PDEX 10-K & 10-Q changes, risk factors and insider trading

We hold our cash balances with a singleseveral financial institutioninstitutions which institution isare subject to risks, which may include failure or other circumstances that limit our access to deposits or other banking services. For example, in March 2023, Silicon Valley Bank (“SVB”) was unable to continue their their operations and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB. If similar failures in in financial institutions occur where we hold deposits, we could experience additional risk. Any such loss or limitation on our cash and cash equivalents would adversely affect our business.

We invest a significantportion portion of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2025,2026, the fair value of of our investments was approximately $6.9$1.7 million. While we intend to hold our investments until such time as we believe it is appropriate to sell them in accordance with our overall investment policy, we may have unexpected cash requirements that could necessitate the sale of some or all of these investments for a loss. 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.

As part of our strategy, we are actively exploring acquisition opportunities. We have acquired, and may acquire in the future, businesses, products, and technologies that complement or expand our current operations. Acquisitions could require significant capital investments and require us to integrate with companies that have different cultures, management teams, and business infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on several factors, including:

Many of our products are complex and technologically advanced. Such products may, from time to time, be the subject of claims concerning product performance and construction, including warranty and patent infringement claims. While we are committed to investigating such concerns and correcting them, there is no assurance that solutions will be found on a timely basis, if at all, to satisfy customer demands or to avoid potential claims or litigation. Also, due to the location of our facilities, as well as the nature of our business activities, there is a risk that we could be subject to litigation related to environmental remediation claims. Additionally, from time to time, including currently, we are involved in various labor claims or other personnel matters. We maintain insurance to protect against claims associated with the manufacture and use of our products as well as environmental pollution,pollution and employment practices, but there can be no assurance that our insurance coverage will adequately cover any claim asserted against us.

WeOur evaluation of internal controls and remediation of potential problems is costly and time-consuming and we have previously 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.

In fiscal 2025 and 2024, we implemented remediation plans designed to address our June 30, 2024 and 2023, material weaknesses, which were both time consuming and costly. InWe addition,completed ifthe additionalremediation of the previously identified material weaknessesweaknesses, orand significantas deficienciesdescribed in Item 9A of this report, management concluded that our internal control are discovered or occur in the future, our consolidatedover financial statementsreporting maywas containeffective materialas misstatementsof andJune we30, could be required to restate our financial results.2026.

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. Management can give no assurance that material weaknesses in internal controls will not be discovered (see above, “We have previously 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.”). 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 further divert the attention of management. 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.

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 CMF markets. Additionally, we provide engineering, quality, and regulatory consulting services to our customers. We also sell rotary air motors to a wide range of industries; however, these motors comprise a de minimis portion of our business. business.Beginning in fiscal 2026, we began selling precision machined parts and assemblies for the aerospace and defense industries through our newly acquired subsidiary, APM. 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.

Investments currently consist of marketable equity securities of publicly held companies.companies as well as preferred stock of a private company. The investments were made to realize a reasonable return, although there is no assurance that positive returns will be realized. Investments are marked to market at each measurement date, with unrealized gains and losses presented in other income (expense) in our consolidated income statements. Some of our investments include the common stock of public companies that are thinly traded. Certain of these investments are classified as long-term in nature, as we may not be able to liquidate the investments in a timely manner even if we wish to sell them. All of our investments were subject to a valuation analysis as of June 30, 20252026 and 2024.2025.

Long-lived Assets & Intangible Assets

We review the recoverability of long-lived assets, consisting of building, equipment, and improvements, and definite-lived intangibles when events or changes in circumstances occur that indicate carrying values may not be recoverable. We assess the impairment of indefinite-lived intangibles annually, and more frequently, if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Building, equipment, and improvements improvements are recorded at historical cost and definite-lived intangibles are recorded at estimated fair value and depreciation is provided using the straight-line method over the following periods:

The majority of our revenue is derived from designing, developing, manufacturing and repairing powered surgical instruments for medical device original equipment manufacturers. We also manufacture and sell rotary air motors to a wide range of industries.industries and precision machined parts and assemblies for the aerospace and defense industries through our newly acquired subsidiary APM. The proportion of total sales by product/service type is as follows:

Net sales in fiscal 20252026 increased by $12.7$11.0 million, or 24%,16%, as compared to fiscal 2024,2025, due primarily to an increase in medical device revenue of $10.8$14.4 millionmillion, andoffset anby increasea decrease in repair revenue of $2.1$6.0 million. Details of our medical device sales by type is as follows:

Sales of our medical device products increased $10.8$14.4 million, or 29%,30%, during fiscal 20252026 as compared to fiscal 2024.2025. Our medical device revenue to our largest customer, included in orthopedic sales above, increased $10.1$15.3 million, compared to the prior fiscal year due primarily to the launch of that customer’s next generation handpiece. As previously disclosed, lateour 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 theorthopedic thirdsales quarterthrough 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, the customer requested that we resume production and shipments of the next generation handpiece. While this pause negatively impacted our fourth quarter results, we do not anticipate any additional delays in shipment of the next generation handpiece.2028. During fiscal 2025, 2026, thoracic sales increaseddecreased by $1.3$2.2 million to $4.3 $2.1 million, updown from $3.0$4.3 million in fiscal 2024.2025. Recurring revenue from distributors of CMF drivers decreasedincreased $391,000$1.3 million in fiscal 2025 2026 compared to fiscal 2024.2025. We do not have much visibility into our customers’ distribution networks, but these fluctuations are within expected levels.

SalesIndustrial of our industrial and scientific products, which consist primarily of our compact pneumatic air motors,sales increased $96,000,$652,000, or 13%,76%, for fiscal 20252026 compared to fiscal 2024.2025 Theseprimarily aredue legacyto productsthe withinclusion noof substantiveAPM marketing or sales efforts.from the acquisition date of February 9, 2026.

Sales of our NRE & prototype services decreasedincreased $88,000,$952,000, or 11%,136%, during fiscal 20252026 as compared to fiscal 20242025 and relates to aan reductionincrease in the number of billable engagements for various NRE projects undertaken for our customers.

Our fiscal 20252026 repair revenue increaseddecreased approximately $2.1$6.0 million, or 13%,33%, to $18.6$12.5 million, as compared to fiscal 2024,2025, due to increaseddecreased repairs of the legacy orthopedic handpiece we sold to our largest customer. This increasedecrease relates to the continuationcustomers oftransition theto previouslytheir disclosednext enhancedgeneration repair program.handpiece. We anticipate that repair revenue may continue to decline in future periods as this customer transitionscontinues to transition to the next generation handpiece in lieu of enhancements of the legacy handpiece. However, beginning in fiscal 2027 we expect to commence billable repairs of our customer’s next generation handpiece but we do not know yet at what volumes.

At June 30, 2025,2026, we had a backlog of $50.4$32.9 million compared with a backlog of $19.8$50.4 million at June 30, 2024.2025. 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. Substantially all of our backlog at June 30, 2025,2026, as well as certain purchase orders received subsequent to June 30, 2025,2026, are expected to be delivered during fiscal 2026.2027. 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. While the June 30, 2026 backlog is significantly less than the backlog from one year ago, we attribute this simply to timing. We do not typically experience seasonal fluctuations in our shipments and revenues.

Cost of sales in fiscal 20252026 increased $7.8$6.1 million, or 20%,13%, from fiscal 2024,2025, primarily due to the increase in product costs, consistent with the 24%16% increase in net sales. During fiscal 2025,2026, we experienced $2.5$2.0 million of under-absorption of manufacturing costs compared to $74,000$2.5 of over-absorption in fiscal 2024, due primarily to an increase in our indirect manufacturing costsmillion in fiscal 2025. 2025. Costs related to inventory and warranty charges decreasedincreased $180,000$858,000 in fiscal 20252026 compared to fiscal 2024,2025, primarily due to decreased increased inventory reserves.reserves relating to a complex machined part used in our largest customer’s next generation handpiece.

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. Selling expenses increased $227,000,$172,000, or 194%,50%, compared to fiscal 2024,2025, primarily due to recruitinga fees$349,000 bad debt expense offset by reduced personnel and personneladvertising costs related to our new Director expenses of Business Development who we hired in December 2024 as well as increased advertising$80,000 and related$92,000, expenses.respectively.

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. TheFiscal $769,000 increase in2026 G&A expenses fromincreased $2.6 million, or 55%, compared to fiscal 20242025, primarily due to 2025$449,000 is due primarily to $441,000 in increased bonus accruals, $249,000$620,000 in increased personnel costs, $668,000 related to APM’s separate general and administrative expenses since the date of acquisition, $500,000 in non-recurring consulting fees paid to the former owner of APM and $270,000 $133,000 in increased legalnon-cash andequity informationcompensation technology expenses, offset by $157,000 in decreased audit fees.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 (“IT”) 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. Fiscal 20252026 research and development costs increased $447,000decreased $291,000 from fiscal 20242025 due to a $155,000 reduction in legal expenses related to intellectual property matters and $76,000 and $35,000 in decreased recruiting and IT expenses, respectively, as well as increased spending on internal product development projects of $378,000 as well as reduced billable project expenditures which get reclassified to cost of sales. The majority of our research and development expenditures incurred in fiscal 2025 2026 and 20242025 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. 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, and replacement and enhancement of tooling and fixtures used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Gain on Salemarketable of Investmentsinvestments, net

Interest expense incurred in fiscal 20252026 and 20242025 consists primarily of interest expense related to our debt with MinnesotaUMB Bank & TrustN.A. (“MBTUMB”) described more fully in Note 89 to the consolidated financial statements contained elsewhere in this report.

Cash usedprovided inby operating activities activities during fiscal 20252026 totaled $1.7$7.2 million. Our net income was $9.0$13.7 million, which includes $1.5$5.7 million of unrealizednet gains on certain equity investments, $595,000 of realized gains on the sale of certain equity investments as well as $1.2$1.4 million of depreciation and amortization and $555,000$688,000 of non-cash stock compensation. Additionally, at June 30, 20252026 compared to June 30, 2024,2025, our accounts receivable increased by $2.5$4.7 million corresponding with our increased revenue, our income tax accounts reflect a $1.5 million outlay of cash mostly relatedoffset to higher estimated income tax payments, andby our inventory increaseddecreasing by $6.9$1.6 million in anticipation of increased sales to support our largest customer’s release of their next generation orthopedic handpiece.million.

Net cash usedprovided inby investing activities infor fiscal 20242026 was $2.2$3.9 million and relatedrelates primarily to the exerciseproceeds received from the Zimmer Biomet acquisition of theMonogram previously warrant to purchase Monogram common stock for cashdisclosed in the amount of $1,250,000$11.2 (Seemillion offset by our acquisition of APM in the amount of $6.5 million described further in Note 43 to the consolidated financial statements contained elsewhere in this report)report. asAdditionally, wellwe asspent $483,000 on the purchase of capital equipment and improvements purchases$350,000 inrelated theto amountSeries A Preferred Stock of $983,000.a privately held technology company.

Net cash used in financing activities for fiscal 20242026 totaled $4.3$3.4 million and relatedrelates primarily to the $3.5 million repurchase of 184,90179,898 shares of our common stock pursuant pursuant to our share repurchase program, as well as $841,000 of net principal payments related to our various loans from MBT more fully described in Note 8 to the consolidated financial statements contained elsewhere in this report.program.

As of June 30, 2025,2026, our working capital was $32.7$40.3 million. We currently believe that our existing cash and cash equivalent balances, together with our account receivable balances, and anticipated cash flows from operations will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months. We may also liquidate some or all of our investment portfolio or borrow against our revolving loan with MBTUMB (See Note 89 to consolidated financial statements contained elsewhere in this report), under which we had availability of $7.3$11.0 million as of June 30, 2025.2026.

The Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot, and Van Kirk. Both Mr. Cabillot and Mr. 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. Swenson or Cabillot 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 $6.9$1.7 million of investments in marketable public equity securities held at June 30, 2025,2026, which amount includes unrealized holding gainslosses in the amount of $3.3 million$97,000 at June 30, 2025.2026.

Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended June 30, 2025, as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended DecemberMarch 31, 2025.2026. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed financial statements included elsewhere in this report and in Part I, Item 2, of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks and uncertainties disclosed in our Form 10-K, our quarterly reports on Form 10-Q, and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect our business, financial condition and results of operations in the future. There have been no material changes to the risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025.

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 six-monthnine-month periods ended DecemberMarch 31, 20252026 and 2024.2025. This This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere 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 optimizeintegrate and effectively operate Advanced Precision Machining, LLC (“APM”), our ability to service our operationsdebt atand remain in compliance with our Franklinrelated facility,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 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 thatwhich 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, and precision machined parts and assemblies for the aerospace and defense industries; through however, these motors compromise a de minimis portion of our business.APM subsidiary.

Our principal principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet addressaddresses isare www.pro-dex.com.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.gov andwww.sec.govand company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

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 sixnine months ended DecemberMarch 31, 20252026 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.

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. WeDuring arethe activelythird pursuingquarter of fiscal 2026, we completed the acquisition of APM, one of our significant suppliers 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.

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, 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.

Certain of our medical device products utilize proprietary designs developed by us under exclusive development and/or supply agreements. All of our medical device products utilize proprietary manufacturing methods and know-how, and are manufactured or machined either in our Costa Mesa or Irvine, California facility, facilities, and are assembled in our Tustin, California facilityfacility, (asalong arewith our industrial products).products. Details of our medical device sales by type is as follows (in thousands, except percentages):

Sales of our medical device products increased $2.9$4.3 million, or 24%,36%, and $11.7 million, or 35%, respectively, for the three and nine months ended DecemberMarch 31, 2025, and increased $7.4 million, or 33%, for the six months ended December 31, 2025,2026, compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer, included in orthopedic sales above, increased $2.6$4.5 million, or 27%,million and $6.9$11.4 million, or 43%, respectively, for the three and sixnine months ended December March 31, 20252026, compared to the corresponding periodperiods of the prior fiscal year,year. dueAs primarilypreviously to the launch ofdiscussed, our largest customer’scustomer nextexecuted a generationcontract amendment which extends the contract through 2028 and also provides for higher volumes of their newest surgical handpiece. WeTherefore, we expect to see similar increaseslevels of revenue reported in orthopedic sales forthrough at2028. leastAdditionally, the remainder of this fiscal year. Recurringrecurring revenue from distributors CMFof thoracic drivers increased $1.3decreased $389,000 and $1.8 million, or 69%, and $1.9 or 47%, respectivelyrespectively, for the three and sixnine months ended DecemberMarch 31, 2025 2026, compared to the corresponding period periods of the prior fiscal year. Our thoracicCMF sales decreasedrevenue $880,000,increased or 83%$252,000 and $1.4$2.1 million or 67%, respectivelymillion, for the three and six nine months ended DecemberMarch 31, 20252026, respectively, compared to the corresponding periodperiods 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 our customers’ required inventory levels.

SalesIndustrial ofand ourscientific compactsales pneumaticincreased air$207,000, motors,or reported as “Industrial78%, and scientific” sales above, increased $24,000,$260,000, or 14%, and $52,000, or 17%,45%, respectively, for the three and sixnine months ended DecemberMarch 31, 2025,2026, compared compared to the corresponding periods of the prior fiscal year.year, Theseprimarily aredue legacy products with no substantive marketing efforts and, as such, expect to seethe continuedinclusion minimalof revenueAPM sales from these products in the future.acquisition date of February 9, 2026. Our non-recurring (“NRE”) and proto-typeprototype revenue increased $108,000, $345,000, or 263%,186%, and $536,000,$882,000, or 602%, respectively,322%, for the three and sixnine months ended December March 31, 2025,2026, 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.

Repair revenue decreased $1.7$2.4 million or 48%, and $5.4 million, or 35%, and $3.0 million, or 30%, respectively,36%, for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, compared compared to the corresponding periods of the prior fiscal year,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 DecemberMarch 31, 2025,2026, we had a backlog of approximately $37.4$39.0 million, of which $32.5$15.6 million is scheduled to be delivered in the fourth quarter of fiscal 2026 and the balance is scheduled to be delivered the followingnext fiscal year. Our backlog represents firm purchase orders received and 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 for the three and six months ended DecemberMarch 31, 2025,2026, increased $1.2$2.2 million, or 10%,19%, and $4.6 million, or 21%, respectively, compared to the corresponding periodsperiod of the prior fiscal year. The increase in costtotal costs of sales is consistent with the 11% and 17%15% increase in revenue for the same period. Under-absorption of manufacturing costs increased by $398,000 for the three and six months ended DecemberMarch 31, 2025, respectively,2026, compared to the corresponding periodsperiod of the prior fiscal fiscal year. Additionally,Costs under-absorptionrelating to inventory and warranty charges increased $122,000 for the three and six months ended DecemberMarch 31, 2025,2026, decreased $132,000 and $64,000, respectively, compared to the corresponding periods of the prior fiscal year. Inventory and warranty charges for the three and six months ended December 31, 2025, increased $201,000, or 609%, and $267,000 or 259%, respectively, compared to the corresponding periodsperiod of the prior fiscal year, primarily due to an increase in inventory reserves.reserves, offset by a decrease in warranty accruals.

Gross profit increased by $671,000,approximately $335,000, or 13%, and $889,000, or 9%,6%, for the three and six months ended DecemberMarch 31, 2025, respectively,2026, compared to the corresponding periodsperiod of the prior fiscal year.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 fordecreased theby three months ended December 31, 2025, increased 1 percentage point, and for the six months ended December 31, 2025, decreasedapproximately 2 percentage points,points compared to the corresponding periods period of the prior fiscal year year.due primarily to unfavorable product mix.

Operating Costs and Expenses (in thousands except % changepercentages)

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 DecemberMarch 31, 20252026, decreased $10,000$73,000, or 65%, and $58,000, or 28%, respectively, compared to the corresponding periods of fiscal 2025. SellingThe decrease in selling expenses forrelates to a reduction in personnel costs as currently we have no employees in the six months ended December 31, 2025 increased $14,000 compared to the corresponding periods of fiscal 2025.department.

General and administrative expenses (“G&A”) consistsconsist 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 expenses increased $322,000$1.1 million and $494,000,$1.6 million, respectively, during during the three and sixnine months ended DecemberMarch 31, 2025,2026, when compared to the corresponding periods of the prior fiscal year. The increases increase relates primarily to aincreased $225,000personnel 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 theour Company’s Chief Executive OfficerCEO in the second quarteramount of fiscal$225,000. 2026Additionally, aswe well asincurred anincreased overall increase in personnel costslegal and consultingprofessional services fees related to the potentialAPM acquisition ofalong one ofwith our significantnew suppliers thatdebt we are currently pursuing.agreements.

Research and development costs generally consist of salaries, employer paidemployer-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 sixnine months ended DecemberMarch 31, 2025,2026, decreased $208,000$120,000, or 13%, and $282,000,$403,000, respectively,or 15%, compared to the corresponding periods of the prior fiscal year. The decrease for the three months ended December 31, 2025, compared to the comparable period of the prior year is primarily relatedrelates to an increase in billable project expenses of $64,000, a decrease in internalthe projectcurrent expensesfiscal year versus the prior fiscal year, which costs get reclassified to cost of $55,000,sales, as well as decreasesa reduction in legal costs related to intellectual property matters. The nine-month inperiod ended March 31, 2025 also included recruiting fees ofin $13,000the and legal fees related to our intellectual propertyamount of $51,000.$78,000 Thewhich decreasedid fornot recur during the sixcurrent monthsfiscal ended December 31, 2025, compared to the comparable period of the prior year is primarily related to a decrease in recruiting fees of $78,000, a decrease in internal project costs of $117,000, an increase in billable project expenses of $65,000 and a decrease in legal fees related to our intellectual property of $70,000. When our engineers are engaged in billable projects as opposed to internal projects, costs get shifted to cost of sales instead of research and development. While we are currently in development on two internal projects, project expenses for the periods presented in this report are not material.year.

Interest and& Other Income

Interest income for the three and sixnine months ended DecemberMarch 31, 2025,2026 and 20242025, includes interest and dividends from our money market accounts and investment portfolio.

Interest expense consists primarily of interest expense related to ourthe UMBnotes Bank (“UMB”) loanspayable described more fully in Note 1112 to the condensed consolidated financial statements contained elsewhere in this report.

Cash and cash equivalents at DecemberMarch 31, 20252026, increased $7.5$9.6 million to $8.0$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.

Net cash provided by operating activities was $5.9$7.5 million for the sixnine months ended DecemberMarch 31, 2025,2026, primarily due to our net income of $6.9$10.8 million plusincluding 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 $625,000$511,000 offset by a $2.2 million increase in receivables. Additionally, accounts payable and $325,000,accrued respectively,expenses lessincreased theby $936,000, net gains on marketable equity investments of $3.0 million. Additionally,and income taxes payable increased by $1.8$1.3 millionmillion. andThe inventoryincreases decreased by $503,000. Offsettingin these cash inflows,balance sheet accounts reflect our accountscontinued receivableand expected increased by $1.5 million consistent with increasedfuture revenue in fiscal 2026 compared to fiscal 2025.growth.

Net cash generatedprovided fromby investing activities for the nine months ended March 31, 2026, was $8.8$3.7 million and relates primarily to the proceeds received from ourthe Zimmer Biomet acquisition of Monogram investment, more fullypreviously 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 4 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 usedprovided inby investing activities for the sixnine months ended DecemberMarch 31, 20242025, was $973,000$754,000 and related mostlyrelates to equipmentthe sale of some of our marketable securities for $1.9 million offset by purchases forof ourcapital machineequipment shop, assembly, and inspection.improvements of $1.2 million.

Net cash used in financing activities for the sixnine months ended DecemberMarch 31, 2025,2026, totaled $7.1$1.7 million and relatedrelates primarily to the$2.8 net principal payments of $4.9 million on our loans from UMB more fully described in Note 11attributable to the condensed consolidated financial statements contained elsewhere inrepurchase this report, as well as repurchase of 55,00069,422 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 amountcondensed ofconsolidated $2.2 million.financial statements contained elsewhere in this report.

Net cash provided by financing activities for the sixnine months ended DecemberMarch 31, 2024,2025, includedtotaled net borrowings in the amount of $4.5$2.6 million primarilyand related primarily to the net increase in borrowings of $6.4 Termmillion Loanfrom CUMB Bank more fully described in Note 1112 to the condensed consolidated financial statements contained elsewhere in this report, report offset by $3.5 million attributable to the repurchase of $3.5130,148 millionshares of our common stock pursuant to our share repurchase program, as well as $305,000 of employee payroll taxes related to shares of common stock issued to employees under previously granted performance awards and nonqualified stock options.program.

Financing Facilities & Liquidity Requirements for the Next Twelve Months As of DecemberMarch 31, 2025,2026, our working capital was $37.0$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 DecemberMarch 31, 2025.2026.