purchase orders received and yet to be received subsequent to June 30, 2020, is expected to be delivered during fiscal 2021.

We have experienced, and may continue to experience, variability in our new order bookings due to, among other reasons, the launch of new products, the timing of customer orders based on end-user demand, and customer inventory levels.

We do not typically experience seasonal fluctuations in our shipments and revenues.

sales in fiscal 2021 increased by $3.2 million, or 9%, as compared to fiscal 2020, due primarily to an increase

in medical device revenue of $5.5 million generated mostly from our second largest customer offset by a $1.4 million reduction in repair

During fiscal 2021, sales to our second largest customer increased by $4.2 million to $10.1 million, up from $5.9 million in

fiscal 2020, primarily due to increased sales of the thoracic driver that was launched in the third quarter of fiscal 2020.

our medical device sales by type is as follows:

Years Ended June 30,

Dollars in thousands

% of Net Sales

Medical device sales:

Sales of our industrial and scientific

products, which consist primarily of our compact pneumatic air motors, increased $67,000,

or 9%, for fiscal 2021 compared to fiscal 2020.

The revenue increase relates to a continued interest in these legacy products, but is

not due to any substantive marketing efforts .

Sales of our dental products

and components in fiscal 2021 declined $98,000, or 38%, as compared to fiscal 2020, and we expect future declines in this area as we are

no longer manufacturing dental products, but rather are simply selling remaining component inventory.

fiscal 2021 repair revenue has decreased approximately $1.4 million, or 22%, over fiscal 2020 to $5.0 million, due to decreased repairs

of the orthopedic handpiece we sell to our largest customer.

We expect repair revenue to continue to decrease based upon a downward trend

we have seen in the volume of repairs of this orthopedic handpiece.

At June 30, 2021, we had

a backlog of $9.7 million compared with a backlog of $7.0 million at June 30, 2020.

Our backlog represents firm purchase orders received

and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts.

backlog at June 30, 2021, as well as certain purchase orders received subsequent to June 30, 2021, are expected to be delivered during

We have experienced, and may continue to experience, variability in our new order bookings due to, among other reasons, the

launch of new products, the timing of customer orders based on end-user demand, and customer inventory levels.

We do not typically experience

seasonal fluctuations in our shipments and revenues.

Cost of Sales and Gross Margin

Years Ended June 30,

Increase (Decrease) From 2019 To 2020

Dollars in thousands

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Total cost of sales

Cost of sales in fiscal 2020 increased $4.3 million, or 25%, from fiscal 2019, primarily due to the increase in product costs, consistent with the 28% increase in net sales.

During fiscal 2020, we incurred costs of $1.2 million to generate $834,000 in revenue related to NRE and Proto-type services, netting losses in the amount of $370,000 from the development services portion of certain contracts compared to none in fiscal 2019.

During fiscal 2020, we experienced over-absorption of manufacturing costs compared to an under-absorption in fiscal 2019, due primarily to adjustments to our standard labor and overhead rates at the beginning of fiscal 2020 in anticipation of higher manufacturing volumes.

Costs related to inventory and warranty charges remained relatively flat in fiscal 2020 compared to fiscal 2019.

Operating Expenses

Cost of sales in fiscal 2021

increased $2.8 million, or 13%, from fiscal 2020, primarily due to the increase in product costs, consistent with the 9% increase

in net sales.

During fiscal 2021, we incurred costs of $395,000 to generate $324,000 in revenue related to NRE and Prototype services,

netting losses in the amount of $71,000 compared to $370,000 in fiscal 2020.

During fiscal 2021, we experienced a $370,000 under-absorption

of manufacturing costs compared to a $140,000 over-absorption in fiscal 2020, due primarily to reduced

production hours in fiscal 2021 resulting in part from paid absences related to COVID-19 .

Costs related to inventory and warranty

charges increased $372,000 in fiscal 2021 compared to fiscal 2020.

Both inventory and warranty related

expenses tend to increase in periods of higher volume sales and in periods with higher product development activity.

Years Ended June 30,

(Decrease) From 2019 To 2020

(Dollars in thousands)

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Research and development costs

Selling expenses consist of salaries and other personnel-related expenses related to our business development department, as well as trade show attendance, advertising and marketing expenses, and travel and related costs incurred in generating and maintaining customer relationships.

Selling expenses increased $162,000, or 39%, compared to fiscal 2019, primarily related to increased personnel expenses in the amount of $95,000 as well as consulting expenses of $96,000, offset by decreases in recruitment fees of $40,000 due to filling the previously vacant position of Director of Business Development during the first quarter of fiscal 2019.

General and administrative expenses (G&A) consist of salaries and other personnel-related expenses for corporate, accounting, finance, and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors fees, and costs associated with being a public company.

The $697,000 increase in G&A expenses from fiscal 2019 to 2020 is due primarily to $277,000 in increased fiscal 2020 bonus accruals, $93,000 in increased personnel expenses, $249,000 in increased equity compensation expense due to the reallocation of previously forfeited performance awards, and increased professional fees related to outsourced information technology services and audit fees in the amount of $85,000.

Research and development costs consist of salaries and other personnel-related costs of our product development and engineering personnel, related professional and consulting fees, and costs related to intellectual property, laboratory usage, materials, and travel and related costs incurred in the development and support of our products.

The $433,000 increase in research and development costs from fiscal 2019 to fiscal 2020 is due primarily to increased personnel-related costs in the amount of $386,000 and increased recruiting expenses as we hired new engineers during the fiscal 2020.

Although the majority of our research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product roadmap to develop future products.

Research and development costs represent between 38% and 39% of total operating expenses during fiscal 2019 and 2020 and are expected to increase in the future as we continue to invest in product development.

The amount spent on projects under development is summarized below (in thousands):

Selling expenses consist of

salaries and other personnel-related expenses related to our business development department, as well as trade show attendance, advertising

and marketing expenses, and travel and related costs incurred in generating and maintaining customer relationships.

Selling expenses increased

$13,000, or 2%, compared to fiscal 2020, primarily related to severance accruals in the amount of $43,000 offset by decreases in travel

expenses due to the COVID-19 pandemic.

We expect a decrease in selling expenses in the near term as we have filled the vacancy caused

by the departure of our Director of Business Development late in the fourth quarter of fiscal 2021, with our Director of Engineering,

who already had a close working relationship with most of our significant customers and prospects.

General and administrative expenses

(“G&A”) consist of salaries and other personnel-related expenses for corporate, accounting, finance, and human resource

personnel, as well as costs for outsourced information technology services, professional fees, directors’

fees, and costs associated

with being a public company.

The $887,000 increase in G&A expenses from fiscal 2020 to 2021 is due primarily to $615,000 in increased

stock compensation expense related to non-qualified stock options awarded in fiscal 2021.

We also incurred $267,000 in expenses related

to operating the Franklin Property while we complete its build-out.

We incurred no similar expenses during the prior fiscal year, as we

purchased the Franklin Property during the second quarter of fiscal 2021.

Research and development costs

generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel, as

well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials,

and travel and related costs incurred in the development and support of our products.

Research and development costs increased $2.1 million

from fiscal 2020 to 2021 due to $1.0 million in increased personnel-related expense primarily due to increased engineering consultants

and $1.2 million in increased spending on internal product development projects.

Although the majority of our

research and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created

a product roadmap to develop future products.

Research and development costs represent between 38% and 48% of total operating expenses

during fiscal 2020 and 2021 and are expected to increase in the future as we continue to invest in product development.

The amount spent

on projects under development is summarized below (in thousands):

Years Ended June 30,

Market Launch

Estimated Annual

Dollars in thousands

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Products in development:

Thoracic Driver

Arthroscopic Shaver (1) .

Arthroscopic Attachment

Vital Ventilator

Sustaining & Other

We substantially completed this product and began initial shipments of a private-labeled version to an existing CMF customer beginning in the third quarter of fiscal 2020, generating $3.1 million in revenue during fiscal 2020.

This project has been internally pushed back to focus on our new internal Pro-Dex branded ENT shaver.

Internal development of this project is complete, but we are looking for the most attractive sales channel and have yet to sell this product.

As we previously discussed, in early fiscal 2019 we entered a development contract with a current significant customer to private-label our thoracic driver for their unique specifications.

We shipped initial launch quantities of this product during the third quarter ended March 31, 2020.

Additionally, the customer CMF driver listed in the prior year was completed during fiscal 2020 and we began shipping initial quantities to this customer during the fourth quarter of fiscal 2020 and generated $556,000 in revenue related to this new product.

Approximately $6,000 in expenses included in fiscal 2020 sustaining and other is related to the Jet Propulsion Laboratorys Ventilator Intervention Technology Accessible Locally (VITAL), a high-pressure, lower cost ventilator.

In the fourth quarter, we were one of eight US-based companies awarded a license to manufacture the VITAL.

We are currently in the process of creating proto-types for testing and look forward to adding this as a formal product under development in our next fiscal quarter.

We are excited about the opportunity to commercialize this product, which may alleviate some of the ventilator supply chain shortages experienced by hospitals during the COVID-19 pandemic.

(1) Represents the calendar quarter of expected market launch.

(2) The CMF Driver was completed in the third quarter of fiscal 2021 and shipped to our existing largest customer

under a distribution agreement we executed in the first quarter of fiscal 2021.

We generated revenue of $220,000 related to these initial

shipments during the third quarter ended March 31, 2021.

This project is now complete and future engineering expenses related to this

project will be included in sustaining and other engineering expenses.

As we introduce new products

into the market, we expect to see an increase in sustaining and other engineering expenses.

Typical examples of sustaining engineering

activities include, but are not limited to, end-of- life component replacement, especially in electronic components found in our printed

circuit board assemblies, analysis of customer complaint data to improve process and design, replacement and enhancement of tooling and

fixtures used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Additionally, these

costs include development projects that may be in their infancy and may or may not result in a full-fledged product development effort.

Other Income (Expense)

Interest and Dividend Income

Our interest and dividend income earned in fiscal 2020 includes $95,000 earned from our interest-bearing money market accounts and portfolio of equity investments.

The fiscal 2019 interest and dividend income included $183,000 of interest related to an investment in a hotel as well as $83,000 of interest and dividend income earned from our interest-bearing money market accounts and portfolio of equity investments.

During the fourth quarter of fiscal 2020, the Monogram Orthopaedics Inc.

(Monogram) note was repaid with interest and we collected a total of $952,000 during fiscal 2020.

We invested in Monogram, a medical device start-up specializing in precision, patient-specific orthopedic implants in April 2017.

In conjunction with making the loan to Monogram, we were granted the exclusive right to develop, engineer, manufacture, and supply certain products on behalf of Monogram.

We impaired our entire $800,000 investment during the fourth quarter of fiscal 2018 due to indications that Monogram had exhausted its cash and had been unable to obtain additional financing to enable continued research to commercialize their technology.

Our interest and dividend income

earned in fiscal 2021 and 2020 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

During the fourth quarter of

fiscal 2020, the Monogram Orthopaedics Inc.

(“Monogram”) note was repaid with interest and we collected a total of $952,000

during fiscal 2020.

Gain on Sale of Investments

During the fourth quarter of fiscal 2020, we liquidated one of the stocks in our portfolio of equity investments receiving proceeds of $128,000 and recording a gain of $25,000.

During the quarter ended December 31, 2018, we liquidated one of the stocks in our portfolio of equity investments receiving proceeds of $1.9 million and recording a gain on the sale in the amount of $356,000.

During fiscal 2021, we liquidated

some of the investments in our portfolio of equity investments receiving proceeds of $4.6 million and recording a gain of $1.3 million.

During the fourth quarter of fiscal 2020, we liquidated one of the stocks in our portfolio of equity investments receiving proceeds of

$128,000 and recording a gain of $25,000.

Interest Expense

Interest expense incurred in fiscal 2020 and 2019, consists primarily of interest expense related to the Term Loan from Minnesota Bank & Trust (MBT) described more fully in Note 6 to the Financial Statements contained elsewhere in this report and capital lease obligations for leased equipment.

The effective tax rate for the years ended June 30, 2020 and 2019, was consistent at 23% and 24%, respectively.

Interest expense incurred in

fiscal 2021 and 2020 consists primarily of interest expense related to our debt with Minnesota Bank & Trust (“MBT”) described

more fully in Note 6 to the consolidated financial statements contained elsewhere in this report.

effective tax rate for the fiscal years ended June 30, 2021 and 2020, decreased slightly from 23% to 21% due to increases in our research

and development credit and tax benefits related to stock compensation, as well as, reduced state income taxes resulting from a shift in

nexus to states with a more favorable tax rate.

Liquidity and Capital Resources

The following table is a summary of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30, 2020 and 2019:

following table is a summary of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30,

2021 and 2020:

As of and for the Years

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Cash Flows from Operating Activities

Cash provided by operating activities during fiscal 2020 relates primarily to our net income of $6.1 million, the non-cash depreciation and amortization and stock compensation expense of $573,000 and $286,000, respectively, offset by a gain on collection of a note receivable in the amount of $952,000, an increase in inventory in the amount of $2.0 million due to projected increased demand relating to two of our newest product launches, and an increase in accounts receivable in the amount of $1.1 million.

Offsetting the use of cash for inventory purchases and accounts receivable increases, our accounts payable, accrued expenses and deferred rent increased by $604,000 and our income taxes payable increased by $642,000, while our prepaid expenses and other assets decreased by $476,000.

Cash provided by operating activities during fiscal 2019 was $3.3 million and relates primarily to our net income of $4.1 million, non-cash depreciation and amortization in the amount of $438,000, and the non-cash decrease in the deferred income taxes of $1.4 million, offset by an increase in inventory in the amount of $1.8 million due to projected increased sales, and an increase in accounts receivable of $1.1 million.

used in operating activities during fiscal 2021 totaled $2.1 million.

Our net income was $4.5 million and included $1.3 million of gains

on the sales of certain equity investments and $901,000 of non-cash stock compensation.

Offsetting this net inflow of cash, our accounts

receivable balance increased by $5.8 million primarily because our largest customer changed their payment terms from net 30 to net 90

in conjunction with a contract extension.

Cash provided by operating activities

during fiscal 2020 relates primarily to our net income of $6.1 million, the non-cash depreciation and amortization and stock compensation

expense of $573,000 and $286,000, respectively, offset by a gain on collection of a note receivable in the amount of $952,000, an increase

in inventory in the amount of $2.0 million due to projected increased demand relating to two of our newest product launches, and an increase

in accounts receivable in the amount of $1.1 million.

Offsetting the use of cash, our accounts payable, accrued expenses and deferred

rent increased by $604,000 and our income taxes payable increased by $642,000, while our prepaid expenses and other assets decreased by

Cash Flows from Investing Activities

Net cash used in investing activities in fiscal 2020 was $2.3 million and related primarily to the purchase of $2.8 million in marketable equity securities as well as purchases of $519,000 in equipment and leasehold improvements offset by the collection of a previously impaired note receivable due from Monogram in the amount of $952,000.

Net cash used in investing activities in fiscal 2019 was $1.2 million.

During the 2019 fiscal year, we invested $3.0 million in the purchase of marketable equity securities and generated $1.9 million in proceeds from sales of marketable equity securities under the direction of the Investment Committee of our Board, made capital expenditures in the amount of $1.4 million primarily for manufacturing equipment, and collected $1.2 million from collection of a note receivable.

cash used in investing activities in fiscal 2021 was $3.7 million.

During the 2021 fiscal year, we generated $4.6 million in proceeds

from sales of marketable equity securities under the direction of the Investment Committee of our Board, purchased the Franklin Property

for $6.5 million and made capital expenditures in the amount of $1.8 million primarily for the Franklin Property.

Net cash used in investing activities

in fiscal 2020 was $2.3 million and related primarily to the purchase of $2.8 million in marketable equity securities as well as purchases

of $519,000 in equipment and leasehold improvements offset by the collection of a previously impaired note receivable due from Monogram

in the amount of $952,000.

Cash Flows from Financing Activities

Net cash used in financing activities for fiscal 2020 totaled $4.0 million and related primarily to the $3.4 million repurchase of 231,274 shares of our common stock pursuant to our share repurchase program, as well as $630,000 of principal payments on our term loan from Minnesota Bank and Trust (MBT) and an equipment lease more fully described in Note 6 to the Financial Statements contained elsewhere in this report.

Net cash provided by financing activities for fiscal 2019 included $5.0 million in a term loan from MBT more fully described in Note 6 to the Financial Statements contained elsewhere in this report, offset by $433,000 of principal payments on the MBT term loan and an equipment lease, as well as $4.0 million related to the repurchase of 322,068 shares of our common stock pursuant to our share repurchase program.

cash provided by financing activities for fiscal 2021, totaled $3.1 million and included $9.1 million in various loans from Minnesota

Bank and Trust (“MBT”) more fully described in Note 6 to the consolidated financial statements contained elsewhere in this

report, offset by $5.5 million related to the repurchase of 216,171 shares of our common stock pursuant to our share repurchase program,

$351,000 of principal payments on our loans with MBT, as well as payment of $259,000 of employee payroll taxes related to the award of

40,000 shares of common stock to employees under previously granted performance awards.

Net cash used in financing activities

for fiscal 2020 totaled $4.0 million and related primarily to the $3.4 million repurchase of 231,274 shares of our common stock pursuant

to our share repurchase program, as well as $630,000 of principal payments primarily related to our term loan from MBT more fully described

in Note 6 to the consolidated financial statements contained elsewhere in this report.

Liquidity Requirements for the Next 12 Months

As of June 30, 2020, our working capital was $17.4 million.

We currently believe that our existing cash and cash equivalent balances, together with our account receivable balances, and anticipated cash flows from operations will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months.

We may also borrow against our $2.0 million revolving loan with MBT, which we anticipate renewing (See Note 6 of Notes to Financial statements contained elsewhere in this report).

We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability.

As we execute our current strategy, however, we may require debt and/or equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes.

In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject to extensive variability.

We believe that if we need additional capital to fund our operations, we can borrow against our revolving loan with MBT.

As of June 30, 2021, our working

capital was $19.1 million.

We currently believe that our existing cash and cash equivalent balances, together with our account receivable

balances, and anticipated cash flows from operations will provide us sufficient funds to satisfy our cash requirements as our business

is currently conducted for at least the next 12 months.

We may also borrow against our $2.0 million revolving loan with MBT, which

we anticipate renewing (See Note 6 of notes to consolidated financial statements contained elsewhere in this report).

We are focused on preserving

our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that

we believe will most likely contribute to our profitability.

As we execute our current strategy, however, we may require debt and/or equity

capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes.

In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy

our backlog, which can be subject to extensive variability.

We believe that if we need additional capital to fund our operations, we can

borrow against our revolving loan with MBT, or sell additional shares of our common stock under our ATM Agreement, which is currently

Surplus Capital Investment Policy

During fiscal 2013, our Board approved a Surplus Capital Investment Policy (the Policy) that provides, among other items, for the following:

Determination by our Board of Directors of (i) our surplus capital balance and (ii) the portion of such surplus capital balance to be invested according to the Policy;

Selection of an Investment Committee responsible for implementing the Policy;

Objectives and criteria under which investments may be made.

The Investment Committee is comprised of Messrs.

Swenson (Chair), Cabillot, and Van Kirk.

The Investment Committee approved each of the investments comprising the $4.9 million of marketable public equity securities held at June 30, 2020, which amount includes unrealized holding losses in the amount of $1.6 million at June 30, 2020.

In December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan, authorized by our Board in 2013, authorizing the repurchase of 750,000 shares of common stock was nearing completion.

In accordance with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (10b5-1 Plan or Plan).

During the fiscal year ended June 30, 2020, we repurchased 231,274 shares at an aggregate cost, inclusive of fees under the Plan, of $3.4 million.

During the fiscal year ended June 30, 2019, we repurchased 322,068 shares at an aggregate cost, inclusive of fees under the Plan, of $4.0 million.

On a cumulative basis, we have repurchased a total of 819,325 shares under the share repurchase programs at an aggregate cost, inclusive of fess under the Plan, of $8.5 million.

During fiscal 2013, our Board approved a Surplus Capital

Investment Policy (the “Policy”) that provides, among other items, for the following:

(a) Determination by our Board of Directors of (i)

our surplus capital balance and (ii) the portion of such surplus capital balance to be invested

according to the Policy;

(b) Selection of an Investment Committee responsible

for implementing the Policy;

Investment Committee is comprised of Messrs.

Swenson (Chair) , Cabillot,

and Van Kirk.

The Investment Committee approved

each of the investments comprising the $3.0 million of marketable public equity securities held at June 30, 2021, which amount includes

unrealized holding losses in the amount of $215,000 at June 30, 2021.

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, authorizing the repurchase of 750,000 shares of common stock was nearing

In accordance with, and as part of, these share repurchase programs, our Board has approved the adoption of several

prearranged share repurchase plans intended to qualify for the safe harbor Rule 10b5-1 under the Securities Exchange Act of 1934, as amended

(“10b5-1 Plan”

or “Plan”).

During the fiscal year ended

June 30, 2021, we repurchased 216,171 shares at an aggregate cost, inclusive of fees under the Plan, of $5.5 million.

During the fiscal

year ended June 30, 2020, we repurchased 231,274 shares at an aggregate cost, inclusive of fees under the Plan, of $3.4 million.

cumulative basis, we have repurchased a total of 1,035,496 shares under the share repurchase programs at an aggregate cost, inclusive

of fess under the Plan, of $14.0 million.

All repurchases under the 10b5-1 Plans were administered through an independent broker.

Recent Accounting Pronouncements

On July 1, 2019, we adopted ASU 2016-02, (Topic 842) Leases , using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of fiscal 2020.

The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The impact of adoption was an increase to long-term assets and total liabilities each in the amount of approximately $3.3 million as of July 1, 2019.

On July 1, 2018, we adopted ASU 2014-09, (Topic 606) "

Revenue from Contracts with Customers ."

This guidance outlines a single, comprehensive model of accounting for revenue from contracts with customers.

We adopted the standard using the modified retrospective transition method, under which prior periods were not revised to reflect the impacts of the new standard.

Our revenue is primarily generated from the sale of finished product to customers.

Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer.

We also perform services when we are engaged to design a product for a customer and there is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts.

In fiscal 2020, the revenue from these activities represented approximately 2% of total revenue.

Accordingly, the timing of revenue recognition is not materially impacted by the new standard.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our Financial Statements.

On July 1, 2019, we adopted

ASU 2016-02, (Topic 842) “

Leases ,”

using a modified retrospective approach through a cumulative effect adjustment to

retained earnings as of the beginning of fiscal 2020.

The objective of this update is to increase transparency and comparability among

organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The impact of adoption was an increase to long-term assets and total liabilities each in the

amount of approximately $3.3 million as of July 1, 2019.

No other new accounting pronouncement

issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 5. Market for Registrant’s Common Equity