What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-08-12 · 88 added, 197 removed, 73 unchanged (80% of the section changed)

6 unchanged sentences

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.

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, 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.

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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.

Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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.

8 unchanged sentences

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.

To that end, and to insure we continue to operate safely 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.

COVID-19 has adversely affected the distribution channel leading to significantly longer lead times when ordering product.

Manufacturers are not producing as much product as prior to the pandemic due to disruptions, resulting in supply shortages.

Additionally, recent global shipping delays have exacerbated this problem.

The TS segment has many vendors it transacts with and supply shortages are pervasive with many of them.

The HPP segment has also experienced shortages with their vendors as well.

The HPP segment secured a $1.8 million contract for real-time networking monitoring for cyber attack detection in the first quarter of fiscal year 2022, but due to the delays by manufacturers the sale is anticipated to be recognized in revenue over the next two years when we can obtain the product from the manufacturers.

Related to the supply shortage and potentially inflation, we have experienced price increases for our products, which we try to pass on to the customer.

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.

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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

June 30, 2020

Overview of the three months ended December 31, 2021

Our sales increased by approximately $1.0 million, or 9%, to $12.4 million for the three months ended December 31, 2021 as compared to $11.4 million for the three months ended December 31, 2020.

The increase in sales is the result of an increase of $1.5 million in our TS segment, partially offset by a $0.5 million decrease in our HPP segment.

Our gross margin percentage slightly decreased to 29% of sales for the three months ended December 31, 2021 as compared to 30% for the three months ended December 31, 2020.

For the three months ended December 31, 2021 there was an operating loss of $0.4 million compared to an operating loss of $0.5 million for the three months ended December 31, 2020, primarily as a result of increased sales from the TS segment, partially offset by the HPP segment.

Other income, (expense) net decreased $1.8 million for the three months ended to December 31, 2021 as compared to the three months ended December 31, 2020.

This is primarily due to forgiveness of the Payroll Protection Program loans being forgiven in the prior year, partially offset with a lower foreign exchange rate loss in the current period.

An income tax expense of $12 thousand was recorded for the three months ended December 31, 2021 compared to an income tax expense of $110 thousand in the same period of 2020.

The income tax expense for the three months ended December 31, 2021 is primarily driven by minimum state tax expenses, as the Company continues to maintain a full valuation allowance on its operations.

The income tax expense for the three months ended December 31, 2020 was 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 incurred through the Paycheck Protection Program.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2021 and 2020:

December 31, 2021

December 31, 2020

(Dollar amounts in thousands)

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Other income, (expense) net

Loss before income taxes

Income (loss) before income taxes

Income tax expense

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.

TS segment sales change was as follows for the three months ended June 30, 2021 and June 30, 2020:

Increase (decrease)

Net income (loss)

Our sales increased by approximately $1.0 million to $12.4 million for the three months ended December 31, 2021 as compared to $11.4 million for the prior year period.

The increase in sales was the result of an increase of $1.5 million in our TS segment, partially offset by a $0.5 million decrease in our HPP segment.

TS segment sales change was as follows for the three months ended December 31, 2021 and 2020:

(Dollar amounts in thousands)

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:

The increase in TS segment product sales of $0.8 million during the period is attributable to an increase in the U.S.

division of $2.1 million due to increased sales to several major customers, partially offset with decreased sales in the U.K.

division of $1.3 million due to one customer not repeating a high volume of sales in the current period.

Service sales for the three months ended December 31, 2021 increased $0.7 million from the prior year period.

The changes in service sales included increased managed services sales of $0.4 million and increased internal and third party service sales of $0.3 million.

HPP segment sales change was as follows for the three months ended December 31, 2021 and 2020:

(Dollar amounts in thousands)

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:

The HPP product sales decreased by $0.5 million for the three months ended December 31, 2021 as compared to the prior year period, primarily as a result of a $0.5 million decrease in E2D part sales, partially offset with an increase of

Myricom sales of $0.1 million.

The HPP services sales remain relatively flat for the three months ended December 31, 2021 compared to the prior year period as royalties on high-speed processing boards related to the E2D program and repairs remained flat.

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 December 31, 2021 and 2020:

Increase (decrease)

(Dollar amounts in thousands)

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.

The $1.9 million increase in sales to the Americas was primarily the result of an increase in the TS segment’s U.S.

division of $2.6 million, partially offset by decreased sales by our HPP segment of $0.6 million and TS segment’s U.K.

division of $0.1 million.

The $0.9 million decrease in sales to Europe was primarily the result of decreased sales by our TS Segment’s U.K.

division of $1.2 million due to a large volume by one customer in the prior year which did not reoccur in the current period, partially offset by an increase in the TS segment’s U.S.

division of $0.1 million and an increase in the HPP segment of $0.1 million.

The sales to Asia remained relatively flat consisting of an increase of $0.1 million from the TS segment’s U.S.

division, offset by a $0.1 million decrease by our HPP segment.

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

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.

Our gross margin ("GM") increased $0.2 million for the three months ended December 31, 2021 as compared to the prior year period.

The GM as a percentage of sales slightly decreased to 29% for the three months ended December 31, 2021 as compared to the prior year period of 30%.

The GM as a percentage of sales slightly increased in the TS segment, but was more than offset by a decrease in the HPP segment.

Increase (decrease)

(Dollar amounts in thousands)

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:

The impact of product mix within our TS segment on gross margin for the three months ended December 31, 2021 and 2020 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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.

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.

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:

Increase (Decrease)

The overall TS segment GM as a percentage of sales increased to 26% for the three month period ended December 31, 2021 compared to 25% for the prior year period.

Product GM as a percentage of product sales increased to 14% for the three months ended December 31, 2021 from 12% for the prior year period.

This was primarily due higher margin products being sold to several customers including a new customer having significant volume with relatively high margins.

Service GM as a percentage of service sales decreased to 56% for the three months ended December 31, 2021 from 60% for the prior year period due to both the U.S.

division having wage increases and additional hires to sustain the growth of managed services.

The impact of product mix within our HPP segment on gross margin for the three months ended December 31, 2021 and 2020 was as follows:

(Dollar amounts in thousands)

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.

The overall HPP segment GM as a percentage of sales decreased to 58% for the three months ended December 31, 2021 from 61% for the three months ended December 31, 2020.

This 3% decrease was primarily attributed to lower margin product sold for the three months ended December 31, 2021 compared to the same prior year period.

Additionally, the decrease in service GM was due to a lower service revenue while manufacturing overhead expenses remained relatively flat from prior year.

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 engineering and development expenses incurred by our HPP segment decreased $0.1 million for the three months ended December 31, 2021 to $0.7 million when compared to the prior year period due to decreased headcount related expenses.

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, 2021 and 2020:

For the three months ended June 30,

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended December 31, 2021 and 2020:

For the three months ended December 31,

(Dollar amounts in thousands)

By Operating Segment:

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.

SG&A expenses of $3.4 million increased $0.2 million for the three months ended December 31, 2021 as compared to the prior year period.

The approximately $0.3 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of increased payroll.

The HPP segment SG&A expenses decreased approximately $0.1 million for the three months ended December 31, 2021 as compared to the prior year period due to decreased headcount.

Other Income/Expenses

The following table details other income (expense) for the three months ended June 30, 2021 and 2020:

The following table details other income (expense) for the three months ended December 31, 2021 and 2020:

For the three months ended

June 30, 2021

June 30, 2020

December 31, 2021

December 31, 2020

(Amounts in thousands)

Foreign exchange loss

Interest expense

Interest income

Foreign exchange (loss) gain

Gain on debt forgiveness

Other income (expense), net

Total other income (expense), net

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.

division has significant bank accounts with U.S.

dollars and Euros.

The $1.8 million decrease in total other income (expense), net for the three months ended December 31, 2021 as compared to the prior year period is primarily due to forgiveness of the Payroll Protection Program loans being forgiven in the prior year for a gain of $2.2 million, partially offset with a decreased foreign exchange rate loss of approximately $0.4 million in the current period.

In consolidation, U.S.

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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.

The US dollar and Euro weakened relative to the British Pound for the three months ended December 31, 2021, which caused the foreign exchange loss.

The interest income increase of $47 thousand for the three months ended December 31, 2021 as compared to the prior year period is primarily related to additional 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 from the prior year period.

The interest expense increase of $67 thousand for the three months ended December 31, 2021 as compared to the prior year period is related to the TS U.S.

division entering into multiple multi-year contracts starting in the second quarter of fiscal year 2021, which did not incur interest expense in the first fiscal quarter of the prior year.

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.

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.

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

June 30, 2020

(Dollar amounts in thousands)

Costs and expenses:

Cost of sales

Engineering and development

Selling, general and administrative

Total costs and expenses

Operating loss

Other income, (expense) net

Income (loss) before income taxes

Income tax expense

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.

TS segment sales change was as follows for the nine months ended June 30, 2021 and 2020:

Increase (decrease)

(Dollar amounts in thousands)

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.

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.

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)

(Dollar amounts in thousands)

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)

(Dollar amounts in thousands)

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.

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.

Increase (Decrease)

(Dollar amounts in thousands)

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:

Increase (decrease)

(Dollar amounts in thousands)

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:

Increase (Decrease)

(Dollar amounts in thousands)

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.

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,

(Dollar amounts in thousands)

By Operating Segment:

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

June 30, 2021

June 30, 2020

(Amounts in thousands)

Interest expense

Interest income

Foreign exchange (loss) gain

Gain on debt forgiveness

Other income, net

Total other income (expense), net

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.

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.

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.

Payments on these agreements contain both principal and interest expense.

See Note 10 in Item 1 to this Quarterly Report on Form 10-Q.

The deferred tax asset change is a non-cash item.

An income tax expense of $12 thousand was recorded for the three months ended December 31, 2021 compared to an income tax expense of $110 thousand in the three months ended December 31, 2020.

The income tax expense for the three months ended December 31, 2020 was 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 incurred through the Paycheck Protection Program.

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.

However, we used a discrete effective tax rate method to calculate income taxes for the quarter ended December 31, 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.

Our primary source of liquidity is our cash and cash equivalents, which decreased by $0.7 million to $19.3 million as of December 31, 2021 from $20.0 million as of September 30, 2021.

Our significant source of cash for the three months ended December 31, 2021 included an decrease of a $1.5 million in accounts receivable and long-term receivable.

Our significant uses of cash for the three months ended December 31, 2021 were primarily related to an increase in other assets of $0.9 million, a decrease in accounts payable and accrued expenses of $0.8 million, and research development expenses of approximately $0.6 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $9.0 million as of December 31, 2021 and consisted of 0.5 million Euros, 0.1 million British Pounds, and 8.2 million U.S.

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.

As of December 31, 2021 and September 30, 2021, 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.

An amount of $13.9 million and $14.1 million were available as of December 31, 2021 and September 30, 2021, respectively.

As of December 31, 2021 and September 30, 2021 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.

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.

Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis