What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-10-30 compared with 2025-05-01 · 323 added, 310 removed, 38 unchanged (94% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion

and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes

and other financial information appearing elsewhere in this report.

following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements

and the related notes and other financial information appearing elsewhere in this report.

COMPANY OVERVIEW

following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the

results of operations and financial condition of Pro-Dex, Inc.

(“Company,” “Pro-Dex,” “we,” “our,”

or “us”) for the three-month and nine-month periods ended March 31, 2025 and 2024.

This discussion should be read in conjunction

with the condensed consolidated financial statements and the notes thereto included elsewhere in this report.

This report contains certain

forward-looking statements and information.

The cautionary statements included herein should be read as being applicable to all related

forward-looking statements wherever they may appear.

following discussion and analysis provides information that management believes is relevant to an assessment and understanding of

the results of operations and financial condition of Pro-Dex, Inc.

(“Company,” “Pro-Dex,”

“we,” “our,” or “us”) for the three-month periods ended September 30, 2025 and 2024.

This discussion

should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere

in this report.

This report contains certain forward-looking statements and information.

cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may

Our actual future results could differ materially from those discussed herein.

for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of

our product development plans, business strategies, strategic opportunities, and market factors influencing our results, are forward-looking

statements that involve certain risks and uncertainties.

Actual results may differ from those anticipated by us as a result of various

factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales

in markets characterized by rapid technological evolution, our ability to optimize our operations at our Franklin facility, consolidation

within our target marketplace and among our competitors, the impact of tariffs on the cost of our raw materials and purchased components,

employee turnover, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities.

other economic, competitive, governmental, and technological factors could impact our ability to achieve our goals.

You are urged to

review the risks, uncertainties, and other cautionary language described in this report, as well as in our other public disclosures and

reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including, but not limited to, the risks,

uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2024.

We specialize in the

design, development, and manufacture of autoclavable, battery-powered, and electric, multi-function surgical drivers and shavers used

primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets.

We have patented adaptive torque-limiting

software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors.

We also manufacture

and sell rotary air motors to a wide range of industries.

Our principal headquarters

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

for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions

of our product development plans, business strategies, strategic opportunities, contract negotiations,

and market factors influencing our results, are forward-looking statements

that involve certain risks and uncertainties.

Actual results may differ from those anticipated by us as a result

of various factors, both foreseen and unforeseen, including, but not limited to, our ability

to continue to develop new products and increase sales

in markets characterized by

rapid technological evolution, consolidation within our target marketplace and among our competitors, employee turnover, competition

from larger, better capitalized competitors, and our ability to realize returns on opportunities.

Many other economic, competitive,

governmental, and technological factors could impact our

ability to achieve our goals.

You are urged to review the risks, uncertainties, and other cautionary language described in this report,

as well as in our other public disclosures and reports filed with the Securities and Exchange

Commission (“SEC”) from time to time, including, but not limited to, the risks, uncertainties, and other cautionary language

discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2025.

specialize in the design, development, and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers

and shavers used primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets.

We have patented adaptive

torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors.

Additionally,

we provide engineering, quality, and regulatory consulting services to our customers.

We also manufacture and sell rotary air motors

to a wide range of industries;

however, these motors comprise a de minimis portion of our business.

principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone

number is (949) 769-3200.

Our Internet address is www.pro-dex.com.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other

SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically

filed with, or furnished to, the SEC.

In addition, our Code of Ethics and other corporate governance documents may be found on our website

at the Internet address set forth above.

Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room

at 100 F Street, N.E., Washington, D.C.

You may obtain information on the operation of the Public Reference Room by calling the

SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information

regarding issuers that file electronically with the SEC at www.sec.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

Our annual reports on Form

10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports,

and other SEC filings are available free of charge through our website as soon as reasonably practicable after such

reports are electronically filed with, or furnished to, the SEC.

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

filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street,

N.E., Washington, D.C.

You may obtain information on the operation of the Public Reference Room by calling

the SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that contains reports, proxy and

information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov and company

specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

Basis of Presentation

The condensed consolidated

results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected

for the entirety of the fiscal year ending June 30, 2025.

Our fiscal year ends on June 30 and our fiscal quarters end on September 30,

December 31, and March 31.

Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.

condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative

of the results to be expected for the entirety of our fiscal year ending June 30, 2026, or any other interim period during such fiscal

Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31.

Unless otherwise stated,

all dates refer to our fiscal year and those fiscal quarters.

Critical Accounting Estimates and Judgments

Our condensed

consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

The preparation

of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,

revenues, expenses, and related disclosures.

We base our estimates on historical experience and various other assumptions that are believed

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets

and liabilities that are not readily apparent from other sources.

financial statements are prepared in accordance with U.S.

The preparation of our financial statements requires management to make

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

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.

An accounting policy is

deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at

the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that

are reasonably likely to occur could materially change the financial statements.

Management believes that there have been no significant

changes during the three and nine months ended March 31, 2025 to the items that we disclosed as our critical accounting policies in Management’s

Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June

accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are

highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the

accounting estimate that are reasonably likely to occur could materially change the financial statements.

Management believes that there

have been no significant changes during the three months ended September 30, 2025, to the items that we disclosed as our critical accounting

policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report

on Form 10-K for our fiscal year ended June 30, 2025.

Business Strategy and Future Plans

Our business today is almost entirely

driven by sales of our medical devices.

Many of our significant customers place purchase orders for specific products that were developed

under various development and/or supply agreements.

Our customers may request that we design and manufacture a custom surgical device

or they may hire us as a contract manufacturer to manufacture a product of their own design.

In either case, we have extensive experience

with autoclavable, battery-powered, and electric, multi-function surgical drivers and shavers.

We continue to focus a significant percentage

of our time and resources on providing outstanding products and service to our valued principal customers.

During the first quarter of

fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply their surgical

handpieces to them through calendar 2025 and we are currently in discussions with them to renew the agreement.

Simultaneously, we are working

to build top-line sales through active proposals of new medical device products with new and existing customers.

Our patented adaptive

torque-limiting software has been very well received in the CMF and thoracic markets.

In November 2020, we purchased

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

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

us additional capacity for our expected continued future growth, including anticipated expanded capacity for the manufacture of batteries

and new products.

We began operations in the new facility during the fourth quarter of fiscal 2023 and believe that the additional capacity

will allow for our continued expected growth.

Our current objectives are focused

primarily on maintaining our relationships with our current medical device customers, investing in research and development activities

to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting software, expanding our manufacturing

capacity through the continuation of operations at the Franklin Property, and promoting active product development proposals to new and

existing customers for both orthopedic shavers and screw drivers for a multitude of surgical applications, while monitoring closely the

progress of all these individual endeavors.

While we expect revenue growth in the future, it may not be a consistent trajectory but rather

periods of incremental growth that current expenditures are helping to create.

However, there can be no assurance that we will be successful

in any of these objectives.

Description of Business Operations

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

devices for the medical device industry.

The proportion of total sales by type is as follows

(in thousands, except percentages):

Three Months Ended

Nine Months Ended

device products

Industrial and

Dental and component

NRE & Proto-type

our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements.

our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California

facility, and are assembled in our Tustin, California facility, along with our industrial products.

Details of our medical device

sales by type is as follows (in thousands, except percentages):

Three Months Ended

Nine Months Ended

Our business today is almost

entirely driven by sales of our medical devices.

Many of our significant customers place purchase orders for specific products that were

developed by us under various development and/or supply agreements.

Our customers may request that we design and manufacture a custom

surgical device or they may hire us as a contract manufacturer to manufacture a product of their own design.

In either case, we have extensive

experience with autoclavable, battery-powered and electric, multi-function surgical drivers, and shavers.

We continue to focus a significant

percentage of our time and resources on providing outstanding products and service to our valued principal customers.

During the first

quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement for us to supply their surgical handpieces

to them through calendar 2025.

Currently, we are in negotiations with our largest customer to extend the contract through calendar 2028.

While we are still negotiating some of the specific commercial terms, we have no reason to believe that the contract amendment will not

be executed and further, the customer has placed purchase orders to us through the end of calendar 2026.

Additionally, based on the planned

volumes of the next generation handpiece that we supply to our largest customer, we are simultaneously pursuing negotiations with one

of our existing suppliers to acquire their business to help meet the expected increased demand currently being contemplated by our largest

In the event we do not acquire this business we will be obligated to reimburse the supplier for legal fees incurred in relation

to the acquisition due diligence.

This amount, not to exceed $62,500, is not accrued for, but is expected to be paid at the end of the

current exclusivity period of October 31,2025, if not extended by mutual agreement of the parties, and will be credited towards the purchase

price upon an acquisition.

are also working to build top-line sales through active proposals of new medical device products with new and existing customers.

patented adaptive torque-limiting software has been very well received in the CMF and thoracic markets.

Additionally, our latest Pro-Dex

branded product, the Helios driver for CMF applications, featuring our adaptive torque-limiting software, is expected to be released

for production in the second quarter of this fiscal year.

Although we anticipate this product will be released in the second quarter

of this fiscal year, and we have had interest in this product, there is no guarantee that our existing customers or new customers will

purchase this new driver.

November 2020, we purchased an approximate 25,000 square foot industrial building in Tustin,

California (the “Franklin Property”).

This building is located approximately four miles from our Irvine, California headquarters

and was acquired to provide us additional capacity for our expected continued future growth, including anticipated expanded capacity

for the manufacture of batteries and new products.

We began operations in the new facility during the fourth quarter of fiscal 2023 and

believe that the additional capacity will allow for our continued expected growth.

summary, our current objectives are focused primarily on maintaining our relationships with our current medical device customers, investing

in research and development activities to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting

software, expanding our manufacturing capacity through the commencement of operations at the Franklin Property, and promoting active

product development proposals to new and existing customers for both orthopedic shavers and screw drivers for a multitude of surgical

applications, while monitoring closely the progress of all these individual endeavors.

While we expect revenue growth in the future,

it may not be a consistent trajectory but rather periods of incremental growth that current expenditures are helping to create.

there can be no assurance that we will be successful in any of these objectives.

Results of Operations

following tables set forth results from continuing operations for the three months ended September 30, 2025 and 2024 (in thousands, except

percentages):

Months Ended September 30,

Dollars in thousands

% of Net Sales

Cost of sales

Selling expenses

General and administrative expenses

Research and development costs

Operating income

Other income, net

Income before income taxes

Provision for income taxes

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

surgical devices.

We continue to sell our rotary air motors for industrial and scientific applications,

but our focus remains in medical devices.

The proportion of total sales by type is as follows (in thousands, except percentages):

Months Ended September 30,

(Decrease) From

Dollars in thousands

% of Net Sales

Medical device

Industrial and scientific

NRE & proto-types

Discounts and other

of our medical device products utilize proprietary designs developed by us under exclusive development

and supply agreements.

All of our medical device products

utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility and assembled in our

Tustin, California facility.

Details of our medical device sales by type is as follows (in thousands, except percentages):

Months Ended September 30,

(Decrease) From

Dollars in thousands

% of Med Device Sales

Medical device sales:

Sales of our medical

device products increased $2.1 million, or 22%, and $7.5 million, or 28%, respectively, for the three and nine months ended March 31,

2025, compared to the corresponding periods of the prior fiscal year.

Our medical device revenue to our largest customer, included in

orthopedic sales above, increased $1.8 million and $7.5 million, respectively, for the three and nine months ended March 31, 2025, compared

to the corresponding periods of the prior fiscal year due primarily to the launch of that customer’s next generation handpiece.

As can be common with new product launches in the industry, the customer’s internal design of the next generation handpiece continues

to evolve, and the customer has recently informed us that it is holding off on next generation handpiece shipments in favor of continued

shipments and enhanced repair of the legacy handpieces as the customer continues to refine the next generation handpiece’s design.

Although we cannot predict the timing of the customer’s further transition to the next generation handpiece at this time, we

fully anticipate a resumption of shipments of the next generation handpiece once the design enhancements are finalized, coupled with larger

orders of the legacy handpiece during the interim.

