What changed in this filing

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Item 1. Business

2022-09-08 compared with 2021-09-09 · 142 added, 154 removed, 97 unchanged (75% of the section changed)

Company Overview

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.

(“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 market and we have continued investment in this area with research and development focused

on applying this technology to thoracic surgical applications.

In early fiscal 2019, we entered a development contract with an existing

significant customer to private-label a thoracic driver for their unique specifications.

We made our first shipment of this new driver,

batteries and accessories during the third quarter ended March 31, 2020.

In November 2020, we purchased

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

Property”).

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

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.

Currently, we are continuing with our build-out of the property and have

yet to transition any of our employees into the facility.

We anticipate that upon completion of initial improvements, to include the installation

of a 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 first quarter of next fiscal year.

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.

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

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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.

our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above.

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.

obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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Description of Business

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):

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):

Years Ended June 30,

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manufacturers and our air motors are sold primarily to a wide range of distributors and end users.

In fiscal 2021, our top three

customers accounted for 91% of our sales compared to 92% in fiscal 2020.

In fiscal 2021, we had one customer, included in both medical

device and repairs revenue above, that accounted for 58% of sales with our next largest customer accounting for 27% of sales.

This compares

to fiscal 2020, when these same two customers accounted for 65% and 17%, respectively, of our total sales.

In many cases, including our

largest customers, disclosure of customer names is prohibited by confidentiality agreements with such entities.

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 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.

Currently, we are continuing with our build-out of

the property and have yet to transition any of our employees into the facility.

We anticipate that upon completion of initial improvements,

to include the installation of a clean room, we will expand our capacity for the manufacture of batteries and new products.

that we will begin operations in the new facility some time during the first quarter of next fiscal year.

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.

As previously discussed,

we invested significantly during fiscal 2018 on a thoracic driver utilizing adaptive torque-limiting software, and in early fiscal 2019

we entered a development contract with an existing significant customer to private-label this driver for their unique specifications.

Sales to this customer increased during fiscal 2021 by $4.3 million, compared to fiscal 2020.

Of the total fiscal 2021 sales to this customer

of $10.1 million, $7.9 million relates to sales of this thoracic driver and related batteries and accessories.

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

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in the supply chain.

We consider our relationships with our suppliers and manufacturers to be good.

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

Our commitment to product

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

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 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.

addition, our Irvine, California facility is certified to ISO 13485:2016, Medical Device Directive 93/42/EEC –

Annex II, and

conforms to Canadian Medical Device Regulations.

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.

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 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

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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.

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

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● enhancing our existing product lines.

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

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.

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and 1% of our revenue in fiscal 2021.

During the fiscal years ended

June 30, 2021 and 2020, we incurred research and development expenses amounting to $4.4 million and $2.3 million, respectively, which

costs exclude labor and related expenses of approximately $121,000 and $315,000 in fiscal 2021 and 2020, respectively, that were reimbursed

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

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.

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, 2021 and 2020 was 16% and 22%, 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, 2021, we had 118

employees, one of whom is part-time, as well as three temporary employees all working at our corporate office in Irvine, California and

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, 2020, we had 117 employees as well as three temporary employees all working at

our corporate office in Irvine, California and two employees working remotely out of state.

None of our employees are a party to any collective

bargaining agreements with us.

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.

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).

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.

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

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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.

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

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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.

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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.

as described in Note 8 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 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.

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.

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