PRO DEX INC

Previous wording

The following discussion and analysis provides information that management believes is relevant to an assessment and understandingofthe results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,” “we,” “our,” or “us”) for the three-month and six-month periods ended December 31, 2024 and 2023. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewherein 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.

Current wording

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, 2025 and 2024. This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. This report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein.

Previous wording

Except for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions ofour product development plans, business strategies, strategic opportunities, and market factors influencing our results, areforward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as aresultof various factors, both foreseen and unforeseen, including, but not limited to, our abilityto continueto develop new products and increase salesin markets characterized by rapid technological evolution, our ability to optimize our operations at our Franklin facility, consolidation within our target marketplace and among our competitors, 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 inour other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including, but not limited to, the risks, uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2024.

Current wording

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 optimize our operations at our Franklin facility, consolidation within our target marketplace and among our competitors, the impact of tariffs on the cost of our raw materials and purchased components, employee turnover, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities. 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, 2024.

Previous wording

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 that appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary air motors to a wide range of industries.

Current wording

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.

Previous wording

Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet address is www.pro-dex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 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 atwww.sec.gov and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

Current wording

Our principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet address is www.pro-dex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 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 and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

Previous wording

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, 2025, 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.

Current wording

The condensed consolidated results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending June 30, 2025. Our fiscal year ends on June 30 and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.

Previous wording

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 six months ended December 31, 2024 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, 2024.

Current wording

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that there have been no significant changes during the three and nine months ended March 31, 2025 to the items that we disclosed as our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024.

Previous wording

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

Current wording

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 in our Irvine, California facility, and are assembled in our Tustin, California facility, along with our industrial products. Details of our medical device sales by type is as follows (in thousands, except percentages):

Previous wording

Sales of our medical device products increased $3.3 million, or 37%, for the three months ended December 31, 2024, and increased $5.4 million, or 32%, for the six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year. Our orthopedic sales increased $3.8 million, or 69%, and $5.7 million, or 55%, respectively, for the three and six months ended December 31, 2024 compared to the corresponding period of the prior fiscal year, due primarily to the launch of our largest customer’s next generation handpiece. We expect to see similar increases in orthopedic sale for at least the remainder of this fiscal year. Recurring revenue from CMF drivers decreased $920,000, or 33%, and $352,000 or 8%, respectively for the three and six months ended December 31, 2024 compared to the corresponding period of the prior fiscal year. Our thoracic sales increased $410,000, or 63% and $89,000 or 5%, respectively for the three and six months ended December 31, 2024 compared to the corresponding period of the prior fiscal year. While we do not have much visibility into our customers’ distribution networks, this level of change in thoracic and CMF sales (whether an increase or decrease) is not uncommon and fluctuations occur based upon required inventory levels.

Current wording

Sales of our medical device products increased $2.1 million, or 22%, and $7.5 million, or 28%, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the prior fiscal year. Our medical device revenue to our largest customer, included in orthopedic sales above, increased $1.8 million and $7.5 million, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the prior fiscal year due primarily to the launch of that customer’s next generation handpiece. As can be common with new product launches in the industry, the customer’s internal design of the next generation handpiece continues to evolve, and the customer has recently informed us that it is holding off on next generation handpiece shipments in favor of continued shipments and enhanced repair of the legacy handpieces as the customer continues to refine the next generation handpiece’s design. Although we cannot predict the timing of the customer’s further transition to the next generation handpiece at this time, we fully anticipate a resumption of shipments of the next generation handpiece once the design enhancements are finalized, coupled with larger orders of the legacy handpiece during the interim. Additionally, recurring revenue from distributors of thoracic drivers increased $182,000 and $272,000, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the prior fiscal year. Our CMF sales revenue increased $107,000 and decreased $246,000, for the three and nine months ended March 31, 2025, respectively, compared to the corresponding periods of the prior fiscal year. While we do not have much visibility into our customers’ distribution networks, this level of change in thoracic and CMF sales (whether an increase or decrease) is not uncommon and fluctuations occur based upon required inventory levels.

Previous wording

Sales of our compact pneumaticair motors, reported as “Industrial and scientific” sales above, decreased $72,000, or 30%, and $69,000, or 18%, respectively, for the three and six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year. These are legacy products with no substantive marketing efforts and, as such, we may continue to see a decline in revenue from these products. Our non-recurring (“NRE”) and proto-type revenue decreased $297,000, or 88%, and $439,000, or 83%, for the three and six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for our customers.

Current wording

Sales of our compact pneumaticair motors, reported as industrial and scientific sales above, increased $54,000, or 26%, and decreased $15,000, or 3%, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the prior fiscal year. These are legacy products with no substantive marketing efforts. Our NRE and proto-type revenue decreased $48,000, or 21%, and $488,000, or 64%, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the prior fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for our customers.

Previous wording

Repair revenue increased $1.6 million, or 48%, and $2.7 million, or 37%, respectively, for the three and six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year, primarily due to an increased number of repairs of the orthopedic handpiece we sell to our largest customer. This increase relates to the continuation of the previously disclosed enhanced repair program.

Current wording

Repair revenue increased $666,000 or 15%, and $3.3 million, or 29%, for the three and nine months ended March 31, 2025, respectively, compared to the corresponding periods of the prior fiscal year primarily due to an increased number of repairs of the orthopedic handpiece we sell to our largest customer. This increase relates to the continuation of the previously disclosed enhanced repair program.

Previous wording

At December 31, 2024, we had a backlog of approximately $48.1 million, of which $36.3 million is scheduled to be delivered in fiscal 2025 and the balance is scheduled to be delivered the following 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.

Current wording

At March 31, 2025, we had a backlog of approximately $49.5 million, of which $12.8 million is scheduled to be delivered in the fourth quarter of fiscal 2025 and the balance is scheduled to be delivered next fiscal year. Our backlog represents firm purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts. 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.

Previous wording

Gross profit increased by $2.3 million, or 81%, and $3.8 million, or 58%, for the three and six months ended December 31, 2024, respectively, compared to the corresponding periods of the prior fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described above. Gross margin as a percentage of sales for the three and six months ended December 31, 2024, increased 8 and 6 percentage points, respectively, compared to the corresponding periods of the prior fiscal year.

Current wording

Gross profit increased by approximately $1.8 million, or 45%, for the three months ended March 31, 2025, compared to the corresponding period of the prior fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described above. Gross margin as a percentage of sales increased by approximately 5 percentage points compared to the corresponding period of the prior fiscal year due primarily to favorable product mix.

Previous wording

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 six months ended December 31, 2024 increased $12,000 and $35,000, respectively, compared to the corresponding periods of fiscal 2024. The increase in both periods is primarily due to recruiting fees related to our new Director of Business Development (who we hired in December, 2024).

Current wording

Selling expenses consist of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships. Selling expenses for the three and nine months ended March 31, 2025, increased $96,000, or 565%, and $132,000, or 167%, respectively, compared to the corresponding periods of fiscal 2024. The increase relates primarily to recruiting fees and personnel costs related to our new Director of Business Development who we hired in December, 2024.

Previous wording

General and administrative expenses (“G&A”) consists of salaries and other personnel-related expenses of our accounting, finance 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 $189,000 and $440,000, respectively, during the three and six months ended December 31, 2024, when compared to the corresponding periods of the prior fiscal year. The increases relate primarily to increased bonus accruals and personnel costs, offset by decreased audit fees and stock compensation expense.

Current wording

General and administrative expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance, facilities, business systems, and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and other costs and expenses attributable to being a public company. G&A increased $86,000 and $524,000, respectively, during the three and nine months ended March 31, 2025, when compared to the corresponding periods of the prior fiscal year. The increases relate primarily to increased bonus accruals, personnel costs, and legal expenses, offset by decreased audit fees and stock compensation expense.

Previous wording

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 six months ended December 31, 2024, increased $154,000 and $191,000, respectively, compared to the corresponding periods of the prior fiscal year. The increase for the three months ended December 31, 2024, compared to the comparable prior year period is primarily due to an increase in internal project expenditures of $136,000 and legal fees related to our intellectual property of $46,000. The increase for the six months ended December 31, 2024, compared to the comparable period of the prior year is primarily related to an increase in recruiting fees of $73,000, billable project expense decreases of $72,000 and legal fees related to our intellectual property of $37,000. 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.

Current wording

Research and development costs generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel, as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our products. Research and development costs for the three and nine months ended March 31, 2025, increased $187,000, or 25%, and $378,000, or 16%, compared to the corresponding periods of the prior fiscal year. This relates to an increase in legal fees related to intellectual property matters as well as an increase in spending related to in-house battery production and sustaining engineering efforts related to our existing products.

Previous wording

Interest income for the three and six months ended December 31, 2024, and 2023 includes interest and dividends from our money market accounts and investment portfolio.

Current wording

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

Previous wording

Interest expense consists primarily of interest expense related to our Minnesota Bank and Trust (“MBT”) loans described more fully in Note 10 to the condensed consolidated financial statements contained elsewhere in this report.

Current wording

Interest expense consists primarily of interest expense related to the notes payable described more fully in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.

Previous wording

Unrealized Gain (Loss) on Investments

Current wording

Unrealized Gain (Loss) on Marketable Equity Investments

Previous wording

The unrealized gain (loss) on investments consists of our investment portfolio described more fully in Note 4 to the condensed consolidated financial statements contained elsewhere in this report. All of these investments are recorded at estimated fair value as of December 31, 2024, and relate to common stock of publicly traded companies whose stock price is subject to significant volatility.

Current wording

The unrealized gain (loss) on marketable equity investments relates to our investment portfolio more fully described in Note 4 to the condensed consolidated financial statements contained elsewhere in this report. All of these investments are recorded at estimated fair value and as of March 31, 2025, all of these investments relate to common stock of publicly traded companies whose stock price is subject to significant volatility.

Previous wording

Cash and cash equivalents at December 31, 2024 decreased $2.6 million to $66,000 as compared to $2.6 million at June 30, 2024. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.

Current wording

Cash and cash equivalents at March 31, 2025, increased $1.9 million to $4.5 million as compared to $2.6 million at June 30, 2024. The following table includes a summary of our condensed statements of cash flows contained elsewhere in this report.

Previous wording

Net cash used in investing activities for the six months ended December 31, 2023, was $2.0 million and related to the exercise of our Monogram Warrant for cash in the amount of $1,250,000 (see Note 4 to the condensed consolidated financial statements contained elsewhere in this report) as well as equipment and improvements purchases in the amount of $759,000.

Current wording

Net cash used in investing activities for the nine months ended March 31, 2024, was $2.1 million and related to the exercise of the Monogram Warrant for cash in the amount of $1,250,000 (See Note 4 to the condensed consolidated financial statements contained elsewhere in this report) as well as equipment and improvements purchases in the amount of $876,000.

Previous wording

Net cash provided by financing activities for the six months ended December 31, 2024, included net borrowings on loans from MBT in the amount of $4.5 million primarily related to the Term Loan C described in Note 10 the condensed consolidated financial statements contained elsewhere in this report, offset by the repurchase of $3.5 million 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.

Current wording

Net cash provided by financing activities for the nine months ended March 31, 2025, totaled $2.6 million and related primarily to the net increase in borrowings of $6.4 million from Minnesota Bank & Trust (“MBT”) more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report offset by $3.5 million attributable to the repurchase of 130,148 shares of our common stock pursuant to our share repurchase program.

Previous wording

Net cash used in financing activities for the six months ended December 31, 2023, totaled $740,000 and related primarily to the net principal payments of $665,000 on our loans from MBT more fully described in Note 10 to the condensed consolidated financial statements contained elsewhere in this report, as well as repurchase of 6,285 shares of our common stock pursuant to our share repurchase program in the amount of $107,000.

Current wording

Net cash used in financing activities for the nine months ended March 31, 2024, totaled $2.8 million and related primarily to the $1.8 million repurchase of 96,890 shares of our common stock pursuant to our share repurchase program as well as $990,000 of net principal payments on our loans from MBT more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.

Previous wording

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 to raise additional capital to fund our operations, we can do so by borrowing against our $7.0 million Amended Revolving Loan with MBT, which had an available balance of $3.5 million at December 31, 2024 (see Note 10 to the condensed consolidated financial statements contained elsewhere in this report).

Current wording

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 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.

Previous wording

We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors, Raymond Cabillot and Nicholas Swenson, who chairs the committee. Both Messrs. Cabillot and Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Cabillot or Swenson or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on. The Investment Committee approved each of the investments comprising the $6.3 million of marketable public equity securities that we held on December 31, 2024.

Current wording

We invest surplus cash from time to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors, Raymond Cabillot and Nicholas Swenson, who chairs the committee. Both Messrs. Cabillot and Swenson are active investors with extensive portfolio management expertise. We leverage the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Cabillot or Swenson or both may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit on. The Investment Committee approved each of the investments comprising the $5.5 million of marketable public equity securities held at March 31, 2025.