Additionally, recurring revenue from distributors of thoracic drivers increased

$182,000 and $272,000, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the

prior fiscal year.

Our CMF sales revenue increased $107,000 and decreased $246,000, for the three and nine months ended March 31, 2025,

respectively, compared to the corresponding periods of the prior fiscal year.

While we do not have much visibility into our customers’

distribution networks, this level of change in thoracic and CMF sales (whether an increase or decrease) is not uncommon and fluctuations

occur based upon required inventory levels.

of our compact pneumatic air motors, reported as industrial and scientific sales above, increased

$54,000, or 26%, and decreased $15,000, or 3%, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding

periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts .

NRE and proto-type revenue decreased $48,000, or 21%, and $488,000, or 64%, for the three and nine months ended March 31, 2025, compared

to the corresponding periods of the prior fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for

our customers.

of our dental products and components decreased $17,000, or 27%, and $28,000, or 19%, respectively, for the three and nine months ended

March 31, 2025, compared to the corresponding periods of the prior fiscal year.

We expect future declines in this area as we are no longer

manufacturing dental products, but rather are simply selling remaining component inventory.

revenue increased $666,000 or 15%, and $3.3 million, or 29%, for the three and nine months ended March 31, 2025, respectively, compared

to the corresponding periods of the prior fiscal year primarily due to an increased number of repairs of the orthopedic handpiece we sell

to our largest customer.

This increase relates to the continuation of the previously disclosed enhanced repair program.

March 31, 2025, we had a backlog of approximately $49.5 million, of which $12.8 million is scheduled to be delivered in the fourth quarter

of fiscal 2025 and the balance is scheduled to be delivered next fiscal year.

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.

may experience variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product

launches and customer planned inventory builds.

However, we do not typically experience seasonal fluctuations in our shipments and revenues.

medical device revenue increased $4.5 million, or 45%, for the three months ended September 30, 2025, compared to the corresponding period

of the prior fiscal year .

Our orthopedic sales increased $4.4 million, or 65%, for the three months ended September 30, 2025,

compared to the corresponding period of the prior fiscal year, due primarily to the launch of our largest customer’s next generation

As previously disclosed, late in the third quarter of fiscal 2025 the customer requested we hold off on next generation handpiece

shipments in favor of continued shipments and enhanced repair of the legacy handpieces.

During the fourth quarter of fiscal 2025, at

the customer’s request, we resumed production and shipments of the next generation handpiece.

Because certain of the sub-assemblies

included in the handpiece take several weeks of internal machining, the process to resume shipments at the requested levels has taken

several months.

By September 2025, our shipments reached the recurring level that the customer has requested.

Recurring revenue from

distributors of CMF drivers increased $627,000, or 29%, for the three months ended September 30, 2025, compared to the corresponding

period of the prior fiscal year.

Our thoracic sales decreased by $515,000, or 51% for the three months ended September 30, 2025, compared

to the corresponding period of the prior fiscal year.

While we do not have much visibility into

our customers’ distribution networks, this level of change (whether an increase or decrease) is not uncommon and fluctuations occur

based upon required inventory levels.

of our compact pneumatic air motors increased $29,000, or 20%, for the three months ended September

30, 2025, compared to the corresponding period of the prior fiscal year.

The minimal and relatively flat sales volume is consistent with

our lack of substantive marketing efforts for our air motors .

Our non-recurring engineering (“NRE”) and proto-type

revenue increased $428,000, or 892%, for the three months ended September 30, 2025 compared to the corresponding period of the prior

fiscal year, due to an increase in billable contracts.

Our NRE and proto-type revenue is typically a small percentage of our total revenue

and can vary significantly from quarter to quarter.

revenue decreased by $1.3 million, or 25%, for the three months ended September 30, 2025, compared to the corresponding period of the

prior fiscal year, due to fewer repairs of the legacy orthopedic handpiece we sell to our largest customer.

While we do not have much

visibility into our largest customer’s distribution networks, they may be reducing repairs of legacy handpieces in favor of replacing

them with the next generation handpiece.

and other decreased by $57,000, or 5%, in the first quarter of fiscal 2026 compared to the corresponding period of the prior fiscal year,

due to volume rebates related to the legacy orthopedic handpiece we sell to our largest customer, which they negotiated in conjunction

with our contract extension through 2025.

September 30, 2025, we had a backlog of approximately

$46.8 million, of which $43.6 million is s cheduled for delivery during the remainder of fiscal 2026.

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.

We may experience

variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches

and customer planned inventory builds.

However, we do not typically experience seasonal fluctuations

in our shipments and revenues.

Cost of Sales and Gross Margin

(in thousands except percentages)

Months Ended September 30,

(Decrease) From

Cost of sales:

Under(over)-absorption of manufacturing

and warranty charges

% of Net Sales

Product costs

Under-(over) absorption of manufacturing costs

Inventory and warranty charges

Total cost of sales

Three Months Ended

Nine Months Ended

Year over Year

of sales for the three months ended March 31, 2025, increased $1.3 million, or 13%, compared to the corresponding period of the prior

The increase in total costs of sales is consistent with the 22% increase in revenue for the same period.

Under-absorption

of manufacturing costs increased by $254,000 for the three months ended March 31, 2025, compared to the corresponding period of the prior

During the third quarter of fiscal 2025 we increased our assembly department labor and overhead rates to reduce the under

absorption of our indirect costs.

Costs relating to inventory and warranty charges decreased $111,000 for the three months ended March

31, 2025, compared to the corresponding period of the prior fiscal year, due to a slight decrease in both inventory reserves and warranty

profit increased by approximately $1.8 million, or 45%, for the three months ended March 31, 2025, compared to the corresponding period

of the prior fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described

Gross margin as a percentage of sales increased by approximately 5 percentage points compared to the corresponding period of the

prior fiscal year due primarily to favorable product mix.

of sales for the nine months ended March 31, 2025, increased by 4.7 million, or 17%, compared to the corresponding period of the prior

The increase in total costs of sales is consistent with the 27% increase in revenue for the same period.

Under-absorption

of manufacturing costs increased by $2.1 million for the nine months ended March 31, 2025, compared to the corresponding period of the

prior fiscal year and as discussed above we have increased our assembly labor and overhead rates to better absorb our indirect manufacturing

Inventory and warranty charges decreased slightly by approximately $49,000, or 14%, for the nine months ended March 31, 2025, compared

to the corresponding period of the prior fiscal year.

profit increased by $5.6 million, or 53%, for the nine months ended March 31, 2025, compared to the corresponding period of the prior

fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described above.

margin as a percentage of sales increased by 6 percentage points compared to the corresponding period of the prior fiscal year primarily

related to a more favorable product mix.

Operating Expenses

Gross profit and gross margin

Cost of sales for the three

months ended September 30, 2025, increased by $3.4 million, or 35%, compared to the corresponding period of the prior fiscal year.

increase in cost of sales is consistent with the 24% increase in revenue for the same period.

Product costs increased by $3.1 million,

or 33%, during the three months ended September 30, 2025, compared to the corresponding period of the prior fiscal year, which is consistent

with higher revenue generated in the first quarter of fiscal 2026, but is higher than expected based partly on product mix and partly

on negative fluctuations in repair service revenue margin.

In the first quarter of fiscal 2026 our repair revenue margin is significantly

lower than in prior year and this is caused by more expensive component replacement as well as an assembled workforce which normally repairs

a higher volume of devices.

During the three months ended September 30, 2025, we experienced under-absorption of $619,000 in manufacturing

costs compared to $325,000 during the corresponding period of the prior fiscal year.

We anticipate growth in our direct labor costs this

fiscal year such that our absorption will stabilize without the need to increase our labor and overhead rates.

Costs related to inventory

and warranty charges increased $66,000, or 94%, for the three months ended September 30, 2025 compared to the corresponding period of

the prior fiscal year, due an increase in both inventory and warranty reserves.

profit increased by approximately $217,000, or 4%, for the three months ended September 30, 2025 compared to the corresponding period

of the prior fiscal year, and gross margin as a percentage of sales decreased by six percentage points between such periods, primarily

as a result of higher costs, including tariffs, which have not fully been passed on to our customers .

Operating Costs and Expenses

(in thousands except percentages)

over Year % Change

Months Ended September 30,

(Decrease) From

% of Net Sales

Operating expenses:

General and administrative

and development costs

Selling expenses consist

of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses,

and travel and related costs incurred in generating and maintaining our customer relationships.

Selling expenses for the three and nine

months ended March 31, 2025, increased $96,000, or 565%, and $132,000, or 167%, respectively, compared to the corresponding periods of

The increase relates primarily to recruiting fees and personnel costs related to our new Director of Business Development

who we hired in December, 2024.

General and administrative

expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance, facilities, business

systems, and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’

fees, and other costs and expenses attributable to being a public company.

G&A increased $86,000 and $524,000, respectively, during

the three and nine months ended March 31, 2025, when compared to the corresponding periods of the prior fiscal year.

The increases relate

primarily to increased bonus accruals, personnel costs, and legal expenses, offset by decreased audit fees and stock compensation expense.

Research and development

costs generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel,

as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials,

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

Research and development costs for the three and

nine months ended March 31, 2025, increased $187,000, or 25%, and $378,000, or 16%, compared to the corresponding periods of the prior

This relates to an increase in legal fees related to intellectual property matters as well as an increase in spending related

to in-house battery production and sustaining engineering efforts related to our existing products.

The majority of our research and

development costs relate to sustaining activities related to products we currently manufacture and sell, but we also have created a product

roadmap to develop future products.

Many of our product development efforts are undertaken only upon completion of an analysis of the

size of the market, our ability to differentiate our product from our competitors’, as well as an analysis of our specific sales

prospects with new and/or existing customers.

The research and development costs represent between 41% and 44% of total operating expenses

for all periods presented and are expected to increase in the future as we continue to invest in product development efforts.

Interest & Other

Interest income for the three

and nine months ended March 31, 2025 and 2024, includes interest and dividends from our money market accounts and investment portfolio.

Selling expenses

General and administrative expenses

Research and development costs

expenses consist of salaries and other personnel-related expenses in support of business development, as well as trade show attendance,

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

expenses for the three months ended September 30, 2025, increased $25,000, or 52%, compared to the corresponding period of the prior

The increase relates to personnel costs related to our former Director of Business Development hired in the second quarter

of the prior fiscal year whose employment with us ended in the second quarter of fiscal 2026.

and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance,

facilities, information technology and human resources personnel, as well as costs for outsourced information technology services, professional

fees, directors’ fees, and other costs and expenses attributable to being a public company.

G&A expenses increased by $171,000,

or 14%, for the three months ended September 30, 2025, when compared to the corresponding period of the prior fiscal year.

in total G&A expenses relates to higher payroll and personnel expenses due to new hires in human resources, information technology

and facilities.

and development costs generally consist of compensation and other personnel-related costs of our engineering and support personnel, related

professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development

and support of our products.

Research and development costs decreased $75,000, or 9%, for the three months ended September 30, 2025 compared

to the corresponding period of the prior fiscal year.

The decrease is due primarily to a decrease in internal project spending and a

reduction in recruiting fees, partially offset by an increase in personnel expenses.

Although internal project spending is lower in the

first quarter of fiscal 2026 compared to the same period in fiscal 2025, we expect to release an internally developed project, our Helios

branded CMF driver, for production in the second quarter of fiscal 2026.

majority of our research and development costs relate to 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.

Typical examples

of sustaining engineering activities include, but are not limited to, end-of-life component replacement, especially in electronic components

found in our printed circuit board assemblies, analysis of customer complaint data to improve process and design, replacement and enhancement

of tooling and fixtures used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Other Income (Expense), Net

Interest and Dividend Income

interest and dividend income recorded during the three months ended September 30, 2025 and 2024, consists primarily of interest and dividends

from our investments and money market accounts.

Unrealized Gain on Investments

unrealized gain on marketable securities for the quarters ended September 30, 2025 and 2024, relates to our portfolio of investments

described more fully in Note 4 to the condensed consolidated financial statements contained elsewhere in this report.

Interest Expense

Interest expense consists primarily

of interest expense related to the notes payable described more fully in Note 11 to the condensed consolidated financial statements contained

elsewhere in this report.

Unrealized Gain (Loss)

on Marketable Equity Investments

The unrealized gain (loss) on

marketable equity investments relates to our investment portfolio more fully described in Note 4 to the condensed consolidated financial

statements contained elsewhere in this report.

All of these investments are recorded at estimated fair value and as of March 31, 2025,

all of these investments relate to common stock of publicly traded companies whose stock price is subject to significant volatility.

Gain on Sale of Investments

During the third quarter ended

March 31, 2025, we sold some of the stocks in our portfolio of equity investments receiving proceeds of $1.9 million and recording a gain

on the sale in the amount of $595,000.

interest expense recorded during the three months ended September 30, 2025 and 2024, relates to our UMB Bank (“UMB”) loans

described more fully in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.

Income Tax Expense

The effective tax rate

for each of the three months ended March 31, 2025 and 2024 was 28%.

These tax rates are consistent with our combined expected federal

and applicable state corporate income tax rates.

The effective tax rate for the nine months ended March 31, 2025 and 2024 was 26% and

23%, respectively, and is less than our combined expected federal and applicable state corporate income tax rates due to a tax benefit

recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal

2025 as described more fully in Note 9 to the condensed consolidated financial statements contained elsewhere in this report, and to the

release of a valuation allowance in the prior fiscal year related to previously recognized unrealized losses on investments.

Liquidity and Capital

The effective tax rate for

the three months ended September 30, 2025 and 2024, was 25% and 26%, respectively, and is slightly less than our combined expected federal

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

Liquidity and Capital Resources

Cash and cash equivalents

at March 31, 2025, increased $1.9 million to $4.5 million as compared to $2.6 million at June 30, 2024.

The following table includes

a summary of our condensed statements of cash flows contained elsewhere in this report.

and For the Nine Months Ended March 31,

at September 30, 2025, increased $95,000 to $514,000 as compared to $419,000 million at June 30, 2025.

The following table includes a

summary of our condensed consolidated statements of cash flows contained elsewhere in this report.

and For the Three Months Ended September 30,

(in thousands)

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Operating Activities

Net cash used in

operating activities was $1.5 million for the nine months ended March 31, 2025, primarily due to net income of $7.8 million including

realized gains on the sale of investments in the amount of $595,000 offset by an $8.2 million increase in inventory and a $2.0 million

increase in receivables.

Offsetting these uses of cash, accounts payable and accrued expenses increased by $1.6 million.

The increases

in these balance sheet accounts reflect our continued and expected future revenue growth.

Net cash provided

by operating activities was $5.2 million for the nine months ended March 31, 2024, primarily due to net income of $540,000, non-cash unrealized

losses on marketable equity investments of $3.8 million, depreciation and amortization of $854,000, share-based compensation of $588,000

as well as a decrease in inventory of $1.9 million.

Offsetting these sources of cash, our accounts receivable increased by $2.6 million

consistent with our increase in revenue.

Net cash provided by operating

activities during the three months ended September 30, 2025 totaled $2.3 million.

Our net income was $4.7 million, which includes $3.3

million of unrealized gains, primarily related to our investment in Monogram, which is more fully described in Note 4 to the condensed

consolidated financial statements contained elsewhere in this report as well as non-cash depreciation and amortization and stock-based

compensation in the amount of $311,000 and $161,000, respectively.

Proceeds of cash arose from income taxes of $1.5 million due to tax

expense incurred in the first quarter of fiscal 2026 having been previously paid and a decrease in inventory of $649,000.

Offsetting these

inflows of cash, our accounts receivable increased by $1.8 million due to an increase in revenue in the first quarter of fiscal 2026.

Net cash provided by operating

activities during the three months ended September 30, 2024, totaled $1.9 million.

Our net income was $2.5 million, which includes $433,000

of unrealized gains on our marketable securities as well as non-cash depreciation and amortization and stock-based compensation in the

amount of $302,000 and $113,000, respectively.

Additionally, our inventory and income taxes payable increased by $1.3 million and $209,000,

respectively.

Offsetting these outflows of cash, our accounts receivable decreased by $428,000 and accounts payable and accrued expenses

increased by $579,000.

Investing Activities

Net cash provided by investing

activities for the nine months ended March 31, 2025, was $754,000 and relates to the sale of some of our marketable securities for $1.9

million offset by purchases of capital equipment and improvements of $1.2 million.

Net cash used in investing

activities for the nine months ended March 31, 2024, was $2.1 million and related to the exercise of the Monogram Warrant for cash in

the amount of $1,250,000 (See Note 4 to the condensed consolidated financial statements contained elsewhere in this report) as well as

equipment and improvements purchases in the amount of $876,000.

activities for the three months ended September 30, 2025, and 2024 was $98,000 and $431,000, respectively, related to the purchase of

equipment and improvements.

Financing Activities

Net cash provided by financing

activities for the nine months ended March 31, 2025, totaled $2.6 million and related primarily to the net increase in borrowings of $6.4

million from Minnesota Bank & Trust (“MBT”) more fully described in Note 11 to the condensed consolidated financial statements

contained elsewhere in this report offset by $3.5 million attributable to the repurchase of 130,148 shares of our common stock pursuant

to our share repurchase program.

Net cash used in financing

activities for the nine months ended March 31, 2024, totaled $2.8 million and related primarily to the $1.8 million repurchase of 96,890

shares of our common stock pursuant to our share repurchase program as well as $990,000 of net principal payments on our loans from MBT

more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.

activities for the three months ended September 30, 2025, included net principal payments of $2.2 million on our loans from UMB (formerly

Net cash used in financing

activities for the three months ended September 30, 2024, included the repurchase of $2.3 million of common stock pursuant to our share

repurchase program, and proceeds of $5.0 million from a new term loan from UMB, offset by principal payments totaling $3.4 million.

Additionally,

we paid $273,000 of employee payroll taxes related to the award of 40,000 shares of common stock to employees under previously granted

performance awards.

Financing Facilities & Liquidity Requirements for the Next

Twelve Months

As of March 31, 2025, our working

capital was $31.6 million.

We currently believe that our existing cash and cash equivalent balances together with our accounts receivable

balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next

In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows

from operations.

We may also liquidate some or all of our investment portfolio or borrow further against our $11.0 million Amended Revolving

Loan with MBT (see Note 11 to condensed consolidated financial statements contained elsewhere in this report), which we amended in April

2025 in order to provide us additional borrowing capacity.

As of September 30, 2025,

our working capital was $37.1 million.

We currently believe that our existing cash and cash equivalent balances together with our

accounts receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted

for at least the next 12 months.

In addition, we expect to derive a portion of our liquidity from our cash flows from operations

and, as described in Note 4 to the condensed consolidated financial statements contained elsewhere in this report, we received $8.9 million

in cash in October 2025 upon the consummation of Zimmer Biomet’s acquisition of Monogram.

We are focused on preserving

1 unchanged sentence

we believe will most likely contribute to our profitability.

As we execute our current strategy, however, we may require debt and/or

As we execute on our current strategy, however, we may require debt and/or

equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes.

1 unchanged sentence

our backlog, which can be subject to extensive variability.

Investment Strategy

We invest surplus cash from time

to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors,

Raymond Cabillot and Nicholas Swenson, who chairs the committee.

Cabillot and Swenson are active investors with extensive

portfolio management expertise.

We leverage the experience of these committee members to make investment decisions for the investment

of our surplus operating capital or borrowed funds.

Additionally, many of our securities holdings include stocks of public companies that

either Messrs.

Cabillot or Swenson or both may own from time to time either individually or through the investment funds that they manage,

or other companies whose boards they sit on.

The Investment Committee approved each of the investments comprising the $5.5 million of

marketable public equity securities held at March 31, 2025.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

We believe that if we need additional capital to fund our operations, we can

borrow against our revolving loan with UMB which has an available balance of $8.8 million as of September 30, 2025.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis