What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-11-03 · 224 added, 223 removed, 162 unchanged (73% of the section changed)

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(“Company,” “Pro-Dex,”

“we,” “our,” or “us”) for the three-month periods ended September 30, 2022 and 2021.

This discussion

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

in this report.

This report contains certain forward-looking statements and information.

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

“we,” “our,” or “us”) for the three-month and six-month periods ended December 31, 2022 and 2021.

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

elsewhere in this report.

This report contains certain

forward-looking statements and information.

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

forward-looking statements wherever they may appear.

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

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and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2022.

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

We specialize in the design, development,

and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in the orthopedic,

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

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

phone number is (949) 769-3200.

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

Our annual reports

on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those

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

reports are electronically filed with, or furnished to, the SEC.

our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above.

filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street,

N.E., Washington, D.C.

You may obtain information on the operation of the Public Reference Room by calling

the SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that contains reports, proxy

and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov

We have patented adaptive torque-limiting software and proprietary

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

We also manufacture and sell rotary air motors

to a wide range of industries.

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

address is www.pro-dex.com.

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

reports on Form 8-K, amendments to those reports, and other SEC filings are available free of charge through our website as soon as reasonably

practicable after such reports are electronically filed with, or furnished to, the SEC.

In addition, our Code of Ethics and other corporate

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

Our filings with the SEC may also be read and

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

You may obtain information on the operation

of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that contains reports, proxy and

information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov

and company specific information at www.sec.gov/edgar/searchedgar/companysearch.html.

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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, 2023, or any other interim period during such fiscal year.

for the entirety of the fiscal year ending June 30, 2023, or any other interim period during such fiscal year.

Our fiscal year ends on

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Unless otherwise stated, all dates refer to our fiscal

year and those fiscal quarter.

year and those fiscal quarters.

Critical Accounting Estimates and Judgments

Our financial statements are prepared

in accordance with U.S.

The preparation of our financial statements requires management to make estimates and judgments that affect

the reported amounts of assets, liabilities, revenues, expenses, and related disclosures.

We base our estimates on historical experience

and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ

from these estimates.

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

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.

An accounting policy is deemed to

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Management believes that there have been no significant changes during

the three months ended September 30, 2022, 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 30, 2022.

the three and six months ended December 31, 2022, 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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Many of our significant customers place purchase orders for specific products that were developed

by us under various development and/or supply agreements.

under various development and/or supply agreements.

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

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and new products.

We completed the build-out of the property during fiscal 2022, we received FDA authorization to commence manufacturing

activities during the first quarter of fiscal 2023, and we are currently performing various verification and validation activities for

both equipment and processes, which includes the validation of our new clean room.

We expect that we will begin operations in the new

facility during the third quarter of this fiscal year.

We completed the build-out of the property during fiscal 2022 and we received U.S.

Food and Drug Administration authorization

to commence manufacturing activities during the first quarter of fiscal 2023.

We are currently performing various verification and validation

activities for both equipment and processes, which includes the validation of our new clean room and we expect that we will begin operations

in the new facility during the third quarter of this fiscal year.

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.

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.

This fiscal year, however, the majority of our engineering efforts relate to customer funded NRE projects,

which costs are reclassified to cost of sales.

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

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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 potential for recommended deferrals of elective procedures by governments and other authorities, we would expect

to see a decline in demand from certain of our customers, including our principal customer.

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 certain of our customers, including our principal customer.

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

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

Results of Operations

The following tables set forth results

from continuing operations for the three months ended September 30, 2022 and 2021 (in thousands, except percentages):

Three Months Ended September 30,

Dollars in thousands

% of Net Sales

Cost of sales

Selling expenses

General and administrative expenses

Research and development costs

Operating income

Other income, net

Income before income taxes

Provision for income taxes

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):

Three Months Ended September 30,

Increase (Decrease) From

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

NRE & Prototype

Discounts and other

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

development and supply agreements.

development and/or supply agreements.

All of our medical device

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

Details of our

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

Three Months Ended September 30,

Increase (Decrease) From

Dollars in thousands

% of Med Device Sales

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

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

Three Months Ended

Six Months Ended

Medical device sales:

medical device revenue decreased $0.4 million, or 5%, in the first quarter of fiscal 2023 compared to the corresponding period of the

prior fiscal year .

The declines in medical device sales across all of our product lines seems to reflect a general softening of

of our compact pneumatic air motors increased $8,000, or 4%, in the first quarter of fiscal

2023 compared to the corresponding period of the prior fiscal year.

The revenue increase relates to a continued interest in these legacy

products but is not due to any substantive marketing efforts .

Sales of our dental products

and components increased $41,000 in the first quarter of fiscal 2023 compared to the corresponding quarter of the prior fiscal year.

believe this increase is temporary due to sales of components to our board assembly houses due to the recent chip shortages experienced

Our non-recurring engineering (“NRE”) and proto-type revenue increased $711,000 in the first quarter of fiscal

2023 compared to the corresponding period of the prior fiscal year, due to an increase in billable contracts.

Our NRE and proto-type revenue

is typically a small percentage of our total revenue and can vary significantly from quarter to quarter.

revenue increased by $793,000 in the first quarter of fiscal 2023 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 was expected as we have been

asked to upgrade handpieces to the next generation, which design was released to manufacture in the third quarter of fiscal 2022.

and other increased by $57,000 in the first quarter of fiscal 2023 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, 2022, we had a backlog of approximately

$26.6 million, of which $18.6 million is s cheduled for delivery during the remainder of fiscal 2023.

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 $0.4 million, or 4%, for the three months ended December 31, 2022, and decreased slightly by

$32,000 for the six months ended December 31, 2022, compared to the corresponding periods of the prior fiscal year.

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

$30,000, or 13%, and $23,000, or 5%, respectively, for the three and six months ended December 31, 2022, 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 increased $368,000, or 320%, and $1.1 million, or 347%, for the three and six months ended December 31, 2022, compared

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

our customers.

revenue increased $521,000, or 33%, and $1.3 million, or 43%, respectively, for the three and six months ended December 31, 2022, compared

to the corresponding periods of the prior fiscal year, and are primarily comprised of repairs of handpieces for our largest customer.

This increase was expected as we have been asked to upgrade handpieces to the next generation, which design was released to manufacture

in the third quarter of fiscal 2022.

We expect to continue to see increases in repair revenue for the remainder of this fiscal year because

our largest customer has requested, beginning in December 2022, that we perform an enhanced repair on each handpiece, which includes the

advance replacement of certain components.

December 31, 2022, we had a backlog of approximately $20.7 million, of which $12.0 million is scheduled to be delivered in the third and

fourth quarters of fiscal 2023 and the balance is scheduled to be delivered next fiscal year and beyond.

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.

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.

Cost of Sales and Gross Margin

Three Months Ended September 30,

Increase (Decrease) From

Dollars in thousands

% of Net Sales

(in thousands except percentages)

Three Months Ended

Six Months Ended

Cost of sales:

Product costs

Under(over)-absorption of manufacturing costs

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Total cost of sales

Gross profit and gross margin

of sales for the three-month period ended September 30, 2022 increased by $1.6 million, or 24%, compared to the corresponding period of

the prior fiscal year.

Although some of the increase in cost of sales is consistent with the 11% increase in revenue for the same period,

approximately $450,000 of the increase relates to the repairs performed to upgrade the orthopedic handpieces we sell our largest customer

to the newest release at no additional cost.

We continue to negotiate in good faith with our customer for additional remuneration for

these refurbished and repaired handpieces.

Product costs increased by $979,000, or 15%, during the three months ended September 30, 2022,

compared to the corresponding period of the prior fiscal year, due to both higher material costs, predominantly related to the repairs

discussed above, and higher costs in our machine shop, materials, assembly and quality departments.

During the first quarter of fiscal

2023 we experienced $362,000 of under-absorbed manufacturing costs compared to an over-absorption of $146,000 in the first quarter of

fiscal 2022, primarily due to the growth of indirect costs outpacing actual production hours.

Costs related to inventory and warranty

charges increased $84,000 in the first quarter of fiscal 2023 compared to the corresponding quarter of fiscal 2022, due primarily to upgraded

repairs we perform on orthopedic handpieces we sell to our largest customer that are still under-warranty at no additional cost.

profit decreased by approximately $472,000, or 14%, for the three months ended September 30, 2022 compared to the corresponding period

of the prior fiscal year, and gross margin as a percentage of sales decreased by seven percentage points between such periods, primarily

as a result of higher component costs and additional repair costs described above.

Three Months Ended

Six Months Ended

Year over Year

of sales for the three and six months ended December 31, 2022, increased $1.9 million, or 28%, and $3.5 million, or 26%, respectively,

compared to the corresponding periods of the prior fiscal year.

Although some of the increase in cost of sales is consistent with the

11% increase in revenue for the same periods, approximately $432,000 and $882,000, of the increases, respectively, relate to the more

costly repairs performed to upgrade the orthopedic handpieces we sell our largest customer to the newest release at no additional cost.

In late December 2022 we began an enhanced repair program, which has an agreed upon repair price, such that we should see improvement

in our margins in the second half of fiscal 2023.

That said, however, we are continuing to negotiate with our largest customer to recover

the additional cost of the repairs completed in the first half of this fiscal year.

Additionally, under-absorption for the three and six

months ended December 31, 2022, increased $448,000, or 180%, and $875,000, or 858%, respectively, compared to the corresponding periods

of the prior fiscal year, primarily due to the growth of indirect costs in our machine shop, materials, assembly and quality departments

outpacing actual production hours.

profit decreased by $781,000, or 23%, and $1.2 million, or 18%, for the three and six months ended December 31, 2022, respectively, compared

to the corresponding periods of the prior fiscal year, primarily as a result of the increase in repair costs for our largest customer’s

handpiece as well as higher indirect costs in our machine shop, assembly, materials and quality departments.

Gross margin as a percentage

of sales for the three and six months ended December 31, 2022 decreased by approximately eleven and nine percentage points, respectively,

compared to the corresponding periods of the prior fiscal year due to higher cost of sales described above.

Operating Expenses

Operating Costs and Expenses

Three Months Ended September 30,

Increase (Decrease) From

Dollars in thousands

(in thousands except % change)

Three Months Ended

Six Months Ended

Year over Year % Change

% of Net Sales

Operating expenses:

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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, 2022 increased $16,000, or 43%, compared to the corresponding year-earlier period.

The increase is primarily due to

sales commissions.

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, 2022 increased $46,000 and $63,000, respectively, compared to the corresponding periods of fiscal 2022.

The increase is primarily

due to increased 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 $69,000,

or 6%, for the three months ended September 30, 2022, when compared to the corresponding period of the prior fiscal year.

in total G&A was primarily related to reduced non-cash compensation expense related to the non-qualified stock options granted in

the prior fiscal year.

(“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 decreased $214,000 and $282,000, respectively, during the three and six months ended December

31, 2022, when compared to the corresponding periods of the prior fiscal year.

The decreases relate primarily to reduced legal expenses

related to employment matters and reduced non-cash compensation expense related to stock compensation, offset by increased legal fees

related to intellectual property matters.

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 products.

Research and development costs decreased $51,000, or 5%, for the quarter ended September 30, 2022, compared to the corresponding prior

The decrease is due primarily to an increase in the amount of $108,000 in salaries and personnel costs offset by $179,000

in reduced internal engineering project spending.

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, 2022 decreased $148,000 and $201,000, respectively, compared to the corresponding periods of the prior fiscal year.

decreases are primarily due to increased personnel related expenses offset by decreased spending on internal development projects.

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

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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 46% of total operating expenses for all periods

presented and are expected to remain relatively flat the remainder of this fiscal year as we continue to work on customer funded NRE projects.

The amount spent on projects under

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

For the Three Months Ended September 30,

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):

Three and Six Months Ended

December 31, 2022

Three and Six Months Ended

December 31, 2021

Total Research & Development costs:

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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

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For instance, in prior filings we included expenses related to the VITAL ventilator product, which we have removed

from the table above because we did not spend any resources on this project in the first quarter of fiscal 2023 and we do not expect to

in the foreseeable future.

Other Income (Expense), net

Interest and dividend income

The interest and dividend income

recorded during the quarters ended September 30, 2022 and 2021, 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 prior fiscal year.

Unrealized gain on marketable equity investments

The unrealized gain on marketable

securities for the quarters ended September 30, 2022 and 2021, relates to our portfolio of investments described more fully in Note 4

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

from the table above because we did not spend any resources on this project in the first half of fiscal 2023 and we do not expect to in

the foreseeable future.

Interest & Other Income

Interest income for the three and

six months ended December 31, 2022 and 2021 includes interest and dividends from our money market accounts and investment portfolio.

Interest Expense

The interest expense recorded during

the quarters ended September 30, 2022 and 2021, 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, 2022 and 2021, is 17% and 22%, respectively.

The current year effective tax rate is less than the prior 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.

and six months ended December 31, 2022 and 2021 is slightly less than our combined expected federal and applicable state corporate income

tax rates due to federal and state research credits.

Liquidity and Capital Resources

Cash and cash equivalents at September

30, 2022 increased $1.9 million to $2.8 million as compared to $0.9 million at June 30, 2022.

The following table includes a summary of

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

As of and For the Three Months Ended September 30,

Cash and cash equivalents at December

31, 2022 decreased $467,000 to $382,000 as compared to $849,000 at June 30, 2022.

The following table includes a summary of our condensed

statements of cash flows contained elsewhere in this report.

As of and For the Six Months Ended

(in thousands)

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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 $1.1 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.

was $2.5 million for the six months ended December 31, 2022, primarily due to net income of $2.0 million and non-cash depreciation and

amortization of $385,000 offset by unrealized gains on marketable securities in the amount of $408,000.

Accounts 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 they will eventually purchase contractually.

Net cash provided by operating activities

during the three months ended September 30, 2021 totaled $2.7 million.

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

quarter of $1.1 million, as well as non-cash share-based compensation and depreciation and amortization of $300,000 and $184,000, respectively,

(b) a decrease of $834,000 in accounts receivable, and (c) a decrease in prepaid expenses and other current assets of $284,000.

cash arose primarily from an increase in inventory of $470,000 primarily related to timing of various components and advance procurement

of long-lead time items.

was $4.2 million for the six months ended December 31, 2021, primarily due to net income of $2.0 million and non-cash stock-based compensation

and depreciation and amortization of $575,000 and $366,000, respectively.

Although we experienced an influx of cash in the amount of $2.1

million in collections from receivables during the six months ended December 31, 2021, our inventory increased by $848,000.

Investing Activities

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 offset by the sale of marketable securities in the amount of $88,000.

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

Net cash used in investing activities

for the three months ended September 30, 2021 was $874,000 and related almost exclusively to the purchase of manufacturing equipment and

improvements at the Franklin Property.

for the six months ended December 31, 2021 was $1.4 million and related to an investment in marketable securities of $334,000 and equipment

and improvements primarily for the Franklin Property of $1.1 million.

Financing Activities

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.

for the six months ended December 31, 2022 included net principal payments of $839,000 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 $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.

Net cash used in financing activities

for the three months ended September 30, 2021 included the repurchase of $95,000 of common stock pursuant to our share repurchase program,

as well as principal payments of $306,000 on our loans from MBT.

for the six months ended December 31, 2021 totaled $1.3 million and related primarily to the $672,000 repurchase of 27,952 shares of our

common stock pursuant to our share repurchase program as well as $616,000 of principal payments on our loans from MBT.

Financing Facilities & Liquidity Requirements for the Next Twelve

As of September 30, 2022, our working

capital was $20.2 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, 2022, our

working capital was $19.7 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 borrow against our $7.0 million Amended Revolving Loan with MBT

(See Note 10 to the condensed consolidated financial statements contained elsewhere in this report).

We are focused on preserving our

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our backlog, which can be subject to extensive variability.

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

sell additional shares of our common stock under our previously disclosed ATM Agreement, which is currently suspended.

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

we can do so by borrowing against our Amended Revolving Loan or by selling additional shares of our common stock under the ATM Agreement.

(See Note 11 to the condensed consolidated financial statements contained elsewhere in this report).

Investment Strategy

We invest surplus cash from time

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

Raymond Cabillot and Nicholas Swenson, who chairs the committee.

Cabillot and Mr.

Swenson are active investors with extensive

portfolio management expertise.

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

of our surplus operating capital or borrowed funds.

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

either Messrs.

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 on.

The Investment Committee approved each of the investments comprising the $2.9 million of

marketable public equity securities that we held at December 31, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

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Item 2. Management’s Discussion and Analysis