What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-01-30 compared with 2024-10-31 · 250 added, 245 removed, 95 unchanged (84% of the section changed)

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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

following discussion and analysis provide information that management believes is relevant to an assessment and understanding of

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 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

“we,” “our,” or “us”) for the three-month and six-month periods ended December 31, 2024 and 2023.

This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included

elsewhere in this report.

This report contains certain

forward-looking statements and information.

The cautionary statements included herein should be read as being applicable to all related

forward-looking statements wherever they may appear.

Our actual future results could differ materially from those discussed herein.

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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,

rapid technological evolution, our ability to optimize our operations at our Franklin facility, consolidation within our target marketplace

and among our competitors, employee turnover, competition from larger, better capitalized competitors, and our ability to realize returns

on opportunities.

Many other economic, competitive, governmental, and

technological factors could impact our ability to achieve our goals.

You are urged to review the risks, uncertainties, and other cautionary

language described in this report, as well as 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.

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.

principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our

phone number is (949) 769-3200.

Our Internet address is www.pro-dex.com.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments

to those reports, and other SEC filings are available free of charge through our website as soon

as reasonably practicable after such reports are electronically

filed with, or furnished to, the SEC.

In addition, our Code of Ethics and other corporate

governance documents may be found on our website at the Internet address set forth above.

Our filings with the SEC may also be read and

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

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

We have patented adaptive torque-limiting software and proprietary

sealing solutions that appeal to our customers, primarily medical device distributors.

We also manufacture and sell rotary air motors

to a wide range of industries.

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.

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.

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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The condensed consolidated

results of operations presented in this report are not audited and those results are not necessarily indicative of the results to be expected

for the entirety of 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.

results of operations presented in this report are not audited and are not necessarily indicative of the results to be expected for the

entirety of the fiscal year ending June 30, 2025, or any other interim period during such fiscal year.

Our fiscal year ends on June 30

and our fiscal quarters end on September 30, December 31, and March 31.

Unless otherwise stated, all dates refer to our fiscal year

and those fiscal quarters.

Critical Accounting Estimates and Judgments

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.

Our condensed

consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

The preparation

of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,

revenues, expenses, and related disclosures.

We base our estimates on historical experience and various other assumptions that are believed

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets

and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

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Management believes that there have been no significant

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

changes during the three and six months ended December 31, 2024 to the items that we disclosed as our critical accounting policies in

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

fiscal year ended June 30, 2024.

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

by us under various development and/or supply agreements.

under various development and/or supply agreements.

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

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fiscal 2021, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply their surgical

handpieces to them through calendar 2025.

handpieces to them through calendar 2025 and we are currently in discussions with them to renew the agreement.

Simultaneously, we are working

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will allow for our continued expected growth.

In summary, our current objectives

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)

Our current objectives 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 continuation of operations at the Franklin Property, and promoting active product development proposals to new and

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

progress of all these individual endeavors.

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

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

However, there can be no assurance that we will be successful

in any of these objectives.

Description of Business Operations

majority of our revenue is derived from designing, developing, and manufacturing surgical

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

devices for the medical device industry.

The proportion of total sales by type is as follows

(in thousands, except percentages):

Three Months Ended

Six Months Ended

Medical device products

Industrial and scientific

Dental and component

NRE & proto-types

Discounts and other

NRE & Prototype

of our medical device products utilize proprietary designs developed by us under exclusive

development and supply agreements.

development and/or supply agreements.

All of our medical device

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):

Months Ended September 30,

(Decrease) From 2023 to 2024

Dollars in thousands

% of Med Device Sales

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

and are assembled in our Tustin, California facility ( as are our industrial products).

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

Three Months Ended

Six Months Ended

Medical device sales:

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.

of our medical device products increased $3.3 million, or 37%, for the three months ended December 31, 2024, and increased $5.4 million,

or 32%, for the six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year.

Our orthopedic

sales increased $3.8 million, or 69%, and $5.7 million, or 55%, respectively, for the three and six months ended December 31, 2024 compared

to the corresponding period of the prior fiscal year, due primarily to the launch of our largest customer’s next generation handpiece.

We expect to see similar increases in orthopedic sale for at least the remainder of this fiscal year.

Recurring revenue from CMF drivers

decreased $920,000, or 33%, and $352,000 or 8%, respectively for the three and six months ended December 31, 2024 compared to the corresponding

period of the prior fiscal year.

Our thoracic sales increased $410,000, or 63% and $89,000 or 5%, respectively for the three and six months

ended December 31, 2024 compared to the corresponding period of the prior fiscal year.

While we do not have much visibility into our customers’

distribution networks, this level of change in thoracic and CMF sales (whether an increase or decrease) is not uncommon and fluctuations

occur based upon required inventory levels.

of our compact pneumatic air motors, reported as “Industrial and scientific”

sales above, decreased $72,000, or 30%, and $69,000, or 18%, respectively, for the three and six months ended December 31, 2024, compared

to the corresponding periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts and, as such, we

may continue to see a decline in revenue from these products.

Our non-recurring (“NRE”) and proto-type revenue decreased $297,000,

or 88%, and $439,000, or 83%, for the three and six months ended December 31, 2024, compared to the corresponding periods of the prior

fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for our customers.

revenue increased $1.6 million, or 48%, and $2.7 million, or 37%, respectively, for the three and six months ended December 31, 2024,

compared to the corresponding periods of the prior fiscal year, primarily due to an increased number of repairs of the orthopedic handpiece

we sell to our largest customer.

This increase relates to the continuation of the previously disclosed enhanced repair program.

December 31, 2024, we had a backlog of approximately $48.1 million, of which $36.3 million is scheduled to be delivered in fiscal 2025

and the balance is scheduled to be delivered the following fiscal year.

Our backlog represents firm purchase orders received and

acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts.

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

Months Ended September 30,

(Decrease) From 2023 to 2024

(in thousands except percentages)

Cost of sales:

% of Net Sales

Product costs

Under-(over) absorption of manufacturing costs

Inventory and warranty charges

Under(over)-absorption

of manufacturing costs

and warranty charges

Total cost of sales

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.

of sales for the three and six months ended December 31, 2024, increased $1.9 million, or 20%, and $3.4 million, or 19%, respectively,

compared to the corresponding periods of the prior fiscal year.

The increase in cost of sales is consistent with the 33% and 29% increase

in revenue for the three and six months ended December 31, 2024, compared to the corresponding periods of the prior fiscal year.

Additionally,

under-absorption for the three and six months ended December 31, 2024, increased $1.0 million and $1.9 million, respectively, compared

to the corresponding periods of the prior fiscal year.

While we continue to anticipate growth

in our direct labor hours during the second half of this fiscal year such that our absorption will stabilize without the need to increase

our labor and overhead rates, however we also expect to increase our labor and overhead rates before the end of this fiscal year as needed.

The inventory and warranty charges for all periods presented are minor.

profit increased by $2.3 million, or 81%, and $3.8 million, or 58%, for the three and six months ended December 31, 2024, respectively,

compared to the corresponding periods of the prior fiscal year, primarily as a result of the increase in medical device and repair revenue

for the same periods as described above.

Gross margin as a percentage of sales for the three and six months ended December 31, 2024, increased

8 and 6 percentage points, respectively, compared to the corresponding periods of the prior fiscal year.

Operating Expenses

Operating Costs and Expenses

Months Ended September 30,

(Decrease) From 2023 to 2024

% of Net Sales

(in thousands except % change)

over Year % Change

Operating expenses:

Selling expenses

General and administrative expenses

Research and development costs

and administrative expenses

and development costs

Selling expenses consist

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.

of salaries and other personnel-related expenses for our business development department, as well as advertising and marketing expenses,

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

Selling expenses for the three and six

months ended December 31, 2024 increased $12,000 and $35,000, respectively, compared to the corresponding periods of fiscal 2024.

increase in both periods is primarily due to recruiting fees related to our new Director of Business Development (who we hired in December,

General and administrative

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.

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

personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and other costs

and expenses attributable to being a public company.

G&A increased $189,000 and $440,000, respectively, during the three and six months

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

The increases relate primarily to increased

bonus accruals and personnel costs, offset by decreased audit fees and stock compensation expense.

Research and development

costs generally consist of salaries, employer paid benefits, and other personnel- related costs of our engineering and support personnel,

as well as allocated facility and information technology costs, professional and consulting fees, patent-related fees, lab costs, materials,

and travel and related costs incurred in the development and support of our products.

Research and development costs for the three and

six months ended December 31, 2024, increased $154,000 and $191,000, respectively, compared to the corresponding periods of the prior

The increase for the three months ended December 31, 2024, compared to the comparable prior year period is primarily due

to an increase in internal project expenditures of $136,000 and legal fees related to our intellectual property of $46,000.

for the six months ended December 31, 2024, compared to the comparable period of the prior year is primarily related to an increase in

recruiting fees of $73,000, billable project expense decreases of $72,000 and legal fees related to our intellectual property of $37,000.

When our engineers are engaged in billable projects as opposed to internal projects, costs get shifted to cost of sales instead of research

and development.

While we are currently in development on two internal projects, project expenses for the periods presented in this report

are not material.

The majority of our research

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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 and Other Income

Interest income for the three

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

Unrealized Gain (Loss)

on Investments

The unrealized gain (loss) on

investments consists of our investment portfolio described more fully in Note 4 to the condensed consolidated financial statements contained

elsewhere in this report.

All of these investments are recorded at estimated fair value as of December 31, 2024, and relate to common

stock of publicly traded companies whose stock price is subject to significant volatility.

Interest Expense

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.

Interest expense consists primarily

of interest expense related to our Minnesota Bank and Trust (“MBT”) loans described more fully in Note 10 to the condensed

consolidated financial statements contained elsewhere in this report.

Income Tax Expense

The effective tax rate

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

for the three months ended December 31, 2024, and 2023 was 21% and 19%, respectively.

The fiscal 2024 effective tax rate was lower due

primarily to the release of a $60,000 valuation allowance related to previously recognized unrealized losses on investments.

had a similar valuation allowance release in fiscal 2025.

The effective tax rate for the six months ended December 31, 2024, and 2023

is 24% and 45%, respectively.

The higher effective tax rate in the prior year was similarly due to the release of the valuation allowance

recorded in the second quarter of fiscal 2024 and was a tax benefit since we had a year-to-date pre-tax loss.

Liquidity and Capital Resources

Cash and cash equivalents

at September 30, 2024 increased $450,000 to $3.1 million as compared to $2.6 million at June 30, 2024.

at December 31, 2024 decreased $2.6 million to $66,000 as compared to $2.6 million at June 30, 2024.

The following table includes a summary

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

and For the Three Months Ended September 30,

and For the Six Months Ended December 31,

(in thousands)

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Operating Activities

Net cash provided by operating

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.

Net cash used in

operating activities was $2.3 million for the six months ended December 31, 2024, due in part to net income of $4.5 million and non-cash

depreciation and amortization of $615,000 offset by non-cash unrealized gains on marketable equity investments of $510,000.

Additionally,

accounts receivable, inventory and prepaid and other assets increased $4.6 million, $4.3 million, and $991,000, respectively, for the

six months ended December 31, 2024, offset by an increase in accounts payable and accrued expenses of $3.0 million.

As our business continues

to grow, we expect to see increases in both inventory and accounts payable.

Our accounts receivable is similarly expected to increase

during periods of increased revenue.

Net cash provided

by operating activities was $1.1 million for the six months ended December 31, 2023, primarily due to our net loss of $115,000 offset

by non-cash stock-based compensation, depreciation and amortization, and unrealized losses on marketable equity investments of $386,000,

$568,000, and $2.6 million, respectively.

Although we experienced an influx of cash in the amount of $1.1 million due to a reduction in

our inventory balance during the six months ended December 31, 2023, our accounts receivable balance increased by $3.2 million due to

timing of customer payments.

Investing Activities

Net cash used in investing

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

activities for the six months ended December 31, 2024 was $973,000 and related mostly to equipment purchases for our machine shop, assembly,

and inspection.

Net cash used in investing

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

activities for the six months ended December 31, 2023, was $2.0 million and related to the exercise of our Monogram Warrant for cash in

the amount of $1,250,000 (see Note 4 to the condensed consolidated financial statements contained elsewhere in this report) as well as

equipment and improvements purchases in the amount of $759,000.

Financing Activities

Net cash used in financing

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 provided by financing

activities for the six months ended December 31, 2024, included net borrowings on loans from MBT in the amount of $4.5 million primarily

related to the Term Loan C described in Note 10 the condensed consolidated financial statements contained elsewhere in this report, offset

by the repurchase of $3.5 million of our common stock pursuant to our share repurchase program, as well as $305,000 of employee payroll

taxes related to shares of common stock issued to employees under previously granted performance awards and nonqualified stock options.

Net cash used in financing

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.

activities for the six months ended December 31, 2023, totaled $740,000 and related primarily to the net principal payments of $665,000

on our loans from MBT more fully described in Note 10 to the condensed consolidated financial statements contained elsewhere in this report,

as well as repurchase of 6,285 shares of our common stock pursuant to our share repurchase program in the amount of $107,000.

Financing Facilities & Liquidity Requirements for the Next

Twelve Months

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

cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we

As of December 31, 2024, our working

capital was $27.2 million.

We currently believe that our existing accounts receivable balances and cash flows from operations will provide

us sufficient funds to satisfy our cash requirements as our business is currently conducted for at least the next 12 months.

our December 31, 2024, cash balance was only $66,000, it was caused largely by a $2.1 million delay in receivable collections from our

largest customer, which has since been received.

Our working capital may also be supplemented by liquidating some of our marketable equity

investments, which had an estimated fair market value of $6.3 million as of December 31, 2024.

We are focused on maximizing our

working capital by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we

believe will most likely contribute to our profitability.

As we execute on our current strategy, however, we may require debt and/or equity

capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection processes.

In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials to satisfy

our backlog, which can be subject to extensive variability.

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

borrow against our MBT revolver.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

capital to fund our working capital needs and requirements for capital equipment to support our manufacturing, assembly, and inspection

In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials

to satisfy our backlog, which can be subject to extensive variability.

We believe that if we need to raise additional capital to fund

our operations, we can do so by borrowing against our $7.0 million Amended Revolving Loan with MBT, which had an available balance of

$3.5 million at December 31, 2024 (see Note 10 to the condensed consolidated financial statements contained elsewhere in this report).

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 Cabillot and Nicholas Swenson, who chairs the committee.

Cabillot and Swenson are active investors with extensive

portfolio management expertise.

We leverage the experience of these committee members to make investment decisions for the investment

of our surplus operating capital or borrowed funds.

Additionally, many of our securities holdings include stocks of public companies that

either Messrs.

Cabillot or Swenson or both may own from time to time either individually or through the investment funds that they manage,

or other companies whose boards they sit on.

The Investment Committee approved each of the investments comprising the $6.3 million of

marketable public equity securities that we held on December 31, 2024.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis