SEC Info - Pro Dex Inc. - ‘10-K’ for 6/30/22

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		Alternative Formats (Word, et al.) Business Certain Relationships and Related Transactions, and Director Independence Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Directors, Executive Officers and Corporate Governance Disclosure Regarding Foreign Jurisdictions That Prevent Inspections Executive Compensation Exhibits, Financial Statement Schedules Financial Statements and Supplementary Data Form 10-K Summary Item 1 Item 10 Item 11 Item 12 Item 13 Item 14 Item 15 Item 16 Item 1A Item 1B Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B Item 9C Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities Mine Safety Disclosures Other Information Principal Accountant Fees and Services Properties Quantitative and Qualitative Disclosures About Market Risk Reserved Risk Factors Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Unresolved Staff Comments
1	1st Page – Filing Submission
"	Item 1
"	Business
"	Item 1A
"	Risk Factors
"	Item 1B
"	Unresolved Staff Comments
"	Item 2
"	Properties
"	Item 3
"	Legal Proceedings
"	Item 4
"	Mine Safety Disclosures
"	Item 5
"	Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities
"	Item 6
"	Reserved
"	Item 7
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Item 7A
"	Quantitative and Qualitative Disclosures About Market Risk
"	Item 8
"	Financial Statements and Supplementary Data
"	Item 9
"	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"	Item 9A
"	Controls and Procedures
"	Item 9B
"	Other Information
"	Item 9C
"	Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
"	Item 10
"	Directors, Executive Officers and Corporate Governance
"	Item 11
"	Executive Compensation
"	Item 12
"	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"	Item 13
"	Certain Relationships and Related Transactions, and Director Independence
"	Item 14
"	Principal Accountant Fees and Services
"	Item 15
"	Exhibits, Financial Statement Schedules
"	Item 16
"	Form 10-K Summary

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ i No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ i No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ i No ☒

As of December 31, 2021, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing sales price on the Nasdaq Capital Market was approximately $ i 50.1 million. For the purpose of this calculation shares owned by officers, directors, and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This calculation does not reflect a determination that persons are affiliates for any other purposes.

Part III of this report incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for its 2022 Annual Meeting of Shareholders. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

This report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not based on historical facts but instead reflect the Company’s expectations, estimates or projections concerning future results or events. These statements generally can be identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “belief,” “estimate,” “project,” “forecast,” “plan,” “likely,” “will,” “should” or similar words or phrases. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties, and assumptions that are difficult to predict and could cause actual results, performance, or achievements to differ materially from those expressed or indicated by those statements. The Company cannot assure you that any of its expectations, estimates or projections will be achieved.

Forward-looking statements included in this report are only made as of the date of this report and the Company disclaims any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances.

Numerous factors could cause the Company’s actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: loss of a significant customer, entry of new and stronger competitors, capital availability, unexpected costs, compliance with contractual obligations, the impact of the COVID-19 pandemic, failure to capitalize upon access to new customers, marketplace delisting, the ramifications of industry consolidation of medical products manufacturers, dealers and distributors, managed health care, failure to mitigate supply chain issues, market acceptance and support of new products, cancellation of existing contracts, customer “in house” production of products previously designed by and/or acquired from the Company, invalidity or unenforceability of the Company’s patents and other intellectual property, maintaining favorable supplier relationships, the Company’s ability to engage qualified human resources as needed, regulatory compliance, general economic conditions, and other factors described under Item 1A (Risk Factors) of this report. This list of factors is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” “us”) 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 craniomaxillofacial (“CMF”) markets. We have patented adaptive torque-limiting technology and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.

Our patented adaptive torque-limiting software has been very well received in the CMF and thoracic markets and we have continued investment in this area with research and development focused on applying this technology to other surgical applications.

In November 2020, we purchased an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin Property”). This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth. We substantially completed the build-out of the property during fiscal 2022 and we are actively engaged in various verification and validation activities. We anticipate that upon completion of these validation activities, which includes the validation of a new clean room, we will expand our capacity for the manufacture of batteries and new products. We expect that we will begin operations in the new facility during the third quarter of next fiscal year.

Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is 949-769-3200. Our Internet address is www.pro-dex.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, and certain other Securities and Exchange Commission (“SEC”) filings, are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

All years relating to financial data herein shall refer to fiscal years ended June 30, unless indicated otherwise.

The majority of our revenue is derived from designing, developing and manufacturing surgical devices for the medical device industry. The proportion of total sales by type is as follows (in thousands, except percentages):

Our medical device products utilize proprietary designs developed by us primarily under exclusive development and supply agreements and are manufactured in our Irvine, California facility, as are our rotary air motors. Our medical device products are sold primarily to original equipment manufacturers and our air motors are sold primarily to a wide range of distributors and end users.

In fiscal 2022, our top three customers accounted for 88% of our sales compared to 91% in fiscal 2021. In fiscal 2022, we had one customer, included in both medical device and repairs revenue above, that accounted for 66% of sales with our next largest customer accounting for 14% of sales. This compares to fiscal 2021, when these same two customers accounted for 58% and 27%, respectively, of our total sales. In many cases, including our largest customers, disclosure of customer names is prohibited by confidentiality agreements with such entities. We have no plans to discontinue the sales relationships with our existing significant customers.

Our business today is almost entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive experience with autoclavable, battery-powered and electric, multi-function surgical drivers and shavers. We continue to focus a significant percentage of our time and resources on providing outstanding products and service to our valued principal customers. During the first quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we will continue to supply their surgical handpieces to them through calendar 2025 and, during the fourth quarter of fiscal 2021, they executed a product development agreement and related statement of work for our assistance with the next generation of this handpiece. Additionally, we continue to invest in property and equipment as well as personnel to expand our capacity to achieve higher sales volumes.

To that end, we purchased the Franklin Property in November 2020. This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide us additional capacity for our expected continued future growth. We substantially completed the build-out of the property during fiscal 2022 and we are actively engaged in various verification and validation activities. We anticipate that upon completion of these validation activities, which includes the validation of a new clean room, we will expand our capacity for the manufacture of batteries and new products. We expect that we will begin operations in the new facility during the third quarter of next fiscal year.

Simultaneously, we are working to build top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive torque-limiting software has been very well received in the CMF and thoracic markets. Additionally, we have other significant engineering projects under way described more fully below under “Results of Operations.”

The majority of the raw materials and components used to manufacture our products are purchased and are available from several sources, including through our own in-house machining capabilities. Portescap, Fischer Connectors, and Tadiran Batteries are examples of key suppliers. We have no exclusive arrangements with any of our suppliers, but in several instances only one supplier is used for certain high-value components. In most of such instances, secondary suppliers have been identified, although it is likely that any transition to a new or different supplier would result in a delay in the supply chain. We consider our relationships with our suppliers and manufacturers to be good, however, during fiscal 2022 many of our suppliers have increased lead times, experienced delays in shipments and raised prices or temporarily added surcharges. We do not intend to terminate any such relationship at this time, nor does management have knowledge that any supplier or manufacturer intends to terminate its relationship with us.

Our commitment to product design, manufacturing, and quality systems are supported by our compliance with several regulatory agency requirements and standards. We hold a U.S. Food and Drug Administration (“FDA”) Establishment Registration and a State of California Device Manufacturing License (Department of Public Health Food and Drug Branch) with respect to our Irvine, California facility. In addition, our Irvine, California facility produces products that are certified to Medical Device Directive 93/42/EEC – Annex II, including Conformity Assessment through full Quality Management System (“QMS”) excluding Section 4, which indicates that Pro-Dex QMS meets requirements.

At June 30, 2022, we had a backlog of $16.5 million compared with a backlog of $9.7 million at June 30, 2021. 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, 2022, as well as certain purchase orders received subsequent to June 30, 2022, are expected to be delivered during fiscal 2023. 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.

The markets for products in the industries served by our customers are intensely competitive, and we face significant competition from a number of different sources. Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product development, and marketing resources, than us.

We compete in all of our markets with other major medical device companies. As a provider of outsourced services, we also compete with our customers’ own internal development and manufacturing groups. Competitive pressures and other factors, such as new product or new technology introductions by us, our customers’ internal development and manufacturing departments, or our competitors, may result in price or market share erosion that could have a material adverse effect on our business, results of operations, and financial condition. Also, there can be no assurance that our products and services will achieve broad market acceptance or will successfully compete with other products targeting the same customers.

We conduct research and development activities to both maintain and improve our market position. Our research and development efforts involve the design and manufacture of products that perform specific applications for our existing and prospective customers. Our research and development activities are focused on:

In certain instances, we may share research and development costs with our customers by billing for non-recurring engineering services often provided for under development portions of certain contracts. Revenue recognized for non-recurring engineering services represented 2% of our revenue in fiscal 2022 and 1% of our revenue in fiscal 2021.

During the fiscal years ended June 30, 2022 and 2021, we incurred research and development expenses amounting to $3.0 million and $4.4 million, respectively, which costs exclude labor and related expenses of approximately $739,000 and $121,000 in fiscal 2022 and 2021, respectively, that were reimbursed by our customers through billings for non-recurring engineering services.

Our employees are among our most critical assets. The success and growth of our business depends on our ability to attract, reward, retain and develop talent in all levels of our organization, including, but not limited to, machine operators, assembly technicians, engineers, and management.

In order to attract and retain highly qualified employees, we offer the following:

Our employee turnover for the fiscal years ended June 30, 2022 and 2021 was 14% and 16%, respectively. We consider the turnover rate a valuable metric to measure the effectiveness of our programs and to assist in developing new programs.

At June 30, 2022, we had 135 employees, one of whom is part-time, working at either our corporate office in Irvine, California or our Franklin office in Tustin, California and one employee working remotely out of state. At June 30, 2021, we had 118 employees, one of whom was part time, as well as three temporary employees all working at our corporate office in Irvine, California and one employee working remotely out of state. None of our employees are a party to any collective bargaining agreements with us. We consider our relationships with our employees to be good.

The manufacture and distribution of medical devices are subject to state and federal requirements set forth by various agencies, including the FDA, and state medical boards. The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to diverse, often conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to eliminate the ongoing risk that one or more of our activities or devices may at some point be determined to be non-compliant. The penalties for non-compliance could range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined to have fully complied with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business could adversely affect or result in the cessation of a portion of our business. A change in such laws or regulations at any time may have an adverse effect on our operations.

The FDA designates all medical devices into one of three classes (Class I, II, or III) based on the level of control necessary to assure the safety and effectiveness of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical instrumentation we manufacture is generally classified into Class I. The FDA has broad enforcement powers to recall and prohibit the sale of products that do not comply with federal regulations and to order the cessation of non-compliant processes. No claim has been made to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and processes have been the subject of routine governmental reviews and investigations.

The total cost of providing health care services has been and will continue to be subject to review by governmental agencies and legislative bodies in the major world markets, including the United States, which are faced with significant pressure to lower health care costs.

We believe that our business is conducted in a manner consistent with the Environmental Protection Agency (“EPA”) and other agency regulations governing disposition of industrial waste materials.

While we believe that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any investigation or review which may be undertaken in the future with respect to our products or processes.

Management believes that each of our facilities has manufacturing systems and processes that are based on established Quality Management System standards. In addition, we believe that our Irvine, California facility is compliant with applicable Good Manufacturing Practices promulgated by the FDA and is compliant with applicable ISO standards set forth by the International Organization for Standardization.

We hold US and foreign patents relating to our handheld medical devices and torque-limiting screwdrivers. Our patents have varying expiration dates. The near-term expiration of the patents, if any, is not expected to cause any change in our revenue-generating operations as the revenue from the products associated with those patents is not material.

We have no reason to believe that our activities infringe upon the intellectual property of any third party. With respect to our own patents, we have no reason to believe that our patents are invalid, and we believe that at least some of our patents cover certain aspects of our products. Other than as described in Note 10 to the consolidated financial statements contained elsewhere in this report, we are unaware of any reason that would cause us to assert or defend a claim of patent infringement, and such assertion or defense could materially and adversely affect our business and results of operations due to the costs involved.

We have certain federally registered trademarks relating to our products, including Pro-Dex^®, along with a number of other common law trademarks.

We have not entered into any franchising agreements. We have not granted, nor do we hold any third-party licenses having terms under which we earn revenue or incur expense in material amounts.

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this report, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition, operating results, and prospects would suffer. In that case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.

The COVID-19 pandemic, or the perception of its effects, could have a material adverse effect on our business, financial condition, and results of operations.

To date, COVID-19 has not had a material adverse impact on our business or results of operations, but due to the uncertainties surrounding this pandemic, it may adversely impact us in the future. We have and may continue to experience disruptions in our supply chain and critical suppliers may delay or be unable to deliver products we have ordered. Additionally, our customers could reduce planned orders, request cancelations of existing orders, and/or delay payment to us due to financial hardship they may experience as a result of this healthcare and resulting economic crisis. Therefore, it is impossible at this time to predict the ultimate short-term or long-term impact of the pandemic on our business, financial condition, and results of operations.

The ability of our employees to work may be significantly impacted by the COVID-19 crisis.

Our employees are being affected by the COVID-19 pandemic. Some of our office and management personnel were continuing to work remotely during some of fiscal 2022, but our employees engaged in manufacturing and assembly continued and are continuing to work at our corporate headquarters. The health of our workforce is of primary concern and we may need to enact further precautionary measures to help minimize the risk of our employees being exposed to the coronavirus. Further, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire Company, thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. To date, several of our employees have had COVID-19, but all have made full recoveries and returned to work. If more of our employees test positive for COVID-19, or these conditions worsen, or last for an extended period of time, our ability to manage our business may be impaired, and operational risks, cybersecurity risks, and other risks facing us even prior to the pandemic may be elevated.

A substantial portion of our revenue is derived from a few customers. If we were to lose a key customer, it would have a material adverse effect on our business, financial condition, and results of operations.

In fiscal 2022, our top three customers accounted for 88% of our sales, with our current largest customer accounting for 66% of our sales. This customer has made purchase commitments to us through a supply agreement to purchase surgical handpieces through calendar 2025. We provide this 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 the COVID-19 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. The loss of this customer or any of our significant customers would severely impact us, including having a material adverse effect on our business, financial condition, cash flows, revenue, and results of operations.

A substantial portion of our business is derived from our core business area that, if not serviced properly, may result in a material adverse impact upon our business, financial condition, and results of operations.

In fiscal 2022, we derived 97% of our revenue from sales of our medical device products and related services. We believe that a primary factor in the market acceptance of our products and services is the value they create for our customers. Our future financial performance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our customers through the timely development, and successful introduction and implementation of new and enhanced products and services, while at the same time continuing to provide the value our customers have come to expect from us. We have historically expended a significant percentage of our revenue on product development and believe that significant continued product development efforts will be required to sustain our growth. Continued investment in our sales and marketing efforts will also be required to support future growth.

There can be no assurance that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of our customers, or achieve market acceptance. If the market does not continue to accept our existing products, or our new products or product enhancements do not achieve market acceptance, our business, financial condition, and results of operations could be materially adversely affected.

Our customers may cancel or reduce their orders, change production quantities, or delay production, any of which would reduce our sales and adversely affect our results of operations.

Since most of our customers purchase our products from us on a purchase order basis, they may cancel, change, or delay product purchase commitments with little notice to us. As a result, we are not always able to forecast with certainty the sales that we will make in a given period and sometimes we may increase our inventory, working capital, and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced, or canceled.

The following factors, among others, affect our ability to forecast accurately our sales and production capacity:

In addition to reducing our sales, delayed, reduced, or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of those orders, such as costs associated with purchased raw materials and write-offs of obsolete inventory.

In recent years, we have launched many new medical device products and our estimates of warranty claims are based largely on our previous history from similar legacy products. If actual warranty claims exceed our estimates, it could have an adverse effect on our results of operations and financial condition.

In recent years, we have completed significant medical device development projects in the CMF and thoracic surgical segments for which we have made estimates of product warranty claims based upon similar, legacy products. If the actual repair volumes or repair costs exceed the estimates that we have been using, we may incur additional costs which could be materially adverse to our results of operations and financial condition.

We face significant competition from a number of different sources, which could negatively impact our results of operations.

We compete in all of our markets with other major surgical device and related companies. As a provider of outsourced products and services, we also compete with our customers’ own internal development groups. Competitive pressures and other factors, such as new product or new technology introductions by us, our customers’ internal development and manufacturing departments, or our competitors, may result in price or market share erosion that could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that our products and services will achieve broad market acceptance or will successfully compete with other products.

The industry in which we operate is subject to significant technological change and any failure or delay in addressing such change could adversely affect our competitive position or could make our current products obsolete.

The medical device market is generally characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of products incorporating new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing new products that respond to technological changes or evolving industry standards.

New product development requires significant research and development expenditures that we have historically funded through operations; however, we may be unable to do so in the future. Any significant decrease in revenues or research funding could impair our ability to respond to technological advances in the marketplace and to remain competitive. If we are unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, our business, results of operations, and financial condition may be materially adversely affected. Although we continue to target new markets for access, develop new products, and update existing products, there can be no assurance that we will do so successfully or that, even if we are successful, such efforts will be completed concurrently with or prior to the introduction of competing products. Any such failure or delay could adversely affect our competitive position or could make our current products obsolete.

We rely heavily on our proprietary technology, which, if not properly protected or if deemed invalid, could have a material adverse effect on our business, financial condition, and results of operations.

We are dependent on the maintenance and protection of our proprietary technology and rely on patent filings, exclusive development and supply agreements, confidentiality procedures and employee nondisclosure agreements to protect it. There can be no assurance that the legal protections and precautions taken by us will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies equivalent or superior to ours. Further, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States and are often not enforced as vigorously as those in the United States.

We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can be no assurance that others will not assert infringement or trade secret claims against us with respect to our current or future products. As an example, see Note 10 to the consolidated financial statements contained elsewhere in this report. Assertions or claims by others, whether or not valid, could cause us to incur significant legal costs defending our intellectual property rights and potentially require us to enter into a license agreement or royalty arrangement with the party asserting the claim or to cease our use of the infringing technology, any of which could have a material adverse effect on our business, financial condition and results of operations.

If our technology infrastructure is compromised, damaged or interrupted by a cybersecurity incident, data security breach or other security problems, our results of operations and financial condition could be adversely affected.

We use technology in substantially all aspects of our business operations, and our ability to serve customers most effectively depends on the reliability of our technology systems. We use software and other technology systems, among other things, to generate sales orders, job orders, and purchase orders and to monitor and manage our business on a day-to-day basis. Cybersecurity incidents can include computer viruses, computer denial-of-service attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties and sabotage.

In addition, our technology infrastructure and systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures. Any such disruption to our systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, could result in business disruption, negative publicity, loss of customers, potential liability, including litigation or other legal actions against us or the imposition of penalties, fines, fees or liabilities, which may not be covered by our insurance policies, and competitive disadvantage, any or all of which would potentially adversely affect our customer service, decrease the volume of our business and result in increased costs and lower profits. Moreover, a cybersecurity breach could require us to devote significant management resources to address the problems associated with the breach and to expend significant additional resources to upgrade further the security measures we employ to protect information against cyber-attacks and other wrongful attempts to access such information, which could result in a disruption of our operations.

While we have invested, and continue to invest, in technology security initiatives and other measures to prevent security breaches and cyber incidents, as well as disaster recovery plans, these initiatives and measures may not be entirely effective to insulate us from technology disruption that could result in adverse effects on our results of operations and financial condition.

To service our debt obligations, we will require a significant amount of cash. However, our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on, and to refinance, our debt obligations and to fund capital expenditures, will depend on our ability to generate cash in the future, which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control.

Our business may not generate sufficient cash flow from operations, and we may not have available to us future borrowings in an amount sufficient to enable us to pay our debt obligations or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our debt obligations on or before maturity. We may not be able to refinance any of our debt obligations, on commercially reasonable terms, or at all. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at all and, in addition, the agreements governing our debt obligations limit our ability to sell assets. In addition, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.

We periodically invest surplus cash in marketable securities and other investments in order to realize a positive return, although there can be no assurance that a positive return will be realized, and we could lose some or all of our investments, which could adversely affect our financial condition and results of operation.

We invest a significant portion of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2022, the fair value of these marketable securities was approximately $2.5 million. Approximately $1.8 million of our investments at June 30, 2022 include equity securities of companies that are thinly traded. As such, 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. While we intend to hold our investments, until such time as we believe it is appropriate to sell them in accordance with our overall investment policy, we may have unexpected cash requirements that could necessitate the sale of some or all of these marketable securities for a loss.

We may not be able to successfully integrate our business acquisitions, which could adversely affect our business, financial condition, and results of operations.

We have acquired, and may acquire in the future, businesses, products, and technologies that complement or expand our current operations. Acquisitions could require significant capital investments and require us to integrate with companies that have different cultures, management teams, and business infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including:

If market conditions or other factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our acquisitions. Our failure to successfully integrate any future acquisitions or realize the expected value from past or future acquisitions could harm our business, financial condition, and results of operations.

We have experienced losses in the past, and we cannot be certain that we will sustain our current profitability; we may need additional capital in the future to fund our businesses, which we may not be able to obtain on acceptable terms.

We have experienced operating losses in the past. Our ability to achieve or sustain profitability is based on a number of factors, many of which are out of our control, including the material costs for our products and the demand for our products.

We currently anticipate that our available capital resources, including our existing cash and cash equivalents and accounts receivable balances, will be sufficient to meet our expected working capital and capital expenditure requirements as our business is currently conducted for at least the next 12 months. We may also attempt to raise additional funds through public or private debt or equity financings, if such financings become available on acceptable terms. We cannot be certain that any additional financing we may need will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of opportunities, develop new products, or otherwise respond to competitive pressures, and our operating results and financial condition could be adversely affected.

Our operations are dependent upon our key personnel. If such personnel were to leave unexpectedly, we may not be able to execute our business plan.

Our future performance depends in significant part upon the continued service of our key technical and senior management personnel. Because we have a relatively small number of employees when compared to other companies in the same industry, our dependence on maintaining our relationship with key employees is particularly significant. We are also dependent on our ability to attract and retain high quality personnel, particularly in the areas of product development, operations management, marketing and finance.

A high level of employee mobility and the aggressive recruiting of skilled personnel characterize the medical device industry. There can be no assurance that our current employees will continue to work for us. Loss of services of key employees could have a material adverse effect on our business, results of operations, and financial condition. Furthermore, we may need to provide enhanced forms of incentive compensation to attract and retain such key personnel, which could potentially dilute the holdings of other shareholders.

Two of our directors hold voting power with respect to a substantial portion of our outstanding common stock that enables them to have significant influence over the outcome of all matters submitted to our shareholders for approval, which influence may conflict with our interests and the interests of other shareholders.

As of August 12, 2022, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, directly or indirectly, controlled voting power over approximately 38% (28% and 10%, respectively) of the outstanding shares of our common stock. As a result of such voting control, these directors will have significant influence over all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions, and may have interests that conflict with our interests and the interests of other shareholders.

Our quarterly results can fluctuate significantly from quarter to quarter, which may negatively impact the price of our shares and/or cause significant variances in the prices at which our shares trade.

Our sales have fluctuated in the past, and may fluctuate in the future from quarter to quarter and period to period, as a result of a number of factors, including, without limitation: the size and timing of orders from customers; the length of new product development cycles; market acceptance of new technologies; changes in pricing policies or price reductions by us or our competitors; the timing of new product announcements and product introductions by us or our competitors; the financial stability of major customers; our success in expanding our sales and marketing programs; acceleration, deferral, or cancellation of customer orders and deliveries; changes in our strategy; revenue recognition policies in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”); personnel changes; and general market and economic factors.

Because a significant percentage of our expenses are fixed, a variation in the timing of sales can cause significant fluctuations in operating results from quarter to quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future performance for any particular period.

In addition, it is possible that our operating results in future quarters may be below the expectations of public market analysts and investors. In such an event, the price of our common stock could be materially adversely affected.

Our operations are subject to a number of complex government regulations, the violation of which could have a material adverse effect on our business.

The manufacture and distribution of medical devices are subject to state and federal requirements set forth by various government agencies including the FDA and EPA. The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to diverse, often conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to eliminate the ongoing risk that one or more of our activities may at some point be determined to be non-compliant. The penalties for non-compliance could range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined to have fully complied with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business could adversely affect or result in the cessation of a portion of our business. A change in such laws or regulations at any time may have an adverse effect on our operations.

The FDA designates all medical devices into one of three classes (Class I, II, or III) based on the level of control necessary to assure the safety and effectiveness of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical instrumentation we manufacture is generally classified into Class I. The FDA has broad enforcement powers to recall and prohibit the sale of products that do not comply with federal regulations and to order the cessation of non-compliant processes. No claim has been made to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and processes are from time to time subject to routine governmental reviews and investigations. We are also subject to EPA regulations concerning the disposal of industrial waste.

While management believes that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any such future review or investigation.

We face risks and uncertainties associated with potential litigation by or against us, which could have a material adverse effect on our business, financial condition, and results of operations.

We continually face the possibility of litigation as either a plaintiff or a defendant (See Note 10 to the consolidated financial statements contained elsewhere in this report). It is not reasonably possible to estimate the awards or damages, or the range of awards or damages, if any, that we might incur in connection with such litigation.

Many of our products are complex and technologically advanced. Such products may, from time to time, be the subject of claims concerning product performance and construction, including warranty and patent infringement claims. While we are committed to investigating such concerns and correcting them, there is no assurance that solutions will be found on a timely basis, if at all, to satisfy customer demands or to avoid potential claims or litigation. Also, due to the location of our facilities, as well as the nature of our business activities, there is a risk that we could be subject to litigation related to environmental remediation claims. We maintain insurance to protect against claims associated with the manufacture and use of our products as well as environmental pollution, but there can be no assurance that our insurance coverage will adequately cover any claim asserted against us.

The uncertainty associated with potential litigation may have an adverse impact on our business. In particular, litigation could impair our relationships with existing customers and our ability to obtain new customers. Defending or prosecuting litigation could result in significant legal costs and a diversion of management’s time and attention away from business operations, either of which could have a material adverse effect on our business, financial condition, and results of operations. There can be no assurance that litigation would not result in liability in excess of our insurance coverage, that our insurance will cover such claims, or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates.

The agreements governing our various debt obligations impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.

The agreements governing our debt obligations include covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:

The agreements governing our debt obligations also require us to comply with a number of financial ratios, borrowing base requirements and additional covenants.

Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. These covenants could adversely affect our business by limiting our ability to take advantage of financing, merger and acquisition, or other corporate opportunities. The breach of any of these covenants or restrictions could result in a default under our debt obligations. If we were unable to repay our debt or are otherwise in default under any provision governing our secured debt obligations, our lender could proceed against us and against the collateral securing that debt.

We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance, compliance with which could be costly and time consuming.

We are subject to changes in and interpretations of financial accounting standards that govern the measurement of our performance. Based on our reading and interpretations of relevant pronouncements, guidance, or concepts issued by, among other authorities, the Financial Accounting Standards Board, the SEC, and the American Institute of Certified Public Accountants, management believes our performance, including current sales contract terms and business arrangements, has been properly reported. However, there continue to be issued pronouncements, interpretations, and guidance for applying the relevant standards to a wide range of contract terms and business arrangements that are prevalent in the industries in which we operate. Future interpretations or changes by the regulators of existing accounting standards or changes in our business practices may result in future changes in our accounting policies and practices that could have a material adverse effect on our business, financial condition, cash flows, revenue, and results of operations.

Our evaluation of internal controls and remediation of potential problems is costly and time consuming and could expose weaknesses in financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002, as amended, requires management’s assessment of the effectiveness of our internal control over financial reporting. This process is expensive and time consuming and requires significant attention of management. Management can give no assurance that material weaknesses in internal controls will not be discovered. If a material weakness is discovered, corrective action may be time consuming and costly, and could further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price, especially if a restatement of financial statements for past periods is required.

The global economic environment may impact our business, financial condition, and results of operations.

Changes in the global economic environment have caused, and may cause in the future, a general tightening in the credit markets, lower levels of liquidity, increases in rates of default and bankruptcy, high rates of inflation, and extreme volatility in credit, equity and fixed income markets. These macroeconomic developments could negatively affect our business, operating results or financial condition should they cause, for example, current or potential customers to become unable to fund purchases of our products, in turn resulting in delays, decreases or cancellations of purchases of our products and services, or causing the customer to not pay us or to delay paying us for previously purchased products and services. In addition, financial institution failures may cause us to incur increased expenses or make it more difficult either to obtain financing for our operations, investing activities (including the financing of any future acquisitions), or financing activities. Additional economic risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, and results of operations.

Our executive offices and manufacturing facility are located at 2361 McGaw Avenue, Irvine, California 92614. We lease the 28,000 square foot facility from an unrelated third party at a current base monthly lease rate of approximately $41,000 with 3% annual escalations through the expiration of the lease in September 2027. The building is a one-story, stand-alone structure of concrete “tilt-up” construction, approximately 30 years old and in good condition.

We are currently preparing the Franklin Property, located at 14401 Franklin Avenue, Tustin, California 92780, for our move-in. We purchased this 25,000 square foot facility in November 2020 from an unrelated third party through a loan (See Note 8 of to the consolidated financial statements contained elsewhere in this report) and while we have moved some staff over there during fiscal 2022, we plan to move our assembly and repairs teams once our validations are completed, currently expected in the third quarter of fiscal 2023. The building is a one-story, stand-alone structure of concrete “tilt-up” construction, approximately 45 years old and in good condition.

We believe that our facilities are adequate for our current and expected future needs and are in full compliance with applicable state, EPA and other agency environmental standards.

See Note 10 to the consolidated financial statements contained elsewhere in this report.

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 6, 2022, the last sale price of our common stock as reported by NASDAQ was $19.68 per share.

As of September 6, 2022, there were 116 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. Any determinations to pay dividends in the future will be at the discretion of our Board of Directors.

During the fourth quarter of fiscal 2022 and 2021, we repurchased 22,532 and 54,880 shares of our common stock, respectively, at an aggregate cost of $350,000 and $1.5 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. Repurchases by us of our common stock by month during the quarter ended June 30, 2022, were as follows:

All repurchases were made pursuant to our previously announced repurchase programs.

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 I 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, 2022 and 2021.

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. We are headquartered in Irvine, California.

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:

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, 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 during calendar 2021, we began to see some challenges in our supply chain in the form of delayed shipments, longer lead times, and surcharges, much of which our suppliers indicate has been caused by the COVID-19 pandemic. As previously disclosed, during early calendar 2022, we saw these conditions persist and worsen such that we expected them to negatively impact our financial performance in the third quarter and possibly the fourth quarter of fiscal 2022, reflected as a reduction in net sales. However, we did not end up experiencing this anticipated decline in our sales because we were able to largely mitigate our biggest concerns by sourcing replacement chips through alternative suppliers, albeit at much higher prices, for many of our printed circuit board assemblies. In so doing, our cost of sales increased during the third and fourth quarter of fiscal 2022. We continue to implement plans and processes to mitigate these challenges that many manufacturers similarly face. Our long-term prospects remain positive, and we believe these challenges will negatively impact us only in the short-term.

Our financial statements are prepared in accordance with U.S. GAAP. 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. Actual results may differ from these estimates.

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; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. 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 2022, the revenue from non-recurring engineering (“NRE”) and prototype services represents approximately 2% 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.

Cost and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated quarterly. An expected loss on development service contracts is recognized immediately in cost of sales. Losses recorded in fiscal 2022 and 2021 related to these services totaled $0 and $71,000, respectively.

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.

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.

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 presented in other income (expense) in our consolidated income statements. Some of our investments include the common stock of public companies that are thinly traded. Certain of 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. Thinly traded investments were subject to a valuation analysis as of June 30, 2022 and 2021.

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:

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, 2022 and 2021 consisted primarily of basis differences related to unrealized gain/loss related to investments, stock-based compensation, 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, 2022 Compared to the Fiscal Year Ended June 30, 2021

The following tables set forth results from operations for the fiscal years ended June 30, 2022 and 2021:

The 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:

Net sales in fiscal 2022 increased by $4.0 million, or 11%, as compared to fiscal 2021, due primarily to an increase in medical device revenue of $1.9 million as well as a $1.7 million increase in repair revenue. Details of our medical device sales by type is as follows:

Sales of our medical device products increased $1.9 million, or 6% during, fiscal 2022 as compared to fiscal 2021. During fiscal 2022, orthopedic sales increased by $3.8 million to $21.9 million, up from $18.1 million in fiscal 2021, due primarily to increased sales to our largest customer. Additionally, recurring revenue from distributors of CMF drivers increased $4.1 million in fiscal 2022 compared to fiscal 2021 in part due to the launch of a new driver to our existing largest customer during the third quarter of fiscal 2021. Our fiscal 2022 thoracic sales revenue decreased $6.0 million compared to the prior fiscal year, due likely as a result of our customer filling the near-term requirements of its distribution network. Currently, the thoracic driver is only sold to one customer, although we are in discussions with other of our existing customers who have expressed an interest in this driver.

Sales of our industrial and scientific products, which consist primarily of our compact pneumatic air motors, increased $65,000, or 8%, for fiscal 2022 compared to fiscal 2021. The revenue increase relates to a continued interest in these legacy products, but is not due to any substantive marketing efforts.

Sales of our NRE & proto-type services increased $690,000 or 213% compared to fiscal 2021 and relates to billable engagement for multiple engineering projects.

Sales of our dental products and components in fiscal 2022 increased $304,000, or 189%, as compared to fiscal 2021. The increase in sales in fiscal 2022 related to component sales of excess inventory directly to our largest customer due to the release of their next generation device. We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.

Our fiscal 2022 repair revenue has increased approximately $1.7 million, or 33%, over fiscal 2021 to $6.6 million, due to increased repairs of the orthopedic handpiece we sell to our largest customer. We expect repair revenue to continue to increase based upon expected refurbishments to upgrade the handpiece to the next generation, which was released in the third quarter of fiscal 2022. While we expect the volume of repairs to increase, we expect the gross margin to deteriorate, at least in the near term, as we are currently upgrading these handpieces at no additional cost while we continue to negotiate a new repair price with our largest customer in good-faith.

Cost of sales in fiscal 2022 increased $4.5 million, or 18%, from fiscal 2021, primarily due to the increase in product costs, consistent with the 11% increase in net sales, coupled with higher material and labor costs. 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 netting profit of $240,000 in fiscal 2022. During fiscal 2022, we experienced $877,000 under-absorption of manufacturing costs compared to a $370,000 in fiscal 2021, due primarily to actual production hours being less than planned. Costs related to inventory and warranty charges increased $366,000 in fiscal 2022 compared to fiscal 2021, primarily due to sourcing components for our printed circuit board assemblies at prices higher than usual.

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 decreased $499,000, or 85%, compared to fiscal 2021, primarily due to decreased personnel and related expenses due to combining our Director of Business Development position with our Director of Engineering position in the first quarter of fiscal 2022.

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 $827,000 increase in G&A expenses from fiscal 2021 to 2022 is due primarily to $374,000 in increased stock compensation expense related to awards granted in fiscal 2022 and 2021. We also incurred $261,000 in expenses in fiscal 2022 related to defending a patent infringement case brought against one of our customers. We incurred no similar expenses during the prior fiscal year. Finally, we incurred an increase in professional service fees in fiscal 2022 as compared to fiscal 2021 related to the costs associated with being a public company of approximately $142,000.

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 decreased $1.4 million from fiscal 2021 to 2022 due to decreased spending on internal product development projects. In fiscal 2022, our engineering department has been engaged in more billable customer projects and therefore costs get shifted to cost of sales instead of research and development.

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. Many of our product development efforts are undertaken only upon completion of an analysis of the size of the market, our ability to differentiate our product from our competitors’, as well as an analysis of our specific sales prospects with new and/or existing customers. Research and development costs represent between 37% and 48% of total operating expenses during fiscal 2021 and 2022 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):

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.

Our interest and dividend income earned in fiscal 2022 and 2021 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

The unrealized gain (loss) on marketable equity investments relates to our investment portfolio more fully described in Note 5 to the consolidated financial statements contained elsewhere in this report.

During fiscal 2022, we liquidated some of the investments in our portfolio of equity investments receiving proceeds of $770,000 and recording a gain of $28,000. 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.

Interest expense incurred in fiscal 2022 and 2021 consists primarily of interest expense related to our debt with Minnesota Bank & Trust (“MBT”) described more fully in Note 8 to the consolidated financial statements contained elsewhere in this report.

The effective tax rate for the fiscal years ended June 30, 2022 and 2021, was 18% and 17%, respectively, slightly less than our combined expected federal and applicable state corporate income tax rates due primarily to federal and state research credits.

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, 2022 and 2021:

Cash used in operating activities totaled $847,000 during fiscal 2022. Our net income was $3.9 million and included non-cash stock compensation expense and depreciation and amortization expense in the amount of $1.3 million and $726,000, respectively. Additionally, our accounts payable and accrued expenses increased by $2.0 million. Offsetting these inflows of cash, our accounts receivable and inventory balances grew by $4.4 million and $4.2 million, respectively.

Cash used in operating activities during fiscal 2021 totaled $2.1 million. Our net income was $5.8 million and included $1.3 million of gains on the sales of certain equity investments, $1.4 million in unrealized gains on marketable equity investments, as well as $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 executed in fiscal 2021.

Net cash used in investing activities in fiscal 2022 was $1.2 million and related primarily to $1.6 million in purchases of equipment and improvements as well as the purchase of $334,000 of marketable equity securities, offset by $770,000 in proceeds from sales of marketable equity securities.

Net 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 financing activities for fiscal 2022 totaled $790,000 and related primarily to the $1.6 million repurchase of 75,250 shares of our common stock pursuant to our share repurchase program, as well as $1.2 million of principal payments primarily related to our various loans from MBT offset by the $2.0 million in new borrowings from MBT more fully described in Note 8 to the consolidated financial statements contained elsewhere in this report.

Net cash provided by financing activities for fiscal 2021, totaled $3.1 million and included $9.1 million in various loans from MBT more fully described in Note 8 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.

As of June 30, 2022, our working capital was $19.8 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 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 suspended, but which we believe we could reinstate if needed.

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

The Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot, and Van Kirk.

The Investment Committee approved each of the investments comprising the $2.5 million of marketable public equity securities held at June 30, 2022, which amount includes unrealized holding losses in the amount of $262,000 at June 30, 2022.

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, 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, 2022, we repurchased 75,250 shares at an aggregate cost, inclusive of fees under the Plan, of $1.6 million. 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. On a cumulative basis, we have repurchased a total of 1,110,746 shares under the share repurchase programs at an aggregate cost, inclusive of fess under the Plan, of $15.7 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.

We have audited the accompanying consolidated balance sheets of Pro-Dex, Inc. and Subsidiaries (the “Company”) as of June 30, 2022 and 2021, the related consolidated income statements, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated investments total $2,534,000 at June 30, 2022. Both current and long-term investments include the common stock of publicly traded companies that are considered thinly traded.

We identified the valuation of thinly traded securities as a critical audit matter. The Company’s current and long-term investments represent shares that materially exceed the average daily trading volume of the thinly traded securities, thus the Company must consider a discount due to the lack of liquidity and marketability. The Company uses a third-party specialist to perform the discount analysis for financial statement reporting purposes in order to comply with the guidelines set forth in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments – Debt and Equity Securities and FASB Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The discount analysis is derived using a two-part approach. The first analysis uses a protective put model to estimate the discount for lack of liquidity and marketability. The second analysis is a time-adjusted analysis based on restricted stock studies, which is used to adjust the discount to reflect the dribble-out period associated with the securities. The determination of the discount involves significant judgment by management. Auditing management’s judgments regarding the appropriate discount involves a high degree of subjectivity, including the use of professionals with specialized skill and knowledge.

The primary procedures we performed to address this critical audit matter included:

Our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer and principal accounting officer) have concluded, based on their evaluation as of June 30, 2022, that the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer, and principal accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2022.

Our internal control over financial reporting is supported by written policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our Company are being made only in accordance with authorizations of our management and directors; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that apply to certain smaller reporting companies that permit us to provide only management’s attestation in this annual report.

During the quarter ended June 30, 2022, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of June 30, 2022, and delivered to shareholders in connection with our 2022 annual meeting of shareholders.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 8, 2022.

We, the undersigned directors and officers of Pro-Dex, Inc., do hereby constitute and appoint Richard L. Van Kirk, as our true and lawful attorney-in-fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

i Colorado	i 84-1261240
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

i 2361 McGaw Avenue, i Irvine, i CA	i 92614
(Address of Principal Executive Offices)	(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
i Common Stock, no par value	i PDEX	i NASDAQ Capital Market

Large accelerated filer ☐		Accelerated filer ☐
i Non-accelerated filer ☒		Smaller reporting company i ☒
		Emerging growth company i ☐

		PAGE

PART I

ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	6
ITEM 1B.	UNRESOLVED STAFF COMMENTS	14
ITEM 2.	PROPERTIES	14
ITEM 3.	LEGAL PROCEEDINGS	14
ITEM 4.	MINE SAFETY DISCLOSURES	14

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	15
ITEM 6.	RESERVED	15
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	26
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	52
ITEM 9A.	CONTROLS AND PROCEDURES	52
ITEM 9B.	OTHER INFORMATION	52
ITEM 9C.	DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS	52

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	53
ITEM 11.	EXECUTIVE COMPENSATION	53
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	53
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	53
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	53

PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	54
ITEM 16.	FORM 10–K SUMMARY	54

	Years Ended June 30,
	2022						2021
	(In thousands)
				% of Revenue						% of Revenue
Medical devices	$	34,004			81	%	$	32,149			85	%
Industrial and scientific		919			2	%		854			2	%
NRE & Prototypes		1,014			2	%		324			1	%
Dental and component		465			1	%		161			—
Repairs		6,610			16	%		4,956			13	%
Discounts & Other		(971	)		(2	%)		(415	)		(1	%)
Total Sales	$	42,041			100	%	$	38,029			100	%

Pro Dex Inc. – ‘10-K’ for 6/30/22

On: Thursday, 9/8/22, at 4:00pm ET · For: 6/30/22 · Accession #: 1553350-22-745 · File #: 0-14942

Previous ‘10-K’: ‘10-K’ on 9/9/21 for 6/30/21 · Next & Latest: ‘10-K’ on 10/13/23 for 6/30/23 · 19 References:

Annual Report — Form 10-K

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‘10-K’ — Annual Report

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Dates Referenced Herein and Documents Incorporated by Reference

19 Previous Filings that this Filing References

	High		Low
Year ended June 30, 2022:
First Quarter	$	31.51	$	23.78
Second Quarter		25.90		20.44
Third Quarter		25.81		15.00
Fourth Quarter		16.51		13.16
Year ended June 30, 2021:
First Quarter	$	31.42	$	17.01
Second Quarter		42.60		26.96
Third Quarter		33.66		21.97
Fourth Quarter		35.80		25.76

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2022 to April 30, 2022		—		—		—		737,885
May 1, 2022 to May 31, 2022		16,251	$	15.41		16,251		721,634
June 1, 2022 to June 30, 2022		6,281	$	15.89		6,281		715,353

Building	Thirty years
Equipment	Three to ten years
Improvements	Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life

	Years Ended June 30,												Increase (Decrease) From 2021 To
	2022						2021						2022
	Dollars in thousands
				% of Net Sales						% of Net Sales
Net sales:
Medical devices	$	34,004			81	%	$	32,149			85	%		6	%
Industrial and scientific		919			2	%		854			2	%		8	%
NRE & Prototype services		1,014			2	%		324			1	%		213	%
Dental and component		465			1	%		161			—			189	%
Repairs		6,610			16	%		4,956			13	%		33	%
Discounts & Other		(971	)		(2	%)		(415	)		(1	%)		134	%
	$	42,041			100	%	$	38,029			100	%		11	%

	Years Ended June 30,										Increase (Decrease) From 2021 To
	2022					2021					2022
	Dollars in thousands
			% of Total					% of Total
Medical device sales:
Orthopedic	$	21,877		64	%	$	18,061		56	%		21	%
CMF		10,277		30	%		6,212		19	%		65	%
Thoracic		1,850		6	%		7,876		25	%		(77	%)
Total	$	34,004		100	%	$	32,149		100	%		6	%

	Years Ended June 30,										Increase (Decrease) From 2021 To
	2022					2021					2022
	Dollars in thousands
			% of Net Sales					% of Net Sales
Cost of sales:
Product costs	$	26,296		63	%	$	23,093		60	%		14	%
NRE and Prototype services costs		774		2	%		395		1	%		96	%
Under (over)-absorption of manufacturing overhead		877		2	%		370		1	%		137	%
Inventory and warranty charges		962		2	%		596		2	%		61	%
Total cost of sales	$	28,909		69	%	$	24,454		64	%		18	%

	Years Ended June 30,				Expected Market Launch⁽¹⁾		Estimated Annual Revenue⁽²⁾
	2022		2021
	Dollars in thousands
Total Research and Development costs:	$	2,980	$	4,384

Products in development:
ENT Shaver		282		829		Q4 2022	$	1,000
CMF Driver		—		826		⁽³⁾	$	1,000
Vital Ventilator		115		191		Q1 2023	$	1,500
Sustaining & Other		2,583		2,538
Total	$	2,980	$	4,384

	As of and for the Years Ended June 30,
	2022			2021
	(In thousands)
Cash provided by (used in):
Operating activities	$	(847	)	$	(2,078	)
Investing activities	$	(1,235	)	$	(3,710	)
Financing activities	$	(790	)	$	3,088

Cash, cash equivalents and working capital:
Cash and cash equivalents	$	849		$	3,721
Working capital	$	19,812		$	18,744

	Page
Report of Independent Registered Public Accounting Firm ( i Moss Adams LLP, i Irvine, California, Auditor ID: i 659)	27
Financial Statements:
Consolidated Balance Sheets, June 30, 2022 and 2021	29
Consolidated Income Statements, Years Ended June 30, 2022 and 2021	30
Consolidated Statements of Shareholders’ Equity, Years Ended June 30, 2022 and 2021	31
Consolidated Statements of Cash Flows, Years Ended June 30, 2022 and 2021	32
Notes to Consolidated Financial Statements	34


	June 30,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	i 849	$	i 3,721
Investments		i 755		i 1,295
Accounts receivable, net of allowance for doubtful accounts of $ i 0 and $ i 2 at June 30, 2022 and 2021, respectively		i 15,384		i 10,933
Deferred costs		i 710		i 193
Inventory		i 12,678		i 8,437
Prepaid expenses and other current assets		i 790		i 434
Total current assets		i 31,166		i 25,013
Land and building, net		i 6,343		i 6,437
Equipment and improvements, net		i 4,833		i 3,845
Right of use asset, net		i 2,248		i 2,605
Intangibles, net		i 118		i 186
Deferred income taxes, net		i 797		i 463
Investments		i 1,779		i 1,704
Other assets		i 42		i 67
Total assets	$	i 47,326	$	i 40,320

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	i 3,761	$	i 2,288
Accrued liabilities		i 2,751		i 2,198
Income taxes payable		i 544		i 397
Deferred revenue		i 1,013		i 150
Notes payable		i 3,285		i 1,236
Total current liabilities		i 11,354		i 6,269
Non-current liabilities:
Lease liability, net of current portion		i 2,054		i 2,432
Notes payable, net of current portion		i 10,250		i 11,535
Total non-current liabilities		i 12,304		i 13,967
Total liabilities		i 23,658		i 20,236

Commitments and Contingencies:

Shareholders’ equity:
Common stock, i i no / par value, i i 50,000,000 / shares authorized; i i 3,596,131 / and i i 3,645,660 / shares issued and outstanding at June 30, 2022 and 2021, respectively		i 7,682		i 7,953
Retained earnings		i 15,986		i 12,131
Total shareholders’ equity		i 23,668		i 20,084
Total liabilities and shareholders’ equity	$	i 47,326	$	i 40,320

Schedule of building, equipment and improvements
Building	i Thirty years
Equipment	i Three to ten years
Improvements	i Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life

Schedule of disaggregation of net sales
	Year ended June 30,
	2022		2021
Net Sales:
Over-time revenue recognition	$	i 1,014	$	i 324
Point-in-time revenue recognition		i 41,027		i 37,705
Total net sales	$	i 42,041	$	i 38,029

Schedule of contract assets and liability
	June 30,
	2022			2021
Contract assets at beginning of year	$	i 193		$	i 155
Expenses incurred during the year		i 1,319			i 458
Amounts reclassified to cost of sales		( i 774	)		( i 395	)
Amounts allocated to discounts for standalone selling price		( i 28	)		( i 25	)
Contract assets at end of year	$	i 710		$	i 193

Schedule of investments
	June 30, 2022		June 30, 2021
Marketable equity securities – short-term	$	i 755	$	i 1,295
Marketable equity securities – long-term		i 1,779		i 1,704
Total Marketable equity securities	$	i 2,534	$	i 2,999

Schedule of inventory
	June 30,
	2022		2021
Raw materials /purchased components	$	i 6,323	$	i 3,967
Work in process		i 3,463		i 2,218
Sub-assemblies /finished components		i 2,118		i 1,738
Finished goods		i 774		i 514
Total inventory	$	i 12,678	$	i 8,437

Schedule of Land and Building
	June 30, 2022			June 30, 2021
Land	$	i 3,684		$	i 3,684
Building		i 2,815			i 2,815
Total		i 6,499			i 6,499
Less: accumulated depreciation		( i 156	)		( i 62	)
	$	i 6,343		$	i 6,437

Schedule of equipment and improvements
	June 30,
	2022			2021
Office furnishings and fixtures	$	i 2,224		$	i 2,173
Machinery and equipment		i 6,661			i 5,895
Automobiles		i 21			i 21
Improvements		i 4,271			i 3,536
Total		i 13,177			i 11,625
Less: accumulated depreciation and amortization		( i 8,344	)		( i 7,780	)
	$	i 4,833		$	i 3,845

Schedule of intangibles
	June 30, 2022			June 30, 2021
Patent-related costs	$	i 208		$	i 260
Less accumulated amortization		( i 90	)		( i 74	)
	$	i 118		$	i 186

Schedule of accrued liabilities
	June 30,
	2022		2021
Payroll and related items	$	i 509	$	i 505
Accrued inventory in transit		i 177		i 128
Accrued legal and professional fees		i 275		i 124
Accrued bonuses		i 430		i 300
Current portion of lease liability		i 379		i 344
Warranty		i 340		i 221
Accrued customer rebate		i 517		i 394
Other		i 124		i 182
Total accrued expenses	$	i 2,751	$	i 2,198

Schedule of accrual warranty costs
	June 30,
	2022			2021
Balance at beginning of year	$	i 221		$	i 213
Accruals during the year		i 177			i 339
Change in estimates of prior period accruals		i 54			( i 27	)
Warranty amortization/utilization		( i 112	)		( i 304	)
Balance at end of year	$	i 340		$	i 221