PRO DEX INC 10-Q

ITEM 2. 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. COMPANY OVERVIEW The 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, 2026 and 2025. 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. Our actual future results could differ materially from those discussed herein. Except 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 integrate and effectively operate Advanced Precision Machining, LLC (“APM”) , our ability to service our debt and remain in compliance with our related covenants, 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. 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. 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, and precision machined parts and assemblies for the aerospace and defense industries through our APM subsidiary. Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet addresses are www.pro-dex.com and www.advanced-precision.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 Pro-Dex, Inc. 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. 20549. 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.govand 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 are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2026, or any other interim period during such fiscal year. 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. 22 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. 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, 2026 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 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 second quarter of fiscal 2026, 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 2028. During the third quarter of fiscal 2026, we completed the acquisition of APM, one of our significant suppliers, to help meet the increased demand as a result of this contract extension. Our acquisition of APM provides us with a second machine shop located in Costa Mesa, California that not only provides machined assemblies to service our largest customer but also provides machining to other customers primarily in the defense and aerospace industries. We are also 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. 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 later this fiscal year. While we have had interest in this product, there is no guarantee that our existing customers or new customers will purchase this new driver. In 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. Our current objectives are focused primarily on maintaining our relationships with our current medical device customers, successfully integrating and operating APM, investing in research and development activities to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting software, 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. 23 Description of Business Operations Revenue The 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 March 31, Nine Months Ended March 31, 2026 2025 2026 2025 % of Revenue % of Revenue % of Revenue % of Revenue Net Sales: Medical device products $ 16,242 82 % $ 11,913 68 % $ 45,796 80 % $ 34,057 69 % Industrial and scientific 472 2 % 265 2 % 836 2 % 576 1 % NRE & Prototype 531 3 % 186 1 % 1,156 2 % 274 1 % Repairs 2,673 13 % 5,099 29 % 9,650 17 % 15,096 31 % Discounts and other 31 — (49 ) — (295 ) (1 %) (904 ) (2 %) $ 19,949 100 % $ 17,414 100 % $ 57,143 100 % $ 49,099 100 % Certain 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 either in our Costa Mesa or Irvine, California facilities, 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 March 31, Nine Months Ended March 31, 2026 2025 2026 2025 % of Total % of Total % of Total % of Total Medical device sales: Orthopedic $ 13,073 81 % $ 8,607 72 % $ 36,011 79 % $ 24,631 72 % CMF 2,606 16 % 2,354 20 % 8,539 18 % 6,395 19 % Thoracic 563 3 % 952 8 % 1,246 3 % 3,031 9 % Total $ 16,242 100 % $ 11,913 100 % $ 45,796 100 % $ 34,057 100 % Sales of our medical device products increased $4.3 million, or 36%, and $11.7 million, or 35%, respectively, for the three and nine months ended March 31, 2026, compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer, included in orthopedic sales above, increased $4.5 million and $11.4 million, respectively, for the three and nine months ended March 31, 2026, compared to the corresponding periods of the prior fiscal year. As previously discussed, our largest customer executed a contract amendment which extends the contract through 2028 and also provides for higher volumes of their newest surgical handpiece. Therefore, we expect to see similar levels of revenue reported in orthopedic sales through 2028. Additionally, recurring revenue from distributors of thoracic drivers decreased $389,000 and $1.8 million, respectively, for the three and nine months ended March 31, 2026, compared to the corresponding periods of the prior fiscal year. Our CMF sales revenue increased $252,000 and $2.1 million, for the three and nine months ended March 31, 2026, 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. Industrial and scientific sales increased $207,000, or 78%, and $260,000, or 45%, respectively, for the three and nine months ended March 31, 2026, compared to the corresponding periods of the prior fiscal year, primarily due to the inclusion of APM sales from the acquisition date of February 9, 2026. Our NRE and prototype revenue increased $345,000, or 186%, and $882,000, or 322%, for the three and nine months ended March 31, 2026, compared to the corresponding periods of the prior fiscal year, due to an increase in billable contracts for various NRE projects undertaken for our customers. 