What changed in this filing

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Item 1. Business

2023-10-13 compared with 2022-09-08 · 137 added, 137 removed, 102 unchanged (73% of the section changed)

Company Overview

(“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.

Pro-Dex, Inc.

“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

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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

In November 2020, we purchased

an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin

This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide

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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.

2022 and concluded various verification and validation activities during fiscal 2023.

We moved our entire assembly and repairs operations

to the new facility in the fourth quarter of fiscal 2023 and we are now fully operational in the new facility.

We believe the new facility

will create additional capacity for our expected continued growth over the next several years.

principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is 949-769-3200.

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(in thousands, except percentages):

Years Ended June 30,

Ended June 30,

(In thousands)

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Discounts & Other

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.

Our medical device products utilize

proprietary designs developed by us primarily under exclusive development and supply agreements and are currently machined in our Irvine,

California facility, and assembled in our Tustin, 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 2023, our top

three customers accounted for 92% of our sales compared to 88% in fiscal 2022.

In fiscal 2023, we had one customer, included in both medical

device and repairs revenue above, that accounted for 67% of sales with our next largest customer accounting for 16% of sales.

This compares

to fiscal 2022, when these same two customers accounted for 66% and 14%, 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.

the sales relationships with our existing significant customers, nor does management have any knowledge that any existing significant

customer intends to terminate its relationship with us.

Our business today is almost entirely

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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.

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 began operations in the new facility during the

fourth quarter of fiscal 2023.

While we believe that the efforts we completed to bring the facility operational will allow us ample capacity

to increase revenues significantly in future years, there can be no assurance that we will increase revenue.

Simultaneously, we are working

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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.

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.

commitment to product design, manufacturing, and quality systems are supported by our compliance with several regulatory agency requirements

and standards.

We consider our relationships with our suppliers and manufacturers to be good, however, during fiscal 2022 and continuing

into fiscal 2023, many of our suppliers have increased lead times, experienced delays in shipments and raised prices or temporarily added

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.

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.

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 and Tustin, California facilities.

both facilities produce products that are certified to ISO 13485:2016, Medical Device Directive 93/42/EEC – Annex II.

At June 30, 2023,

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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.

We have only one operating segment

as our business is currently operated.

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

and Development

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:

Of our backlog at June 30, 2023, $31.4 million, as well as certain purchase orders received subsequent to June 30, 2023, are expected

to be delivered during fiscal 2024 and the balance of $10.2 million is expected to be delivered in fiscal 2025.

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.

We have only one operating

segment as our business is currently operated.

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.

Research and Development

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

· expanding our knowledge base in the medical device industry to solidify our products with current customers

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and 2% of our revenue in fiscal 2022.

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.

During the fiscal years

ended June 30, 2023 and 2022, we incurred research and development expenses amounting to $2.8 million and $3.0 million, respectively,

which costs exclude labor and related expenses of approximately $724,000 and $739,000 in fiscal 2023 and 2022, respectively, that were

reimbursed by our customers through billings for non-recurring engineering services.

Human Capital Management

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 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:

· Competitive, reasonable, and equitable compensation programs;

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· Education/tuition reimbursement and referral programs.

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.

Our employee turnover for

the fiscal years ended June 30, 2023 and 2022 was 16% and 14%, 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, 2023, we had

146 employees, one of whom was part time, working at our two office locations in California and one employee working remotely out of state.

At June 30, 2022, we had 135 employees, one of whom was 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.

None of our employees are a party to any collective

bargaining agreements with us.

We consider our relationships with our employees to be good.

Government Regulations

The manufacture and distribution

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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.

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.

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).

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.

we believe that both our Irvine, California and Tustin, California facilities are compliant with applicable Good Manufacturing Practices

promulgated by the FDA and are compliant with applicable ISO standards set forth by the International Organization for Standardization.

Patents, Trademarks, and Licensing Agreements

We hold US and foreign patents relating

to our handheld medical devices and torque-limiting screwdrivers.

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

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.

of the patents, if any, is not expected to cause any change in our revenue-generating operations as changing the legal manufacturer of

medical devices is a significant undertaking and the expiration of a patent would offer minimal inducement to make such a change.

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.

we are currently unaware of any reason that would cause us to assert or defend a claim of patent infringement, any 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.

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

What changed 10-K

Item 1. Business