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Item 7. Management’s Discussion and Analysis

2023-10-13 compared with 2022-09-08 · 244 added, 246 removed, 182 unchanged (73% of the section changed)

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

The following discussion of our

financial condition and results of operations should be read in conjunction with our Financial Statements and the Notes thereto contained

elsewhere in this report, as well as the Risk Factors included in Item 1A of this report.

The following discussion contains forward-looking

(See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this report.)

The following

discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of

operations and financial condition for the fiscal years ended June 30, 2022 and 2021.

The following discussion

of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the

notes thereto contained elsewhere in this report, as well as the Risk Factors included in Item 1A of this report.

The following discussion

contains forward-looking statements.

(See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this

The following discussion and analysis

provides information that management believes is relevant to an assessment and understanding of our results of operations and financial

condition for the fiscal years ended June 30, 2023 and 2022.

We specialize in the design, development,

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and procedures based on applicable national, state, and local emergency orders and safety guidance that may be issued from time to time,

in order to effectively manage our business during the pandemic, including:

· Non-essential employees that are able to work remotely did so during most of fiscal 2021 and some of fiscal

· Increased frequency of disinfectant cleanings, especially for high-touch surfaces;

· Curtailed business travel;

· Multiple, staggered work shifts have been implemented

in order to achieve effective social distancing;

· Provided training, education and appropriate

personal protective equipment;

· Implemented quarterly, then monthly, company-wide

COVID-19 testing through June 2021;

· Daily temperature screenings and personal affidavits

in order to effectively manage our business during the pandemic and to keep our employees safe.

These measures have changed over time

and continue to change as our specific circumstances change.

While we have yet to see any decline

in our customer orders, we have received and accepted some customer requests to delay the shipment of their existing orders.

our largest customer with a device used primarily in elective surgeries and although this customer has not requested a reduction or delay

to their planned shipments, if this pandemic continues to adversely impact the United States and other markets where our products are

sold, coupled with the recommended deferrals of elective procedures by governments and other authorities, we would expect to see a decline

in demand from our principal customer.

focused on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers.

supporting our customers according to their priorities and working with them to the degree that we can offer relief in the form of delayed

We are focused on continuity of supply by working with our suppliers, some of whom have delivered our orders late and are quoting

longer lead times.

While the COVID-19 pandemic did

not materially adversely affect our financial results and business during calendar 2021, we began to see some challenges in our supply

chain in the form of delayed shipments, longer lead times, and surcharges, much of which our suppliers indicate has been caused by the

COVID-19 pandemic.

As previously disclosed, during early calendar 2022, we saw these conditions persist and worsen such that we expected

them to negatively impact our financial performance in the third quarter and possibly the fourth quarter of fiscal 2022, reflected as

a reduction in net sales.

However, we did not end up experiencing this anticipated decline in our sales because we were able to largely

mitigate our biggest concerns by sourcing replacement chips through alternative suppliers, albeit at much higher prices, for many of our

printed circuit board assemblies.

In so doing, our cost of sales increased during the third and fourth quarter of fiscal 2022.

to implement plans and processes to mitigate these challenges that many manufacturers similarly face.

Our long-term prospects remain positive,

and we believe these challenges will negatively impact us only in the short-term.

We are focused

on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers.

We are supporting

our customers according to their priorities and working with them to the degree that we can offer relief in the form of delayed shipments.

We are focused on continuity of supply by working with our suppliers, some of whom have delivered our orders late and are quoting longer

During fiscal 2022, we began to

see some challenges in our supply chain in the form of delayed shipments, longer lead times, higher prices, and surcharges, much of which

our suppliers indicate have been caused by the COVID-19 pandemic.

We have largely been able to mitigate our biggest supply chain concerns

by sourcing replacement chips through alternative suppliers, albeit at much higher prices, for many of our printed circuit board assemblies.

In so doing, our cost of sales increased during the second half of fiscal 2022 and in fiscal 2023.

We continue to implement plans and

processes to mitigate these challenges that many manufacturers similarly face.

Our long-term prospects remain positive, and we believe

these challenges will negatively impact us only in the short-term.

Critical Accounting Policies

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.

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.

Revenue Recognition

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from non-recurring engineering (“NRE”) and prototype services represents approximately 6% of total revenue.

Returns of our product for credit

are not material;

Returns of our product for

credit are not material;

accordingly, we do not establish a reserve for product returns at the time of sale.

Estimated Losses on Product Development Services

and revenue estimates related to the product development service portions of development and supply contracts are reviewed and updated

An expected loss on development service contracts is recognized immediately in cost of sales.

Losses recorded in fiscal 2022

and 2021 related to these services totaled $0 and $71,000, respectively.

Cost and revenue estimates

related to the product development service portions of development and supply contracts are reviewed and updated quarterly.

loss on development service contracts is recognized immediately in cost of sales.

Losses recorded in fiscal 2023 and 2022 related to these

services totaled $108,000 and $0, respectively.

to the complexity of many of the contracts we have undertaken, the cost estimation process requires significant judgment.

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availability of materials, performance of subcontractors, and expected costs for specific regulatory approvals.

Most of our products are sold with

a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the sale.

the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors as return

rates and repair costs, which factors are reviewed quarterly.

Warranty expenses, including changes

of estimates, are included in cost of sales in our statements of operations.

Inventories are stated at the lower

of cost (first-in, first-out method) or net realizable value.

Reductions to estimated net realizable value are recorded, and charged to

cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand over the

ensuing 12 months from the measurement date.

Most of our products are

sold with a warranty that provides for repairs or replacement of any defective parts for a period, generally one to two years, after the

At the time of the sale, we accrue an estimate of the cost of providing the warranty based on prior experience with such factors

as return rates and repair costs, which factors are reviewed quarterly.

Warranty expenses, including

changes of estimates, are included in cost of sales in our statements of operations.

Inventories are stated

at the lower of cost (first-in, first-out method) or net realizable value.

Reductions to estimated net realizable value are recorded,

and charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated

demand over the ensuing 12 months from the measurement date.

Accounts Receivable

Trade receivables are stated at

their original invoice amounts, less an allowance for doubtful portions of such accounts.

Trade receivables are stated

at their original invoice amounts, less an allowance for doubtful portions of such accounts.

Management determines the allowance for doubtful

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Deferred Costs

Deferred costs reflect costs incurred

related to non-recurring engineering services under the terms of the related development and supply contracts.

These costs get recorded

to cost of sales in the period that the revenue is recognized.

Investments consist of marketable

equity securities of publicly held companies.

The investments were made to realize a reasonable return, although there is no assurance

that positive returns will be realized.

Investments are marked to market at each measurement date, with unrealized gains and losses presented

in other income (expense) in our consolidated income statements.

Some of our investments include the common stock of public companies

that are thinly traded.

Certain of these investments are classified as long-term in nature, as we may not be able to liquidate the investments

in a timely manner even if we wish to sell them.

Deferred costs reflect

costs incurred related to non-recurring engineering services under the terms of the related development and supply contracts.

get recorded to cost of sales in the period that the revenue is recognized.

Investments consist

of marketable equity securities of publicly held companies and a warrant (the “Monogram Warrant”) to purchase common stock

of a publicly held company.

The investments were made to realize a reasonable return, although there is no assurance that positive returns

will be realized.

Investments are marked to market at each measurement date, with unrealized gains and losses presented in other income

(expense) in our consolidated income statements.

Some of our investments include the common stock of public companies that are thinly

Certain of these investments are classified as long-term in nature, as we may not be able to liquidate the investments in a timely

manner even if we wish to sell them.

Thinly traded investments were subject to a valuation analysis as of June 30, 2023 and 2022.

Monogram Warrant is the subject of the restatement of our previous financial statements described in Note 2 to the consolidated financial

statements contained elsewhere in this report.

As previously disclosed, from the time we were issued the Monogram warrant through the

fourth quarter of fiscal 2023, we considered the Monogram warrant to be of little value and did not record it as an investment in our

consolidated balance sheet.

Long-lived Assets

We review the recoverability of

long-lived assets, consisting of building, equipment, and improvements, when events or changes in circumstances occur that indicate carrying

values may not be recoverable.

Building, equipment, and improvements

are recorded at historical cost and depreciation is provided using the straight-line method over the following periods:

We review the recoverability

of long-lived assets, consisting of building, equipment, and improvements, when events or changes in circumstances occur that indicate

carrying values may not be recoverable.

Building, equipment, and

improvements are recorded at historical cost and depreciation is provided using the straight-line method over the following periods:

Three to ten years

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of the patent costs is recognized in research and development costs.

We recognize deferred tax assets

and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along

with net operating loss and tax credit carryovers.

Deferred tax assets at June 30, 2022 and 2021 consisted primarily of basis differences

related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses and inventories.

tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

We recognize deferred tax

assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities,

along with net operating loss and tax credit carryovers.

Deferred tax assets and liabilities at June 30, 2023 and 2022 consisted primarily

of basis differences related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses

and inventories.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Significant management judgment

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In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income

Results of Operations for the Fiscal Year Ended June 30, 2022 Compared

to the Fiscal Year Ended June 30, 2021

The following tables set forth results

from operations for the fiscal years ended June 30, 2022 and 2021:

Years Ended June 30,

Dollars in thousands

Results of Operations for the Fiscal Year Ended June 30, 2023

Compared to the Fiscal Year Ended June 30, 2022

The following tables set

forth results from operations for the fiscal years ended June 30, 2023 and 2022:

Ended June 30,

Cost of sales

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Research and development costs

Total operating expenses

Operating income

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type is as follows:

Years Ended June 30,

(Decrease) From 2021 To

Dollars in thousands

Ended June 30,

From 2022 To 2023

Medical devices

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Discounts & Other

sales in fiscal 2022 increased by $4.0 million, or 11%, as compared to fiscal 2021, due primarily to an increase

in medical device revenue of $1.9 million as well as a $1.7 million increase in repair revenue.

Details of our medical device sales by

type is as follows:

Years Ended June 30,

Dollars in thousands

sales in fiscal 2023 increased by $4.0 million, or 10%, as compared to fiscal 2022, due primarily to an increase in repair revenue of

$6.0 million and an increase in NRE and prototype services of $1.7 million offset by a decrease in medical device revenue of $3.3 million.

Details of our medical device sales by type is as follows:

Ended June 30,

From 2022 To 2023

Medical device sales:

of our medical device products increased $1.9 million, or 6% during, fiscal 2022 as compared to fiscal 2021.

During fiscal 2022, orthopedic

sales increased by $3.8 million to $21.9 million, up from $18.1 million in fiscal 2021, due primarily to increased sales to our largest

Additionally, recurring revenue from distributors of CMF drivers increased $4.1 million in fiscal 2022 compared to fiscal

2021 in part due to the launch of a new driver to our existing largest customer during the

third quarter of fiscal 2021.

Our fiscal 2022 thoracic sales revenue decreased $6.0 million compared to the prior fiscal year, due likely

as a result of our customer filling the near-term requirements of its distribution network.

Currently, the thoracic driver is only sold

to one customer, although we are in discussions with other of our existing customers who have expressed an interest in this driver.

of our medical device products decreased $3.3 million, or 10%, during fiscal 2023 as compared to fiscal 2022.

During fiscal 2023, thoracic

sales increased by $705,000 to $2.6 million, up from $1.9 million in fiscal 2022, due to additional orders from our single distributor

of this driver.

In late fiscal 2023, we executed a supply agreement with another distributor for a thoracic driver and we expect an increase

in revenue of thoracic products in fiscal 2024.

Recurring revenue from distributors of CMF drivers decreased $1.8 million in fiscal 2023

compared to fiscal 2022.

We do not have much visibility into our customers’ distribution networks, but we surmise the decline relates

to a buildup of customer inventory.

Our orthopedic sales decreased $2.2 million in fiscal 2023 compared to fiscal 2022, in part, due

to our largest customer shifting priorities to an enhanced repair program (described under the discussion of repair revenue below).

of our industrial and scientific products, which consist primarily of our compact pneumatic air

motors, increased $65,000, or 8%, for fiscal 2022 compared to fiscal 2021.

The revenue increase relates to a continued interest in these

legacy products, but is not due to any substantive marketing efforts .

of our NRE & proto-type services increased $690,000 or 213% compared to fiscal 2021 and relates to billable engagement for multiple

motors, decreased $54,000, or 6%, for fiscal 2023 compared to fiscal 2022.

The revenue decrease is expected as these are legacy products

with no substantive marketing or sales efforts.

of our NRE & prototype services increased $1.7 million or 166% compared to fiscal 2022 and relates to billable engagement for multiple

engineering projects.

of our dental products and components in fiscal 2022 increased $304,000, or 189%, as compared to fiscal 2021.

The increase in sales in

fiscal 2022 related to component sales of excess inventory directly to our largest customer due to the release of their next generation

of our dental products and components in fiscal 2023 decreased $208,000, or 45%, as compared to fiscal 2022.

The decrease is as expected

because in fiscal 2022 we sold components of excess inventory directly to our largest customer due to the release of their next generation

We expect future declines in this area as we are no longer manufacturing dental products, but rather are simply selling remaining

component inventory.

fiscal 2022 repair revenue has increased approximately $1.7 million, or 33%, over fiscal 2021 to $6.6 million, due to increased repairs

of the orthopedic handpiece we sell to our largest customer.

We expect repair revenue to continue to increase based upon expected refurbishments

to upgrade the handpiece to the next generation, which was released in the third quarter of fiscal 2022.

While we expect the volume of

repairs to increase, we expect the gross margin to deteriorate, at least in the near term, as we are currently upgrading these handpieces

at no additional cost while we continue to negotiate a new repair price with our largest customer in good-faith.

At June 30, 2022, we had a

backlog of $16.5 million compared with a backlog of $9.7 million at June 30, 2021.

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.

backlog at June 30, 2022, as well as certain purchase orders received subsequent to June 30, 2022, are expected to be delivered during

We have experienced, and may continue to experience, variability in our new order bookings due to, among other reasons, the

launch of new products, the timing of customer orders based on end-user demand, and customer inventory levels.

We do not typically experience

seasonal fluctuations in our shipments and revenues.

fiscal 2023 repair revenue increased approximately $6.0 million, or 91%, to $12.6 million, as compared to fiscal 2022, due to increased

repairs of the orthopedic handpiece we sell to our largest customer.

We expected repair revenue to increase based upon the customer’s

requested refurbishments to upgrade previously purchased handpieces to the next generation, which we collectively term “enhanced

We are rapidly refurbishing these handpieces and we believe that our largest customer will request enhanced repairs for

a similar volume or number of handpieces in fiscal 2024, but there are no assurances that our customer will return the same volume of

At June 30, 2023, we

had a backlog of $41.6 million compared with a backlog of $16.5 million at June 30, 2022.

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.

Of our backlog at June 30, 2023, $31.4 million, as well as certain purchase orders received subsequent to June 30, 2023, are expected

to be delivered during fiscal 2024 and the balance of $10.2 million is expected to be delivered in fiscal 2025.

We have experienced, and

may continue to experience, variability in our new order bookings due to, among other reasons, the launch of new products, the timing

of customer orders based on end-user demand, and customer inventory levels.

We do not typically experience seasonal fluctuations in our

shipments and revenues.

Cost of Sales and Gross Margin

Years Ended June 30,

Dollars in thousands

Ended June 30,

(Decrease) From 2022 To 2023

Cost of sales:

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coupled with higher material and labor costs.

During fiscal 2021, we incurred costs of $395,000 to generate $324,000 in revenue related

to NRE and Prototype services, netting losses in the amount of $71,000 compared to netting profit of $240,000 in fiscal 2022.

During fiscal

2022, we experienced $877,000 under-absorption of manufacturing costs compared to a $370,000 in fiscal 2021, due primarily to actual

production hours being less than planned .

Costs related to inventory and warranty charges increased $366,000 in fiscal 2022 compared

to fiscal 2021, primarily due to sourcing components for our printed circuit board assemblies at prices higher than usual .

During fiscal 2023, we experienced $1.7 million of under-absorption of manufacturing costs

compared to $877,000 in fiscal 2022, due primarily to actual production hours being less than planned .

Costs related to inventory and warranty charges decreased $672,000 in fiscal 2023 compared to fiscal 2022, primarily due to sourcing of

components for our printed circuit board assemblies at prices higher than usual in fiscal 2022 coupled with reduced warranty repairs related

to the handpiece we sell to our largest customer in fiscal 2023 .

Operating Expenses

Years Ended June 30,

(Dollars in thousands)

Ended June 30,

From 2022 To 2023

in thousands)

% of Net Sales

Operating expenses:

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Research and development costs

Selling expenses consist of salaries

and other personnel-related expenses related to our business development department, as well as trade show attendance, advertising and

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

Selling expenses decreased

$499,000, or 85%, compared to fiscal 2021, primarily due to decreased personnel and related expenses due to combining our Director of

Business Development position with our Director of Engineering position in the first quarter of fiscal 2022.

General and administrative expenses

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

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

with being a public company.

The $827,000 increase in G&A expenses from fiscal 2021 to 2022 is due primarily to $374,000 in increased

stock compensation expense related to awards granted in fiscal 2022 and 2021.

We also incurred $261,000 in expenses in fiscal 2022 related

to defending a patent infringement case brought against one of our customers.

We incurred no similar expenses during the prior fiscal

Finally, we incurred an increase in professional service fees in fiscal 2022 as compared to fiscal 2021 related to the costs associated

with being a public company of approximately $142,000.

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 decreased $1.4 million from fiscal

2021 to 2022 due to decreased spending on internal product development projects.

In fiscal 2022, our engineering department has been engaged

in more billable customer projects and therefore costs get shifted to cost of sales instead of research and development.

Selling expenses consist

of salaries and other personnel-related expenses related to our business development department, as well as trade show attendance, advertising

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

Selling expenses increased

$64,000, or 70%, compared to fiscal 2022, primarily due to increased sales commissions.

General and administrative

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

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

associated with being a public company.

The $875,000 decrease in G&A expenses from fiscal 2022 to 2023 is due primarily to reduced

legal and settlement expenses related to employment matters and reduced non-cash compensation expense related to stock compensation.

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 decreased $176,000

from fiscal 2022 to 2023 due to increased personnel and related costs of $333,000 as well as increased legal fees related to IP matters

of $89,000 offset by decreased spending on internal product development projects of $604,000.

In fiscal 2023, our engineering department

has continued to be engaged in billable customer projects and therefore those costs are shifted to cost of sales instead of research and

Although the majority of our research

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

Years Ended June 30,

Dollars in thousands

Total Research and Development costs:

Products in development:

Vital Ventilator

Sustaining & Other

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

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

(3) The CMF Driver was completed in the third quarter of fiscal 2021 and began shipping to our existing largest

customer under a distribution agreement we executed in the first quarter of fiscal 2021.

We generated revenue of $1.8 million related

to this product in fiscal 2022.

(3) We have suspended the vital ventilator project at this time.

As we introduce new products into

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earned in fiscal 2023 and 2022 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

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 5 to the consolidated financial statements contained

elsewhere in this report.

Unrealized gain (loss) on investments

The unrealized gain (loss) on

investments relates to our investment portfolio, which is the subject of our restatement described in Note 2 to the consolidated financial

statements contained elsewhere in this report.

Additional information related to the nature of our investments is more fully described

in Note 5 to the consolidated financial statements contained elsewhere in this report.

Gain on Sale of Investments

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some of the investments in our portfolio of equity investments receiving proceeds of $89,000 and recording a gain of $6,000.

fiscal 2021, we liquidated some of the investments in our portfolio of equity investments receiving proceeds of $4.6 million and recording

a gain of $1.3 million.

During fiscal

2022, we liquidated some of the investments in our portfolio of equity investments receiving proceeds of $770,000 and recording a gain

Interest Expense

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more fully in Note 8 to the consolidated financial statements contained elsewhere in this report.

The effective

tax rate for the fiscal years ended June 30, 2022 and 2021, was 18% and 17%, respectively, 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 Resources

following table is a summary of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30,

2022 and 2021:

As of and for the Years

The effective tax rate

for the fiscal years ended June 30, 2023 and 2022 was 26% and 20%, as restated, respectively, 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

The following table is a summary

of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30, 2023 and 2022:

and for the Years

Ended June 30,

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Cash Flows from Operating Activities

in operating activities totaled $847,000 during fiscal 2022.

Our net income was $3.9 million and included non-cash stock compensation

expense and depreciation and amortization expense in the amount of $1.3 million and $726,000, respectively.

Additionally, our accounts

payable and accrued expenses increased by $2.0 million.

Offsetting these inflows of cash, our accounts receivable and inventory balances

grew by $4.4 million and $4.2 million, respectively.

Cash used in operating activities

during fiscal 2021 totaled $2.1 million.

Our net income was $5.8 million and included $1.3 million of gains on the sales of certain equity

investments, $1.4 million in unrealized gains on marketable equity investments, as well as $901,000 of non-cash stock compensation.

this net inflow of cash, our accounts receivable balance increased by $5.8 million primarily because our largest customer changed their

payment terms from net 30 to net 90 in conjunction with a contract extension executed in fiscal 2021.

Cash provided by operating

activities during fiscal 2023 totaled $5.5 million.

Our net income was $7.1 million and included $3.9 million of unrealized gains on certain

equity investments, as well as $857,000 of depreciation and amortization and $766,000 of non-cash stock compensation.

Additionally, our

accounts receivable decreased by $5.4 million due to the variability in the timing of shipments and our prepaid expenses and deferred

income taxes decreased by $494,000 and $264,000, respectively.

Offsetting this net inflow of cash, inventory increased by $3.5 million

and our accounts payable and accrued expenses and deferred revenue decreased by $1.1 million and $1.0 million, respectively.

Cash used in operating

activities totaled $847,000 during fiscal 2022.

Our net income was $4.6 million and included $931,000 of unrealized gains on certain equity

investments, as well as non-cash stock compensation expense and depreciation and amortization expense in the amount of $1.3 million and

$726,000, respectively.

Additionally, our accounts payable and accrued expenses increased by $2.0 million.

Offsetting these inflows of

cash, our accounts receivable and inventory balances grew by $4.4 million and $4.2 million, respectively.

Cash Flows from Investing Activities

used in investing activities in fiscal 2022 was $1.2 million and related primarily to $1.6 million in purchases of equipment and improvements

as well as the purchase of $334,000 of marketable equity securities, offset by $770,000 in proceeds from sales of marketable equity securities.

Net cash used in investing activities

in fiscal 2021 was $3.7 million.

During the 2021 fiscal year, we generated $4.6 million in proceeds from sales of marketable equity securities

under the direction of the Investment Committee of our Board, purchased the Franklin Property for $6.5 million and made capital expenditures

in the amount of $1.8 million primarily for the Franklin Property.

Net cash used in investing

activities in fiscal 2023 was $885,000.

During the 2023 fiscal year, we made capital expenditures in the amount of $974,000 primarily

for the Franklin Property and we received proceeds of $89,000 from the sales of marketable equity securities.

Net cash used in investing

activities in fiscal 2022 was $1.2 million and related primarily to $1.6 million in purchases of equipment and improvements as well as

the purchase of $334,000 of marketable equity securities, offset by $770,000 in proceeds from sales of marketable equity securities.

Cash Flows from Financing Activities

cash used in financing activities for fiscal 2022 totaled $790,000 and related primarily to the $1.6 million repurchase of 75,250 shares

of our common stock pursuant to our share repurchase program, as well as $1.2 million of principal payments primarily related to our various

loans from MBT offset by the $2.0 million in new borrowings from MBT more fully described in Note 8 to the consolidated financial statements

contained elsewhere in this report.

Net cash provided by financing activities

for fiscal 2021, totaled $3.1 million and included $9.1 million in various loans from MBT more fully described in Note 8 to the consolidated

financial statements contained elsewhere in this report, offset by $5.5 million related to the repurchase of 216,171 shares of our common

stock pursuant to our share repurchase program, $351,000 of principal payments on our loans with MBT, as well as payment of $259,000 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 fiscal 2023 totaled $2.5 million and included $809,000 in net principal payments of various notes payable to MBT more fully

described in Note 8 to the consolidated financial statements contained elsewhere in this report, and $1.5 million related to the repurchase

of 86,422 shares of our common stock pursuant to our share repurchase program, 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.

Net cash used in financing

activities for fiscal 2022 totaled $790,000 and related primarily to the $1.6 million repurchase of 75,250 shares of our common stock

pursuant to our share repurchase program, as well as $1.2 million of principal payments primarily related to our various loans from MBT

offset by the $2.0 million in new borrowings from MBT more fully described in Note 8 to the consolidated financial statements contained

elsewhere in this report.

Liquidity Requirements for the Next 12 Months

As of June 30, 2022, our working

capital was $19.8 million.

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

balances, and anticipated 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.

As of June 30, 2023, our

working capital was $21.3 million.

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

receivable balances, and anticipated 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.

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 8 to condensed consolidated financial statements

contained elsewhere in this report), under which we had availability of $4.5 million as of June 30, 2023.

We are focused on preserving our

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

borrow against our revolving loan with MBT, or sell additional shares of our common stock under our ATM Agreement, which is currently

suspended, but which we believe we could reinstate if needed.

borrow against our revolving loan with MBT.

Surplus Capital Investment Policy

During fiscal 2013, our

Board approved a Surplus Capital Investment Policy (the “Policy”) that provides, among

other items, for the following:

fiscal 2013, our Board approved a Surplus Capital Investment Policy (the “Policy”) that provides,

among other items, for the following:

(a) Determination by our Board of Directors

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and Van Kirk.

The Investment Committee approved

each of the investments comprising the $2.5 million of marketable public equity securities held at June 30, 2022, which amount includes

unrealized holding losses in the amount of $262,000 at June 30, 2022.

Cabillot and Mr.

Swenson are active investors with extensive portfolio management expertise.

the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed

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

Swenson or Cabillot 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

The Investment Committee approved each of the investments comprising the $8.8 million of investments consisting of a warrant to purchase

common stock of a publicly held company and marketable public equity securities held at June 30, 2023, which amount includes unrealized

holding gains in the amount of $6.1 million at June 30, 2023.

December 2019, our Board approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock,

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(“10b5-1 Plan” or “Plan”).

During the fiscal year ended June

30, 2022, we repurchased 75,250 shares at an aggregate cost, inclusive of fees under the Plan, of $1.6 million.

During the fiscal year

ended June 30, 2021, we repurchased 216,171 shares at an aggregate cost, inclusive of fees under the Plan, of $5.5 million.

During the fiscal year ended

June 30, 2023, we repurchased 86,422 shares at an aggregate cost, inclusive of fees under the Plan, of $1.5 million.

During the fiscal

year ended June 30, 2022, we repurchased 75,250 shares at an aggregate cost, inclusive of fees under the Plan, of $1.6 million.

On a cumulative

basis, we have repurchased a total of 1,110,746 shares under the share repurchase programs at an aggregate cost, inclusive of fess under

basis, we have repurchased a total of 1,197,168 shares under the share repurchase programs at an aggregate cost, inclusive of fees under

the Plan, of $17.2 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis