PRO DEX INC (PDEX)

CIK: 0000788920. SIC: 3841 Surgical & Medical Instruments & Apparatus. Latest 10-K as of: 2025-09-04.

SIC breadcrumb: Manufacturing > SIC Major Group 38 > SIC 3841 Surgical & Medical Instruments & Apparatus

SEC company page: https://www.sec.gov/edgar/browse/?CIK=788920. Latest filing source: 0001079973-25-001426.

Selected Fundamentals

Financials

Annual standardized facts from SEC companyfacts as of latest extracted filing date 2025-09-04. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0000788920.json. Derived margins, ratios, and free cash flow are computed from the extracted annual SEC facts.

Flow metrics use full-year FY periods from 10-K/10-K/A filings; balance-sheet metrics use FY-end instants. Free cash flow = operating cash flow - capital expenditures. Missing metrics are omitted rather than fabricated.

Ratios

ROE and ROA use period-end equity/assets. Liabilities / equity uses total liabilities divided by stockholders' equity. Current ratio uses current assets divided by current liabilities when both are reported.

Financial Charts

Quarterly

Quarterly standardized facts from SEC companyfacts as of latest extracted filing date 2026-04-30. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0000788920.json.

Flow metrics use discrete quarter-length periods from 10-Q/10-Q/A filings. Q4 revenue and net income are derived only when annual FY and nine-month YTD facts exist for the same fiscal year; derived Q4 values are labeled. EPS Q4 is not derived.

Quarterly Charts

Macro Cross-References

• CPIAUCSL - Consumer Price Index for All Urban Consumers: All Items in U.S. City Average
• UNRATE - Unemployment Rate
• FEDFUNDS - Federal Funds Effective Rate
• CES0500000003 - Average Hourly Earnings of All Employees, Total Private
• DFEDTARU - Federal Funds Target Range - Upper Limit
• DFEDTARL - Federal Funds Target Range - Lower Limit
• DGS3MO - Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity
• DGS2 - Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity
• DGS10 - Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
• DGS30 - Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity
• T10Y2Y - 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
• CPILFESL - Consumer Price Index for All Urban Consumers: All Items Less Food and Energy
• CPIUFDSL - Consumer Price Index for All Urban Consumers: Food
• CPIENGSL - Consumer Price Index for All Urban Consumers: Energy
• CUSR0000SAH1 - Consumer Price Index for All Urban Consumers: Shelter
• PCEPI - Personal Consumption Expenditures: Chain-type Price Index
• PCEPILFE - Personal Consumption Expenditures Excluding Food and Energy: Chain-type Price Index
• PPIACO - Producer Price Index by Commodity: All Commodities
• T10YIE - 10-Year Breakeven Inflation Rate
• U6RATE - Total Unemployed, Plus All Marginally Attached Workers Plus Total Employed Part Time for Economic Reasons
• PAYEMS - All Employees, Total Nonfarm
• CIVPART - Labor Force Participation Rate
• EMRATIO - Employment-Population Ratio
• UNEMPLOY - Unemployed
• CE16OV - Employment Level
• ICSA - Initial Claims
• JTSJOL - Job Openings: Total Nonfarm
• JTSQUR - Quits: Total Nonfarm
• GDPC1 - Real Gross Domestic Product
• A191RL1Q225SBEA - Real Gross Domestic Product: Percent Change from Preceding Period
• INDPRO - Industrial Production: Total Index
• TCU - Capacity Utilization: Total Index
• HOUST - New Privately-Owned Housing Units Started: Total Units
• PERMIT - New Privately-Owned Housing Units Authorized in Permit-Issuing Places: Total Units
• RSAFS - Advance Retail Sales: Retail Trade
• PCE - Personal Consumption Expenditures
• DSPIC96 - Real Disposable Personal Income
• PSAVERT - Personal Saving Rate
• M2SL - M2
• BOPGSTB - U.S. International Trade in Goods and Services: Balance
• MSPUS - Median Sales Price of Houses Sold for the United States
• HSN1F - New One Family Houses Sold: United States
• RHORUSQ156N - Homeownership Rate in the United States
• TTLCONS - Total Construction Spending: Total Construction in the United States
• RRVRUSQ156N - Rental Vacancy Rate in the United States
• TOTALSL - Total Consumer Credit Owned and Securitized
• REVOLSL - Revolving Consumer Credit Owned and Securitized
• DRCCLACBS - Delinquency Rate on Credit Card Loans, All Commercial Banks
• GDP - Gross Domestic Product
• GPDI - Gross Private Domestic Investment
• GCE - Government Consumption Expenditures and Gross Investment
• PCEC - Personal Consumption Expenditures
• NETEXP - Net Exports of Goods and Services
• GFDEBTN - Federal Debt: Total Public Debt
• GFDEGDQ188S - Federal Debt: Total Public Debt as Percent of Gross Domestic Product
• FYFSD - Federal Surplus or Deficit
• FGRECPT - Federal Government Current Receipts
• FGEXPND - Federal Government: Current Expenditures
• MANEMP - All Employees, Manufacturing
• USCONS - All Employees, Construction
• USTRADE - All Employees, Retail Trade
• USFIRE - All Employees, Financial Activities
• USGOVT - All Employees, Government
• AWHAETP - Average Weekly Hours of All Employees, Total Private
• DGORDER - Manufacturers' New Orders: Durable Goods
• NEWORDER - Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft
• BUSINV - Total Business Inventories
• EXPGS - Exports of Goods and Services
• IMPGS - Imports of Goods and Services
• IR - Import Price Index (End Use): All Commodities
• PPIFIS - Producer Price Index by Commodity: Final Demand

Latest quarter (10-Q)

Latest 10-Q source: 0001079973-26-000580.

Extracted structurally from real Item 2 body heading to real Item 3/4 boundary. Confidence: high. Filing date: 2026-04-30. Report date: 2026-03-31.

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

[Excerpt truncated for page length; source filing is linked above.]

Latest 10-K MD&A

Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization. Confidence: high. Filing date: 2025-09-04. Report date: 2025-06-30.

ITEM 7.

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

The following discussion of
our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes
thereto contained elsewhere in this report, as well as the Risk Factors included in Item 1A of this report. The following discussion contains
forward-looking statements. (See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this report.)

Overview

The following discussion and
analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and
financial condition for the fiscal years ended June 30, 2025 and 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 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. Our products are found in hospitals, medical engineering labs, scientific research facilities, and high-tech
manufacturing operations around the world. We are headquartered in Irvine, California.

Critical Accounting Policies and Estimates

Our consolidated financial
statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We base our estimates
on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.

Revenue Recognition

Under Accounting Standards
Update (“ASU”) 2014-09, (Topic 606) “Revenue From Contracts with Customers,” we recognize revenue from
the sales of products and services by applying the following steps: (1) identify the contract with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in
the contract; and (5) recognize revenue when each performance obligation is satisfied. We primarily sell finished products and recognize
revenue at point of sale or delivery. However, we also perform services when we are engaged to design a product for a customer and there
is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts. In fiscal 2025,
the revenue from NRE and prototype services represents approximately 1% of total revenue.

Returns of our product for
credit are not material; accordingly, we do not establish a reserve for product returns at the time of sale.

Inventories

Inventories are stated at
the lower of cost (first-in, first-out method) or net realizable value. Reductions to estimated net realizable value are recorded, and
charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand
from the measurement date.

Investments

Investments consist of marketable
equity securities of publicly held companies. 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, 2025 and 2024.

15 

Long-lived Assets

We review the recoverability
of long-lived assets, consisting of building, equipment, and improvements, when events or changes in circumstances occur that indicate
carrying values may not be recoverable.

Building, equipment, and
improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods: 

Building

Thirty years

Equipment

Three to ten years

Improvements

Shorter of the remaining life of the underlying building, lease term, or the asset’s estimated useful life

Income Taxes

We recognize deferred tax
assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities,
along with net operating loss and tax credit carryovers. Deferred tax assets and liabilities at June 30, 2025 and 2024 consisted primarily
of basis differences related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses
and inventories. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Significant management judgment
is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based
on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which deferred
tax assets will be recoverable. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative
evidence, including reversals of deferred tax liabilities, projected future taxable income, and results of recent operations. The assumptions
about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying
business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income
(loss).

16 

Results of Operations for the Fiscal Year Ended
June 30, 2025 Compared to the Fiscal Year Ended June 30, 2024

The following tables set forth
results from operations for the fiscal years ended June 30, 2025 and 2024:

Years
Ended June 30,

2025

2024

Dollars
in thousands

% of Net Sales

% of Net Sales

Net sales

$

66,593

100

%

$

53,844

100

%

   Cost of sales

47,083

71

%

39,293

73

%

Gross profit

19,510

29

%

14,551

27

%

   Selling expenses

344

—

117

—

   General and administrative expenses

4,841

7

%

4,072

8

%

   Research and development costs

3,636

6

%

3,189

6

%

Total operating expenses

8,821

13

%

7,378

14

%

   Operating income

10,689

16

%

7,173

13

%

   Other income (expense), net

1,369

2

%

(4,539

)

(8

%)

Income before income taxes

12,058

18

%

2,634

5

%

Income tax expense

3,080

5

%

507

1

%

Net income

$

8,978

13

%

$

2,127

4

%

Net Sales

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. The proportion of total sales by product/service type is as follows:

Years
Ended June 30,

Increase

(Decrease)
From 2024 To

2025

2024

 2025

Dollars
in thousands

% of Net Sales

% of Net Sales

Net sales:

Medical devices

$

47,747

72

%

$

36,979

69

%

29

%

Industrial and scientific

861

1

%

765

1

%

13

%

NRE & Prototype services

698

1

%

786

1

%

(11

%)

Dental and component

194

—

201

—

(4

%)

Repairs

18,586

28

%

16,505

31

%

13

%

Discounts & Other

(1,493

)

(2

%)

(1,392

)

(2

%)

7

%

$

66,593

100

%

$

53,844

100

%

24

%

17 

Net
sales in fiscal 2025 increased by $12.7 million, or 24%, as compared to fiscal 2024, due primarily to an increase in medical device revenue
of $10.8 million and an increase in repair revenue of $2.1 million. Details of our medical device sales by type is as follows:

Years
Ended June 30,

Increase

(Decrease)
From 2024 To

2025

2024

 2025

Dollars
in thousands

% of Net Sales

% of Net Sales

Medical device sales:

Orthopedic

$

33,542

70

%

$

23,630

64

%

42

%

CMF

9,943

21

%

10,334

28

%

(4

%)

Thoracic

4,262

9

%

3,015

8

%

41

%

Total

$

47,747

100

%

$

36,979

100

%

29

%

Sales
of our medical device products increased $10.8 million, or 29%, during fiscal 2025 as compared to fiscal 2024. Our medical device revenue
to our largest customer, included in orthopedic sales above, increased $10.1 million, compared to the prior fiscal year due primarily
to the launch of that customer’s next generation handpiece. 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, 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. During fiscal 2025, thoracic sales increased by $1.3 million to $4.3
million, up from $3.0 million in fiscal 2024. Recurring revenue from distributors of CMF drivers decreased $391,000 in fiscal 2025
compared to fiscal 2024. We do not have much visibility into our customers’ distribution networks, but these fluctuations are within
expected levels.

Sales
of our industrial and scientific products, which consist primarily of our compact pneumatic air
motors, increased $96,000, or 13%, for fiscal 2025 compared to fiscal 2024. These are legacy products with no substantive marketing or
sales efforts.

Sales
of our NRE & prototype services decreased $88,000, or 11%, during fiscal 2025 as compared to fiscal 2024 and relates to a reduction
in the number of billable engagements for various NRE projects undertaken for our customers.

Sales
of our dental products and components in fiscal 2025 decreased $7,000, or 4%, as compared to fiscal 2024. The decrease is as expected
and we expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining
component inventory.

Our
fiscal 2025 repair revenue increased approximately $2.1 million, or 13%, to $18.6 million, as compared to fiscal 2024, due to increased
repairs of the legacy orthopedic handpiece we sold to our largest customer. This increase relates to the continuation of the previously
disclosed enhanced repair program. We anticipate that repair revenue may decline in future periods as this customer transitions to the
next generation handpiece in lieu of enhancements of the legacy handpiece.

At June 30, 2025, we
had a backlog of $50.4 million compared with a backlog of $19.8 million at June 30, 2024. 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, as well as certain purchase orders received subsequent to June 30, 2025, are expected
to be delivered during fiscal 2026. We have experienced, and may continue to experience, variability in our new order bookings due to,
among other reasons, the launch of new products, the timing of customer orders based on end-user demand, and customer inventory levels.
We do not typically experience seasonal fluctuations in our shipments and revenues.

18 

Cost of Sales and Gross Margin

Years
Ended June 30,

Increase

(Decrease)
From 2024 To

2025

2024

 2025

Dollars
in thousands

% of Net Sales

% of Net Sales

Costs of sales

Product costs

$

43,833

66

%

$

38,121

71

%

15

%

NRE and Prototype services costs

469

1

%

802

1

%

(42

%)

Under (over)-absorption of manufacturing overhead

2,517

4

%

(74

)

—

3,501

%

Inventory and warranty charges

264

—

444

1

%

(41

%)

Total cost of sales

$

47,083

71

%

$

39,293

73

%

20

%

Cost of sales in fiscal 2025
increased $7.8 million, or 20%, from fiscal 2024, primarily due to the increase in product costs, consistent with the 24% increase
in net sales. During fiscal 2025, we experienced $2.5 million of under-absorption of manufacturing costs compared to $74,000 of over-absorption
in fiscal 2024, due primarily to an increase in our indirect manufacturing costs in fiscal 2025.
Costs related to inventory and warranty charges decreased $180,000 in fiscal 2025 compared to fiscal 2024, primarily due to decreased
inventory reserves.

Operating Expenses

Years
Ended June 30,

Increase

(Decrease)
From 2024 To

2025

2024

 2025

Dollars
in thousands

% of Net Sales

% of Net Sales

Operating expenses:

Selling expenses

$

344

—

$

117

—

194

%

General and administrative expenses

4,841

7

%

4,072

8

%

19

%

Research and development costs

3,636

6

%

3,189

6

%

14

%

$

8,821

13

%

$

7,378

14

%

20

%

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, or 194%, compared to fiscal 2024, primarily due to recruiting fees and personnel costs related to our new Director of Business
Development who we hired in December 2024 as well as increased advertising and related expenses.

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. The $769,000 increase in G&A expenses from fiscal 2024 to 2025 is due primarily to $441,000
in increased bonus accruals, $249,000 in increased personnel costs, and $270,000 in increased legal and information technology expenses,
offset by $157,000 in decreased audit fees.

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. Fiscal 2025 research and development costs increased
$447,000 from fiscal 2024 due to 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
and 2024 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.

19 

Other Income (Expense)

Interest and Dividend Income

Our interest and dividend
income earned in fiscal 2025 and 2024 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

Unrealized gain (loss)
on investments

The unrealized gain (loss)
on investments relates to our investment portfolio. Additional information related to the nature of our investments is more fully described
in Note 4 to the consolidated financial statements contained elsewhere in this report.

Gain on Sale of Investments

During fiscal 2025, we liquidated
some of the investments in our portfolio of equity investments receiving proceeds of $1.9 million and recording a gain of $595,000. During
fiscal 2024, our investment sales were immaterial.

Interest Expense

Interest expense incurred
in fiscal 2025 and 2024 consists primarily of interest expense related to our debt with Minnesota Bank & Trust (“MBT”)
described more fully in Note 8 to the consolidated financial statements contained elsewhere in this report.

Income Taxes

The effective tax rate for
the fiscal years ended June 30, 2025 and 2024 was 26% and 19%, respectively, slightly less than our combined expected federal and applicable
state corporate income tax rates due primarily to federal and state research credits. Our pre-tax income in fiscal 2025 was $12.0 million
compared to $2.6 million in fiscal 2024. The impact of our tax credits is more significant when pre-tax income is lower.

Liquidity and Capital Resources

The following table is a summary
of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30, 2025 and 2024:

As of
and for the Years

Ended June 30,

2025

2024

(In thousands)

Cash provided by (used in):

Operating activities

$

(1,682

)

$

6,224

Investing activities

$

(238

)

$

(2,233

)

Financing activities

$

(292

)

$

(4,296

)

Cash, cash equivalents and working capital:

Cash and cash equivalents

$

419

$

2,631

Working capital

$

32,666

$

23,719

20 

Cash Flows from Operating Activities

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

Cash provided by operating
activities totaled $6.2 million during fiscal 2024. Our fiscal 2024 net income was $2.1 million, which includes $4.1 million of unrealized
losses on certain equity investments, as well as non-cash stock compensation expense and depreciation and amortization expense in the
amount of $605,000 and $1.2 million, respectively. Additionally, our accounts payable and accrued expenses at June 30, 2024 increased
by $2.4 million and our inventory decreased by $898,000 as compared to June 30, 2023. Offsetting these inflows of cash, our accounts receivable
and deferred tax assets at June 30, 2024 grew by $3.9 million and $1.6 million, respectively, compared to June 30, 2023.

Cash Flows from Investing Activities

Net cash used in investing
activities in fiscal 2025 was $238,000. During the 2025 fiscal year, we made capital expenditures in the amount of $1.2 million and exercised
warrants to purchase common stock and preferred stock of Monogram Technologies, Inc., formerly Monogram Orthopaedics Inc. (“Monogram”)
for cash in the amount of $899,000 (See Note 4 to the consolidated financial statements contained elsewhere in this report) offset by
proceeds of $1.9 million from the sales of marketable equity securities.

Net cash used in investing
activities in fiscal 2024 was $2.2 million and related to the exercise of the warrant to purchase Monogram common stock for cash in the
amount of $1,250,000 (See Note 4 to the consolidated financial statements contained elsewhere in this report) as well as equipment and
improvements purchases in the amount of $983,000.

Cash Flows from Financing Activities

Net cash used in financing
activities for fiscal 2025 totaled $292,000 and included $3.5 million in net borrowings on various notes payable to MBT, more fully described
in Note 8 to the consolidated financial statements contained elsewhere in this report, offset by $3.5 million related to the repurchase
of 130,148 shares of our common stock pursuant to our share repurchase program, as well as payment of $305,000 of employee payroll taxes
related to the award of 40,000 shares of common stock to employees under previously granted performance awards.

Net cash used in financing
activities for fiscal 2024 totaled $4.3 million and related primarily to the $3.5 million repurchase of 184,901 shares of our common stock
pursuant to our share repurchase program, as well as $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.

Liquidity Requirements for the Next 12 Months

 As of June 30, 2025,
our working capital was $32.7 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 MBT (See Note 8 to consolidated financial statements contained elsewhere in this report), under
which we had availability of $7.3 million as of June 30, 2025.

21 

We are focused on preserving
our cash balances 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 our current strategy, however, we may require additional debt
and/or equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing 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.

Surplus Capital Investment Policy

During fiscal
2013, our Board approved a Surplus Capital Investment Policy (the “Policy”) that provides,
among other items, for the following:

(a)

Determination by our Board of Directors
of (i) our surplus capital balance and (ii) the portion of such
surplus capital balance to be invested according to the Policy;

(b)

Selection of an Investment
Committee responsible for implementing the Policy; and

(c)

Objectives and criteria under which investments may be made.

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 million of investments in marketable public equity securities
held at June 30, 2025, which amount includes unrealized holding gains in the amount of $3.3 million at June 30, 2025.

In December 2019, our Board
approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock, as the prior repurchase
plan, authorized by our Board in 2013, authorizing the repurchase of 750,000 shares of common stock was nearing completion. In accordance
with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans
intended to qualify for the safe harbor Rule 10b5-1 under the Exchange Act (“10b5-1 Plan” or “Plan”).

During the fiscal year ended
June 30, 2025, we repurchased 130,148 shares at an aggregate cost, inclusive of fees under the Plan, of $3.5 million. During the fiscal
year ended June 30, 2024, we repurchased 184,901 shares at an aggregate cost, inclusive of fees under the Plan, of $3.5 million. On a
cumulative basis, since 2013 we have repurchased a total of 1,511,497 shares under the share repurchase programs at an aggregate cost,
inclusive of fees under the Plan, of $24.2 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.