What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-09-05 compared with 2023-10-13 · 140 added, 181 removed, 245 unchanged (57% of the section changed)

18 unchanged sentences

We are headquartered in Irvine, California.

COVID-19 Pandemic

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 and to keep our employees safe.

These measures have changed over time

and continue to change as our specific circumstances change.

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 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

During fiscal 2022, we began to

see some challenges in our supply chain in the form of delayed shipments, longer lead times, higher prices, and surcharges, much of which

our suppliers indicate have been caused by the COVID-19 pandemic.

We have largely been able to mitigate our biggest supply chain 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 second half of fiscal 2022 and in fiscal 2023.

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.

Critical Accounting Policies

Our financial statements

are prepared in accordance with U.S.

The preparation of our financial statements requires management to make estimates and judgments

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

We base our estimates on historical

experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis

for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results

may differ from these estimates.

Critical Accounting Policies and Estimates

Our consolidated financial

statements are prepared in accordance with U.S.

The preparation of our financial statements requires management to make estimates

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

We base our estimates

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

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

Actual results may differ from these estimates.

Revenue Recognition

13 unchanged sentences

In fiscal 2024, the revenue

from non-recurring engineering (“NRE”) and prototype services represents approximately 6% of total revenue.

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

Returns of our product for

2 unchanged sentences

Estimated Losses on Product Development Services

Cost and revenue estimates

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

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

Losses recorded in fiscal 2023 and 2022 related to these

services totaled $108,000 and $0, respectively.

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

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

Losses recorded in fiscal 2024

and 2023 related to these services totaled $118,000 and $108,000, respectively.

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

14 unchanged sentences

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.

demand from the measurement date.

Accounts Receivable

Trade receivables are stated

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

Management determines the allowance for doubtful

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

receivables are written off when deemed uncollectible.

Recoveries of trade receivables previously reserved are offset against the allowance

when received.

at their original invoice amounts, less an allowance for credit losses.

Management determines the allowance for credit losses 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

Deferred costs reflect

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

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

costs incurred related to NRE 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 and a warrant (the “Monogram Warrant”) to purchase common stock

of a publicly held company.

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

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, 2023 and 2022.

Monogram Warrant is the subject of the restatement of our previous financial statements described in Note 2 to the consolidated financial

statements contained elsewhere in this report.

As previously disclosed, from the time we were issued the Monogram warrant through the

fourth quarter of fiscal 2023, we considered the Monogram warrant to be of little value and did not record it as an investment in our

consolidated balance sheet.

of marketable equity securities of publicly held companies and, as of June 30, 2023, a warrant (the “Monogram Warrant”) to

purchase common stock of a publicly held company (which we exercised in the second quarter of fiscal 2024).

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.

investments were subject to a valuation analysis as of June 30, 2024 and 2023.

Long-lived Assets

29 unchanged sentences

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

Results of Operations for the Fiscal Year Ended June 30, 2023

Compared to the Fiscal Year Ended June 30, 2022

Results of Operations for the Fiscal Year Ended

June 30, 2024 Compared to the Fiscal Year Ended June 30, 2023

The following tables set

1 unchanged sentence

Ended June 30,

% of Net Sales

Cost of sales

1 unchanged sentence

General and administrative expenses

Loss from disposal of equipment

Research and development costs

1 unchanged sentence

Operating income

Other income (loss), net

Other income (expense), net

Income before income taxes

Income tax expense

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.

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

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

1 unchanged sentence

Ended June 30,

From 2022 To 2023

% of Net Sales

Medical devices

4 unchanged sentences

sales in fiscal 2024 increased by $7.8 million, or 17%, as compared to fiscal 2023, due primarily to an increase in repair revenue of

$6.0 million and an increase in NRE and prototype services of $1.7 million offset by a decrease in medical device revenue of $3.3 million.

$3.9 million and an increase in medical device revenue of $6.2 million offset by a decrease in NRE and prototype services of $1.9 million.

Details of our medical device sales by type is as follows:

Ended June 30,

From 2022 To 2023

Medical device sales:

of our medical device products decreased $3.3 million, or 10%, during fiscal 2023 as compared to fiscal 2022.

of our medical device products increased $6.2 million, or 20%, during fiscal 2024 as compared to fiscal 2023.

During fiscal 2024, thoracic

sales increased by $705,000 to $2.6 million, up from $1.9 million in fiscal 2022, due to additional orders from our single distributor

of this driver.

In late fiscal 2023, we executed a supply agreement with another distributor for a thoracic driver and we expect an increase

in revenue of thoracic products in fiscal 2024.

Recurring revenue from distributors of CMF drivers decreased $1.8 million in fiscal 2023

compared to fiscal 2022.

We do not have much visibility into our customers’ distribution networks, but we surmise the decline relates

to a buildup of customer inventory.

Our orthopedic sales decreased $2.2 million in fiscal 2023 compared to fiscal 2022, in part, due

to our largest customer shifting priorities to an enhanced repair program (described under the discussion of repair revenue below).

sales increased by $460,000 to $3.0 million, up from $2.6 million in fiscal 2023, due to a product launch for a second distributor in

the first quarter of fiscal 2024.

Recurring revenue from distributors of CMF drivers increased $1.8 million in fiscal 2024 compared

to fiscal 2023.

We do not have much visibility into our customers’ distribution networks, but we surmise the increase relates to

a replenishment of customer inventory.

Our orthopedic sales increased $3.9 million in fiscal 2024 compared to fiscal 2023, due to continued

demand from our largest customer.

of our industrial and scientific products, which consist primarily of our compact pneumatic air

2 unchanged sentences

with no substantive marketing or sales efforts.

of our NRE & prototype services increased $1.7 million or 166% compared to fiscal 2022 and relates to billable engagement for multiple

engineering projects.

of our NRE & prototype services decreased $1.9 million or 71% compared to fiscal 2023 and relates to a reduction in the number of

billable engagements during fiscal 2024 compared to fiscal 2023.

of our dental products and components in fiscal 2024 decreased $56,000, or 22%, as compared to fiscal 2023.

The decrease is as expected

because in fiscal 2022 we sold components of excess inventory directly to our largest customer due to the release of their next generation

We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining

and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining

component inventory.

4 unchanged sentences

We are rapidly refurbishing these handpieces and we believe that our largest customer will request enhanced repairs for

a similar volume or number of handpieces in fiscal 2024, but there are no assurances that our customer will return the same volume of

a similar volume or number of handpieces in fiscal 2025;

however, there are no assurances as to the number of enhanced repairs that will

ultimately be requested from this client in fiscal 2025 or thereafter.

At June 30, 2024, we

2 unchanged sentences

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

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.

Substantially all of our backlog at June 30, 2024, as well as certain purchase orders received subsequent to June 30, 2024, are expected

to be delivered during 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 expect a reduction in fiscal 2025 revenue as compared to fiscal 2024 revenue and believe that the decline in backlog at June

30, 2024 compared to June 30, 2023 is related to timing of customer orders, although there can be no assurance that there will not be

a decline in future revenue.

Additionally, $10.2 million of our backlog at June 30, 2023 related to orders expected to be delivered in

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

Cost of Sales and Gross Margin

Ended June 30,

(Decrease) From 2022 To 2023

Increase (Decrease)

Cost of sales:

% of Net Sales

Product costs

5 unchanged sentences

$6.0 million, or 18%, from fiscal 2023, primarily due to the increase in product costs, consistent with the 17% increase in net sales.

coupled with higher material and labor costs.

During fiscal 2023, we experienced $1.7 million of under-absorption of manufacturing costs

compared to $877,000 in fiscal 2022, due primarily to actual production hours being less than planned .

Costs related to inventory and warranty charges decreased $672,000 in fiscal 2023 compared to fiscal 2022, primarily due to sourcing of

components for our printed circuit board assemblies at prices higher than usual in fiscal 2022 coupled with reduced warranty repairs related

to the handpiece we sell to our largest customer in fiscal 2023 .

During fiscal 2024, we experienced $74,000 of over-absorption of manufacturing costs compared to $1.7 million of under-absorption in fiscal

2023, due primarily to an increase in our standard labor and overhead rate recorded in the fourth

quarter of fiscal 2024 .

Costs related to inventory and warranty charges increased $154,000 in fiscal 2024 compared to fiscal 2023,

primarily due to increased inventory reserves .

Operating Expenses

Ended June 30,

From 2022 To 2023

in thousands)

Increase (Decrease)

% of Net Sales

7 unchanged sentences

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

Selling expenses increased

$64,000, or 70%, compared to fiscal 2022, primarily due to increased sales commissions.

Selling expenses decreased

$38,000, or 25%, compared to fiscal 2023, primarily due to decreased sales commissions in the amount of $74,000 offset by increased recruiting

and advertising of $20,000 and $10,000, respectively.

General and administrative

2 unchanged sentences

associated with being a public company.

The $875,000 decrease in G&A expenses from fiscal 2022 to 2023 is due primarily to reduced

legal and settlement expenses related to employment matters and reduced non-cash compensation expense related to stock compensation.

The $44,000 increase in G&A expenses from fiscal 2023 to 2024 is due primarily to increased

audit and consulting fees in the amount of $323,000 and increased recruiting fees of $100,000 offset by reduced patent related legal fees

of $233,000 and non-cash compensation expense related to stock compensation in the amount of $161,000 due primarily to forfeitures caused

by employee turnover.

Research and development

2 unchanged sentences

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

Research and development costs decreased $176,000

from fiscal 2022 to 2023 due to increased personnel and related costs of $333,000 as well as increased legal fees related to IP matters

of $89,000 offset by decreased spending on internal product development projects of $604,000.

In fiscal 2023, our engineering department

has continued to be engaged in billable customer projects and therefore those costs are shifted to cost of sales instead of research and

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 40% of total operating expenses

during fiscal 2022 and 2023 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):

Total Research and Development costs:

Products in development:

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

(2) The products in development include risks that they could be abandoned in the future prior to completion,

they could fail to become commercialized, or the actual annual revenue realized may be less than the amount estimated.

(3) We have suspended the vital ventilator project at this time.

Fiscal 2024 research and development costs increased

$385,000 from fiscal 2023 due to increased spending on internal product development projects of $82,000 as well as reduced billable project

expenditures which get reclassified to cost of sales.

The majority of our research and development expenditures incurred in fiscal 2024

and 2023 relates to our sustaining activities related to products we currently manufacture and sell.

As we introduce new products into

1 unchanged sentence

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.

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.

Other Income (Expense)

2 unchanged sentences

earned in fiscal 2024 and 2023 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

Unrealized gain (loss) on investments

Unrealized gain (loss)

on investments

The unrealized gain (loss) on

investments relates to our investment portfolio, which is the subject of our restatement described in Note 2 to the consolidated financial

statements contained elsewhere in this report.

investments relates to our investment portfolio.

Additional information related to the nature of our investments is more fully described

1 unchanged sentence

Gain on Sale of Investments

During fiscal 2023, we liquidated

some of the investments in our portfolio of equity investments receiving proceeds of $89,000 and recording a gain of $6,000.

During fiscal

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

During fiscal 2024, our investment

sales were immaterial.

During fiscal 2023, we liquidated some of the investments in our portfolio of equity investments receiving proceeds

of $89,000 and recording a gain of $6,000.

Interest Expense

3 unchanged sentences

The effective tax rate

for the fiscal years ended June 30, 2023 and 2022 was 26% and 20%, as restated, respectively, slightly less than our combined expected

federal and applicable state corporate income tax rates due primarily to federal and state research credits.

for the fiscal years ended June 30, 2024 and 2023 was 19% and 25%, respectively, slightly less than our combined expected federal and

applicable state corporate income tax rates due primarily to federal and state research credits.

Liquidity and Capital

12 unchanged sentences

Cash Flows from Operating Activities

Cash provided by

operating activities totaled $6.2 million during fiscal 2024.

Our net income was $2.1 million, which includes $4.1 million of

unrealized losses on certain equity investments, as well as non-cash stock compensation expense and depreciation and amortization

expense in the amount of $605,000 and $1.2 million, respectively.

Additionally, our accounts payable and accrued expenses increased

by $2.4 million and our inventory decreased by $898,000.

Offsetting these inflows of cash, our accounts receivable and deferred tax

assets grew by $3.9 million and $1.6 million, respectively.

Cash provided by operating

activities during fiscal 2023 totaled $5.5 million.

Our net income was $7.1 million and included $3.9 million of unrealized gains on certain

equity investments, as well as $857,000 of depreciation and amortization and $766,000 of non-cash stock compensation.

Additionally, our

accounts receivable decreased by $5.4 million due to the variability in the timing of shipments and our prepaid expenses and deferred

Our net income was $7.1 million, which includes $3.9 million of unrealized gains on

certain equity investments, as well as $857,000 of depreciation and amortization and $766,000 of non-cash stock compensation.

Additionally,

our accounts receivable decreased by $5.4 million due to the variability in the timing of shipments and our prepaid expenses and deferred

income taxes decreased by $494,000 and $264,000, respectively.

1 unchanged sentence

and our accounts payable and accrued expenses and deferred revenue decreased by $1.1 million and $1.0 million, respectively.

Cash used in operating

activities totaled $847,000 during fiscal 2022.

Our net income was $4.6 million and included $931,000 of unrealized gains on certain equity

investments, as well as 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 Flows from Investing Activities

Net cash used in investing

activities in fiscal 2024 was $2.2 million and related to the exercise of the Monogram Warrant for cash in the amount of $1,250,000 (See

Note 4 to the consolidated financial statements contained elsewhere in this report) as well as equipment and improvements purchases in

the amount of $983,000.

Net cash used in investing

activities in fiscal 2023 was $885,000.

1 unchanged sentence

for the Franklin Property and we received proceeds of $89,000 from the sales of marketable equity securities.

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.

Cash Flows from Financing Activities

Net cash used in financing

activities for fiscal 2023 totaled $2.5 million and included $809,000 in net principal payments of various notes payable to MBT more fully

described in Note 8 to the consolidated financial statements contained elsewhere in this report, and $1.5 million related to the repurchase

of 86,422 shares of our common stock pursuant to our share repurchase program, as well as payment of $223,000 of employee payroll taxes

related to the award of 37,500 shares of common stock to employees under previously granted performance awards.

activities for fiscal 2024 totaled $4.3 million and related primarily to the $3.5 million repurchase of 184,901 shares of our common stock

pursuant to our share repurchase program, as well as $816,000 of net principal payments related to our various loans from MBT more fully

described in Note 7 to the consolidated financial statements contained elsewhere in this report.

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.

activities for fiscal 2023 totaled $2.5 million and included $809,000 in net principal payments of various notes payable to MBT, and $1.5

million related to the repurchase of 86,422 shares of our common stock pursuant to our share repurchase program, as well as payment of

$223,000 of employee payroll taxes related to the award of 37,500 shares of common stock to employees under previously granted performance

Liquidity Requirements for the Next 12 Months

7 unchanged sentences

We may also liquidate some or all of our investment portfolio

or borrow further against our $7.0 million Amended Revolving Loan with MBT (see Note 8 to condensed consolidated financial statements

contained elsewhere in this report), under which we had availability of $4.5 million as of June 30, 2023.

or borrow against our revolving loan with MBT (See Notes 7 and 14 to consolidated financial statements contained elsewhere in this report),

under which we had availability of $4.0 million as of June 30, 2024.

We are focused on preserving our

25 unchanged sentences

may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit

The Investment Committee approved each of the investments comprising the $8.8 million of investments consisting of a warrant to purchase

common stock of a publicly held company and marketable public equity securities held at June 30, 2023, which amount includes unrealized

holding gains in the amount of $6.1 million at June 30, 2023.

December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock,

as the prior repurchase plan, authorized by our Board in 2013, authorizing the repurchase of 750,000 shares of common stock was nearing

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

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

(“10b5-1 Plan” or “Plan”).

The Investment Committee approved each of the investments comprising the $5.8 million of investments in marketable public equity securities

held at June 30, 2024, which amount includes unrealized holding gains in the amount of $3.1 million at June 30, 2024.

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 Exchange Act (“10b5-1 Plan” or “Plan”).

During the fiscal year ended

3 unchanged sentences

On a cumulative

basis, we have repurchased a total of 1,197,168 shares under the share repurchase programs at an aggregate cost, inclusive of fees under

the Plan, of $17.2 million.

basis, since 2013 we have repurchased a total of 1,381,349 shares under the share repurchase programs at an aggregate cost, inclusive

of fees under the Plan, of $20.7 million.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

As a smaller reporting company, we are not required

to provide this information.

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 7. Management’s Discussion and Analysis