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Item 2. Management’s Discussion and Analysis

2025-05-01 compared with 2025-01-30 · 212 added, 209 removed, 136 unchanged (76% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion

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COMPANY OVERVIEW

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 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.

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

results of operations and financial condition of Pro-Dex, Inc.

(“Company,” “Pro-Dex,” “we,” “our,”

or “us”) for the three-month and nine-month periods ended March 31, 2025 and 2024.

This discussion should be read in conjunction

with the condensed consolidated financial statements and the notes thereto included elsewhere in this report.

This report contains certain

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

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, 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.

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.

for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions of

our product development plans, business strategies, strategic opportunities, and market factors influencing our results, are forward-looking

statements that involve certain risks and uncertainties.

Actual results may differ from those anticipated by us as a result of various

factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase sales

in markets characterized by rapid technological evolution, our ability to optimize our operations at our Franklin facility, consolidation

within our target marketplace and among our competitors, the impact of tariffs on the cost of our raw materials and purchased components,

employee turnover, competition from larger, better capitalized competitors, and our ability to realize returns on opportunities.

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.

We have patented adaptive torque-limiting

software and proprietary sealing solutions which appeal to our customers, primarily medical device distributors.

We also manufacture

and sell rotary air motors to a wide range of industries.

Our principal headquarters

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

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

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other

SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically

filed with, or furnished to, the SEC.

In addition, our Code of Ethics and other corporate governance documents may be found on our website

at the Internet address set forth above.

Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room

at 100 F Street, N.E., Washington, D.C.

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.

Basis of Presentation

The condensed consolidated

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

entirety of the fiscal year ending June 30, 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 those results are not necessarily indicative of the results to be expected

for the entirety of the fiscal year ending June 30, 2025.

Our fiscal year ends on June 30 and our fiscal quarters end on September 30,

December 31, and March 31.

Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.

Critical Accounting Estimates and Judgments

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Management believes that there have been no significant

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

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

fiscal year ended June 30, 2024.

changes during the three and nine months ended March 31, 2025 to the items that we disclosed as our critical accounting policies in Management’s

Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June

Business Strategy and Future Plans

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Three Months Ended

Six Months Ended

Medical device products

Industrial and scientific

Nine Months Ended

device products

Industrial and

Dental and component

NRE & Prototype

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

development and/or supply agreements.

All of our medical device

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

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

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

NRE & Proto-type

our medical device products utilize proprietary designs developed by us under exclusive development and supply agreements.

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

facility, and are assembled in our Tustin, California facility, along with our industrial products.

Details of our medical device

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

Three Months Ended

Six Months Ended

Nine Months Ended

Medical device sales:

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

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

Our orthopedic

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

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

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

Recurring revenue from CMF drivers

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

period of the prior fiscal year.

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

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

Sales of our medical

device products increased $2.1 million, or 22%, and $7.5 million, or 28%, respectively, for the three and nine months ended March 31,

2025, compared to the corresponding periods of the prior fiscal year.

Our medical device revenue to our largest customer, included in

orthopedic sales above, increased $1.8 million and $7.5 million, respectively, for the three and nine months ended March 31, 2025, compared

to the corresponding periods of the prior fiscal year due primarily to the launch of that customer’s next generation handpiece.

As can be common with new product launches in the industry, the customer’s internal design of the next generation handpiece continues

to evolve, and the customer has recently informed us that it is holding off on next generation handpiece shipments in favor of continued

shipments and enhanced repair of the legacy handpieces as the customer continues to refine the next generation handpiece’s design.

Although we cannot predict the timing of the customer’s further transition to the next generation handpiece at this time, we

fully anticipate a resumption of shipments of the next generation handpiece once the design enhancements are finalized, coupled with larger

orders of the legacy handpiece during the interim.

Additionally, recurring revenue from distributors of thoracic drivers increased

$182,000 and $272,000, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding periods of the

prior fiscal year.

Our CMF sales revenue increased $107,000 and decreased $246,000, for the three and nine months ended March 31, 2025,

respectively, compared to the corresponding periods of the prior fiscal year.

While we do not have much visibility into our customers’

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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.

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

$54,000, or 26%, and decreased $15,000, or 3%, respectively, for the three and nine months ended March 31, 2025, compared to the corresponding

periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts .

NRE and proto-type revenue decreased $48,000, or 21%, and $488,000, or 64%, for the three and nine months ended March 31, 2025, compared

to the corresponding periods of the prior fiscal year, due to a decrease in billable contracts for various NRE projects undertaken for

our customers.

of our dental products and components decreased $17,000, or 27%, and $28,000, or 19%, respectively, for the three and nine months ended

March 31, 2025, compared to the corresponding periods of the prior 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 increased $666,000 or 15%, and $3.3 million, or 29%, for the three and nine months ended March 31, 2025, respectively, compared

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

to our largest customer.

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

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.

March 31, 2025, we had a backlog of approximately $49.5 million, of which $12.8 million is scheduled to be delivered in the fourth quarter

of fiscal 2025 and the balance is scheduled to be delivered next fiscal year.

Our backlog represents firm purchase orders received

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

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

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Cost of sales:

Under(over)-absorption

of manufacturing costs

Under(over)-absorption of manufacturing

and warranty charges

Total cost of sales

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.

Three Months Ended

Nine Months Ended

Year over Year

of sales for the three months ended March 31, 2025, increased $1.3 million, or 13%, compared to the corresponding period of the prior

The increase in total costs of sales is consistent with the 22% increase in revenue for the same period.

Under-absorption

of manufacturing costs increased by $254,000 for the three months ended March 31, 2025, compared to the corresponding period of the prior

During the third quarter of fiscal 2025 we increased our assembly department labor and overhead rates to reduce the under

absorption of our indirect costs.

Costs relating to inventory and warranty charges decreased $111,000 for the three months ended March

31, 2025, compared to the corresponding period of the prior fiscal year, due to a slight decrease in both inventory reserves and warranty

profit increased by approximately $1.8 million, or 45%, for the three months ended March 31, 2025, compared to the corresponding period

of the prior fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described

Gross margin as a percentage of sales increased by approximately 5 percentage points compared to the corresponding period of the

prior fiscal year due primarily to favorable product mix.

of sales for the nine months ended March 31, 2025, increased by 4.7 million, or 17%, compared to the corresponding period of the prior

The increase in total costs of sales is consistent with the 27% increase in revenue for the same period.

Under-absorption

of manufacturing costs increased by $2.1 million for the nine months ended March 31, 2025, compared to the corresponding period of the

prior fiscal year and as discussed above we have increased our assembly labor and overhead rates to better absorb our indirect manufacturing

Inventory and warranty charges decreased slightly by approximately $49,000, or 14%, for the nine months ended March 31, 2025, compared

to the corresponding period of the prior fiscal year.

profit increased by $5.6 million, or 53%, for the nine months ended March 31, 2025, compared to the corresponding period of the prior

fiscal year, primarily as a result of the increase in medical device and repair revenue for the same periods as described above.

margin as a percentage of sales increased by 6 percentage points compared to the corresponding period of the prior fiscal year primarily

related to a more favorable product mix.

Operating Expenses

Operating Costs and Expenses

(in thousands except % change)

(in thousands except percentages)

over Year % Change

Operating expenses:

and administrative expenses

General and administrative

and development costs

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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,

Selling expenses for the three and nine

months ended March 31, 2025, increased $96,000, or 565%, and $132,000, or 167%, respectively, compared to the corresponding periods of

The increase relates primarily to recruiting fees and personnel costs related to our new Director of Business Development

who we hired in December, 2024.

General and administrative

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

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

and expenses attributable to being a public company.

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

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

The increases relate primarily to increased

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

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

systems, and human resource personnel, as well as costs for outsourced information technology services, professional fees, directors’

fees, and other costs and expenses attributable to being a public company.

G&A increased $86,000 and $524,000, respectively, during

the three and nine months ended March 31, 2025, when compared to the corresponding periods of the prior fiscal year.

The increases relate

primarily to increased bonus accruals, personnel costs, and legal expenses, offset by decreased audit fees and stock compensation expense.

Research and development

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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

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 Other Income

nine months ended March 31, 2025, increased $187,000, or 25%, and $378,000, or 16%, compared to the corresponding periods of the prior

This relates to an increase in legal fees related to intellectual property matters as well as an increase in spending related

to in-house battery production and sustaining engineering efforts related to our existing products.

The majority of our research and

development costs relate to sustaining activities related to products we currently manufacture and sell, but we also 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 41% and 44% 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.

Interest & Other

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.

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

Interest Expense

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.

of interest expense related to the notes payable described more fully in Note 11 to the condensed consolidated financial statements contained

elsewhere in this report.

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, 2025,

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 third quarter ended

March 31, 2025, we sold some of the stocks in our portfolio of equity investments receiving proceeds of $1.9 million and recording a gain

on the sale in the amount of $595,000.

Income Tax Expense

The effective tax rate

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

for each of the three months ended March 31, 2025 and 2024 was 28%.

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, 2025 and 2024 was 26% and

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

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

2025 as described more fully in Note 9 to the condensed consolidated financial statements contained elsewhere in this report, and to the

release of a valuation allowance in the prior fiscal year related to previously recognized unrealized losses on investments.

Liquidity and Capital

Cash and cash equivalents

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

The following table includes a summary

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

and For the Six Months Ended December 31,

at March 31, 2025, increased $1.9 million to $4.5 million as compared to $2.6 million at June 30, 2024.

The following table includes

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

and For the Nine Months Ended March 31,

(in thousands)

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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.

operating activities was $1.5 million for the nine months ended March 31, 2025, primarily due to net income of $7.8 million including

realized gains on the sale of investments in the amount of $595,000 offset by an $8.2 million increase in inventory and a $2.0 million

increase in receivables.

Offsetting these uses of cash, accounts payable and accrued expenses increased by $1.6 million.

The increases

in these balance sheet accounts reflect our continued and expected future revenue growth.

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.

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.

Investing Activities

Net cash used in investing

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 provided by investing

activities for the nine months ended March 31, 2025, was $754,000 and relates to the sale of some of our marketable securities for $1.9

million offset by purchases of capital equipment and improvements of $1.2 million.

Net cash used in investing

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

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

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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.

activities for the nine months ended March 31, 2025, totaled $2.6 million and related primarily to the net increase in borrowings of $6.4

million from Minnesota Bank & Trust (“MBT”) more fully described in Note 11 to the condensed consolidated financial statements

contained elsewhere in this report offset by $3.5 million attributable to the repurchase of 130,148 shares of our common stock pursuant

to our share repurchase program.

Net cash used in financing

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

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

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

activities for the nine months ended March 31, 2024, totaled $2.8 million and related primarily to the $1.8 million repurchase of 96,890

shares of our common stock pursuant to our share repurchase program as well as $990,000 of net principal payments on our loans from MBT

more fully described in Note 11 to the condensed consolidated financial statements contained elsewhere in this report.

Financing Facilities & Liquidity Requirements for the next

twelve months

As of December 31, 2024, our working

As of March 31, 2025, our working

capital was $31.6 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, 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).

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 $11.0 million Amended Revolving

Loan with MBT (see Note 11 to condensed consolidated financial statements contained elsewhere in this report), which we amended in April

2025 in order to provide us additional borrowing capacity.

We are focused on preserving

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

we believe will most likely contribute to our profitability.

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

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

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

our backlog, which can be subject to extensive variability.

Investment Strategy

11 unchanged sentences

The Investment Committee approved each of the investments comprising the $5.5 million of

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

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

marketable public equity securities held at March 31, 2025.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis