What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-08 compared with 2023-11-02 · 236 added, 258 removed, 102 unchanged (83% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

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.

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 periods ended September 30, 2023 and 2022.

This discussion

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

in this report.

The following discussion and analysis provides information that management

believes is relevant to an assessment and understanding of the results of operations and financial condition of Pro-Dex, Inc.

“Pro-Dex,” “we,” “our,” or “us”) for the three-month and six-month periods ended December

31, 2023 and 2022.

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

included elsewhere in this report.

This report contains certain forward-looking statements and information.

The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may

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

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, the impact of the COVID-19 pandemic on our suppliers, customers and us, consolidation within our target

marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize returns on

opportunities.

Many other economic, competitive, governmental, and

technological factors could impact our ability to achieve 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, 2023.

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

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

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

phone number is (949) 769-3200.

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.

Except for the historical information contained herein, the matters discussed

in this report, including, but not limited to, discussions of our product development plans, business strategies, strategic opportunities,

and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties.

Actual results

may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our

ability to continue to develop new products and increase sales in markets characterized by rapid technological evolution, our ability

to optimize our operations at our Franklin facility, the impact of the COVID-19 pandemic on our suppliers, customers, and us, consolidation

within our target marketplace and among our competitors, competition from larger, better capitalized competitors, and our ability to realize

returns on opportunities.

Many other economic, competitive, governmental, and technological factors could impact our ability to achieve

You are urged to review the risks, uncertainties, and other cautionary language described in this report, as well as in our

other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including,

but not limited to, the risks, uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal

year ended June 30, 2023.

We specialize in the design, development, and manufacture of autoclavable,

battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial

facial (“CMF”) markets.

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

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

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.

of Presentation

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, 2024, or any other interim period during such fiscal year.

for the entirety of the fiscal year ending June 30, 2024, or any other interim period during such fiscal year.

Our fiscal year ends on

3 unchanged sentences

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 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.

4 unchanged sentences

Management believes that there have been no significant

changes during the three months ended September 30, 2023, 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 our fiscal year ended June

changes during the three and six months ended December 31, 2023, 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, 2023.

Business Strategy and Future Plans

2 unchanged sentences

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

11 unchanged sentences

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

Additionally, we have other significant engineering

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

In November 2020, we purchased

15 unchanged sentences

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, 2023, and 2022 (in thousands, except percentages):

Months Ended September 30,

(as restated)

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)

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 2022 To

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

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

development and 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.

NRE & Prototype

Certain 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, and are manufactured or machined in our Irvine, California facility, and assembled in our Tustin, California facility, as

are our industrial products.

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

Months Ended September 30,

(Decrease) From 2022 To

Dollars in thousands

% of Med Device Sales

Three Months Ended

Six Months Ended

Medical device sales:

medical device revenue decreased $79,000, or 1%, in the first quarter of fiscal 2024 compared to the corresponding period of the prior

fiscal year .

Our orthopedic sales decreased $797,000 in the first quarter of fiscal 2024 compared to the first quarter of fiscal

2023, due in part, to our largest customer shifting priorities to an enhanced repair program (described under the discussion of repair

revenue below).

Recurring revenue from distributors of CMF drivers decreased $449,000 in fiscal 2024 compared to fiscal 2023.

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

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

We anticipate higher purchase

volumes from this customer in the future.

Our thoracic sales increased by $1.2 million for the three months ended September 30, 2023 compared

to the corresponding period of the prior fiscal year because of the launch of a new product in the

first quarter of this fiscal year.

of our compact pneumatic air motors decreased $83,000, or 37%, in the first quarter of fiscal

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

The revenue decrease is consistent with our lack of substantive marketing

Sales of our dental products and components decreased $64,000 in the first

quarter of fiscal 2024 compared to the corresponding quarter of the prior fiscal year, which 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

$717,000 in the first quarter of fiscal 2024 compared to the corresponding period of the prior fiscal year, due to a decline in billable

Our NRE and proto-type revenue is typically a small percentage of our total revenue and can vary significantly from quarter

revenue increased by $1.8 million in the first quarter of fiscal 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 that we began last fiscal year.

and other decreased by $23,000 in the first quarter of fiscal 2024 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, 2023, we had a backlog of approximately

$35.7 million, of which $25.4 million is s cheduled for delivery during the remainder of fiscal 2024.

Our backlog represents firm

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

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 $0.2 million, or 2%, for the three months ended December 31, 2023, and increased slightly by

$113,000, or 1%, for the six months ended December 31, 2023, compared to the corresponding periods of the prior fiscal year.

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

$31,000, or 15%, and decreased $51,000, or 12%, respectively, for the three and six months ended December 31, 2023, compared to the corresponding

periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts.

Our non-recurring (“NRE”)

and proto-type revenue decreased $145,000, or 30%, and $863,000, or 62%, for the three and six months ended December 31, 2023, 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 $1.2 million, or 58%, and $3.0 million, or 68%, respectively, for the three and six months ended December 31, 2023,

compared to the corresponding periods of the prior fiscal year, primarily due to upgrades of handpieces for our largest customer.

increase was expected, as we have been asked to upgrade handpieces for this customer to its next generation, as well as include the advance

replacement of certain components, beginning in December 2022.

We expect to see continued heightened repair revenue from these upgrades

for at least the remainder of this fiscal year.

December 31, 2023, we had a backlog of approximately $29.1 million, of which $18.9 million is scheduled to be delivered in fiscal 2024

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

Our backlog represents firm purchase orders received and acknowledged

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

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

launches and customer planned inventory builds.

However, we do not typically experience seasonal fluctuations in our shipments and revenues.

Cost of Sales and Gross Margin

Months Ended September 30,

(Decrease) From 2022 To

(in thousands except percentages)

Cost of sales:

% of Net Sales

Product costs

Under-(over) absorption of manufacturing costs

Inventory and warranty charges

Total cost of sales

Gross profit and gross margin

Cost of sales for the three-month

period ended September 30, 2023 increased by $149,000, or 2%, compared to the corresponding period of the prior fiscal year.

some of the increase in cost of sales is consistent with the 8% increase in revenue for the same period, approximately $450,000 of the

prior year product costs included the repairs we performed to upgrade the orthopedic handpieces we sell our largest customer to the newest

release at no additional cost.

Product costs increased by $932,000, or 12%, during the three months ended September 30, 2023, compared

to the corresponding period of the prior fiscal year, due to higher material costs, predominantly related to the repairs discussed above.

During the first quarter of fiscal 2024 we experienced $285,000 of over-absorbed manufacturing costs compared to an under-absorption of

$362,000 in the first quarter of fiscal 2023, primarily due to increases in our standard labor and overhead rates which are made in an

attempt to minimize our over-under absorption.

Costs related to inventory and warranty charges decreased $136,000 in the first quarter

of fiscal 2024 compared to the corresponding quarter of fiscal 2023, due primarily to a reduction in warranty expenses due to the shift

to enhanced repairs we perform on orthopedic handpieces we sell to our largest customer.

profit increased by approximately $702,000, or 24%, for the three months ended September 30, 2023 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, 2023 compared to the corresponding

period of the prior fiscal year, coupled with reduced inventory and warranty charges.

Under(over)-absorption

of manufacturing costs

and warranty charges

cost of sales

Cost of sales for the three and

six months ended December 31, 2023, increased $1.1 million, or 13%, and $1.3 million, or 8%, respectively, compared to the corresponding

periods of the prior fiscal year.

The increase in cost of sales is consistent with the 12% and 10% increase in revenue for the three and

six months ended December 31, 2023, compared to the corresponding periods of the prior fiscal year.

Additionally, under(over)-absorption

for the three and six months ended December 31, 2023, decreased $727,000, and $1.3 million, respectively, compared to the corresponding

periods of the prior fiscal year, based upon increasing our labor and overhead rates to better absorb our indirect costs.

profit increased by $179,000, or 7%, and $882,000, or 16%, for the three and six months ended December 31, 2023, respectively, compared

to the corresponding periods of the prior fiscal year, primarily as a result of the increase in 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, 2023 remained relatively comparable

(within one percentage point) compared to the corresponding periods of the prior fiscal year.

Operating Expenses

Operating Costs and Expenses

Months Ended September 30,

(Decrease) From 2022 To

% of Net Sales

(in thousands except % change)

over Year % Change

Operating expenses:

Selling expenses

General and administrative expenses

Research and development costs

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, 2023 decreased $28,000, or 53%, compared to the corresponding year-earlier period.

The decrease relates

to a reduction in sales commissions and tradeshow expenses, which was partially offset by higher payroll expenses.

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, 2023 decreased $31,000 and $59,000, respectively, compared to the corresponding periods of fiscal 2023.

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

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.

G&A decreased

by $29,000, or 3%, for the three months ended September 30, 2023, when compared to the corresponding period of the prior fiscal year.

The decrease in total G&A was a result of non-cash compensation expense related to the non-qualified stock options granted in the

prior fiscal year and reduced professional fees, partially offset by higher payroll and personnel expenses.

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 decreased $124,000, or 13%, for the quarter ended September 30, 2023, compared to the corresponding

prior year period.

The decrease is due primarily to a $242,000 reduction in internal engineering project spending, partially offset by

a reduction in billable offsets reclassed to costs of sales of approximately $87,000 and an increase in legal expense related to IP matters

Although the majority of our

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

a product roadmap to develop future products.

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

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

sales prospects with new and/or existing customers.

Research and development costs represent between 44% and 46% of total operating expenses

for all periods presented and are expected to remain relatively flat the remainder of this fiscal year.

The amount spent on projects under

development, along with the current estimated commercial launch date and estimated recurring annual revenue, is summarized below (in

For the Three Months Ended

September 30,

Annual Revenue (2)

Total Research & Development costs:

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 $249,000 and $220,000, respectively, during the three and six months

ended December 31, 2023, when compared to the corresponding periods of the prior fiscal year.

The increases relate primarily to increased

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

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

by decreased legal fees related to intellectual property matters.

Research and development

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

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

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

Research and development costs for the three and

six months ended December 31, 2023, increased $321,000 and $198,000, respectively, compared to the corresponding periods of the prior

These increases are primarily due to a reduction of billable customer projects in the current fiscal year compared to the

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.

Although the majority of our research

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

roadmap to develop future products.

The research and development costs represent between 31% and 41% of total operating expenses for all

periods presented and are expected to increase in the future as we continue to invest in our business.

The amount spent on internal projects

under development is summarized below (in thousands):

and Six Months Ended December 31, 2023

Three and Six Months Ended

December 31, 2022

Est Market Launch

Est Annual Revenue

Total Research &

Products in development:

7 unchanged sentences

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.

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

Additionally, these costs include

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

are later abandoned.

Other Income (Expense), net

Interest and Dividend Income

The interest and dividend income

recorded during the quarters ended September 30, 2023 and 2022, consists primarily of interest and dividends from our investments and

money market accounts.

One of the investments in our portfolio paid a $204,000 cash dividend in the first quarter of fiscal 2023, and

no such dividend was paid during the current fiscal year.

Unrealized Gain (Loss) on Investments

The unrealized gain or (loss)

on marketable securities for the quarters ended September 30, 2023 and 2022, relates to our portfolio of investments described more fully

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

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

may ultimately be abandoned.

Interest & Other

Interest income for the three

and six months ended December 31, 2023, and 2022 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 and as of December 31, 2023, all of these investments

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

Interest Expense

The interest expense recorded

during the quarters ended September 30, 2023 and 2022, 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 the three months ended September 30, 2023 and 2022, is 26% and 18%, respectively.

The prior year effective tax rate is less than the

current year rate due primarily to a tax benefit recognized as a result of the common stock awarded to our employees described more fully

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

Liquidity and Capital

for the three months ended December 31, 2023, and 2022 is 19% and 26%, respectively.

The decrease in the current year effective tax rate

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

effective tax rate for the six months ended December 31, 2023, and 2022 is 45% and 24%, respectively.

The increase in the current year

effective tax rate is similarly due to the release of the valuation allowance recorded in the second quarter of fiscal 2024 and is a tax

benefit since we have a year-to-date pre-tax loss.

Liquidity and Capital Resources

Cash and cash equivalents

at September 30, 2023 decreased $1.0 million to $1.9 million as compared to $2.9 million at June 30, 2023.

at December 31, 2023 decreased $1.6 million to $1.3 million as compared to $2.9 million at June 30, 2023.

The following table includes

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

and For the Three Months Ended September 30,

and For the Six Months Ended December 31,

(in thousands)

7 unchanged sentences

Operating Activities

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 $874,000.

Net cash provided by operating

activities during the three months ended September 30, 2022 totaled $2.9 million.

The primary sources of cash arose from (a) our net income

for the quarter of $1.2 million, as well as non-cash share-based compensation and depreciation and amortization of $207,000 and $193,000,

respectively, (b) a decrease of $4.3 million in accounts receivable due to more timely collection of receivables from our largest customer,

and (c) an increase in accounts payable and accrued expenses of $273,000.

Uses of cash arose primarily from an increase in inventory of

$3.0 million primarily related to building up inventory in anticipation of our transfer of assembly and repairs to the Franklin Property.

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.

Net cash provided

by operating activities was $2.5 million for the six months ended December 31, 2022, primarily due to net income of $4.0 million and non-cash

depreciation and amortization of $384,000 offset by unrealized gains on marketable securities in the amount of $3.2 million.

receivable net collections amounted to $3.2 million for the six months ended December 31, 2022, offset by expenditures of $2.5 million

for inventory, based primarily upon a forecast received from our largest customer, which later was reduced.

Although current inventory

levels exceed immediate requirements for this customer, they do not exceed the amounts that will ultimately be required to fulfill our

customers’ contractual requirements.

Investing Activities

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.

Net cash used in investing

activities for the three months ended September 30, 2022 was $90,000 and related primarily to the purchase of equipment and improvements

at the Franklin Property in the amount of $178,000, partially offset by the sale of marketable securities in the amount of $88,000.

activities for the six months ended December 31, 2022, was $598,000 and related mostly to improvements and equipment primarily for the

Franklin Property.

Financing Activities

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 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.

Net cash used in financing

activities for the three months ended September 30, 2022 included net principal payments of $318,000 on our existing loans from MBT more

fully described in Note 10 to the condensed consolidated financial statements contained elsewhere in this report, the repurchase of $354,000

of common stock pursuant to our share repurchase program, as well as $223,000 of employee payroll taxes related to the award of 37,500

shares of common stock to employees under previously granted performance awards.

activities for the six months ended December 31, 2022, included net principal payments of $839,000 on our existing loans from MBT, the

repurchase of $1.3 million of our common stock pursuant to our share repurchase program, as well as $223,000 of employee payroll taxes

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

Financing Facilities & Liquidity Requirements for the Next

Twelve Months

As of September 30, 2023, our working capital

was $23.1 million.

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

As of December 31, 2023,

our working capital was $26.6 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 may also liquidate some of our marketable equity investments, which had an estimated fair market value

of $7.3 million as of December 31, 2023.

We are focused on preserving our

5 unchanged sentences

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

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

Both Nick and Ray

are active investors with extensive portfolio management expertise.

We leverage the experience of these committee members to make investment

decisions for the investment of our surplus operating capital or borrowed funds.

Additionally, many of our securities holdings include

stocks of public companies that either Nick or Ray or both may own from time to time either individually or through the investment funds

that they manage, or other companies whose boards they sit on.

The Investment Committee approved each of the investments comprising the

$7.3 million of marketable public equity securities that we held on December 31, 2023.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis