What changed in this filing

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Item 1. Financial Statements

2023-02-02 compared with 2022-11-03 · 359 added, 251 removed, 321 unchanged (66% of the section changed)

4 unchanged sentences

(In thousands, except share amounts)

September 30,

Current assets:

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts of $ 2 and $ 0 at September 30, 2022 and at June 30, 2022, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 2 and $ 0 at December 31, 2022 and at June 30, 2022, respectively

Deferred costs

9 unchanged sentences

Accounts payable

Accrued liabilities

Accrued expenses

Income taxes payable

Deferred revenue

Notes payable

Total current liabilities

4 unchanged sentences

Shareholders’ equity:

Common stock;

Common shares;

no par value;

50,000,000 shares authorized;

3,606,422 and 3,596,131 shares issued and outstanding at September 30, 2022 and June 30, 2022, respectively

3,553,929 and 3,596,131 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively

Retained earnings

5 unchanged sentences

AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except share and per share

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share

Three Months Ended

September 30,

Six Months Ended

Cost of sales

5 unchanged sentences

Operating income

Other income (expense):

Interest and dividend income

Realized gain on sale of marketable equity investments

Unrealized gain on marketable equity investments

Interest expense

Total other income

Unrealized gain (loss) on marketable equity investments

Interest and other income

Gain on sale of investments

Income before income taxes

Provision for income taxes

Basic and diluted net income per share:

Income tax expense

Basic net income per share:

9 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

Common stock:

1 unchanged sentence

Share-based compensation expense

Stock option exercise

Share repurchases

Shares withheld from common stock issued to employees to pay employee payroll taxes

Exercise of stock options

ESPP shares issued

2 unchanged sentences

Balance, beginning of period

Balance, at end of period

Balance, end of period

Balance, beginning of period

6 unchanged sentences

(In thousands)

Three Months Ended

September 30,

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

6 unchanged sentences

Gain on sale of investments

Impairment of long-lived assets

Deferred income taxes

1 unchanged sentence

Changes in operating assets and liabilities:

Accounts receivable and other receivables

Accounts receivable

Deferred costs

5 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of equipment and improvements

Purchases of investments

Increase in intangibles

Purchases of equipment and improvements

Proceeds from sale of investments

Increase in intangibles

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments on notes payable

Proceeds from Minnesota Bank & Trust loans, net of origination fees

Proceeds from stock option exercises and ESPP contributions

Payments of employee taxes on net issuance of common stock

Repurchases of common stock

Proceeds from exercise of options and ESPP contributions

Payment of employee payroll taxes on net issuance of common stock

Proceeds from Minnesota Bank & Trust revolving loan

Principal payments on notes payable and revolving loan

Net cash used in financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

5 unchanged sentences

(In thousands)

Three Months Ended

September 30,

Six Months Ended

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Non-cash investing and financing activity:

Cashless stock option exercise

Cash paid during the period for:

Income taxes, net of refunds

The accompanying notes are an integral part of

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BASIS OF PRESENTATION

accompanying unaudited condensed consolidated financial statements of Pro-Dex, Inc.

(“we,” “us,” “our,”

“Pro-Dex,” or the “Company”) have been prepared in accordance with accounting principles

generally accepted in the United States (“U.S.

GAAP”) for interim financial information and with the instructions to Form 10-Q and

Regulation S-K.

Accordingly, they do not include all of the information and footnotes required

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.

for interim financial information and the instructions to Form 10-Q and Regulation S-K.

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.

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.

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.

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.

DESCRIPTION OF BUSINESS

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We also manufacture and sell rotary air motors to a wide range of industries.

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.

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.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the

2 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

Over-time revenue recognition

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based on costs incurred compared to the estimated total costs upon completion.

During the three months ended September 30, 2022 and 2021,

During the three and six months ended December 31, 2022,

we recorded $ 312,000 and $ 862,000 , respectively, of revenue that had been included in deferred revenue in the prior year.

The revenue recognized

from the contract liabilities consisted of satisfying our performance obligations during the normal course of business.

Our entire deferred

revenue balance of $ 851,000 at September 30, 2022, is currently expected to be recognized in the next 12-months.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize our

contract assets and liability balances (in thousands):

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.

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

1 unchanged sentence

Three Months Ended

September 30,

As of and for the

Six Months Ended

Contract assets beginning balance

3 unchanged sentences

Contract assets ending balance

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the

Three Months Ended

September 30,

As of and for the

Six Months Ended

Contract liabilities beginning balance

2 unchanged sentences

Contract liabilities ending balance

COMPOSITION OF CERTAIN FINANCIAL STATEMENT

are stated at fair market value and consist of the following (in thousands):

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

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

Raw materials/purchased components

Work in process

Sub-assemblies/finished components

Finished goods

Total inventory

are stated at market value and consist of the following (in thousands):

Schedule of investments

September 30,

Marketable equity securities - short-term

1 unchanged sentence

Total marketable equity securities

at September 30, 2022 and June 30, 2022 had an aggregate cost basis of $ 2,714,000 and $ 2,796,000 ,

at December 31, 2022 and June 30, 2022 had an aggregate cost basis of $ 2,714,000 and $ 2,796,000 ,

respectively.

We classified certain investments as long-term in nature because if we decide to sell these securities we may not be able

to sell our position within one year.

At September 30, 2022, the investments included unrealized losses of $ 12,000 (gross

unrealized losses of $ 325,000 offset by gross unrealized gains of $ 313,000 ) .

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 ).

the total marketable equity securities at September 30, 2022 and June 30, 2022, $ 813,000 and $ 755,000 , respectively, represent an investment

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 ).

2022, the investments included net unrealized losses of $ 262,000 (gross unrealized losses of $ 369,000

offset by gross unrealized gains of $ 107,000 ).

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.

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We invest surplus cash from time

to time through our Investment Committee, which is comprised of one management director, Mr.

Van Kirk, and two non-management directors,

Cabillot and Mr.

Swenson, who chairs the committee.

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.

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.

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

Raw materials/purchased components

Work in process

Sub-assemblies/finished components

Finished goods

Total inventory

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

accumulated depreciation

Land and building

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 consist

1 unchanged sentence

Schedule of intangibles

September 30,

Patent-related costs

4 unchanged sentences

the issuance of the patent.

Future amortization expense is estimated to be $ 27,000 for the balance of fiscal 2023 and annually through

All remaining costs are expected to be fully amortized within 3 years and nine months.

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 balance sheets.

As of September 30, 2022 and June 30, 2022, the warranty reserve amounted to $ 366,000

and $ 340,000 , respectively.

Warranty expenses are included in cost of sales in the accompanying statements of operations.

Changes in estimates

to previously established warranty accruals result from current period updates to assumptions regarding repair costs and warranty return

rates and are included in current period warranty expense.

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.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 months ended September 30, 2022 and 2021 are as follows (in thousands):

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

1 unchanged sentence

Three Months Ended

September 30,

As of and for the

Six Months Ended

Beginning balance

1 unchanged sentence

Changes in estimates of prior period warranty accruals

Warranty amortization/utilization

Warranty amortization

Ending balance

2 unchanged sentences

share by dividing net income by the weighted-average number of common shares outstanding during the reporting period.

Diluted income per

share reflects the effects of potentially dilutive securities, which consist entirely of outstanding stock options and performance awards.

The 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 income per share computations.

In the tables below, income amounts represent

the numerator, and share amounts represent the denominator (in thousands, except per share amounts):

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

Schedule of weighted average shares outstanding calculation of basic and diluted per share

Three Months Ended

September 30,

Six Months Ended

Weighted average shares outstanding

Basic earnings per share

Basic income per share

Weighted average shares outstanding

1 unchanged sentence

Weighted average shares used in calculation of diluted earnings per share

Diluted earnings per share

Diluted income per share

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

income taxes are provided on a liability method whereby deferred tax assets and liabilities

1 unchanged sentence

differences are the differences between the reported amounts of assets and liabilities and

their tax bases.

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.

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

2 unchanged sentences

deferred tax assets.

Such determination is based primarily on our historical taxable income or loss, with some consideration given to

our estimates of future taxable income or loss

by jurisdictions in which we operate and the period over which our deferred tax assets would be recoverable.

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 September 30, 2022 and 2021,

As of December 31, 2022 and 2021,

we recognized accrued interest of $ 54,000 and $ 61,000 , respectively, related to unrecognized tax benefits.

Our effective tax rate

for the three months ended September 30, 2022 and 2021, is 17 % and 22 %, respectively.

The current year effective tax rate is less than

the prior year rate due primarily to a tax benefit recognized as a result of the common stock awarded to our employees under previously

granted performance awards (see Note 8).

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2018 and

However, because of our prior net operating losses and research credit carryovers, our tax years from June 30, 2007 are open to

We do not anticipate a significant change to the

total amount of unrecognized tax benefits within the next 12 months.

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.

SHARE-BASED COMPENSATION

Through 2014, we had

Through June 2014, we had

two equity compensation plans, the Second Amended and Restated 2004 Stock Option Plan (the “Employee Stock Option Plan”) and

8 unchanged sentences

stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards, and other stock-based awards.

As of September 30, 2022, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive

As of December 31, 2022, 200,000 performance awards and 372,000 non-qualified stock options have been granted under the 2016 Equity Incentive

Former Stock Option Plans

There were no stock options granted

during the three months ended September 30, 2022 and 2021.

As of September

30, 2022, there was no unrecognized compensation cost under our Former Stock Option Plans as all outstanding

stock options under those plans are fully vested.

As of September 30, 2022, there were 1,500 options outstanding under our Former

Stock Option Plans at a weighted-average exercise price of $ 2.14 per share.

These outstanding options had a weighted-average remaining

contractual life of 0.35 years and an intrinsic value of $ 23,000 .

During the first quarter ended September 30, 2022 and 2021, 5,000 and

25,000 options under our Former Stock Option Plans were exercised, at exercise prices of $ 1.73 and $ 1.80 per share, respectively.

were granted under the Former Stock Option Plans during the three or six months ended December 31, 2022 and 2021.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

remaining stock options outstanding under the Former Stock Option Plans were exercised during the six months ended December 31,

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,

Number of Shares

Weighted-Average

Exercise Price

Number of Shares

Weighted-Average

Exercise Price

Outstanding at July 1,

Options granted

Options exercised

Options forfeited

Outstanding at end of period

Stock Options Exercisable at December 31,

Performance Awards

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using the weighted average fair market value for each award, using a Monte Carlo simulation.

We recorded share-based compensation expense

of $ 30,000 and $ 21,000 for the three months ended September 30, 2022 and 2021, respectively, related to these performance awards.

30, 2022, there was approximately $ 292,000 of unrecognized compensation cost related to these non-vested performance awards, which is

expected to be expensed over the weighted-average period of 2.76 years.

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

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

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The vesting of these stock options is tied to the completion of service periods that range from 18 months to 10.5

years at inception and the achievement of our common stock trading at certain pre-determined prices.

We recorded compensation expense

of $ 171,000 and $ 274,000 for the three months ended September 30, 2022 and 2021, respectively, related to these options.

The weighted-average

fair value of the stock option awards granted was $ 16.72 , calculated using a Monte Carlo simulation.

As of September 30, 2022, none of

these stock options had vested and there was approximately $ 2.9 million of unrecognized compensation cost related to these non-vested

non-qualified stock options.

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

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

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The ESPP was approved by our shareholders at our 2014 Annual Meeting.

During the first quarters ended

September 30, 2022 and 2021, 2,503 and 1,130 shares were purchased, respectively, under the ESPP and allocated to employees based upon

their contributions at discount prices of $ 13.52 and $ 26.17 , respectively, per share.

On a cumulative basis, since the inception of the

ESPP plan, employees have purchased a total of 29,542 shares.

During the three months ended September 30, 2022 and 2021, we recorded stock

compensation expense in the amount of $ 6,000 and $ 5,000 , respectively, relating to the ESPP.

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.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAJOR CUSTOMERS & SUPPLIERS

MAJOR CUSTOMERS AND SUPPLIERS

with respect to customers that accounted for sales in excess of 10% of our total sales in

either of the three-month periods ended September 30,

2022 and 2021 is as follows (in thousands, except percentages):

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

Months Ended September 30,

Total revenue

Three Months Ended December 31,

Percent of Total

Customer concentration:

with respect to accounts receivable from those customers that comprised more than 10 % of our gross accounts receivable at either

September 30, 2022 and June 30, 2022 is as follows (in thousands, except percentages):

Six Months Ended December 31,

Percent of Total

Customer concentration:

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

Customer concentration:

During the three months ended September

30, 2022 and 2021, we had three suppliers that each accounted for more than 10% of total inventory purchases.

Amounts owed to the fiscal

2022 significant suppliers at September 30, 2022 totaled $970,000, $266,000 and $368,000, respectively, and at June 30, 2022 totaled $721,000,

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.

NOTES PAYABLE AND FINANCING TRANSACTIONS

Minnesota Bank & Trust (“MBT”)

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES PAYABLE

AND FINANCING TRANSACTIONS

Minnesota Bank & Trust

November 6, 2020 (the “Closing Date”), PDEX Franklin, a newly created wholly owned subsidiary of the Company, purchased an

8 unchanged sentences

We paid loan origination fees to MBT on the Closing Date in the amount of $ 26,037 .

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

is payable monthly beginning on December 1, 2020, and both principal and interest in the amount of approximately $ 30,000 are due and payable

on the first day of each subsequent month until the maturity date of November 1, 2030 (the “Maturity Date”), at which time

a balloon payment in the amount of $ 3.1 million is due.

Any prepayment of the Property Loan (other than monthly scheduled interest and

principal payments), is subject to a prepayment fee equal to 4% of the principal amount prepaid for any prepayment made during the first

or second year, 3% of the principal amount prepaid for any prepayment made during the third or fourth year, 2% of the principal amount

prepaid for any prepayment made during the fifth or sixth year, and 1% of the principal amount prepaid for any prepayment made during

the seventh or eighth year.

The Property Loan Agreement, Property Note, Deed, and Rents Assignment each contain representations, warranties,

covenants, and events of default that are customary for a loan of this type.

The balance owed on the Property Loan at September 30, 2022

was $ 4,889,000 .

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 .

the Closing Date, we also entered into an Amended and Restated Credit Agreement with MBT (the “Amended Credit Agreement”),

providing for a $ 7,525,000 amended and restated term loan (the “Term Loan A”), a $ 1,000,000 term loan (the “Term Loan

B”), and a $ 2,000,000 amended and restated revolving loan (the “Revolving Loan” and, together with the Term Loan A and

the Term Loan B, collectively, the “Loans”), evidenced by an Amended and Restated Term Note A (“Term Note A”),

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.

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

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.

Term Loan A matures on November 1, 2027 , and bears interest at a fixed rate of 3.84 % per annum.

5 unchanged sentences

The balance owed on Term Loan

A as of September 30, 2022, was $ 5,556,000 .

A as of December 31, 2022, is $ 5,317,000 .

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 are due on December 1, 2020 through June 1, 2021.

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

1 unchanged sentence

plus any additional accrued and unpaid interest through the date of payment.

As of March 31, 2021, we had drawn fully against Term Note

B and the balance outstanding on Term Note B was $ 827,000 on September 30, 2022.

Revolving Loan may be borrowed against from time to time through its maturity date of November 5, 2023 , unless earlier terminated pursuant

to its terms, and bears interest at an annual rate equal to the greater of (a) 2.75 % or (b) the prime rate minus 0.5% as published in

the Money Rates section of the Wall Street Journal.

Commencing on the first day of each month after we initially borrow against the Revolving

Loan and each month thereafter until maturity, we are required to pay all accrued and unpaid interest on the Revolving Loan through the

date of payment.

Any principal on the Revolving Loan that is not previously prepaid shall be due and payable in full on the maturity date

(or earlier termination of the Revolving Loan).

The full $ 2,000,000 was drawn and outstanding on the Revolving Loan as of September 30,

payment on 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 the Loans immediately due and payable in full.

Amended Credit Agreement, Security Agreement, Term Note A, Term Note B, and Revolving Note contain representations and warranties, affirmative,

negative and financial covenants, and events of default that are customary for loans of this type.

The balance owing on Term Note B was $ 792,000 on December

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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).

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.

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.

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.

Share Repurchase Program

In December 2019, our Board approved

a new share repurchase program authorizing us to repurchase up to 1 million shares of our common stock, as the prior repurchase plan authorized

by our Board in 2013 was nearing completion.

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

the adoption of several prearranged share repurchase plans intended to qualify for the safe harbor Rule 10b5-1 under the Securities Exchange

Act of 1934, as amended (“10b5-1 Plan” or “Plan”).

During the quarter ended September 30, 2022, we repurchased

20,853 shares at an aggregate cost, inclusive of fees under the plan, of $ 354,000 .

During the quarter ended September 30, 2021, we repurchased

3,616 shares at an aggregate cost, inclusive of fees under the plan, of $ 95,000 .

On a cumulative basis since 2013, we have repurchased

a total of 1,131,599 shares under the share repurchase programs at an aggregate cost, inclusive of fees, of $ 16.0 million.

All repurchases

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

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

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

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.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At The Market Offering Agreement

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.

Our operating lease right-of-use

1 unchanged sentence

The current portion of our operating

lease liability as of September 30, 2022, in the amount of $ 388,000 , is presented within accrued expenses on the condensed consolidated

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 September 30, 2022, our operating

lease has a remaining lease term of five years and an imputed interest rate of 5.53 %.

Cash paid for amounts included in the lease liability

was $ 123,000 for the three months ended September 30, 2022, excluding $ 12,000 paid for common area maintenance charges.

As of September 30, 2022, the maturity

of our lease liability is as follows (in thousands):

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

Total lease payments

3 unchanged sentences

We may be involved from time to

time in legal proceedings arising either in the ordinary course of our business or incidental to our business.

There can be no certainty,

however, that we may not ultimately incur liability or that such liability will not be material or adverse.

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.

SUBSEQUENT EVENTS

We have evaluated subsequent events

through the date of this filing.

There were no subsequent events that require disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements