UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
(Mark One)
For the fiscal year ended June 30,
2025
OR
For the transition period from ______________
to ______________
Commission File Number 000-14942
___________________
PRO-DEX, INC.
(Exact name of registrant as specified in its
charter)
___________________
Registrant’s
telephone number, including area code: (949) 769-3200
Securities registered
pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, no par value PDEX NASDAQ Capital Market
___________________
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check
mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging
growth company ☐
If an emerging
growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
If securities are
registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check
mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31,
2024, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing
sales price on the Nasdaq Capital Market was approximately $79.9 million. For the purpose of this calculation shares owned by officers,
directors, and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This calculation does not reflect
a determination that persons are affiliates for any other purposes.
As of September 3, 2025, 3,261,979 shares
of the registrant’s no par value common stock were issued and outstanding.
Documents incorporated
by reference:
Part III of this
report incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”)
for its 2025 Annual Meeting of Shareholders. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within
120 days after the end of the fiscal year to which this report relates.
PRO-DEX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2025
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 6
ITEM 1B. UNRESOLVED STAFF COMMENTS 13
ITEM 1C. CYBERSECURITY 13
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. MINE SAFETY DISCLOSURES 13
PART II
ITEM 6. RESERVED 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9A. CONTROLS AND PROCEDURES 50
ITEM 9B. OTHER INFORMATION 51
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 51
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 52
ITEM 11. EXECUTIVE COMPENSATION 52
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 52
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 53
SIGNATURES 56
i
PART I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking
statements within the meaning of federal securities laws. Forward-looking statements are not based on historical facts but instead reflect
the Company’s expectations, estimates or projections concerning future results or events. These statements generally can be identified
by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,”
“could,” “intend,” “intent,” “belief,” “estimate,” “project,”
“forecast,” “plan,” “likely,” “will,” “should” or similar words or phrases.
These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties, and assumptions
that are difficult to predict and could cause actual results, performance, or achievements to differ materially from those expressed or
indicated by those statements. The Company cannot assure you that any of its expectations, estimates or projections will be achieved.
Forward-looking statements
included in this report are only made as of the date of this report and the Company disclaims any obligation to publicly update any forward-looking
statement to reflect subsequent events or circumstances.
Numerous factors could cause
the Company’s actual results and events to differ materially from those expressed or implied by forward-looking statements, including,
without limitation: loss of a significant customer, entry of new and stronger competitors, capital availability, unexpected costs, compliance
with contractual obligations, failure to capitalize upon access to new customers, the ramifications of industry consolidation of medical
products manufacturers, dealers and distributors, failure to mitigate supply chain issues, market acceptance and support of new products,
cancellation of existing contracts, customer “in house” production of products previously designed by and/or acquired from
the Company, invalidity or unenforceability of the Company’s patents and other intellectual property, maintaining favorable supplier
relationships, the Company’s ability to engage qualified human resources as needed, regulatory compliance, general economic conditions,
and other factors described under Item 1A (Risk Factors) of this report. This list of factors is illustrative, but by no means exhaustive.
All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
ITEM 1. BUSINESS
Company Overview
Pro-Dex, Inc. (“Company,”
“Pro-Dex,” “we,” “our,” “us”) specializes 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 craniomaxillofacial (“CMF”) markets. We have patented adaptive torque-limiting technology 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; however, these motors comprise a de minimis portion of our business.
Our patented adaptive torque-limiting
software has been very well received in the CMF and thoracic markets and we have continued investment in this area with research and development
focused on applying this technology to other surgical applications.
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. We substantially completed the build-out of the property during fiscal
2022 and concluded various verification and validation activities during fiscal 2023. We moved our entire assembly and repairs operations
to the new facility in the fourth quarter of fiscal 2023 and we are now fully operational in the new facility. We believe the new facility
will create additional capacity for our expected continued growth over the next several years.
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 certain other Securities and Exchange Commission (“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.
All years relating to financial
data herein shall refer to fiscal years ended June 30, unless indicated otherwise.
Description of Business
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):
Years Ended June 30,
(In thousands)
% of Revenue % of Revenue
Industrial and scientific 861 1 % 765 1 %
Dental and component 194 — 201 —
Our medical device products
utilize proprietary designs developed by us primarily under exclusive development and supply agreements and are currently machined in
our Irvine, California facility, and assembled in our Tustin, California facility, as are our rotary air motors. Our medical device products
are sold primarily to original equipment manufacturers and our air motors are sold to a wide range of distributors and end users.
In fiscal 2025, our top three
customers accounted for 94% of our sales compared to 88% in fiscal 2024. In fiscal 2025, we had one customer, included in both medical
device and repairs revenue above, that accounted for 75% of sales with our next largest customer accounting for 12% of sales. This compares
to fiscal 2024, when these same two customers accounted for 71% and 12%, respectively, of our total sales. In many cases, including our
largest customers, disclosure of customer names is prohibited by confidentiality agreements with such entities. We have no plans to discontinue
the sales relationships with our existing significant customers, nor does management have any knowledge that any existing significant
customer intends to terminate its relationship with us.
Our business today is almost
entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were
developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical
device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive
experience with autoclavable, battery-powered and electric, multi-function surgical drivers and shavers. We continue to focus a significant
percentage of our time and resources on providing outstanding products and service to our valued principal customers. During the first
quarter of fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we will continue to supply
their surgical handpieces to them through calendar 2025 and, during the fourth quarter of fiscal 2021, they executed a product development
agreement and related statement of work for our assistance with the next generation of this handpiece. During fiscal 2025, they launched
their next generation handpiece. During the fourth quarter of fiscal 2025, the customer released the hold that it had placed on shipments
of the next generation handpiece in the third quarter of fiscal 2025, and we resumed production and shipments of the next generation handpiece
late in the fourth quarter of fiscal 2025. Additionally, we continue to invest in property and equipment as well as personnel to expand
our capacity to achieve higher sales volumes.
To that end, we purchased
the Franklin Property in November 2020. 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. We began operations in the new facility during
the fourth quarter of fiscal 2023. While we believe that the efforts we completed to bring the facility operational will allow us ample
capacity to increase revenues significantly in future years, there can be no assurance that we will increase revenue.
Simultaneously, we are working
to build top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive
torque-limiting software has been very well received in the CMF and thoracic markets.
The majority of the raw materials
and components used to manufacture our products are purchased and are available from several sources, including through our own in-house
machining capabilities. Portescap, Fischer Connectors, and Tadiran Batteries are examples of key suppliers. We have no exclusive arrangements
with any of our suppliers, but in several instances only one supplier is used for certain high-value components. In most of such instances,
secondary suppliers have been identified, although it is likely that any transition to a new or different supplier would result in a delay
in the supply chain. We consider our relationships with our suppliers and manufacturers to be good, however, since fiscal 2022 and continuing
through fiscal 2025, many of our suppliers have increased lead times, experienced delays in shipments and raised prices or temporarily
added surcharges. Additionally, beginning in fiscal 2025, some of our suppliers have begun passing along tariff charges. While we intend
to pass on these charges to our customers, we do not know if we will be successful in these endeavors. We do not intend to terminate any
such relationship at this time, nor does management have knowledge that any supplier or manufacturer intends to terminate its relationship
with us.
Our commitment to product
design, manufacturing, and quality systems are supported by our compliance with several regulatory agency requirements and standards.
We hold a U.S. Food and Drug Administration (“FDA”) Establishment Registration and a State of California Device Manufacturing
License (Department of Public Health Food and Drug Branch) with respect to our Irvine and Tustin, California facilities. In addition,
both facilities produce products that are certified to ISO 13485:2016, Medical Device Directive 93/42/EEC – Annex II.
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.
Segments
We have only one operating
segment as our business is currently operated. We have reached this conclusion because our Chief Executive Officer (“CEO”)
allocates resources, assesses performance, and manages our business as one segment. Additionally, 99% of our business in fiscal 2025 relates
to designing, manufacturing, and repairing medical devices. We primarily design, sell, and repair handheld medical devices and accessories.
We provide medical devices, NRE and proto-type services, as well as repairs to all our customers and we utilize one machine shop and purchasing
team to procure and manufacture all the products that we sell. The CEO utilizes consolidated operating income to analyze our business
operations.
Competition
The markets for products in
the industries served by our customers are intensely competitive, and we face significant competition from a number of different sources.
Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development, and marketing resources, than us.
We compete in all of our markets
with other major medical device companies. As a provider of outsourced services, we also compete with our customers’ own internal
development and manufacturing groups. Competitive pressures and other factors, such as new product or new technology introductions by
us, our customers’ internal development and manufacturing departments, or our competitors, may result in price or market share erosion
that could have a material adverse effect on our business, results of operations, and financial condition. Also, there can be no assurance
that our products and services will achieve broad market acceptance or will successfully compete with other products targeting the same
customers.
Research and Development
We conduct research and development
activities to both maintain and improve our market position. Our research and development efforts involve the design and manufacture of
products that perform specific applications for our existing and prospective customers. Our research and development activities are focused
on:
● advancing applicable technologies;
● introducing new products; and
● enhancing our existing product lines.
In certain instances, we may
share research and development costs with our customers by billing for non-recurring engineering (“NRE”) services often provided
for under development portions of certain contracts. Revenue recognized for NRE services represented 1% of our revenue in both fiscal
2025 and 2024.
During the fiscal years ended
June 30, 2025 and 2024, we incurred research and development expenses amounting to $3.6 million and $3.2 million, respectively, which
costs exclude labor and related expenses of approximately $73,000 and $224,000 in fiscal 2025 and 2024, respectively, that were reimbursed
by our customers through billings for NRE services.
Human Capital Management
Our employees are among our
most critical assets. The success and growth of our business depends on our ability to attract, reward, retain and develop talent in all
levels of our organization, including, but not limited to, machine operators, assembly technicians, engineers, and management.
In order to attract and retain
highly qualified employees, we offer the following:
· Competitive, reasonable, and equitable compensation programs;
· Flexible paid vacation and sick time, as well as paid volunteer time; and
· Education/tuition reimbursement and referral programs.
Our employee turnover for
the fiscal years ended June 30, 2025 and 2024 was 16% and 21%, respectively. We consider the turnover rate a valuable metric to measure
the effectiveness of our programs and to assist in developing new programs.
Employees
At June 30, 2025 and 2024,
we had 181 and 148 employees, respectively, two of whom were part time, and all were working at one or both of our facilities in Irvine,
California and Tustin, California. None of our employees are a party to any collective bargaining agreements with us. We consider our
relationships with our employees to be good.
Government Regulations
The manufacture and distribution
of medical devices are subject to state and federal requirements set forth by various agencies, including the FDA, and state medical boards.
The statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to diverse, often
conflicting, interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are
unable to eliminate the ongoing risk that one or more of our activities or devices may at some point be determined to be non-compliant.
The penalties for non-compliance could range from an administrative warning to termination of a portion of our business. Furthermore,
even if we are subsequently determined to have fully complied with applicable laws or regulations, the costs to achieve such a determination
and the intervening loss of business could adversely affect or result in the cessation of a portion of our business. A change in such
laws or regulations at any time may have an adverse effect on our operations.
The FDA designates all medical
devices into one of three classes (Class I, II, or III) based on the level of control necessary to assure the safety and effectiveness
of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical
instrumentation we manufacture is generally classified into Class I. The FDA has broad enforcement powers to recall and prohibit the sale
of products that do not comply with federal regulations and to order the cessation of non-compliant processes. No claim has been made
to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes have been the subject of routine governmental reviews and investigations.
The total cost of providing
health care services has been and will continue to be subject to review by governmental agencies and legislative bodies in the major world
markets, including the United States, which are faced with significant pressure to lower health care costs. Downward pressure on health
care costs could result in reduced pricing or demand for our products.
We believe that our business
is conducted in a manner consistent with the Environmental Protection Agency (“EPA”) and other agency regulations governing
disposition of industrial waste materials.
While we believe that our
products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any investigation or
review which may be undertaken in the future with respect to our products or processes.
Management believes that each
of our facilities has manufacturing systems and processes that are based on established Quality Management System standards. In addition,
we believe that both our Irvine, California and Tustin, California facilities are compliant with applicable Good Manufacturing Practices
promulgated by the FDA and are compliant with applicable ISO standards set forth by the International Organization for Standardization.
Patents, Trademarks, and Licensing Agreements
We hold US and foreign patents
relating to our handheld medical devices and torque-limiting screwdrivers. Our patents have varying expiration dates. The near-term expiration
of the patents, if any, is not expected to cause any change in our revenue-generating operations as changing the legal manufacturer of
medical devices is a significant undertaking and we believe the expiration of a patent would offer minimal inducement to make such a change.
We have no reason to believe
that our activities infringe upon the intellectual property of any third party. With respect to our own patents, we have no reason to
believe that our patents are invalid, and we believe that at least some of our patents cover certain aspects of our products. Although
we are currently unaware of any reason that would cause us to assert or defend a claim of patent infringement, any such assertion or defense
could materially and adversely affect our business and results of operations due to the costs involved.
We have certain federally
registered trademarks relating to our products, including Pro-Dex®, along with a number of other common law trademarks.
We have not entered into any
franchising agreements. We have not granted, nor do we hold any, third-party licenses having terms under which we earn revenue or incur
expense in material amounts.
ITEM 1A. RISK FACTORS
Investing in our common
stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained
in this report, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business,
financial condition, operating results, and prospects would suffer. In that case, the trading price of our common stock would likely decline
and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional
risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.
Risks Related to Our Business and the Industry
in Which We Operate
A substantial portion of our revenue is derived
from a few customers. If we were to lose a key customer, it would have a material adverse effect on our business, financial condition,
and results of operations.
In fiscal 2025, our top three
customers accounted for 94% of our sales, with our current largest customer accounting for 75% of our sales. This customer has made purchase
commitments to us through a supply agreement to purchase surgical handpieces through calendar 2025, and has placed purchase orders for
deliveries in 2026, but there can be no assurance that this customer will extend purchase commitments to us beyond that date. The loss
of, or a material reduction in purchases from, this customer or any of our other significant customers would severely impact us, including
having a material adverse effect on our business, financial condition, cash flows, revenue, and results of operations.
A substantial portion of our business is derived
from our core business area that, if not serviced properly, may result in a material adverse impact upon our business, financial condition,
and results of operations.
In fiscal 2025, we derived
99% of our revenue from sales of our medical device products and related services. We believe that a primary factor in the market acceptance
of our products and services is the value they create for our customers. Our future financial performance will depend in large part on
our ability to continue to meet the increasingly sophisticated needs of our customers through the timely development, and successful introduction
and implementation, of new and enhanced products and services, while at the same time continuing to provide the value our customers have
come to expect from us. We have historically expended a significant percentage of our revenue on product development and believe that
significant continued product development efforts will be required to sustain our growth. Continued investment in our sales and marketing
efforts will also be required to support future growth.
There can be no assurance
that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that
new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of our customers, or
achieve market acceptance. If the market does not continue to accept our existing products, or our new products or product enhancements
do not achieve market acceptance, our business, financial condition, and results of operations could be materially adversely affected.
Our customers may cancel or reduce their orders, change production
quantities, or delay production, any of which would reduce our sales and adversely affect our results of operations.
Since most
of our customers purchase our products from us on a purchase order basis, they may cancel, change, or delay product purchase commitments
with little notice to us. As a result, we are not always able to forecast with certainty the sales that we will make in a given period
and sometimes we may increase our inventory, working capital, and overhead in expectation of orders that may never be placed, or, if placed,
may be delayed, reduced, or canceled.
The following factors, among others, affect our
ability to forecast accurately our sales and production capacity:
• Changes in the specific products or quantities our customers order; and
In addition to reducing our
sales, delayed, reduced, or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of
those orders, such as costs associated with purchased raw materials and write-offs of obsolete inventory.
In recent years, we have launched several new
medical device products and our estimates of warranty claims are based largely on our previous history from similar legacy products. If
actual warranty claims exceed our estimates, it could have an adverse effect on our results of operations and financial condition.
In recent years, we have completed
significant medical device development projects in the CMF and thoracic surgical segments for which we have made estimates of product
warranty claims based upon similar, legacy products. If the actual repair volumes or repair costs exceed the estimates that we have been
using, we may incur additional costs which could be materially adverse to our results of operations and financial condition.
We face significant competition from a number
of different sources, which could negatively impact our results of operations.
The markets for products in
the industries served by our customers are intensely competitive, and we face significant competition from a number of different sources.
Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development and marketing resources, than us.
We compete in all of our markets
with other major surgical device and related companies. As a provider of outsourced products and services, we also compete with our customers’
own internal development groups. Competitive pressures and other factors, such as new product or new technology introductions by us, our
customers’ internal development and manufacturing departments, or our competitors, may result in price or market share erosion that
could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that
our products and services will achieve or maintain broad market acceptance or will successfully compete with other products.
The industry in which we operate is subject
to significant technological change and any failure or delay in addressing such change could adversely affect our competitive position
or could make our current products obsolete.
The medical device market
is generally characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry
standards. The introduction of products incorporating new technologies and the emergence of new industry standards could render our existing
products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing new products that
respond to technological changes or evolving industry standards.
New product development requires
significant research and development expenditures that we have historically funded through operations; however, we may be unable to do
so in the future. Any significant decrease in revenues or research funding could impair our ability to respond to technological advances
in the marketplace and to remain competitive. If we are unable, for technological or other reasons, to develop and introduce new products
in a timely manner in response to changing market conditions or customer requirements, our business, results of operations, and financial
condition may be materially adversely affected. Although we continue to target new markets for access, develop new products, and update
existing products, there can be no assurance that we will do so successfully or that, even if we are successful, such efforts will be
completed concurrently with or prior to the introduction of competing products. Any such failure or delay could adversely affect our competitive
position or could make our current products obsolete.
We rely heavily on our proprietary technology,
which, if not properly protected or if deemed invalid, could have a material adverse effect on our business, financial condition, and
results of operations.
We are dependent on the maintenance
and protection of our proprietary technology and rely on patent filings, exclusive development and supply agreements, confidentiality
procedures and employee nondisclosure agreements to protect it. There can be no assurance that the legal protections and precautions taken
by us will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies equivalent
or superior to ours. Further, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the United States and are often not enforced as vigorously as those in the United States.
We do not believe that our
operations or products infringe on the intellectual property rights of others. However, there can be no assurance that others will not
assert infringement or trade secret claims against us with respect to our current or future products. Assertions or claims by others,
whether or not valid, could cause us to incur significant legal costs defending our intellectual property rights and potentially require
us to enter into a license agreement or royalty arrangement with the party asserting the claim or to cease our use of the infringing technology,
any of which could have a material adverse effect on our business, financial condition and results of operations.
If our technology infrastructure is compromised,
damaged or interrupted by a cybersecurity incident, data security breach or other security problems, our results of operations and financial
condition could be adversely affected.
We use technology in substantially
all aspects of our business operations, and our ability to serve customers most effectively depends on the reliability of our technology
systems. We use software and other technology systems, among other things, to generate sales orders, job orders, and purchase orders and
to monitor and manage our business on a day-to-day basis. Cybersecurity incidents can include computer viruses, computer denial-of-service
attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation
of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities or security weaknesses, as well
as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties
and sabotage.
In addition, our technology
infrastructure and systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures.
Any such disruption to our systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise
perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or
intellectual property, could result in business disruption, negative publicity, loss of customers, potential liability, including litigation
or other legal actions against us or the imposition of penalties, fines, fees or liabilities, which may not be covered by our insurance
policies, and competitive disadvantage, any or all of which would potentially adversely affect our customer service, decrease the volume
of our business and result in increased costs and lower profits. Moreover, a cybersecurity breach could require us to devote significant
management resources to address the problems associated with the breach and to expend significant additional resources to upgrade further
the security measures we employ to protect information against cyber-attacks and other wrongful attempts to access such information, which
could result in a disruption of our operations.
While we have invested, and
continue to invest, in technology security initiatives and other measures to prevent security breaches and cyber incidents, as well as
disaster recovery plans, these initiatives and measures may not be entirely effective to insulate us from technology disruption that could
result in adverse effects on our results of operations and financial condition.
To service our debt obligations, we will require
a significant amount of cash. However, our ability to generate cash depends on many factors beyond our control.
Our ability to make payments
on, and to refinance, our debt obligations and to fund capital expenditures, will depend on our ability to generate cash in the future,
which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control.
Our business may not generate
sufficient cash flow from operations, and we may not have available to us future borrowings in an amount sufficient to enable us to pay
our debt obligations or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our debt
obligations on or before maturity. We may not be able to refinance any of our debt obligations, on commercially reasonable terms, or at
all. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment
obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at
all and, in addition, the agreements governing our debt obligations limit our ability to sell assets. In addition, we may not be able
to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
Our cash and cash equivalents may be exposed
to banking institution risk.
We hold our cash balances
with a single financial institution which institution is 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 operations and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB. If similar failures
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.
In addition, if similar failures
affect institutions relied on by our customers, we might not be able to receive timely payment from customers. We and they may maintain
cash balances that are not insured or are in excess of the FDIC’s insurance limit. Any delay in ours or our customers’ ability
to access funds could have a material adverse effect on our operations. If any parties with which we conduct business are unable to access
funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to continue
to fund their business and perform their obligations to us could be adversely affected, which, in turn, could have a material adverse
effect on our business, financial condition and results of operations.
We periodically invest surplus cash in marketable
securities and other investments in order to realize a positive return, although there can be no assurance that a positive return will
be realized, and we could lose some or all of our investments, which could adversely affect our financial condition and results of operation.
We invest a significant portion
of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2025, the fair value
of our investments was approximately $6.9 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.
Our operations are dependent upon our key personnel.
If such personnel were to leave unexpectedly, we may not be able to execute our business plan.
Our future performance depends
in significant part upon the continued service of our key technical and senior management personnel. Because we have a relatively small
number of employees when compared to other companies in the same industry, our dependence on maintaining our relationship with key employees
is particularly significant. We are also dependent on our ability to attract and retain high quality personnel, particularly in the areas
of product development, operations management, marketing and finance.
A high level of employee mobility
and the aggressive recruiting of skilled personnel characterize the medical device industry. There can be no assurance that our current
employees will continue to work for us. Loss of services of key employees could have a material adverse effect on our business, results
of operations, and financial condition. Furthermore, we may need to provide enhanced forms of incentive compensation to attract and retain
such key personnel, which could potentially dilute the holdings of other shareholders.
We may not be able to successfully integrate our business acquisitions,
which could adversely affect our business, financial condition, and results of operations.
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:
• The retention of key employees;
• Management of facilities and employees in separate geographic areas;
• Successfully converting information and accounting systems; and
• Diversion of resources and management attention from our other operations.
If market conditions or other
factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our acquisitions.
Our failure to successfully integrate any future acquisitions or realize the expected value from past or future acquisitions could harm
our business, financial condition, and results of operations.
We have experienced losses in the past, and we cannot be certain
that we will sustain our current profitability; we may need additional capital in the future to fund our businesses, which we may not
be able to obtain on acceptable terms.
We have experienced operating
losses in the past. Our ability to achieve or sustain profitability is based on a number of factors, many of which are out of our control,
including the material costs for our products and the demand for our products.
We currently anticipate that
our available capital resources, including our existing cash and cash equivalents and accounts receivable balances, will be sufficient
to meet our expected working capital and capital expenditure requirements as our business is currently conducted for at least the next
12 months. However, if our available capital resources become insufficient, we may attempt to raise additional funds through public
or private debt or equity financings, if such financings become available on acceptable terms. We cannot be certain that any additional
financing we may need will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available
on acceptable terms, we may not be able to take advantage of opportunities, develop new products, or otherwise respond to competitive
pressures, and our operating results and financial condition could be adversely affected.
Risks Related to Ownership of Our Common Stock
Two of our directors hold voting power with
respect to a substantial portion of our outstanding common stock that enables them to have significant influence over the outcome of all
matters submitted to our shareholders for approval, which influence may conflict with our interests and the interests of other shareholders.
As of August 20, 2025, two
of our directors, Nicholas J. Swenson and Raymond E. Cabillot, directly or indirectly, controlled voting power over approximately 39%
(31% and 8%, respectively) of the outstanding shares of our common stock. As a result of such voting control, these directors will have
significant influence over all matters submitted to our shareholders for approval, including the election of our directors and other corporate
actions, and may have interests that conflict with our interests and the interests of other shareholders.
Our quarterly results can fluctuate significantly
from quarter to quarter, which may negatively impact the price of our shares and/or cause significant variances in the prices at which
our shares trade.
Our sales have fluctuated
in the past, and may fluctuate in the future from quarter to quarter and period to period, as a result of a number of factors, including,
without limitation: the size and timing of orders from customers; the length of new product development cycles; market acceptance of new
technologies; changes in pricing policies or price reductions by us or our competitors; the timing of new product announcements and product
introductions by us or our competitors; the financial stability of major customers; our success in expanding our sales and marketing programs;
acceleration, deferral, or cancellation of customer orders and deliveries; changes in our strategy; revenue recognition policies in conformity
with accounting principles generally accepted in the United States (“U.S. GAAP”); personnel changes; and general market and
economic factors.
Because a significant percentage
of our expenses are fixed, a variation in the timing of sales can cause significant fluctuations in operating results from quarter to
quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative
of future performance for any particular period.
In addition, it is possible
that our operating results in future quarters may be below the expectations of public market analysts and investors. In such an event,
the price of our common stock could be materially adversely affected.
Regulatory & Compliance Risks
Our operations are subject to a number of complex
government regulations, the violation of which could have a material adverse effect on our business.
The manufacture and distribution
of medical devices are subject to state and federal requirements set forth by various government agencies including the FDA and EPA. The
statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to diverse, often conflicting,
interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to eliminate
the ongoing risk that one or more of our activities may at some point be determined to be non-compliant. The penalties for non-compliance
could range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined
to have fully complied with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business
could adversely affect or result in the cessation of a portion of our business. A change in such laws or regulations at any time may have
an adverse effect on our operations.
The FDA designates all medical
devices into one of three classes (Class I, II, or III) based on the level of control necessary to assure the safety and effectiveness
of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical
instrumentation we manufacture is generally classified into Class I. The FDA has broad enforcement powers to recall and prohibit the sale
of products that do not comply with federal regulations and to order the cessation of non-compliant processes. No claim has been made
to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes are from time to time subject to routine governmental reviews and investigations. We are also subject to EPA regulations concerning
the disposal of industrial waste.
While management believes
that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any such future
review or investigation.
We face risks and uncertainties associated
with potential litigation by or against us, which could have a material adverse effect on our business, financial condition, and results
of operations.
We continually face the possibility
of litigation as either a plaintiff or a defendant. It is not reasonably possible to estimate the awards or damages, or the range of awards
or damages, if any, that we might incur in connection with such litigation.
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. We maintain insurance to protect against claims associated with the manufacture
and use of our products as well as environmental pollution, but there can be no assurance that our insurance coverage will adequately
cover any claim asserted against us.
The uncertainty associated
with potential litigation may have an adverse impact on our business. In particular, litigation could impair our relationships with existing
customers and our ability to obtain new customers. Defending or prosecuting litigation could result in significant legal costs and a diversion
of management’s time and attention away from business operations, either of which could have a material adverse effect on our business,
financial condition, and results of operations. There can be no assurance that litigation would not result in liability in excess of our
insurance coverage, that our insurance will cover such claims, or that appropriate insurance will continue to be available to us in the
future at commercially reasonable rates.
The agreements governing our various debt obligations
impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.
The agreements governing
our debt obligations include covenants imposing significant restrictions on our business. These restrictions may affect our ability to
operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place
restrictions on our ability to, among other things:
•