Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The discussion below contains certain forward-looking statements including, but not limited to, among others, statements concerning future revenues and future business plans. Forward-looking statements include statements in which we use words such as “expect”, “believe”, “anticipate”, “intend”, “project”, “estimate”, “should”, “could”, “may”, “plan”, “potential”, “predict”, “project”, “will”, “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus we cannot assure you that these expectations will prove to have been correct, and actual results may vary from those contained in such forward-looking statements. We discuss many of these risks and uncertainties in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and in this Form 10-Q. Factors that may cause such variances include, but are not limited to, our dependence on a small number of customers for a significant portion of our revenue, our high dependence on contracts with the U.S. federal government, our reliance in certain circumstances on single sources for supply of key product components, intense competition in the market segments in which we operate, the recent changes in the U.S. Tax laws, and the impact of the novel coronavirus (COVID-19) on our business, results of operations and financial condition. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. Except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, impairment assessment of intangibles, income taxes, deferred compensation and retirement plans, as well as estimated selling prices used for revenue recognition and contingencies. We base our estimates on historical performance and on various other assumptions that we believe 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 under different assumptions or conditions. A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Due to adoption of ASU No. 2016-02, Leases (ASC 842) , our lease accounting policy has changed effective October 1, 2019 and is included in Note 8 of our unaudited consolidated financial statements included in Item 1 to this Quarterly Report on Form 10-Q with effects of initial adoption in Note 3.
Observations on effects of novel coronavirus (COVID-19)
On March 11, 2020, the World Health Organization characterized the novel coronavirus (COVID-19) outbreak as a pandemic. The outbreak has and continues to adversely affect the economies of the U.S., U.K., and other international markets and economies in which we operate. As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic, national, state, and local governments have and continue to take actions such as declaring a state of emergency, implementing social distancing and other guidelines, and shutting down and/or limiting the opening or operation of certain businesses which are not considered essential. The Company continues to comply with such actions causing most employees to work remotely in all locations. Although revenue decreased significantly for the three months ended June 30, 2020, the decreased revenue is due to a few large, low margin deals from the same prior year period that did not reoccur primarily due to the pandemic. This is reflected in our overall gross margin increasing significantly. However, we do anticipate continuing business with these customers in the future. The pandemic has also had an adverse effect on our ability to transact one-on-one business. Due to the uncertainty of the pandemic, including but not limited to, regulatory measures or voluntary actions that have and may be put in place to limit the spread of COVID-19 and the duration of such measures, the impact of any further spread of COVID-19, or the resurgence of COVID-19 in a given geographic region after it has hit its “peak,” at this time, we cannot make a reasonable estimate on the extent or duration of the impacts on our business.
Please refer to Item 1A Risk Factors located in Part II Other Information in this Quarterly Report on Form 10-Q for discussion of the risks related to COVID-19 on our business, financial condition, and results of operations.
Results of Operations
Overview of the three months ended June 30, 2020
Our revenues decreased by approximately $8.1 million, or 38%, to $13.5 million for the three months ended June 30, 2020 as compared to $21.6 million for the three months ended June 30, 2019. The decrease in revenue is the result of a decrease of $7.5 million in our TS segment combined with a $0.6 million decrease in our HPP segment. Our gross margin percentage increased to 31% of revenues for the three months ended June 30, 2020 from 22% for the three months ended June 30, 2019. The increase is attributed to both the TS and HPP segment. For the three months ended June 30, 2020 there was an operating loss of $0.4 million compared to an operating income of $0.1 million for the three months ended June 30, 2019, primarily as a result of decreased sales. Our provision for income tax was a tax expense of $10 thousand for the three months ended June 30, 2020 as compared to a tax benefit of $326 thousand for the three months ended June 30, 2019. The effective tax expense rate for the current quarter is (5%).
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The following table details our results of operations in dollars and as a percentage of sales for the three months ended June 30, 2020 and 2019:
%
%
June 30, 2020
of sales
June 30, 2019
of sales
(Dollar amounts in thousands)
Sales
$
13,532
100
%
$
21,570
100
%
Costs and expenses:
Cost of sales
9,308
69
%
16,731
77
%
Engineering and development
693
5
%
583
3
%
Selling, general and administrative
3,924
29
%
4,111
19
%
Total costs and expenses
13,925
103
%
21,425
99
%
Operating income (loss)
(393)
(3)
%
145
1
%
Other income
193
1
%
61
—
%
Income (loss) before income taxes
(200)
(1)
%
206
1
%
Income tax expense (benefit)
10
—
%
(326)
(2)
%
Net income (loss)
$
(210)
(1)
%
$
532
3
%
Revenues
Our revenues decreased by approximately $8.1 million to $13.5 million for the three months ended June 30, 2020 as compared to $21.6 million of revenues for the three months ended June 30, 2019. TS segment revenues decreased by $7.5 million and HPP segment revenues decreased by approximately $0.6 million.
TS segment revenue change was as follows for the three months ended June 30, 2020 and June 30, 2019:
Decrease
2020
2019
$
%
(Dollar amounts in thousands)
Products
$
9,514
$
16,484
$
(6,970)
(42)
%
Services
2,435
2,946
(511)
(17)
%
Total
$
11,949
$
19,430
$
(7,481)
(39)
%
The decrease in TS segment product revenues of $7.0 million during the period is primarily the result of a decrease of $6.3 million in our U.S. division combined with a decrease in the U.K. division of $0.7 million. The $6.3 million decrease in the U.S. division is primarily the result of decreased sales to several major customers during the period. The $0.7 million decrease in the U.K. division product revenues is primarily the result of lower sales volume to one major customer during the period as compared to the prior year period. There is a decrease in TS segment service revenues of $0.5 million during the period as compared to the prior year period, which is primarily due to a decrease in the U.S. division service revenues. The U.S. division service revenues decrease is substantially the result of a decrease of $0.9 million in internal service and third party service revenues, partially offset with a $0.4 million increase in managed service contracts.
HPP segment revenue change was as follows for the three months ended June 30, 2020 and 2019:
Increase (decrease)
2020
2019
$
%
(Dollar amounts in thousands)
Products
$
780
$
1,592
$
(812)
(51)
%
Services
803
548
255
47
%
Total
$
1,583
$
2,140
$
(557)
(26)
%
The HPP product revenues decreased by $0.8 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily as a result of a decrease in Myricom product sales of $0.7 million and a
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decrease in Multicomputer product sales of $0.1 million. The HPP services revenues increased $0.3 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 due to increased royalties on high-speed processing boards related to the E2D program.
Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended June 30, 2020 and June 30, 2019:
Decrease
2020
%
2019
%
$
%
(Dollar amounts in thousands)
Americas
$
13,072
96
%
$
19,606
91
%
$
(6,534)
(33)
%
Europe
382
3
%
1,033
5
%
(651)
(63)
%
Asia
78
1
%
931
4
%
(853)
(92)
%
Totals
$
13,532
100
%
$
21,570
100
%
$
(8,038)
(37)
%
The $6.5 million decrease in revenue to the Americas is primarily the result of decreased sales by our TS segment division of $6.8 million, partially offset with an increase in the HPP segment of $0.3 million. The $0.7 million decrease in revenue to Europe is primarily the result of decreased sales by our TS segment of $0.6 million combined with decreased sales of $0.1 million by our HPP division. The $0.9 million decrease in revenue to Asia is primarily the result of decreased sales of $0.8 million by our HPP division due to a one time deal in prior year that did not reoccur in the current period combined with decreased sales of $0.1 million in our TS U.K. division.
Gross Margins
Our gross margin ("GM") decreased by approximately $0.6 million to $4.2 million for the three months ended June 30, 2020 as compared to a gross margin of approximately $4.8 million for the three months ended June 30, 2019. The GM as a percentage of revenue increased to 31% for the three months ended June 30, 2020, from 22% for the three months ended June 30, 2019. The increase in GM as a percentage of revenue is primarily attributed to increased GM in the TS segment and increased service revenue relative to product revenue in the HPP segment.
2020
2019
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
TS
$
3,173
27
%
$
3,632
19
%
$
(459)
8
%
HPP
1,051
66
%
1,207
56
%
(156)
10
%
Total
$
4,224
31
%
$
4,839
22
%
$
(615)
9
%
The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2020 and 2019 was as follows:
2020
2019
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,668
18
%
$
1,994
12
%
$
(326)
6
%
Services
1,505
62
%
1,638
56
%
(133)
6
%
Total
$
3,173
27
%
$
3,632
19
%
$
(459)
8
%
The overall TS segment GM as a percentage of sales increased to 27% for the three month period ended June 30, 2020 from 19% for the three month period ended June 30, 2019. The increased product margin as a percentage of product revenue is due to increased vendor rebates as well as increased sales of high margin software. The increased volume in managed services for the three months ended June 30, 2020 as compared to prior year period led to increased GM as a percentage of service revenue.
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The impact of product mix within our HPP segment on gross margin for the three months ended June 30, 2020 and 2019 was as follows:
2020
2019
Increase (Decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
265
34
%
$
678
43
%
$
(413)
(9)
%
Services
786
98
%
529
97
%
257
1
%
Total
$
1,051
66
%
$
1,207
56
%
$
(156)
10
%
The overall HPP segment GM as a percentage of sales increased to 66% for the three months ended June 30, 2020 from 56% for the three months ended June 30, 2019. The 10% increase in gross margin as a percentage of sales in the HPP segment for the three months ended June 30, 2020 as compared to the prior year period is primarily attributed to increased GM from increased services revenue including a $350 thousand increase of royalty revenues and decreased GM from product revenue. The GM as a percentage of sales from products decreased primarily due to product mix.
Operating Expenses
Engineering and Development Expenses
The engineering and development expenses incurred by our HPP segment increased $0.1 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019. This is due to recovery of consulting expenses in the prior year for services that were not completed. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA SDS cyber security products.
Selling, General and Administrative Expenses
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended June 30, 2020 and 2019:
For the three months ended June 30,
% of
% of
$ Increase
% Increase
2020
Total
2019
Total
(decrease)
(decrease)
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
2,801
71
%
$
3,002
73
%
$
(201)
(7)
%
HPP segment
1,123
29
%
1,109
27
%
14
1
%
Total
$
3,924
100
%
$
4,111
100
%
$
(187)
(5)
%
SG&A expenses overall decreased $0.2 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. The $0.2 million decrease in TS segment SG&A expenses compared to the prior year period is primarily the result of a decrease to bad debt reserve of $0.1 million and a decrease of variable compensation of $0.1 million. The HPP segment SG&A expenses for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 remained flat.
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Other Income/Expenses
The following table details other income (expense) for the three and nine months ended June 30, 2020 and 2019:
For the three months ended
Increase
June 30, 2020
June 30, 2019
(Decrease)
(Amounts in thousands)
Interest expense
$
(56)
$
(26)
$
(30)
Interest income
133
79
54
Foreign exchange gain (loss)
113
8
105
Other income, net
3
—
3
Total other income (expense), net
$
193
$
61
$
132
The $132 thousand increase in total other income (expense), net for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 is primarily driven by a foreign exchange gain of $113 thousand for the three months ended June 30, 2020, as compared to a gain of $8 thousand for the three months ended June 30, 2019. In consolidation, U.S. dollars and Euros are remeasured into the functional currency, British Pounds, of our U.K. subsidiary. This non-cash remeasurement is included in foreign exchange gain or loss on the income statement and the foreign exchange gain is primarily from a Euro and U.S. Dollar bank account. There were 500,000 Euros converted to U.S. Dollars during the three months ended June 30, 2020.
The interest income increase of $54 thousand for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 is primarily related to agreements that have payment terms in excess of one year (see Note 6 in Item 1 to this Quarterly Report on Form 10-Q) from the TS-US segment.
Income Taxes
An income tax expense of $10 thousand was recorded for the three months ended June 30, 2020 compared to an income tax benefit of $326 thousand in the same period of 2019.
Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, other special items, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Overview of the nine months ended June 30, 2020
Our revenues decreased by approximately $10.7 million, or 19%, to $46.2 million for the nine months ended June 30, 2020 as compared to $56.9 million for the nine months ended June 30, 2019. The decrease in overall revenue for the nine months ended June 30, 2020 as compared to the prior fiscal year nine month period is the result of an approximately $9.0 million decrease in our TS segment revenue combined with a $1.7 million decrease in our HPP segment revenue. The TS segment revenue for the nine months ended June 30, 2020 is primarily impacted by a decrease of sales to a major customer in the U.K. Division and a decrease in product revenue due to several major customers in the U.S. division, partially offset in the U.S. division by increased volume of product sales to one major customer and increased volume in managed services revenues. The $1.7 million decrease in HPP segment revenue for the nine month period ended June 30, 2020 is primarily impacted by decreased combined Myricom and Multicomputer product sales of $2.2 million, partially offset by higher royalties recognized of approximately $0.5 million on high-speed processing boards during the nine months ended June 30, 2020 as compared to the nine month period ended June 30, 2019. Our overall gross margin percentage increased to 28% of revenue for the nine months ended June 30, 2020 from 23% of revenue for the nine months ended June 30, 2019. Our operating loss increased by approximately $0.3 million resulting in an operating loss of $0.9 million for the nine months ended June 30, 2020 as compared to operating loss of $0.6 million for the nine months ended June 30, 2019, primarily as a result of decreased product revenues. Our provision for income tax was a tax expense of $1.1 million for the nine months ended June 30, 2020 as compared to a tax benefit of $466 thousand for the nine months ended June 30, 2019. The effective tax expense rate for the current period is (297)%. The negative rate is high due to the recording of a valuation allowance against deferred tax assets during the second quarter, as the Company has concluded
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that it is more likely than not that a portion of its deferred tax assets will not be realized in light of recent results, the COVID-19 pandemic, and the resulting economic fallout. The current tax expense is net of federal tax benefits anticipated from the carryback of current and prior period federal net operating losses, as allowed under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to recover federal taxes paid in prior periods. The recording of a valuation allowance against deferred tax assets is a non-cash expense and the federal tax benefits will result in a cash refund.
The following table details our results of operations in dollars and as a percentage of sales for the nine months ended June 30, 2020 and 2019:
%
%
June 30, 2020
of sales
June 30, 2019
of sales
(Dollar amounts in thousands)
Sales
$
46,199
100
%
$
56,900
100
%
Costs and expenses:
Cost of sales
33,461
72
%
43,966
77
%
Engineering and development
2,081
5
%
2,109
4
%
Selling, general and administrative
11,595
25
%
11,436
20
%
Total costs and expenses
47,137
102
%
57,511
101
%
Operating loss
(938)
(2)
%
(611)
(1)
%
Other income
565
1
%
108
—
%
Loss before income taxes
(373)
(1)
%
(503)
(1)
%
Income tax expense (benefit)
1,109
2
%
(466)
(1)
%
Net loss
$
(1,482)
(3)
%
$
(37)
—
%
Revenues
Our total revenues decreased by approximately $10.7 million to $46.2 million for the nine months ended June 30, 2020 as compared to $56.9 million of revenues for the nine months ended June 30, 2019.
TS segment revenue change was as follows for the nine months ended June 30, 2020 and 2019:
Increase (decrease)
2020
2019
$
%
(Dollar amounts in thousands)
Products
$
33,343
$
42,690
$
(9,347)
(22)
%
Services
8,757
8,430
327
4
%
Total
$
42,100
$
51,120
$
(9,020)
(18)
%
The decrease in TS segment product revenues of $9.3 million for the nine months ended June 30, 2020 as compared to the prior year period is the result of a $3.5 million decrease in our U.K. division combined with a decrease in product revenues of $5.8 million in our U.S. division. The $5.8 million decrease in the U.S. division product revenues is the result of decreased sales to several major customers. The $3.5 million decrease in the U.K. division product revenue is due to sales to one customer that did not reoccur in the current nine month period ended June 30, 2020. The increase in TS segment service revenues of $0.3 million for the nine month period ended June 30, 2020 as compared to the prior year period is primarily the result of an increase of $0.3 million in our U.S. division, comprised of a $1.6 million increase in managed service contract revenues and an increase of $0.3 million in third party maintenance revenue, partially offset by a $1.6 million decrease in internal and third party service revenues.
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HPP segment revenue change was as follows for the nine months ended June 30, 2020 and 2019:
Increase (decrease)
2020
2019
$
%
(Dollar amounts in thousands)
Products
$
2,469
$
4,700
$
(2,231)
(47)
%
Services
1,630
1,080
550
51
%
Total
$
4,099
$
5,780
$
(1,681)
(29)
%
The HPP product revenue decrease of $2.2 million during the nine month period ended June 30, 2020 as compared to the prior year period is due to decreased Multicomputer product sales of $0.5 million and decreased Myricom sales of $1.7 million, of which $1.3 million was related to a one time order that did not reoccur in the current period. The increase in HPP services revenues of approximately $0.6 million for the period is the result of an increase in royalty revenues on high-speed processing boards related to the E2D program during the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019.
Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the nine months ended June 30, 2020 and 2019:
Decrease
2020
%
2019
%
$
%
(Dollar amounts in thousands)
Americas
$
44,266
95
%
$
51,442
90
%
$
(7,176)
(14)
%
Europe
1,664
4
%
3,276
6
%
(1,612)
(49)
%
Asia
269
1
%
2,182
4
%
(1,913)
(88)
%
Totals
$
46,199
100
%
$
56,900
100
%
$
(10,701)
(19)
%
The $7.2 million decrease in the Americas revenues for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019 is primarily due to decreased revenue by our TS U.S. division of $5.2 million and decreased revenue by our TS U.K. division of $2.0 million. The $1.6 million decrease in Europe revenue for the nine month period ended June 30, 2020 as compared to the prior year period is primarily due to decreased sales by our TS U.K. division of $1.1 million, decreased sales by our TS U.S. division of $0.3 million, and decreased sales in our HPP segment of $0.2 million for the nine month period ended June 30, 2020 as compared to the prior fiscal year period. The $1.9 million decrease in Asia revenue for the nine month period ended June 30, 2020 as compared to the prior year period is primarily due to decreased sales by our HPP segment of $1.4 million and decreased sales in our TS U.K. division of $0.5 million for the nine month period ended June 30, 2020 as compared to the prior fiscal year period.
Gross Margins
Our gross margin ("GM") decreased by $0.2 million to $12.7 million for the nine months ended June 30, 2020 as compared to a gross margin of approximately $12.9 million for the nine months ended June 30, 2019. However, the GM as a percentage of revenue increased to 28% for the nine months ended June 30, 2020 from 23% for the nine months ended June 30, 2019.
2020
2019
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
10,353
25
%
$
9,988
20
%
$
365
5
%
HPP
2,385
58
%
2,946
51
%
(561)
7
%
Total
$
12,738
28
%
$
12,934
23
%
$
(196)
5
%
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The impact of product mix within our TS segment on gross margin for the nine months ended June 30, 2020 and 2019 was as follows:
2020
2019
Increase (Decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
5,047
15
%
$
5,479
13
%
$
(432)
2
%
Services
5,306
61
%
4,509
53
%
797
8
%
Total
$
10,353
25
%
$
9,988
20
%
$
365
5
%
The overall TS segment GM as a percentage of sales increased to 25% for the nine months ended June 30, 2020 from 20% for the nine months ended June 30, 2019. The 2% increase in GM on product as a percentage of product sales is due to increased vendor rebates and increased high margin software. The 8% increase in GM on services as a percentage of services sales is due to increased volume of managed services.
The impact of product mix within our HPP segment on gross margin for the nine months ended June 30, 2020 and 2019 was as follows:
2020
2019
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
841
34
%
$
1,924
41
%
$
(1,083)
(7)
%
Services
1,544
95
%
1,022
95
%
522
—
%
Total
$
2,385
58
%
$
2,946
51
%
$
(561)
7
%
The overall HPP segment GM as a percentage of sales increased to 58% for the period from 51% in the same prior year period. The 7% increase in total GM as a percentage of sales in the HPP segment is primarily attributed to an increase in services margin including a $560 thousand increase of royalty revenues, while total GM from products decreased because product GM as a percentage of product sales are significantly lower than services.
Operating Expenses
Engineering and Development Expenses
Engineering and development expenses remained relatively flat at $2.1 million for the nine months ended June 30, 2020 as compared to $2.1 million for the nine months ended June 30, 2019. The current period expenses were primarily for product engineering expenses incurred in connection with continued development of the ARIA SDS cyber security products.
Selling, General and Administrative Expenses
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the nine months ended June 30, 2020 and 2019:
For the nine months ended June 30,
% of
% of
$ Increase
% Increase
2020
Total
2019
Total
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
8,239
71
%
$
8,194
72
%
$
45
1
%
HPP segment
3,356
29
%
3,242
28
%
114
4
%
Total
$
11,595
100
%
$
11,436
100
%
$
159
1
%
SG&A expenses increased by approximately $0.2 million, or 1%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. The slight increase in TS segment expenses is primarily attributed to
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increased payroll and variable compensation expenses. The $0.1 million increase, or 4%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019 in HPP segment expenses is primarily due to increases in payroll expenses related to sales employees.
Other Income/Expenses
The following table details other income (expense) for the nine months ended June 30, 2020 and 2019:
For the nine months ended
Increase
June 30, 2020
June 30, 2019
(Decrease)
(Amounts in thousands)
Interest expense
$
(168)
$
(74)
$
(94)
Interest income
469
200
269
Foreign exchange gain (loss)
257
(22)
279
Other income, net
7
4
3
Total other income (expense), net
$
565
$
108
$
457
The $457 thousand increase to total other income (expense), net for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019 is primarily driven by an increase in interest income of $269 thousand and an increase in foreign exchange gain of $279 thousand, partially offset by an increase of $94 thousand of interest expense. There were 500,000 Euros converted to U.S. Dollars during the nine months ended June 30, 2020.
The increase in interest income of $269 thousand is primarily related to agreements that have payment terms in excess of one year (see Note 6) from the TS-US segment.
Income Taxes
The income tax provision was $1.1 million for the nine months ended June 30, 2020 compared to income tax benefit of $466 thousand in the same period of 2019. The U.K. division did not have any tax expense in the third quarter of fiscal year 2020 due to its pension contribution and the utilization of a portion of its net tax operating loss.
The income tax provision for the nine months period is not comparable to the same period of the prior year due to the recording of a valuation allowance in the current period net of the impact of the federal tax benefits anticipated from the carryback of current and prior period federal net operating losses, as allowed under the recently enacted CARES Act, to recover federal taxes paid in prior periods.
Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, other special items, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which increased by $1.9 million to $20.0 million as of June 30, 2020 from $18.1 million as of September 30, 2019. As of May 14, 2020, we have suspended our quarterly dividend until further economic clarity.
Our significant sources of cash for the nine months ended June 30, 2020 included a decrease in accounts receivable of $4.2 million, proceeds from debt of $4.2 million, and a decrease in inventories of $1.1 million.
Our significant uses of cash for the nine months ended June 30, 2020 included a decrease of accounts payable and accrued expenses of $6.9 million, net payment on line of credit $1.3 million, and dividends paid of $1.3 million.
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Cash held by our foreign subsidiary in the United Kingdom totaled approximately $10.0 million as of June 30, 2020 and consists of 2.4 million Euros, 0.2 million British Pounds, and 6.6 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within the financial statements.
As of June 30, 2020 and September 30, 2019 the Company maintained a line of credit with a capacity of up to $15.0 million and $20.0 million for inventory accessible to both the HPP and TS segments, respectively. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million and $1.5 million as of June 30, 2020 and September 30, 2019, respectively. An amount of $13.9 million and $17.5 million were available as of June 30, 2020 and September 30, 2019, respectively. As of June 30, 2020 and September 30, 2019 there were no cash withdrawals outstanding. The amount of the inventory line of credit and cash withdrawal was lowered in June of 2020 primarily due to lack of need for full use of the line.
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition, retain key employees, or continue to effectively operate our business.
On April 17, 2020, the Company and Modcomp, Inc., its wholly owned subsidiary each received a loan (“SBA Loans”) in the form of a promissory note from Paragon Bank in the amounts of $827,000 and $1,353,600, respectively under the Paycheck Protection Program, which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) administered by the U.S. Small Business Administration. The loans have a two-year term and carry an annual fixed interest rate of 1%. For additional information on the SBA Loans, see Note 8 of this Form 10-Q.
Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash received from the SBA loans, the cash generated from operations, and availability on our line of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.