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What changed in PRO DEX INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of PRO DEX INC's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+132 added−141 removedSource: 10-K (2024-09-05) vs 10-K (2023-10-13)

Top changes in PRO DEX INC's 2024 10-K

132 paragraphs added · 141 removed · 107 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeOur 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.
Biggest changeOur employee turnover for the fiscal years ended June 30, 2024 and 2023 was 21% and 16%, respectively.
We consider our relationships with our employees to be good. 5 Government Regulations 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.
We consider our relationships with our employees to be good. Government Regulations 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.
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. 4 Research and Development We conduct research and development activities to both maintain and improve our market position.
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.
Additionally, we continue to invest in property and equipment as well as personnel to expand our capacity to achieve higher sales volumes. 3 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.
Additionally, we continue to invest in property and equipment as well as personnel to expand our capacity to achieve higher sales volumes. 2 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 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. 6
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. 5
We believe the new facility will create additional capacity for our expected continued growth over the next several years. 2 O ur 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 .
We believe the new facility will create additional capacity for our expected continued growth over the next several years. 1 O ur 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 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.
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 2024, our top three customers accounted for 88% of our sales compared to 92% in fiscal 2023.
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 fiscal 2024, we had one customer, included in both medical device and repairs revenue above, that accounted for 71% of sales with our next largest customer accounting for 12% of sales. This compares to fiscal 2023, when these same two customers accounted for 67% and 16%, respectively, of our total sales.
At June 30, 2023, we had a backlog of $41.6 million compared with a backlog of $16.5 million at June 30, 2022. 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.
At June 30, 2024, we had a backlog of $19.8 million compared with a backlog of $41.6 million at June 30, 2023. 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.
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 6% of our revenue in fiscal 2023 and 2% of our revenue in fiscal 2022.
In certain instances, we may share research and development costs with our customers by billing for non-recurring engineering (“NRE”) services often provided for under development portions of certain contracts. Revenue recognized for NRE services represented 1% of our revenue in fiscal 2024 and 6% of our revenue in fiscal 2023.
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 surcharges.
We consider our relationships with our suppliers and manufacturers to be good, however, since fiscal 2022 and continuing through fiscal 2024, many of our suppliers have increased lead times, experienced delays in shipments and raised prices or temporarily added surcharges.
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 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.
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.
During the fiscal years ended June 30, 2024 and 2023, we incurred research and development expenses amounting to $3.2 million and $2.8 million, respectively, which costs exclude labor and related expenses of approximately $224,000 and $724,000 in fiscal 2024 and 2023, respectively, that were reimbursed by our customers through billings for NRE services.
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.
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. Downward pressure on health care costs could result in reduced pricing or demand for our products.
The proportion of total sales by type is as follows (in thousands, except percentages): Years Ended June 30, 2023 2022 (In thousands) % of Revenue % of Revenue Medical devices $ 30,740 66 % $ 34,004 81 % Industrial and scientific 865 2 % 919 2 % NRE & Prototypes 2,695 6 % 1,014 2 % Dental and component 257 1 % 465 1 % Repairs 12,617 27 % 6,610 16 % Discounts & Other (1,087 ) (2 %) (971 ) (2 %) Total Sales $ 46,087 100 % $ 42,041 100 % 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.
The proportion of total sales by type is as follows (in thousands, except percentages): Years Ended June 30, 2024 2023 (In thousands) % of Revenue % of Revenue Medical devices $ 36,979 69 % $ 30,740 66 % Industrial and scientific 765 1 % 865 2 % NRE & Prototypes 786 1 % 2,695 6 % Dental and component 201 — 257 1 % Repairs 16,505 31 % 12,617 27 % Discounts & Other (1,392 ) (2 %) (1,087 ) (2 %) Total Sales $ 53,844 100 % $ 46,087 100 % 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.
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.
At June 30, 2023, we had 146 employees, one of whom was part-time, and all were working at either our Irvine, California facility or our Tustin, California facility, except for one employee who worked remotely out of state. None of our employees are a party to any collective bargaining agreements with us.
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.
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.
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.
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.
Segments We have only one operating segment as our business is currently operated. Competition 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.
The CEO utilizes consolidated operating income to analyze our business operations. 3 Competition 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.
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Employees 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.
Added
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.
Added
Additionally, $10.2 million of our backlog at June 30, 2023 related to orders expected to be delivered in fiscal 2025. We do not typically experience seasonal fluctuations in our shipments and revenues. Segments We have only one operating segment as our business is currently operated.
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We have reached this conclusion because the our Chief Executive Officer (“CEO”) allocates resources, assesses performance, and manages our business as one segment. Additionally, 99% of our business relates to designing, manufacturing, and repairing medical devices. We primarily design, sell, and repair handheld medical devices and accessories.
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We provide medical devices, NRE and proto-type services, as well as repairs to all our customers and we utilize one machine shop and purchasing team to procure and manufacture all the products that we sell.
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We consider the turnover rate a valuable metric to measure the effectiveness of our programs and to assist in developing new programs. 4 Employees At June 30, 2024, we had 148 employees, two of whom were part time, and all of our employees were working at one or both of our facilities in Irvine, California and Tustin, California.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeRegulatory & Compliance Risks 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.
Biggest changeThe 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.
Any such failure or delay could adversely affect our competitive position or could make our current products obsolete. 8 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.
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.
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.
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. 7 We do not believe that our operations or products infringe on the intellectual property rights of others.
The following factors, among others, affect our ability to forecast accurately our sales and production capacity: • Changes in the specific products or quantities our customers order; and • Long lead times and advance financial commitments for components required to complete actual/anticipated customer orders. 7 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.
The following factors, among others, affect our ability to forecast accurately our sales and production capacity: • Changes in the specific products or quantities our customers order; and • Long lead times and advance financial commitments for components required to complete actual/anticipated customer orders. 6 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.
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. 12 The agreements governing our various debt obligations impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.
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. 11 The agreements governing our various debt obligations impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.
For example, in March 2023, Silicon Valley Bank (“SVB”) was unable to continue their operations and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB. However, if further failures in financial institutions occur where we hold deposits, we could experience additional risk.
For example, in March 2023, Silicon Valley Bank (“SVB”) was unable to continue their operations and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB. However, if similar failures in financial institutions occur where we hold deposits, we could experience additional risk.
In addition, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations. 9 Our cash and cash equivalents may be exposed to banking institution risk.
In addition, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations. 8 Our cash and cash equivalents may be exposed to banking institution risk.
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 2023, we derived 97% of our revenue from sales of our medical device products and related services.
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 2024, we derived 99% of our revenue from sales of our medical device products and related services.
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.
The loss of, or a material reduction in purchases from, 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.
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 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.
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 2023, our top three customers accounted for 92% of our sales, with our current largest customer accounting for 67% of our sales.
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 2024, our top three customers accounted for 88% of our sales, with our current largest customer accounting for 71% of our sales.
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.
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 (consisting of substantially all of our assets) securing that debt.
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.
However, if our available capital resources become insufficient, we may 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.
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.
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. We have identified material weaknesses in our internal control over financial reporting.
We invest a significant portion of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2023, the fair value of our investments was approximately $8.7 million. Of that amount $6.2 million relates to an investment in Monogram Orthopaedics Inc.
We invest a significant portion of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2024, the fair value of our investments was approximately $5.8 million. Of that amount $3.2 million relates to an investment in Monogram Technologies, Inc., formerly Monogram Orthopaedics Inc.
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.
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.
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.
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.
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.
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.
As of August 12, 2023, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, directly or indirectly, controlled voting power over approximately 39% (29% and 10%, respectively) of the outstanding shares of our common stock.
As of August 20, 2024, two of our directors, Nicholas J. Swenson and Raymond E. Cabillot, directly or indirectly, controlled voting power over approximately 42% (31% and 11%, respectively) of the outstanding shares of our common stock.
Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including: • Difficulties in assimilating and integrating the operations, products, and workforce of an acquired business; • The retention of key employees; • Management of facilities and employees in separate geographic areas; • The integration or coordination of different research and development and product manufacturing facilities; • Successfully converting information and accounting systems; and • Diversion of resources and management attention from our other operations.
Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including: • Difficulties in assimilating and integrating the operations, products, and workforce of an acquired business; • The retention of key employees; • Management of facilities and employees in separate geographic areas; • The integration or coordination of different research and development and product manufacturing facilities; • Successfully converting information and accounting systems; and • Diversion of resources and management attention from our other operations. 9 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.
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 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. 12 General Risks The global economic environment may impact our business, financial condition, and results of operations.
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.
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. We may not be able to successfully integrate our business acquisitions, which could adversely affect our business, financial condition, and results of operations.
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.
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.
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. 10 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 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.
This customer has made purchase commitments to us through a supply agreement to purchase surgical handpieces through calendar 2025.
This customer has made purchase commitments to us through a supply agreement to purchase surgical handpieces through calendar 2025, but there can be no assurance that this customer will extend purchase commitments to us beyond that date.
(“Monogram”) described more fully in Note 5 to the consolidated financial statements contained elsewhere in this report. The investment in Monogram is also the subject of the restatement of our previous financial statements described in Note 2 to the consolidated financial statements contained elsewhere in this report.
(“Monogram”), described more fully in Note 4 to the consolidated financial statements contained elsewhere in this report.
Further, our historical operating results are not necessarily indicative of future performance for any particular period. 11 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.
In addition, it is possible that our operating results in future quarters may be below the expectations of public market analysts and investors.
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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 were to again materially adversely impact the United States and other markets where our products are sold, coupled with any new recommended deferrals of elective procedures by governments and other authorities, we would expect to see a decline in demand from our principal customer.
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Additionally, these investments are subject to changes in their valuation, and are recorded at their estimated fair value at each measurement date, with unrealized gains and losses presented in other income (expense) in our consolidated income statements, which can result in material upward or downward non-cash adjustments to our income from quarter-to-quarter. Our operations are dependent upon our key personnel.
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Our initial investment in Monogram was an $800,000 loan which we made primarily in exchange for exclusive development and supply rights. At that time, we believed that this long-term strategic investment would likely take several years to cultivate, which it has.
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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.
Removed
Additionally, these investments are subject to changes in their valuation, which could cause us to record a significant unrealized loss in the future. We may not be able to successfully integrate our business acquisitions, which could adversely affect our business, financial condition, and results of operations.
Added
In such an event, the price of our common stock could be materially adversely affected. 10 Regulatory & Compliance Risks Our operations are subject to a number of complex government regulations, the violation of which could have a material adverse effect on our business.
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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.
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Failure to achieve and maintain effective internal control over financial reporting could materially and adversely affect our business, results of operations, financial condition, and stock price. We identified material weaknesses in our internal control over financial reporting as of June 30, 2024, and June 30, 2023.
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The penalties for non-compliance could range from an administrative warning to termination of a portion of our business.
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The material weaknesses as of June 30, 2024, related to our inventory accounting and the valuation of one of our Level 2 investments. The material weakness as of June 30, 2023, related to the valuation of our Level 3 investment.
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Management can give no assurance that material weaknesses in internal controls will not be discovered. The material weakness discovered in conjunction with the preparation of our consolidated financial statements for the fiscal year ended June 30, 2023, as described in Note 2 to the consolidated financial statements contained elsewhere in this report, for example, has been time consuming and costly.
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As a result of these material weaknesses, as of June 30, 2024, and June 30, 2023, our management concluded that our internal control over financial reporting was not effective based on the framework in Internal Control-Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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Risks Related to COVID-19 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.
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In fiscal 2024, we implemented a remediation plan designed to address our June 30, 2023 material weakness, which was both time consuming and costly. We are actively engaged in implementing a remediation plan designed to address the June 30, 2024 material weaknesses.
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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.
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However, as with the June 30, 2023 material weakness, our remediation efforts could be both time consuming and costly.
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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.
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In addition, if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
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Therefore, it is impossible to predict the future impact of the pandemic on our business, financial condition, and results of operations. 13 The ability of our employees to work may be significantly impacted by the COVID-19 crisis. Substantially all of our employees worked in the office during fiscal 2023.
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Even if the June 30, 2024 material weaknesses are quickly remedied, or if we or our auditors discover one or more additional material weaknesses in our internal controls, the market’s confidence in our financial statements could decline and our stock price may be harmed.
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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.
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In addition, our failure to maintain effective controls over financial reporting could subject us to sanctions or investigations by The Nasdaq Stock Market, the SEC, or other regulatory authorities. Our evaluation of internal controls and remediation of potential problems is costly and time-consuming and could expose weaknesses in financial reporting.
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Further, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and may 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.
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Management can give no assurance that material weaknesses in internal controls will not be discovered (see above, “ We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could materially and adversely affect our business, results of operations, financial condition, and stock price. ”).
Removed
To date, several of our employees have had COVID-19, but all have made full recoveries and returned to work.
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We cannot be certain that a future material weakness will not occur and that it will not be time consuming and costly to remediate and could further divert the attention of management.
Removed
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.
Removed
General Risks The global economic environment may impact our business, financial condition, and results of operations.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe purchased this 25,000 square foot facility in November 2020 from an unrelated third party through a loan (See Note 5 of to the consolidated financial statements contained elsewhere in this report). The building is a one-story, stand-alone structure of concrete “tilt-up” construction, approximately 45 years old and in good condition.
Biggest changeWe purchased this 25,000 square foot facility in November 2020 from an unrelated third party, with the majority of the purchase price financed by a property loan (See Notes 4 and 7 of to the consolidated financial statements contained elsewhere in this report).
ITEM 2. PROPERTIES 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 $42,000 with 3% annual escalations through the expiration of the lease in September 2027.
ITEM 2. PROPERTIES 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 $44,000 with 3% annual escalations through the expiration of the lease in September 2027.
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.
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.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeITEM 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 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
Biggest changeITEM 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 16 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeRepurchases During the fourth quarter of fiscal 2023 and 2022, we repurchased 0 and 22,532 shares of our common stock, respectively, at an aggregate cost of $0 and $350,000, 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.
Biggest changeIn addition, our current credit facilities contain covenants that prohibit us from paying dividends. 15 Repurchases During the fourth quarter of fiscal 2024 and 2023, we repurchased 88,011 and 0 shares of our common stock, respectively, at an aggregate cost of $1.7 million and $0, 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 (the “Exchange Act”).
The quotations reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions. On September 29, 2023, the last sale price of our common stock as reported by NASDAQ was $15.70 per share.
The quotations reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions. On September 3, 2024, the last sale price of our common stock as reported by NASDAQ was $22.33 per share.
High Low Year ended June 30, 2023: First Quarter $ 20.25 $ 14.94 Second Quarter 19.93 15.80 Third Quarter 17.71 15.29 Fourth Quarter 19.24 15.50 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 Holders As of September 29, 2023, there were 120 holders of record of our common stock.
High Low Year ended June 30, 2024: First Quarter $ 18.94 $ 15.52 Second Quarter 18.63 14.63 Third Quarter 22.50 16.50 Fourth Quarter 19.95 17.55 Year ended June 30, 2023: First Quarter $ 20.25 $ 14.94 Second Quarter 19.93 15.80 Third Quarter 17.71 15.29 Fourth Quarter 19.24 15.50 Holders As of September 3, 2024, there were 122 holders of record of our common stock.
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Period Total Number of Shares Purchased (1) Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) April 1, 2024 to April 30, 2024 32,334 $ 18.47 32,334 499,707 May 1, 2024 to May 31, 2024 38,162 $ 19.17 38,162 461,545 June 1, 2024 to June 30, 2024 17,515 $ 19.79 17,515 444,030 Total 88,011 $ 19.04 88,011 (1) In December 2019, we announced that our Board of Directors authorized the repurchase of up to one million shares of our outstanding common stock.
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The extent to which we repurchase our shares, and the timing of such repurchases is at our discretion and will depend upon a variety of factors, including working capital requirements, market conditions, legal requirements, business condition, and other factors. Our repurchase program has no stated expiration and may be discontinued at any time

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeIn evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). 17 Results of Operations for the Fiscal Year Ended June 30, 2023 Compared to the Fiscal Year Ended June 30, 2022 The following tables set forth results from operations for the fiscal years ended June 30, 2023 and 2022: Years Ended June 30, 2023 2022 (Restated) Dollars in thousands % of Net Sales % of Net Sales Net sales $ 46,087 100 % $ 42,041 100 % Cost of sales 33,338 72 % 28,909 69 % Gross profit 12,749 28 % 13,132 31 % Selling expenses 155 — 91 — General and administrative expenses 4,028 9 % 4,903 12 % Loss from disposal of equipment — — 35 — Research and development costs 2,804 6 % 2,980 7 % Total operating expenses 6,987 15 % 8,009 19 % Operating income 5,762 13 % 5,123 12 % Other income (loss), net 3,666 7 % 571 1 % Income before income taxes 9,428 20 % 5,694 13 % Income tax expense 2,354 5 % 1,122 2 % Net income $ 7,074 15 % $ 4,572 11 % Net Sales The majority of our revenue is derived from designing, developing, and manufacturing powered surgical instruments for medical device original equipment manufacturers.
Biggest changeResults of Operations for the Fiscal Year Ended June 30, 2024 Compared to the Fiscal Year Ended June 30, 2023 The following tables set forth results from operations for the fiscal years ended June 30, 2024 and 2023: Years Ended June 30, 2024 2023 Dollars in thousands % of Net Sales % of Net Sales Net sales $ 53,844 100 % $ 46,087 100 % Cost of sales 39,293 73 % 33,338 72 % Gross profit 14,551 27 % 12,749 28 % Selling expenses 117 — 155 — General and administrative expenses 4,072 8 % 4,028 9 % Research and development costs 3,189 6 % 2,804 6 % Total operating expenses 7,378 14 % 6,987 15 % Operating income 7,173 13 % 5,762 13 % Other income (expense), net (4,539 ) (8 %) 3,666 7 % Income before income taxes 2,634 5 % 9,428 20 % Income tax expense 507 1 % 2,354 5 % Net income $ 2,127 4 % $ 7,074 15 % 19 Net Sales The majority of our revenue is derived from designing, developing, manufacturing and\ repairing powered surgical instruments for medical device original equipment manufacturers.
Building, equipment, and improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods: 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 Intangibles Other intangibles consist of legal fees incurred in connection with patent applications.
Building, equipment, and improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods: 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 18 Intangibles Other intangibles consist of legal fees incurred in connection with patent applications.
The following discussion contains forward-looking statements. (See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this report.) Overview 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, 2023 and 2022.
The following discussion contains forward-looking statements. (See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this report.) Overview 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, 2024 and 2023.
Deferred tax assets and liabilities at June 30, 2023 and 2022 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.
Deferred tax assets and liabilities at June 30, 2024 and 2023 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.
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.
Due 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.
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”).
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”).
Inventories 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.
Inventories 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 from the measurement date.
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.
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.
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. An expected 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.
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. 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.
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.
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.
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. These costs get recorded to cost of sales in the period that the revenue is recognized.
Recoveries of trade receivables previously reserved are offset against the allowance when received. Deferred Costs Deferred costs reflect 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.
Interest Expense Interest expense incurred in fiscal 2023 and 2022 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.
Interest Expense Interest expense incurred in fiscal 2024 and 2023 consists primarily of interest expense related to our debt with Minnesota Bank & Trust (“MBT”) described more fully in Note 7 to the consolidated financial statements contained elsewhere in this report.
Actual results may differ from these estimates. 16 Revenue Recognition 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.
Revenue Recognition 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.
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. Trade receivables are written off when deemed uncollectible.
Accounts Receivable Trade receivables are stated 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.
Sales of our industrial and scientific products, which consist primarily of our compact pneumatic air motors, decreased $54,000, or 6%, for fiscal 2023 compared to fiscal 2022. The revenue decrease is expected as these are legacy products with no substantive marketing or sales efforts.
Sales of our industrial and scientific products, which consist primarily of our compact pneumatic air motors, decreased $100,000, or 12%, for fiscal 2024 compared to fiscal 2023. The revenue decrease is expected as these are legacy products with no substantive marketing or sales efforts.
At June 30, 2023, we had a backlog of $41.6 million compared with a backlog of $16.5 million at June 30, 2022. 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.
At June 30, 2024, we had a backlog of $19.8 million compared with a backlog of $41.6 million at June 30, 2023. 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.
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.
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. All of our investments were subject to a valuation analysis as of June 30, 2024 and 2023.
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. 23 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.
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. 24 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.
Income Taxes 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.
Income Taxes The effective tax rate 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.
During the 2023 fiscal year, we made capital expenditures in the amount of $974,000 primarily 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 2023 was $885,000. During the 2023 fiscal year, we made capital expenditures in the amount of $974,000 primarily for the Franklin Property and we received proceeds of $89,000 from the 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.
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, 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.
Our fiscal 2023 repair revenue increased approximately $6.0 million, or 91%, to $12.6 million, as compared to fiscal 2022, due to increased repairs of the orthopedic handpiece we sell to our largest customer. We expected repair revenue to increase based upon the customer’s requested refurbishments to upgrade previously purchased handpieces to the next generation, which we collectively term “enhanced repairs”.
Our fiscal 2024 repair revenue increased approximately $3.9 million, or 31%, to $16.5 million, as compared to fiscal 2023, due to increased repairs of the orthopedic handpiece we sell to our largest customer. We expected repair revenue to increase based upon the customer’s requested refurbishments to upgrade previously purchased handpieces to the next generation, which we collectively term “enhanced repairs”.
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.
We may also liquidate some or all of our investment portfolio 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.
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. All repurchases under the 10b5-1 Plans were administered through an independent broker.
On a cumulative 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.
In fiscal 2023, the revenue from non-recurring engineering (“NRE”) and prototype services represents approximately 6% 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.
In fiscal 2024, the revenue from NRE and prototype services represents approximately 1% 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.
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 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 the fiscal year ended June 30, 2023, we repurchased 86,422 shares at an aggregate cost, inclusive of fees under the Plan, of $1.5 million. 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, 2024, we repurchased 184,901 shares at an aggregate cost, inclusive of fees under the Plan, of $3.5 million. During the fiscal year ended June 30, 2023, we repurchased 86,422 shares at an aggregate cost, inclusive of fees under the Plan, of $1.5 million.
Liquidity and Capital Resources 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, 2023 and 2022: As of and for the Years Ended June 30, 2023 2022 (In thousands) Cash provided by (used in): Operating activities $ 5,462 $ (847 ) Investing activities $ (885 ) $ (1,235 ) Financing activities $ (2,490 ) $ (790 ) Cash, cash equivalents and working capital: Cash and cash equivalents $ 2,936 $ 849 Working capital $ 21,303 $ 19,812 Cash Flows from Operating Activities Cash provided by operating activities during fiscal 2023 totaled $5.5 million.
Liquidity and Capital Resources 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, 2024 and 2023: As of and for the Years Ended June 30, 2024 2023 (In thousands) Cash provided by (used in): Operating activities $ 6,199 $ 5,462 Investing activities $ (2,233 ) $ (885 ) Financing activities $ (4,271 ) $ (2,490 ) Cash, cash equivalents and working capital: Cash and cash equivalents $ 2,631 $ 2,936 Working capital $ 23,719 $ 21,303 Cash Flows from Operating Activities Cash provided by operating activities totaled $6.2 million during fiscal 2024.
Liquidity Requirements for the Next 12 Months As of June 30, 2023, our working capital was $21.3 million.
Liquidity Requirements for the Next 12 Months As of June 30, 2024, our working capital was $23.7 million.
Selling expenses increased $64,000, or 70%, compared to fiscal 2022, primarily due to increased sales commissions. 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.
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.
Details of our medical device sales by type is as follows: Years Ended June 30, Increase (Decrease) From 2022 To 2023 2023 2022 Dollars in thousands % of Total % of Total Medical device sales: Orthopedic $ 19,688 64 % $ 21,877 64 % (10 %) CMF 8,497 28 % 10,277 30 % (17 %) Thoracic 2,555 8 % 1,850 6 % 38 % Total $ 30,740 100 % $ 34,004 100 % (10 %) Sales of our medical device products decreased $3.3 million, or 10%, during fiscal 2023 as compared to fiscal 2022.
Details of our medical device sales by type is as follows: Years Ended June 30, Increase (Decrease) From 2023 2024 2023 To 2024 Dollars in thousands % of Total % of Total Medical device sales: Orthopedic 23,630 64 % 19,688 64 % 20 % CMF 10,334 28 % 8,497 28 % 22 % Thoracic 3,015 8 % 2,555 8 % 18 % Total 36,979 100 % 30,740 100 % 20 % Sales of our medical device products increased $6.2 million, or 20%, during fiscal 2024 as compared to fiscal 2023.
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. Offsetting this net inflow of cash, inventory increased by $3.5 million and our accounts payable and accrued expenses and deferred revenue decreased by $1.1 million and $1.0 million, respectively.
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.
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.
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.
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.
Cash Flows from Financing Activities Net cash used in financing 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.
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 handpieces.
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 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.
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.
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. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP.
The proportion of total sales by product/service type is as follows: Years Ended June 30, Increase (Decrease) From 2022 To 2023 2023 2022 Dollars in thousands % of Net Sales % of Net Sales Net sales: Medical devices $ 30,740 66 % $ 34,004 81 % (10 %) Industrial and scientific 865 2 % 919 2 % (6 %) NRE & Prototype services 2,695 6 % 1,014 2 % 166 % Dental and component 257 1 % 465 1 % (45 %) Repairs 12,617 27 % 6,610 16 % 91 % Discounts & Other (1,087 ) (2 %) (971 ) (2 %) 12 % $ 46,087 100 % $ 42,041 100 % 10 % 18 Net sales in fiscal 2023 increased by $4.0 million, or 10%, as compared to fiscal 2022, 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.
The proportion of total sales by product/service type is as follows: Years Ended June 30, Increase (Decrease) From 2023 2024 2023 To 2024 Dollars in thousands % of Net Sales % of Net Sales Net sales: Medical devices $ 36,979 69 % $ 30,740 66 % 20 % Industrial and scientific 765 1 % 865 2 % (12 %) NRE & Prototype services 786 1 % 2,695 6 % (71 %) Dental and component 201 — 257 1 % (22 %) Repairs 16,505 31 % 12,617 27 % 31 % Discounts & Other (1,392 ) (2 %) (1,087 ) (2 %) 28 % $ 53,844 100 % $ 46,087 100 % 17 % Net 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 $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.
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.
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. 17 Warranties 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.
Operating Expenses Years Ended June 30, Increase (Decrease) From 2022 To 2023 2023 2022 (Dollars in thousands) % of Net Sales % of Net Sales Operating expenses: Selling expenses $ 155 — $ 91 — 70 % General and administrative expenses 4,028 9 % 4,903 12 % (18 %) Research and development costs 2,804 6 % 2,980 7 % (6 %) $ 6,987 15 % $ 7,974 19 % (12 %) 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.
Costs related to inventory and warranty charges increased $154,000 in fiscal 2024 compared to fiscal 2023, primarily due to increased inventory reserves . 21 Operating Expenses Years Ended June 30, Increase (Decrease) From 2023 2024 2023 To 2024 Dollars in thousands % of Net Sales % of Net Sales Operating expenses: Selling expenses $ 117 — $ 155 — (25 %) General and administrative expenses 4,072 8 % 4,028 9 % 1 % Research and development costs 3,189 6 % 2,804 6 % 14 % $ 7,378 14 % $ 6,987 15 % 6 % 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.
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.
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.
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.
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.
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 device. We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.
The decrease is as expected and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.
As we introduce new products into the market, we expect to see an increase in sustaining and other engineering expenses.
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 the market, we expect to see an increase in sustaining and other engineering expenses.
Additional information related to the nature of our investments is more fully described in Note 5 to the consolidated financial statements contained elsewhere in this report. 21 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.
Additional information related to the nature of our investments is more fully described in Note 4 to the consolidated financial statements contained elsewhere in this report. 22 Gain on Sale of Investments During fiscal 2024, our investment sales were immaterial.
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.
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.
We do not typically experience seasonal fluctuations in our shipments and revenues. 19 Cost of Sales and Gross Margin Years Ended June 30, Increase (Decrease) From 2022 To 2023 2023 2022 Dollars in thousands Cost of sales: % of Net Sales % of Net Sales Product costs $ 29,600 64 % $ 26,296 63 % 13 % NRE and Prototype services costs 1,724 4 % 774 2 % 123 % Under (over)-absorption of manufacturing overhead 1,724 4 % 877 2 % 97 % Inventory and warranty charges 290 — 962 2 % (70 %) Total cost of sales $ 33,338 72 % $ 28,909 69 % 15 % Cost of sales in fiscal 2023 increased $4.4 million, or 15%, from fiscal 2022, primarily due to the increase in product costs, consistent with the 10% increase in net sales, coupled with higher material and labor costs.
Cost of Sales and Gross Margin Years Ended June 30, Increase (Decrease) From 2023 2024 2023 To 2024 Dollars in thousands Cost of sales: % of Net Sales % of Net Sales Product costs $ 38,121 71 % $ 29,600 64 % 29 % NRE and Prototype services costs 802 1 % 1,724 4 % (54 %) Under (over)-absorption of manufacturing overhead (74 ) — 1,724 4 % (104 %) Inventory and warranty charges 444 1 % 290 — 53 % Total cost of sales $ 39,293 73 % $ 33,338 72 % 18 % Cost of sales in fiscal 2024 increased $6.0 million, or 18%, from fiscal 2023, primarily due to the increase in product costs, consistent with the 17% increase in net sales.
Sales of our NRE & prototype services increased $1.7 million or 166% compared to fiscal 2022 and relates to billable engagement for multiple engineering projects. Sales of our dental products and components in fiscal 2023 decreased $208,000, or 45%, as compared to fiscal 2022.
Sales 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. 20 Sales of our dental products and components in fiscal 2024 decreased $56,000, or 22%, as compared to fiscal 2023.
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.
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 .
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 .
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.
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.
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. Other Income (Expense) Interest and Dividend Income Our interest and dividend income earned in fiscal 2023 and 2022 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.
Other Income (Expense) Interest and Dividend Income Our interest and dividend income 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 The unrealized gain (loss) on investments relates to our investment portfolio.
Investments 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 Investments consist 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).
During fiscal 2023, 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.
During fiscal 2024, thoracic 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.
Offsetting these inflows of cash, our accounts receivable and inventory balances grew by $4.4 million and $4.2 million, respectively. 22 Cash Flows from Investing Activities Net cash used in investing activities in fiscal 2023 was $885,000.
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.
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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.
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In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
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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.
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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.
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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.
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Additionally, $10.2 million of our backlog at June 30, 2023 related to orders expected to be delivered in fiscal 2025. We do not typically experience seasonal fluctuations in our shipments and revenues.
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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.
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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.
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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.
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Offsetting this net inflow of cash, inventory increased by $3.5 million and our accounts payable and accrued expenses and deferred revenue decreased by $1.1 million and $1.0 million, respectively. 23 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.
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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. GAAP.
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Warranties 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.
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The 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.
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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.
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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).
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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 .
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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 development. 20 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.
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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.
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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.
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The amount spent on projects under development is summarized below (in thousands): Years Ended June 30, Expected Market Launch (1) Estimated Annual Revenue (2) 2023 2022 Dollars in thousands Total Research and Development costs: $ 2,804 $ 2,980 Products in development: ENT Shaver $ 51 $ 282 Q4 2023 $ 1,000 Vital Ventilator — 115 (3 ) $ 1,500 Sustaining & Other 2,753 2,583 Total $ 2,804 $ 2,980 (1) Represents the calendar quarter of expected market launch.
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(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.
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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.
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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.

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