24 Repair revenue decreased $2.4 million or 48%, and $5.4 million, or 36%, for the three and nine months ended March 31, 2026, respectively, compared to the corresponding periods 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, in which case we may continue to experience future declines in repair revenue. At March 31, 2026, we had a backlog of approximately $39.0 million, of which $15.6 million is scheduled to be delivered in the fourth quarter of fiscal 2026 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. 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) Three Months Ended March 31, Nine Months Ended March 31, 2026 2025 2026 2025 % of Total % of Total % of Total % of Total Cost of sales: Product cost $ 12,677 92 % $ 10,997 95 % $ 36,896 92 % $ 30,799 93 % Under(over)-absorption of manufacturing costs 822 6 % 424 3 % 2,316 6 % 1,983 6 % Inventory and warranty charges 317 2 % 195 2 % 687 2 % 298 1 % Total cost of sales $ 13,816 100 % $ 11,616 100 % $ 39,899 100 % $ 33,080 100 % Three Months Ended March 31, Nine Months Ended March 31, Year over Year ppt Change 2026 2025 2026 2025 Three Months Nine Months Gross margin 31 % 33 % 30 % 33 % (2 ) (3 ) Cost of sales for the three months ended March 31, 2026, increased $2.2 million, or 19%, compared to the corresponding period of the prior fiscal year. The increase in total costs of sales is consistent with the 15% increase in revenue for the same period. Under-absorption of manufacturing costs increased by $398,000 for the three months ended March 31, 2026, compared to the corresponding period of the prior fiscal year. Costs relating to inventory and warranty charges increased $122,000 for the three months ended March 31, 2026, compared to the corresponding period of the prior fiscal year, due to an increase in inventory reserves, offset by a decrease in warranty accruals. Gross profit increased by approximately $335,000, or 6%, for the three months ended March 31, 2026, compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in medical device revenue for the same periods as described above. Gross margin as a percentage of sales decreased by approximately 2 percentage points compared to the corresponding period of the prior fiscal year due primarily to unfavorable product mix. Cost of sales for the nine months ended March 31, 2026, increased by $6.8 million, or 21%, compared to the corresponding period of the prior fiscal year. The increase in total costs of sales is consistent with the 16% increase in revenue for the same period. Under-absorption of manufacturing costs increased by $333,000 for the nine months ended March 31, 2026, compared to the corresponding period of the prior fiscal year. Inventory and warranty charges increased by $389,000, or 131%, for the nine months ended March 31, 2026, compared to the corresponding period of the prior fiscal year. A significant portion of the current fiscal year inventory charges relates to reserves established related to a complex machined component in the next generation hand piece we sell to our largest customer. 25 Gross profit increased by $1.2 million, or 8%, for the nine months ended March 31, 2026, compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in medical device revenue for the same periods as described above. Gross margin as a percentage of sales decreased by 3 percentage points compared to the corresponding period of the prior fiscal year primarily related to unfavorable product mix. Operating Expenses Operating Costs and Expenses (in thousands except percentages) Three Months Ended March 31, Nine Months Ended March 31, Year over Year % Change 2026 2025 2026 2025 Three Months Nine Months % of Net Sales % of Net Sales % of Net Sales % of Net Sales Operating expenses: Selling expenses $ 40 — $ 113 1 % $ 153 — $ 211 — (65 %) (28 %) General and administrative expenses 2,172 11 % 1,098 6 % 5,301 9 % 3,732 8 % 98 % 42 % Research and development costs 827 4 % 947 5 % 2,328 4 % 2,731 6 % (13 %) (15 %) $ 3,039 15 % $ 2,158 12 % $ 7,782 13 % $ 6,674 14 % 41 % 17 % 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, 2026, decreased $73,000, or 65%, and $58,000, or 28%, respectively, compared to the corresponding periods of fiscal 2025. The decrease in selling expenses relates to a reduction in personnel costs as currently we have no employees in the department. 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 $1.1 million and $1.6 million, respectively, during the three and nine months ended March 31, 2026, when compared to the corresponding periods of the prior fiscal year. The increase relates to increased personnel costs of approximately $200,000 and $500,000 for the three and nine months ended March 31, 2026, respectively, as well as G&A expenses of our newly acquired subsidiary APM, which accounted for $233,000 of the increase during the three and nine months ended March 31, 2026. Additionally, consulting fees paid to the seller of APM contributed to an increase of $250,000 for the three and nine months ended March 31, 2026. In the current fiscal year, we have increased bonus accruals including the second quarter bonus accrual earned and paid to our CEO in the amount of $225,000. Additionally, we incurred increased legal and professional services fees related to the APM acquisition along with our new debt agreements. 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, 2026, decreased $120,000, or 13%, and $403,000, or 15%, compared to the corresponding periods of the prior fiscal year. The decrease relates to an increase in billable project expenses in the current fiscal year versus the prior fiscal year, which costs get reclassified to cost of sales, as well as a reduction in legal costs related to intellectual property matters. The nine-month period ended March 31, 2025 also included recruiting fees in the amount of $78,000 which did not recur during the current fiscal year. 26 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 27% and 44% of total operating expenses for all periods presented. Interest & Other Income Interest income for the three and nine months ended March 31, 2026 and 2025, includes interest and dividends from our money market accounts and investment portfolio. Interest Expense Interest expense consists primarily of interest expense related to the notes payable described more fully in Note 12 to the condensed consolidated financial statements contained elsewhere in this report. Gain on Equity Investments As described in Note 5 to the consolidated financial statements contained elsewhere in this report, during the second quarter of fiscal 2026, Zimmer Biomet acquired Monogram and upon consummation of the acquisition we received proceeds of $8.9 million and realized a gain on our investment of $6.8 million. Additionally, during the third quarter ended March 31, 2026, Monogram successfully completed the first of five milestones such that we earned and recorded an additional gain in the amount of $2.3 million. 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. In addition to these realized gains, during the three and nine months ended March 31, 2026 and 2025, we also recorded unrealized gains and losses to adjust our investment holdings to estimated fair value as well as eliminating the previously recorded unrealized gains on our Monogram investment during the second quarter of fiscal 2026 in conjunction with recording the realized gain. Income Tax Expense The effective tax rate for each of the three months ended March 31, 2026 and 2025 was 26% and 28%, respectively. These tax rates are consistent with our combined expected federal and applicable state corporate income tax rates, and the current year decrease is attributable to the expanded state tax nexus into Florida and Indiana which have lower tax rates than California. The effective tax rate for the nine months ended March 31, 2026 and 2025 was 25% and 26%, respectively. The prior year rate was slightly 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 10 to the condensed consolidated financial statements contained elsewhere in this report. Liquidity and Capital Resources Cash and cash equivalents at March 31, 2026, increased $9.6 million to $10.0 million as compared to $419,000 at June 30, 2025. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report. As of and For the Nine Months Ended March 31, 2026 2025 (in thousands) Cash provided by (used in): Operating activities $ 7,515 $ (1,509 ) Investing activities $ 3,715 $ 754 Financing activities $ (1,656 ) $ 2,597 Cash and Working Capital: Cash and cash equivalents $ 9,993 $ 4,473 Working capital $ 39,074 $ 31,626 27 Operating Activities Net cash provided by operating activities was $7.5 million for the nine months ended March 31, 2026, primarily due to net income of $10.8 million including gains on the investments in the amount of $5.4 million, non-cash depreciation and amortization of $988,000 and non-cash share-based compensation expense of $511,000 offset by a $2.2 million increase in receivables. Additionally, accounts payable and accrued expenses increased by $936,000, and income taxes payable increased by $1.3 million. The increases in these balance sheet accounts reflect our continued and expected future revenue growth. 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 gains on investments in the amount of $1.7 million and non-cash depreciation and amortization of $925,000 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. Investing Activities Net cash provided by investing activities for the nine months ended March 31, 2026, was $3.7 million and relates primarily to the proceeds received from the Zimmer Biomet acquisition of Monogram previously described in the amount of $10.8 million offset by our acquisition of APM in the amount of $6.5 million described further in Note 3 to the condensed consolidated financial statements contained elsewhere in this report. Additionally, we spent $280,000 during the nine months ended March 31, 2026, on the purchase of capital equipment and $350,000 related to Series A Preferred Stock of a privately held technology company. 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. Financing Activities Net cash used in financing activities for the nine months ended March 31, 2026, totaled $1.7 million and relates primarily to $2.8 million attributable to the repurchase of 69,422 shares of our common stock pursuant to our share repurchase program offset by $1.1 million in net borrowings from UMB Bank more fully described in Note 12 to the condensed consolidated financial statements contained elsewhere in this report. 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 UMB Bank more fully described in Note 12 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. Financing Facilities & Liquidity Requirements for the Next Twelve Months As of March 31, 2026, our working capital was $39.1 million. We currently believe that our existing cash and cash equivalents coupled with our accounts receivable balances as well as our expected cash flows from operations will provide us with sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. We are focused on maximizing our working capital by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability. 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, assembly, and inspection processes. In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy our backlog, which can be subject to extensive variability. 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 $11.0 million as of March 31, 2026. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.