What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2024-02-08 · 250 added, 197 removed, 141 unchanged (76% of the section changed)

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COMPANY OVERVIEW

The following discussion and analysis provides information that management

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

“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 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

The following discussion

and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations

and financial condition of Pro-Dex, Inc.

(“Company,” “Pro-Dex,” “we,” “our,” or “us”)

for the three-month and nine-month periods ended March 31, 2024 and 2023.

This discussion should be read in conjunction with the condensed

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

This report contains certain forward-looking

statements and information.

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

statements wherever they may appear.

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

Except for the historical

information contained herein, the matters discussed in this report, including, but not limited to, discussions of our product development

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

involve certain risks and uncertainties.

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

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

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

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

returns on opportunities.

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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 specialize in the design, development, and manufacture of autoclavable, battery-powered and electric, multi-function

surgical drivers and shavers used primarily in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets.

have patented adaptive torque-limiting software and proprietary sealing solutions which appeal to our customers, primarily medical device

distributors.

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

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.

of Presentation

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.

Basis 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 the fiscal year ending June 30, 2024, 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.

for the entirety of the fiscal year ending June 30, 2024.

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

December 31, and March 31.

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

Critical Accounting Estimates and Judgments

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,

Our condensed

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

The preparation

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

revenues, expenses and related disclosures.

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Management believes that there have been no significant

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.

changes during the three and nine months ended March 31, 2024 to the items that we disclosed as our critical accounting policies in Management’s

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

Business Strategy and Future Plans

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

Additionally, we have other significant engineering

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

In November 2020, we purchased

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In summary, our current objectives

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

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

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

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

closely the progress of all these individual endeavors.

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

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

However, there can be no assurance that we will

be successful in any of these objectives.

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

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

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

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

individual endeavors.

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

and we anticipate this may continue in future periods.

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

new customer relationships.

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

incremental growth that current expenditures are helping to create.

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

of these objectives.

Description of Business Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

Medical device products

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Dental and component

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.

NRE & Proto-type

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, 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 $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

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

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

Our medical device revenue to our largest customer, included

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

to the corresponding periods of the prior fiscal year .

Additionally, recurring revenue from distributors of thoracic drivers increased

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

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

the first quarter of this fiscal year.

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

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

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

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

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

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

periods of the prior fiscal year.

These are legacy products with no substantive marketing efforts .

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

NRE and proto-type revenue decreased $736,000, or 76%, and $1.6 million, or 68%, for the three and nine months ended March 31, 2024, compared

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

our customers.

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.

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

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

In the prior fiscal year we sold component inventory

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

We expect future declines in this

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

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

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

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

in the third quarter of fiscal 2022.

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

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

similar adjustment in the current fiscal year.

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

of fiscal 2024 and the balance is scheduled to be delivered next fiscal year.

Our backlog represents firm purchase orders received

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

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

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(in thousands except percentages)

Cost of sales:

Under(over)-absorption

of manufacturing costs

and warranty charges

Three Months Ended

Nine Months Ended

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.

Under(over)-absorption of manufacturing costs

Inventory and warranty charges

Total cost of sales

Three Months Ended

Nine Months Ended

Year over Year

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

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

Under-absorption

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

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

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

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

reserves and warranty accruals.

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

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

Gross margin as a percentage of sales decreased by approximately

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

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

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

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

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

to the corresponding period of the prior fiscal year.

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

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

reserves and warranty accruals.

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

This fiscal year we have

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

procedures and processes to reduce our costs.

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

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

Operating Expenses

Operating Costs and Expenses

(in thousands except % change)

over Year % Change

(in thousands except percentages)

Three Months Ended

Nine Months Ended

Year over Year % Change

% of Net Sales

Operating expenses:

administrative expenses

and development costs

Selling expenses

General and administrative expenses

Research and development costs

Selling expenses consist

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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, 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.

Selling expenses for the three and nine

months ended March 31, 2024, decreased $7,000, or 29%, and $67,000, or 46%, respectively, compared to the corresponding periods of fiscal

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

General and administrative

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

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

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

and expenses attributable to being a public company.

G&A increased $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.

G&A increased $3,000 and $225,000, respectively, during the three and nine months

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

The increases relate primarily to increased

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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.

nine months ended March 31, 2024, increased $47,000, or 7%, and $244,000, or 12%, compared to the corresponding periods of the prior fiscal

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

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

and development.

Although the majority of our research

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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 &

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

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

prospects with new and/or existing customers.

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

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

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

and Nine Months Ended March 31, 2024

Three and Nine Months Ended March 31, 2023

Annual Revenue (2)

Total Research & Development costs:

Products in development:

Sustaining & Other

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

The ENT Shaver project has been suspended.

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

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

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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 that later

may ultimately be abandoned.

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

Interest & Other

Interest income for the three

and 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 income for the three and nine months ended March

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

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 10 to the condensed consolidated financial statements contained

elsewhere in this report.

Unrealized Gain (Loss)

on Marketable Equity Investments

The unrealized gain (loss) on

marketable equity investments relates to our investment portfolio more fully described in Note 4 to the condensed consolidated financial

statements contained elsewhere in this report.

All of these investments are recorded at estimated fair value and as of March 31, 2024,

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

Gain on Sale of Investments

During the first quarter ended

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

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

Income Tax Expense

The effective tax rate

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

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

These tax rates are consistent with our combined expected

federal and applicable state corporate income tax rates.

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

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

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

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

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

as unrealized gains on our marketable equity investments.

Liquidity and Capital

Cash and cash equivalents

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

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

The following table includes

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

and For the Six Months Ended December 31,

and For the Nine Months Ended March 31,

(in thousands)

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Operating Activities

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.

Net cash provided by operating

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

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

well as a decrease in inventory of $1.9 million.

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

consistent with our increase in revenue.

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

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

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

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

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

Investing Activities

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

1 unchanged sentence

Net cash used in investing

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

Franklin Property.

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

primarily for the Franklin Property totaling $822,000.

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

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

Financing Activities

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 Minnesota

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

in this report.

Net cash used in financing

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.

activities for the nine months ended March 31, 2023, totaled $2.9 million and related primarily to the $1.5 million repurchase of 86,422

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

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

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

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

Financing Facilities & Liquidity Requirements for the next

twelve months

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.

As of March 31, 2024, our working

capital was $25.5 million.

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

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

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

from operations.

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

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

of $4.5 million as of March 31, 2024.

We are focused on preserving our

5 unchanged sentences

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 (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

We invest surplus cash from time

to time through our Investment Committee, which is comprised of one management director, Richard Van Kirk, and two non-management directors,

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

Both Nick and Ray are active

investors with extensive portfolio management expertise.

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

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

Additionally, many of our securities holdings include stocks of

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

manage, or other companies whose boards they sit on.

The Investment Committee approved each of the investments comprising the $6.1 million

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis