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, 2020, 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, 2020.
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, 2020 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Observations on effects of novel coronavirus
On March 11, 2020, the World Health Organization characterized the novel coronavirus 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.
In these times of pandemic, our top priorities are to protect the health, well-being, and safety of our employees and partners, while still focusing on the key drivers of our business. To that end, and to insure we continue to operate safety and cautiously while also meeting our public health responsibilities, the Company has adopted flexible business practices including allowing most employees to work remotely in all locations. Our sales decreased significantly for the nine months ended June 30, 2021, which we believe is primarily due to the pandemic. This is largely the result of customers reducing their budgets. The pandemic has also had an adverse effect on our ability to transact one-on-one business.
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We recognize the pandemic has created a dynamic and uncertain situation in the national economy, and we continue to closely monitor the latest information to make timely, informed business decisions and public disclosures regarding the potential impact of the pandemic on our operations. Despite reduced infection rates and ever-increasing vaccination rates in the United States, many nations and certain pockets within the United States are still battling various strains/variants of the novel coronavirus, creating ongoing uncertainties as to when economies will return to business as usual and what that will look like, what regulatory measures or voluntary actions will be further implemented to limit the spread of COVID-19 and its variants and the duration of any such measures. The extent, severity and impact of any further spread of COVID-19 variants or resurgence of COVID-19 in a given geographic region after it has hit its “peak,” and the extent to which herd immunity will be achieved through the vaccination process is still uncertain. In summary, the scope of this pandemic and its effects are unprecedented, and we cannot at this time make a reasonable estimate on the extent or duration of the impacts on our business.
Results of Operations
Overview of the three months ended June 30, 2021
Our sales decreased by approximately $0.1 million, or 1%, to $13.7 million for the three months ended June 30, 2021 as compared to $13.8 million for the three months ended June 30, 2020. The decrease in sales is the result of a decrease of $0.6 million in our HPP segment, partially offset by approximately a $0.5 million increase in our TS segment. Our gross margin percentage remained 31% of sales for the three months ended June 30, 2021 as compared to 31% for the three months ended June 30, 2020. For the three months ended June 30, 2021 there was an operating loss of $0.4 million compared to an operating loss of $0.4 million for the three months ended June 30, 2020, primarily as a result of decreased sales offset by a higher overall gross margin as a percentage of sales. Other income, (expense) net decreased $0.2 million for the three months ended June, 2021 to approximately no income as compared to income of $0.2 million for the three months ended June 30, 2020. This is primarily due to an increase in foreign exchange loss of $0.2 million for the three months ended June 30, 2021 from the prior year period. The income tax expense of $35 thousand for the three months ended June 30, 2021 is primarily driven by incremental state tax expense on an additional quarter of earnings using the discrete effective tax rate method, compared to the income tax expense of $10 thousand for the three months ended June 30, 2020.
The following table details our results of operations in dollars and as a percentage of sales for the three months ended June 30, 2021 and 2020:
%
%
June 30, 2021
of sales
June 30, 2020
of sales
(Dollar amounts in thousands)
Sales
$
13,721
100
%
$
13,780
100
%
Costs and expenses:
Cost of sales
9,492
68
%
9,556
70
%
Engineering and development
700
5
%
693
5
%
Selling, general and administrative
3,886
28
%
3,924
28
%
Total costs and expenses
14,078
103
%
14,173
103
%
Operating loss
(357)
(3)
%
(393)
(3)
%
Other income, (expense) net
(31)
—
%
193
1
%
Loss before income taxes
(388)
(3)
%
(200)
(2)
%
Income tax expense
35
—
%
10
—
%
Net loss
$
(423)
(3)
%
$
(210)
(2)
%
Sales
Our sales decreased by approximately $0.1 million to $13.7 million for the three months ended June 30, 2021 as compared to $13.8 million of sales for the prior year period. The decrease in sales is the result of a decrease of $0.6 million in our HPP segment, partially offset by approximately a $0.5 million increase in our TS segment.
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TS segment sales change was as follows for the three months ended June 30, 2021 and June 30, 2020:
Increase (decrease)
2021
2020
$
%
(Dollar amounts in thousands)
Products
$
9,540
$
9,619
$
(79)
(1)
%
Services
3,223
2,578
645
25
%
Total
$
12,763
$
12,197
$
566
5
%
The decrease in TS segment product sales of $0.1 million during the period is primarily attributable to the U.S. division and the result of decreased sales to several major customers during the period as companies continue the trend of budget freezes or reductions attributable to the pandemic, partially offset with increased sales to new customers. Service sales for the three months ended June 30, 2021 increased $0.6 million from the prior year period. The changes in service sales include increased third party maintenance sales of $0.3 million primarily related to sales of security and cloud based software as well as maintenance (all recorded as net sales), increased internal and third party service sales of $0.2 million, and increased managed services sales of $0.1 million.
HPP segment sales change was as follows for the three months ended June 30, 2021 and 2020:
Decrease
2021
2020
$
%
(Dollar amounts in thousands)
Products
$
602
$
780
$
(178)
(23)
%
Services
356
803
(447)
(56)
%
Total
$
958
$
1,583
$
(625)
(39)
%
The HPP product sales decreased by $0.2 million for the three months ended June 30, 2021 as compared to the prior year period, primarily as a result of a $0.2 million decrease in Myricom product sales. The HPP services sales decreased $0.4 million for the three months ended June 30, 2021 from the prior year period primarily due to decreased royalties on high-speed processing boards related to the E2D program.
Our sales 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, 2021 and June 30, 2020:
Increase (decrease)
2021
%
2020
%
$
%
(Dollar amounts in thousands)
Americas
$
12,764
93
%
$
13,320
96
%
$
(556)
(4)
%
Europe
747
5
%
382
3
%
365
96
%
Asia
210
2
%
78
1
%
132
169
%
Totals
$
13,721
100
%
$
13,780
100
%
$
(59)
—
%
The $0.6 million decrease in sales to the Americas is primarily the result of a decrease in the HPP segment of $0.7 million, partially offset with increased sales by our TS segment of $0.1 million. The $0.4 million increase in sales to Europe is primarily the result of increased sales by our TS Segment of $0.3 million combined with a $0.1 million increase from the HPP segment. The sales to Asia increased $0.1 million is primarily the result of an increase from the TS U.S. division.
Gross Margins
Our gross margin ("GM") remained relatively flat at $4.2 million for the three months ended June 30, 2021 as compared to the prior year period. The GM as a percentage of sales remained relatively flat at 31% for the three months
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ended June 30, 2021 as compared to 31% in the prior year period. The GM as a percentage of sales increased in the TS segment, but was offset by a decrease in the HPP segment.
2021
2020
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
TS
$
3,664
29
%
$
3,173
26
%
$
491
3
%
HPP
565
59
%
1,051
66
%
(486)
(7)
%
Total
$
4,229
31
%
$
4,224
31
%
$
5
—
%
The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2021 and 2020 was as follows:
2021
2020
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,748
18
%
$
1,534
16
%
$
214
2
%
Services
1,916
59
%
1,639
64
%
277
(5)
%
Total
$
3,664
29
%
$
3,173
26
%
$
491
3
%
The overall TS segment GM as a percentage of sales increased to 29% for the three month period ended June 30, 2021 compared to 26% for the prior year period. Product GM as a percentage of product sales increased to 18% for the three months ended June 30, 2021 from 16% for the prior year period. This is primarily due to significant pricing discounts given to the U.S. division from several manufacturers that were not given in the prior year period. Service GM as a percentage of service sales decreased to 59% for the three months ended June 30, 2021 from 64% for the prior year period due to both the U.S. and U.K. divisions. The U.S. division had decreased service GM as a percentage of service sales due to additional employees hired to the managed services practice as it continues to grow causing cost of sales to increase because there was not a direct proportion of sales increase. The U.K. division had decreased service sales from the prior year period while service cost of sales remained the same due to fixed costs causing a decrease in service GM as a percentage of service sales.
The impact of product mix within our HPP segment on gross margin for the three months ended June 30, 2021 and 2020 was as follows:
2021
2020
Increase (Decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
219
36
%
$
265
34
%
$
(46)
2
%
Services
346
97
%
786
98
%
(440)
(1)
%
Total
$
565
59
%
$
1,051
66
%
$
(486)
(7)
%
The overall HPP segment GM as a percentage of sales decreased to 59% for the three months ended June 30, 2021 from 66% for the three months ended June 30, 2020. This 7% decrease is attributed to a relatively larger decrease in services sales compared to a decrease in product sales, which causes overall GM as a percentage of sales to decrease because the services sales is nearly all margin. The increase in product GM was due to a reduction in manufacturing overhead.
Operating Expenses
Engineering and Development Expenses
The engineering and development expenses incurred by our HPP segment remained relatively flat for the three months ended June 30, 2021 at $0.7 million when compared to the prior year period. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA SDS cyber security products.
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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, 2021 and 2020:
For the three months ended June 30,
$
%
% of
% of
Increase
Increase
2021
Total
2020
Total
(decrease)
(decrease)
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
2,649
68
%
$
2,801
71
%
$
(152)
(5)
%
HPP segment
1,237
32
%
1,123
29
%
114
10
%
Total
$
3,886
100
%
$
3,924
100
%
$
(38)
(1)
%
SG&A expenses overall of $3.9 million remained relatively flat for the three months ended June 30, 2021 as compared to the prior year period. The approximately $0.2 million decrease in TS segment SG&A expenses compared to the same prior year period is primarily the result of a decrease of payroll. The HPP segment SG&A expenses increased approximately $0.1 million for the three months ended June 30, 2021 as compared to the prior year period due to increased variable compensation expense.
Other Income/Expenses
The following table details other income (expense) for the three months ended June 30, 2021 and 2020:
For the three months ended
Increase
June 30, 2021
June 30, 2020
(Decrease)
(Amounts in thousands)
Interest expense
$
(131)
$
(56)
$
(75)
Interest income
175
133
42
Foreign exchange (loss) gain
(110)
113
(223)
Other income (expense), net
35
3
32
Total other income (expense), net
$
(31)
$
193
$
(224)
The $224 thousand decrease in total other income (expense), net for the three months ended June 30, 2021 as compared to the prior year period is primarily driven by an increase in foreign exchange loss of $223 thousand. The TS U.K. division has significant bank accounts with U.S. dollars and Euros. 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 loss is primarily from a Euro and U.S. Dollar bank account. The US dollar and Euro weakened relative to the British Pound for the three months ended June 30, 2021, which caused the foreign exchange loss.
The interest income increase of $42 thousand for the three months ended June 30, 2021 as compared to the prior year period 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 for details) from the TS-US segment. There were two new agreements that were entered into during the three months ended June 30, 2021.
The interest expense increase of $75 thousand for the three months ended June 30, 2021 as compared to the prior year period is related to two new multi-year agreements with vendors effective in February 2021 in the TS U.S. division. Payments on these agreements contain both principal and interest expense. See Note 10 in Item 1 to this Quarterly Report on Form 10-Q for details.
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Income Taxes
The income tax expense of $35 thousand for the three months ended June 30, 2021 is primarily driven by incremental state tax expense on an additional quarter of earnings using the discrete effective tax rate method, compared to the income tax expense of $10 thousand for the three months ended June 30, 2020. We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the three months ended June 30, 2021 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.
Overview of the nine months ended June 30, 2021
Our sales decreased by approximately $8.3 million, or 17%, to $39.2 million for the nine months ended June 30, 2021 as compared to $47.5 million for the prior year period. The decrease in overall sales for the nine months ended June 30, 2021 as compared to the prior year period is the result of a $7.6 million decrease in our TS segment sales and a $0.7 million decrease in our HPP segment sales. The TS segment decrease is primarily due to decreased sales to several major customers in the U.S. division. Our overall gross margin percentage increased to 31% of sales for nine months ended June 30, 2021 from 27% of sales for the nine months ended June 30, 2020. Our operating loss increased by approximately $0.1 million resulting in an operating loss of $1.0 million for the nine months ended June 30, 2021 as compared to operating loss of $0.9 million for the prior year period, primarily as a result of decreased product sales, which were partially offset by overall increased gross margin as a percentage of sales. Other income, (expense) net increased by $1.2 million primarily due the $2.2 million gain on forgiveness of the Payroll Protection Program loans, partially offset by an increase in foreign exchange loss of $1.0 million. The income tax expense of $868 thousand for the nine months ended June 30, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the nine months ended June 30, 2020 reflected the recording of a valuation allowance during the quarter, offset by the anticipated tax benefit from the carryback of net operating losses.
The following table details our results of operations in dollars and as a percentage of sales for the nine months ended June 30, 2021 and 2020:
%
%
June 30, 2021
of sales
June 30, 2020
of sales
(Dollar amounts in thousands)
Sales
$
39,197
100
%
$
47,521
100
%
Costs and expenses:
Cost of sales
27,222
69
%
34,783
74
%
Engineering and development
2,191
6
%
2,081
4
%
Selling, general and administrative
10,799
28
%
11,595
24
%
Total costs and expenses
40,212
103
%
48,459
102
%
Operating loss
(1,015)
(3)
%
(938)
(2)
%
Other income, (expense) net
1,764
5
%
565
1
%
Income (loss) before income taxes
749
2
%
(373)
(1)
%
Income tax expense
868
2
%
1,109
2
%
Net loss
$
(119)
—
%
$
(1,482)
(3)
%
Sales
Our total sales decreased by approximately $8.3 million to $39.2 million for the nine months ended June 30, 2021 as compared to $47.5 million of sales for the prior year period.
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TS segment sales change was as follows for the nine months ended June 30, 2021 and 2020:
Increase (decrease)
2021
2020
$
%
(Dollar amounts in thousands)
Products
$
27,032
$
34,635
$
(7,603)
(22)
%
Services
8,763
8,787
(24)
—
%
Total
$
35,795
$
43,422
$
(7,627)
(18)
%
The decrease in TS segment product sales of $7.6 million for the nine months ended June 30, 2021 as compared to the prior year period is the result of a decrease of $8.6 million in our U.S. division, partially offset by a $1.0 million increase in our U.K. division. The $8.6 million decrease in the U.S. division product sales is the result of decreased sales to several major customers. The $1.0 million increase in the U.K. division product sales is due to increased sales to one customer that did not occur in the prior year period. TS segment service sales remained relatively flat at $8.7 million when compared to the prior year period. The U.S. division had increased service sales of $0.1 million and the U.K. division had a decrease of $0.1 million. The change in service sales of the U.S. division is primarily the result of an increase of $1.0 million in third party maintenance sales primarily related to sales of security and cloud based software as well as maintenance (all recorded as net sales) and a $0.5 million increase in managed service contract sales, partially offset by a decrease of $1.4 million in third party decrease in internal and third party service sales.
HPP segment sales change was as follows for the nine months ended June 30, 2021 and 2020:
Increase (decrease)
2021
2020
$
%
(Dollar amounts in thousands)
Products
$
2,494
$
2,469
$
25
1
%
Services
908
1,630
(722)
(44)
%
Total
$
3,402
$
4,099
$
(697)
(17)
%
The HPP product sales remained relatively flat for the nine months ended June 30, 2021 as compared to the prior year period, which is primarily due to increased Multicomputer sales of approximately $0.4 million, offset by a decrease of $0.4 million from Myricom product sales. The decrease in HPP services sales of approximately $0.7 million is primarily the result of a $0.4 million decrease in royalty sales on high-speed processing boards related to the E2D program combined with decreased repair sales of $0.3 million.
Our sales 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, 2021 and 2020:
Increase (decrease)
2021
%
2020
%
$
%
(Dollar amounts in thousands)
Americas
$
35,547
91
%
$
45,588
95
%
$
(10,041)
(22)
%
Europe
3,067
8
%
1,664
4
%
1,403
84
%
Asia
583
1
%
269
1
%
314
117
%
Totals
$
39,197
100
%
$
47,521
100
%
$
(8,324)
(18)
%
The $10.0 million decrease in the Americas sales for the nine months ended June 30, 2021 as compared to the same prior year period is primarily due to decreased sales by our TS U.S. division of $8.9 million and decreased sales by our HPP segment of $1.1 million. The $1.4 million increase in Europe sales for the nine month period ended June 30, 2021 as compared to the prior year period is primarily due to increased sales by our TS U.K. division of $0.9 million, increased sales by our TS U.S. division of $0.2 million, and increased sales in our HPP segment of $0.2 million. The $0.3 million increase in Asia sales for the nine month period ended June 30, 2021 as compared to the prior year period is primarily due to increased sales by our HPP segment of $0.2 million and increased sales by our TS U.S. division of $0.1 million.
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Gross Margins
Our gross margin ("GM") decreased by approximately $0.7 million to $12.0 million for the nine months ended June 30, 2021 as compared to a gross margin of $12.7 million for the prior year period. However, the GM as a percentage of sales increased to 31% for the nine months ended June 30, 2021 from 27% for the prior year period.
2021
2020
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
9,985
28
%
$
10,353
24
%
$
(368)
4
%
HPP
1,990
58
%
2,385
58
%
(395)
—
%
Total
$
11,975
31
%
$
12,738
27
%
$
(763)
4
%
The impact of product mix within our TS segment on gross margin for the nine months ended June 30, 2021 and 2020 is as follows:
2021
2020
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
4,728
17
%
$
5,026
15
%
$
(298)
2
%
Services
5,257
60
%
5,327
61
%
(70)
(1)
%
Total
$
9,985
28
%
$
10,353
24
%
$
(368)
4
%
The overall TS segment GM as a percentage of sales increased to 28% for the nine months ended June 30, 2021 from 24% for the same prior year period. The 2% increase in GM on product as a percentage of product sales is primarily due to significant pricing discounts given to the U.S. division from several manufacturers that were not given in the prior year period. GM on services as a percentage of services sales had a slight decrease of 1% compared to the prior year period as there were additional employees hired to the managed services practice as it continues to grow.
The impact of product mix within our HPP segment on gross margin for the nine months ended June 30, 2021 and 2020 is as follows:
2021
2020
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
1,120
45
%
$
841
34
%
$
279
11
%
Services
870
96
%
1,544
95
%
(674)
1
%
Total
$
1,990
58
%
$
2,385
58
%
$
(395)
—
%
The overall HPP segment GM as a percentage of sales remained relatively flat at 58% compared to the prior year period. Product GM as a percentage of product sales increased by 11% from the prior year period due to the increased Multicomputer product sales, which are higher margin than the Myricom sales. Myricom sales also decreased compared to the prior year period contributing to the increased product GM as a percentage of product sales.
Operating Expenses
Engineering and Development Expenses
Engineering and development expenses increased by $0.1 million to $2.2 million for the nine months ended June 30, 2021 as compared to the prior year period. The current period expenses were primarily for product engineering expenses incurred in connection with continued development of the ARIA SDS cyber security products.
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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, 2021 and 2020:
For the nine months ended June 30,
$
%
% of
% of
Increase
Increase
2021
Total
2020
Total
(decrease)
(decrease)
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
7,435
69
%
$
8,239
71
%
$
(804)
(10)
%
HPP segment
3,364
31
%
3,356
29
%
8
—
%
Total
$
10,799
100
%
$
11,595
100
%
$
(796)
(7)
%
SG&A expenses decreased by approximately $0.8 million, or 7%, for the nine months ended June 30, 2021 as compared to the prior year period. The $0.8 million decrease in TS segment expenses is primarily attributed to decreased payroll, variable compensation expenses, and travel expenses. The HPP segment remained relatively flat for the nine months ended June 30, 2021 as compared to the prior year period with slightly increased consulting expenses offset by decreased salary expenses.
Other Income/Expenses
The following table details other income (expense) for the nine months ended June 30, 2021 and 2020:
For the nine months ended
$ Increase
June 30, 2021
June 30, 2020
(Decrease)
(Amounts in thousands)
Interest expense
$
(244)
$
(168)
$
(76)
Interest income
406
469
(63)
Foreign exchange (loss) gain
(731)
257
(988)
Gain on debt forgiveness
2,196
—
2,196
Other income, net
137
7
130
Total other income (expense), net
$
1,764
$
565
$
1,199
The $1.2 million increase to total other income (expense), net for the nine months ended June 30, 2021 as compared to the prior year period is primarily driven by a gain on debt forgiveness of $2.2 million, partially offset by an increase in foreign exchange loss of $1.0 million. The U.K. division has significant bank accounts with U.S. dollars and Euros. 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 loss is primarily from a Euro and U.S. Dollar bank account. The US dollar and Euro weakened relative to the British Pound for the nine months ended June 30, 2021, which caused the foreign exchange loss.
The decrease in interest income of $63 thousand 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 for details) from the TS-US segment as interest income recognized in each agreement decreases as principal payments are made.
The interest expense increase of $76 thousand for the nine months ended June 30, 2021 as compared to the prior year period is related to two new multi-year agreements with vendors effective in February 2021 in the TS U.S. division. Payments on these agreements contain both principal and interest expense. See Note 10 in Item 1 to this Quarterly Report on Form 10-Q.
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Income Taxes
The income tax expense of $868 thousand for the nine months ended June 30, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the nine months ended June 30, 2020 reflected the recording of a valuation allowance during the quarter, offset by the anticipated tax benefit from the carryback of net operating losses.
We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the quarter ended June 30, 2021 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which increased by $0.4 million to $19.7 million as of June 30, 2021 from $19.3 million as of September 30, 2020.
Our significant source of cash for the nine months ended June 30, 2021 included an increase in accounts payable and accrued expenses of $3.8 million and other long-term liabilities of $4.4 million.
Our significant uses of cash for the nine months ended June 30, 2021 are primarily related to the increase of accounts receivable and long-term receivable of $7.4 million and a decrease in operating lease liabilities of $0.4 million.
Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $9.9 million as of June 30, 2021, which consisted of 0.5 million Euros, 0.3 million British Pounds, and 8.5 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within our financial statements.
As of June 30, 2021 and September 30, 2020, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. An amount of $13.3 million and $13.4 million were available as of June 30, 2021 and September 30, 2020, respectively. As of June 30, 2021 and September 30, 2020 there were no cash withdrawals outstanding. For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 10 “Notes Payable and Line of Credit ”.
During the second quarter of fiscal year 2021 we entered into two multi-year agreements that involved us selling goods and services in which we were an agent and therefore recorded net sales for the transactions. These agreements combined involved us receiving approximately $9.0 million over four years and us making payments of around $8.7 million over four years with similar dates to when we would be receiving payments.
During the third quarter of fiscal year 2021 we entered into two multi-year agreements that involved us selling goods and services in which we were an agent and therefore recorded net sales for the transactions. These agreements combined involved us receiving approximately $5.1 million over two years.
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 SBA loans had a two-year term and carried an annual fixed interest rate of 1%. The SBA Loans were forgiven in full by the SBA in the first quarter of fiscal year 2021.
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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.
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 filing.
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.