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Item 2. Management’s Discussion and Analysis

2024-10-31 compared with 2024-05-02 · 241 added, 292 removed, 99 unchanged (84% of the section changed)

1 unchanged sentence

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.

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, 2024 and 2023.

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.

following discussion and analysis provide 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 periods ended September 30, 2024 and 2023.

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

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 optimize our operations at our Franklin facility, consolidation within

our target marketplace and among our competitors, 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

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, 2023.

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.

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.

principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200.

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.

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, 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 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.

specialize in the design, development, and manufacture of powered rotary drive surgical instruments used primarily in the orthopedic,

thoracic, and maxocranial facial (“CMF”) markets.

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

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copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.

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

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.

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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, 2024.

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.

for the entirety of our 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.

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.

Our financial

statements are prepared in accordance with U.S.

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.

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Management believes that there have been no significant

changes during the three and nine months ended March 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

changes during the three months ended September 30, 2024, to the items that we disclosed as our critical accounting policies and estimates

in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for our

fiscal year ended June 30, 2024.

Business Strategy and Future Plans

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Many of our significant customers place purchase orders for specific products that were developed

under various development and/or supply agreements.

by us under various development and/or supply agreements.

Our customers may request that we design and manufacture a custom surgical device

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torque-limiting software has been very well received in the CMF and thoracic markets.

Additionally, we have other significant engineering

projects under way described more fully below under “Results of Operations.”

In November 2020, we purchased

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In summary, our current objectives

are focused primarily on maintaining our relationships with our current medical device customers, expanding our manufacturing capacity

with the addition of the Franklin Property, investing in research and development activities to design Pro-Dex branded drivers to leverage

our torque-limiting software, and promoting active product development proposals to new and existing customers for orthopedic shavers,

screw drivers for a multitude of surgical applications, and other medical devices, while monitoring closely the progress of all these

individual endeavors.

Our investments in research and development have historically increased disproportionately to our growth in revenue

and we anticipate this may continue in future periods.

These expenditures are being made in an effort to release new products and garner

new customer relationships.

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.

Description of Business Operations

are focused primarily on maintaining our relationships with our current medical device customers, investing in research and development

activities to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting software, expanding our

manufacturing capacity through the commencement of operations at the Franklin Property, and promoting active product development proposals

to new and existing customers for both orthopedic shavers and screw drivers for a multitude of surgical applications, while monitoring

closely the progress of all these individual endeavors.

While we expect revenue growth in the future, it may not be a consistent trajectory

but rather periods of incremental growth that current expenditures are helping to create.

However, there can be no assurance that we will

be successful in any of these objectives.

Results of Operations

The following tables set

forth results from continuing operations for the three months ended September 30, 2024, and 2023 (in thousands, except percentages):

Months Ended September 30,

Dollars in thousands

% of Net Sales

Cost of sales

Selling expenses

General and administrative expenses

Research and development costs

Operating income

Other income (loss), net

Income before income taxes

Provision for income taxes

Net income (loss)

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

Nine Months Ended

Medical device products

We continue to sell our rotary air motors for industrial and scientific applications, but our focus remains in medical devices.

The proportion of total sales by type is as follows (in thousands, except percentages):

Months Ended September 30,

(Decrease) From 2023 to 2024

Dollars in thousands

% of Net Sales

Medical device

Industrial and scientific

Dental and component

NRE & Proto-type

NRE & proto-types

Discounts and other

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All of our medical device

products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility, along with our

industrial products.

products utilize proprietary manufacturing methods and know-how, and are manufactured in our Irvine, California facility and assembled

in our Tustin, California facility.

Details of our medical device sales by type is as follows (in thousands, except percentages):

Three Months Ended

Nine Months Ended

Months Ended September 30,

(Decrease) From 2023 to 2024

Dollars in thousands

% of Med Device Sales

Medical device sales:

of our medical device products increased $2.8 million, or 40%, and $2.9 million, or 12%, respectively, for the three and nine months ended

March 31, 2024, compared to the corresponding periods of the prior fiscal year.

Our medical device revenue to our largest customer, included

in orthopedic sales above, increased $2.9 million and $1.9 million, respectively, for the three and nine months ended March 31, 2024 compared

to the corresponding periods of the prior fiscal year .

Additionally, recurring revenue from distributors of thoracic drivers increased

$532,000 and $1.6 million, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding periods of

the prior fiscal year in part due to the launch of a new driver to one of our customers in

the first quarter of this fiscal year.

Our CMF sales revenue decreased $639,000 and $567,000, for

the three and nine months ended March 31, 2024, respectively, compared to the corresponding periods of the prior fiscal year.

we do not have much visibility into our customers’ distribution networks, we do know that one of our distributors is selling some

legacy products in their inventory which has caused a reduction in demand for the CMF driver they procure from us.

of our compact pneumatic air motors, reported as industrial and scientific sales above, decreased

$49,000, or 19%, and $100,000, or 14%, respectively, for the three and nine months ended March 31, 2024, compared to the corresponding

periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts .

NRE and proto-type revenue decreased $736,000, or 76%, and $1.6 million, or 68%, for the three and nine months ended March 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.

of our dental products and components increased $19,000, or 44%, and decreased $36,000, or 20%, respectively, for the three and nine months

ended March 31, 2024, compared to the corresponding periods of the prior fiscal year.

In the prior fiscal year we sold component inventory

to our largest customer used in their legacy design which did not recur in the current fiscal year.

We expect future declines in this

area as we are no longer manufacturing dental products, but rather are simply selling remaining component inventory.

revenue decreased $635,000 or 13%, and increased $2.3 million, or 25%, for the three and nine months ended March 31, 2024, respectively,

compared to the corresponding periods of the prior fiscal year due to repairs of the orthopedic handpiece we sell to our largest customer.

The year-to-date increase was expected as we have been upgrading handpieces to the next generation, which design was released to manufacture

in the third quarter of fiscal 2022.

The repair revenue recorded during the three months ended March 31,

2023, included an additional $520,000 in compensation, for handpieces upgraded between July 2022 and December 2022.

similar adjustment in the current fiscal year.

March 31, 2024, we had a backlog of approximately $25.2 million, of which $9.9 million is scheduled to be delivered in the fourth quarter

of fiscal 2024 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.

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.

medical device revenue increased $2.1 million, or 27%, for the three months ended September 30, 2024 compared to the corresponding period

of the prior fiscal year .

Our orthopedic sales increased $1.9 million, or 38%, for the three months ended September 30, 2024 compared

to the corresponding period of the prior fiscal year, due in part, to our largest customer requesting shipment of their next generation

handpiece, or end-effector, to satisfy quantities requested for a limited market release.

We expect production shipments of this newest

generation to ramp up in the third and fourth quarters of fiscal 2025.

Recurring revenue from distributors of CMF drivers increased $567,000,

or 35%, for the three months ended September 30, 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 (whether an increase or decrease) is not uncommon

and fluctuations occur based upon required inventory levels.

Our thoracic sales decreased by $320,000, or 24% for the three months ended

September 30, 2024, compared to the corresponding period of the prior fiscal year.

of our compact pneumatic air motors increased $2,000, or 1%, for the three months ended September

30, 2024 compared to the corresponding period of the prior fiscal year.

The relatively flat sales volume is consistent with our lack of

substantive marketing efforts .

Sales of our dental products and components increased

$3,000, or 8%, for the three months ended September 30, 2024 compared to the corresponding period of the prior fiscal year, which negligible

increase is expected given our prior disclosures that we are no longer pursuing this line of business.

Our non-recurring engineering

(“NRE”) and proto-type revenue decreased $142,000, for the three months ended September 30, 2024 compared to the corresponding

period of the prior fiscal year, due to a decline in billable contracts.

Our NRE and proto-type revenue is typically a small percentage

of our total revenue and can vary significantly from quarter to quarter.

revenue increased by $1.1 million, or 28%, for the three months ended September 30, 2024 compared to the corresponding period of the prior

fiscal year, 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.

and other increased by $126,000 in the first quarter of fiscal 2025 compared to the corresponding period of the prior fiscal year, due

to volume rebates related to the orthopedic handpiece we sell to our largest customer, which they negotiated in conjunction with our contract

extension through 2025.

30, 2024, we had a backlog of approximately

$56.8 million, of which $45.6 million is s cheduled for delivery during the remainder of fiscal 2025.

Our backlog represents firm

purchase orders received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer

We may experience

variability in our new order bookings due to various reasons, including, but not limited to, the timing of major new product launches

and customer planned inventory builds.

However, we do not typically experience seasonal fluctuations

in our shipments and revenues.

Cost of Sales and Gross Margin

(in thousands except percentages)

Three Months Ended

Nine Months Ended

Months Ended September 30,

(Decrease) From 2023 to 2024

Cost of sales :

% of Net Sales

Product costs

Under-(over) absorption of manufacturing costs

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Total cost of sales

Three Months Ended

Nine Months Ended

Year over Year

of sales for the three months ended March 31, 2024, increased $1.0 million, or 11%, compared to the corresponding period of the prior

The increase in total costs of sales is consistent with the 9% increase in revenue for the same period.

Under-absorption

of manufacturing costs decreased by $559,000 for the three months ended March 31, 2024, compared to the corresponding period of the prior

fiscal year due to increases in our standard labor and overhead rates.

Costs relating to inventory and warranty charges increased $277,000

for the three months ended March 31, 2024 compared to the corresponding period of the prior fiscal year, due to an increase in both inventory

reserves and warranty accruals.

profit increased by approximately $191,000, or 5%, for the three months ended March 31, 2024, compared to the corresponding period of

the prior fiscal year, consistent with the overall increase in revenue.

Gross margin as a percentage of sales decreased by approximately

1 percentage point compared to the corresponding period of the prior fiscal year due primarily to our increased inventory and warranty

charges compared to the corresponding period of the prior fiscal year.

of sales for the nine months ended March 31, 2024, increased by $2.3 million, or 9%, compared to the corresponding period of the prior

Although some of the increase in cost of sales is consistent with the 4% increase in revenue for the same period, for the

reasons discussed above, the majority of the increase relates to increased labor and overhead rates in the current fiscal year, compared

to the corresponding period of the prior fiscal year.

Inventory and warranty charges increased by approximately $60,000, or 21%, for the

nine months ended March 31, 2024, compared to the corresponding period of the prior fiscal year, due to an increase in both inventory

reserves and warranty accruals.

Some of the inventory charges relate to our in-house packaging of batteries.

This fiscal year we have

begun the process of packaging our batteries, which we had previously out-sourced, and we are continuing to make improvements to our assembly

procedures and processes to reduce our costs.

profit increased by $1.1 million, or 11%, for the nine months ended March 31, 2024, compared to the corresponding period of the prior

fiscal year, representing an increase of 1 percentage point compared to the corresponding period of the prior fiscal year.

Operating Expenses

Gross profit and gross margin

Cost of sales for the three

months ended September 30, 2024, increased by $1.5 million, or 18%, compared to the corresponding period of the prior fiscal year.

increase in cost of sales is consistent with the 25% increase in revenue for the same period.

Product costs increased by $804,000, or

9%, during the three months ended September 30, 2024, compared to the corresponding period of the prior fiscal year, which is consistent

with higher revenue generated in the first quarter of fiscal 2025.

During the three months ended September 30, 2024 we experienced under-absorption

of $325,000 in manufacturing costs compared to $285,000 over-absorption during the corresponding period of the prior fiscal year.

We anticipate

growth in our direct labor costs this fiscal year such that our absorption will stabilize without the need to increase our labor and overhead

Costs related to inventory and warranty charges increased $48,000 for the three months ended September 30, 2024 compared to the

corresponding period of the prior fiscal year, due primarily to an increase in warranty reserves.

profit increased by approximately $1.5 million, or 41%, for the three months ended September 30, 2024 compared to the corresponding period

of the prior fiscal year, and gross margin as a percentage of sales increased by four percentage points between such periods, primarily

as a result of a more favorable product mix of sales during the three months ended September 30, 2024 compared to the corresponding

period of the prior fiscal year.

Operating Costs and Expenses

(in thousands except percentages)

Three Months Ended

Nine Months Ended

Year over Year % Change

% of Net Sales

Months Ended September 30,

(Decrease) From 2023 to 2024

% of Net Sales

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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, 2024, decreased $7,000, or 29%, and $67,000, or 46%, respectively, compared to the corresponding periods of fiscal

The decrease in both periods is primarily due to decreased sales commissions.

of salaries and other personnel-related expenses in support of business development, as well as trade show attendance, advertising and

marketing expenses, and travel and related costs incurred in generating and maintaining our customer relationships.

Selling expenses for

the three months ended September 30, 2024 increased $23,000, or 92%, compared to the corresponding period of the prior fiscal year.

increase relates to recruiting fees related to an ongoing search for a director of business development.

General and administrative

expenses (“G&A”) consist 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 $3,000 and $225,000, respectively, during the three and nine months

ended March 31, 2024, when compared to the corresponding periods of the prior fiscal year.

The increases relate primarily to increased

professional fees (consisting primarily of audit and valuation fees, related to the restatement of our financial statements as referenced

in Note 1 to the condensed consolidated financial statements contained elsewhere in this report) and increased personnel costs, offset

by decreased legal fees related to intellectual property matters.

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, 2024, increased $47,000, or 7%, and $244,000, or 12%, compared to the corresponding periods of the prior fiscal

This relates to a decrease in personnel-related costs as well as a decrease in spending on billable development projects.

engineers are engaged in a billable project as opposed to an internal project, costs get shifted to cost of sales instead of research

and development.

Although the majority of our research

and development costs relate to sustaining activities related to products we currently manufacture and sell, we have created a product

roadmap to develop future products.

Many of our product development efforts are undertaken only upon completion of an analysis of the

size of the market, our ability to differentiate our product from our competitors’, as well as an analysis of our specific sales

prospects with new and/or existing customers.

The research and development costs represent between 40% and 42% of total operating expenses

for all periods presented and are expected to increase in the future as we continue to invest in product development efforts.

spent on internal projects under development is summarized below (in thousands):

and Nine Months Ended March 31, 2024

Three and Nine Months Ended March 31, 2023

Annual Revenue (2)

Total Research & Development costs:

Products in development:

Sustaining & Other

(1) Represents the calendar quarter of expected market launch.

The ENT Shaver project has been suspended.

At this time, we do not know when or whether we will continue with this product development effort.

(2) The products in development include risks that they could be abandoned in the future prior to completion,

they could fail to become commercialized, or the actual annual revenue realized may be less than the amount estimated.

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, replacement and enhancement of tooling and fixtures

used in our machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Additionally, these costs include

development projects that may be in their infancy and may or may not result in a full-fledged product development effort.

Interest & Other

Interest income for the three and nine months ended March

31, 2024 and 2023, includes interest and dividends from our money market accounts and investment portfolio.

expenses (“G&A”) consist of salaries and other personnel-related expenses of our accounting, finance, and human resources

personnel, professional fees, directors’ fees, and other costs and expenses attributable to being a public company.

increased by $251,000, or 25%, for the three months ended September 30, 2024, when compared to the corresponding period of the prior fiscal

The increase in total G&A expenses relates to higher payroll and personnel expenses including higher bonus accruals.

Research and development costs

generally consist of compensation and other personnel-related costs of our engineering and support personnel, related professional and

consulting fees, patent-related fees, lab costs, materials, and travel and related costs incurred in the development and support of our

Research and development costs increased $38,000, or 5%, for the three months ended September 30, 2024 compared to the corresponding

period of the prior fiscal year.

The increase is due primarily to an increase in internal project spending and a reduction in billable

project offsets, partially offset by a reduction in personnel-related expenses.

The majority of our research

and development costs relate to 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, replacement and enhancement of tooling and

fixtures used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Other Income (Expense), Net

Interest and Dividend Income

The interest and dividend income

recorded during the three months ended September 30, 2024 and 2023, consists primarily of interest and dividends from our investments

and money market accounts.

Unrealized Gain (Loss) on Investments

The unrealized gain or (loss)

on marketable securities for the quarters ended September 30, 2024 and 2023, relates to our portfolio of investments described more fully

in Note 4 to the condensed consolidated financial statements contained elsewhere in this report.

Interest Expense

Interest expense consists primarily

of interest expense related to the notes payable described more fully in Note 10 to the condensed consolidated financial statements contained

elsewhere in this report.

Unrealized Gain (Loss)

on Marketable Equity Investments

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, 2024,

all of these investments relate to common stock of publicly traded companies whose stock price is subject to significant volatility.

Gain on Sale of Investments

During the first quarter ended

September 30, 2022, we sold some of the stocks in our portfolio of equity investments receiving proceeds of $89,000 and recording a gain

on the sale in the amount of $7,000.

The interest expense recorded

during the three months ended September 30, 2024 and 2023, relates 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.

Income Tax Expense

The effective tax rate

for the three months ended March 31, 2024 and 2023 was 28% and 25%, respectively.

These tax rates are consistent with our combined expected

federal and applicable state corporate income tax rates.

The effective tax rate for the nine months ended March 31, 2024 and 2023 was

23% and 24%, respectively, and is less than our combined expected federal and applicable state corporate income tax rates due to the release

of a valuation allowance related to previously recognized unrealized losses on investments in the current fiscal year and a tax benefit

recognized as a result of common stock awarded to employees under previously granted performance awards in the first quarter of fiscal

2023 as described more fully in Note 8 to the condensed consolidated financial statements contained elsewhere in this report, as well

as unrealized gains on our marketable equity investments.

for both the three months ended September 30, 2024 and 2023, is 26%.

and is slightly less than our combined expected federal and applicable

state corporate income tax rates due primarily to federal and state research credits.

Liquidity and Capital

Cash and cash equivalents

at March 31, 2024, increased $283,000 to $3.2 million as compared to $2.9 million at June 30, 2023.

The following table includes

a summary of our condensed statements of cash flows contained elsewhere in this report.

and For the Nine Months Ended March 31,

at September 30, 2024 increased $450,000 to $3.1 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.

and For the Three Months Ended September 30,

(in thousands)

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Net cash provided by operating

activities was $5.2 million for the nine months ended March 31, 2024, primarily due to net income of $540,000, non-cash unrealized losses

on marketable equity investments of $3.8 million, depreciation and amortization of $854,000, share-based compensation of $588,000 as

well as a decrease in inventory of $1.9 million.

Offsetting these sources of cash, our accounts receivable increased by $2.6 million

consistent with our increase in revenue.

Net cash provided by operating activities was $4.8 million for the nine months ended March 31,

2023, primarily due to net income of $5.6 million, non-cash depreciation and amortization of $594,000, share-based compensation of $584,000,

and collections of accounts receivable in the amount of $4.8 million offset by non-cash unrealized gains on marketable equity investments

of $3.4 million, a decrease in accounts payable and accrued expenses of $1.0 million, a decrease in deferred revenue of $956,000, and

an increase in inventory in the amount of $2.5 million.

activities during the three months ended September 30, 2024 totaled $1.9 million.

Our net income was $2.5 million, which includes $433,000

of unrealized gains on our marketable securities as well as non-cash depreciation and amortization and stock-based compensation in the

amount of $302,000 and $113,000, respectively.

Additionally, our inventory and income taxes payable increased by $1.3 million and $209,000,

respectively.

Offsetting these outflows of cash, our accounts receivable decreased by $428,000 and accounts payable and accrued expenses

increased by $579,000.

Net cash provided by operating

activities during the three months ended September 30, 2023 totaled $392,000.

This is primarily because our net loss of $615,000 for the

three months ended September 30, 2023 included non-cash unrealized loss on investments, share-based compensation and depreciation and

amortization of $2.6 million, $188,000 and $283,000, respectively.

Uses of cash arose primarily from an increase in accounts receivable

of $1.1 million related to increased sales and our increase in income tax assets of $873,000.

Investing Activities

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.

activities for the three months ended September 30, 2024 was $431,000 and related to the purchase of equipment and improvements.

Net cash used in investing

activities for the nine months ended March 31, 2023, was $733,000 and related primarily to the purchases of equipment and improvements

primarily for the Franklin Property totaling $822,000.

Offsetting this use of cash, we sold some of our marketable securities during the

nine months ended March 31, 2023 for $89,000.

activities for the three months ended September 30, 2023 was $126,000 and related to the purchase of equipment and improvements.

Financing Activities

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 Minnesota

Bank and Trust (“MBT”) more fully described in Note 10 to the condensed consolidated financial statements contained elsewhere

in this report.

activities for the three months ended September 30, 2024 included the repurchase of $2.3 million of common stock pursuant to our share

repurchase program, and proceeds of $5.0 million from a new term loan from MBT, offset by principal payments totaling $3.4 million.

Additionally,

we paid $273,000 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 the nine months ended March 31, 2023, totaled $2.9 million and related primarily to the $1.5 million repurchase of 86,422

shares of our common stock pursuant to our share repurchase program, $4.8 million of payments to MBT as well as payment of $223,000 of

employee payroll taxes related to the award of 37,500 shares of common stock to employees under previously granted performance awards.

Offsetting these uses of cash we also borrowed $3.6 million from MBT under our amended revolving loan, and collected $78,000 and $11,000,

respectively, related to employee contributions to the ESPP plan and exercises of stock options.

activities for the three months ended September 30, 2023 included principal payments of $1.3 million on our loans from MBT, which included

a $1.0 million payment against our revolving loan.

Financing Facilities & Liquidity Requirements for the Next

Twelve Months

As of March 31, 2024, our working

capital was $25.5 million.

We currently believe that our existing cash and cash equivalent balances together with our accounts receivable

balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next

In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our cash flows

from operations.

We may also liquidate some or all of our investment portfolio or borrow further against our $7.0 million Amended Revolving

Loan with MBT (see Note 10 to condensed consolidated financial statements contained elsewhere in this report), under which we had availability

of $4.5 million as of March 31, 2024.

As of September 30, 2024, our

working capital was $27.2 million.

We currently believe that our existing cash and cash equivalent balances together with our accounts

receivable balances will provide us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least

the next 12 months.

In addition to our cash and cash equivalent balances, we expect to derive a portion of our liquidity from our

cash flows from operations.

We are focused on preserving our

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our backlog, which can be subject to extensive variability.

Investment Strategy

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 (“Ray”) Cabillot and Nicholas (“Nick”) Swenson, who chairs the committee.

Both Nick and Ray 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 Nick or Ray 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 $6.1 million

of marketable public equity securities held at March 31, 2024.

We believe that if we need additional capital to fund our operations, we can

borrow against our MBT revolver.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

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Item 2. Management’s Discussion and Analysis