What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2022-02-09 · 184 added, 77 removed, 84 unchanged (76% of the section changed)

4 unchanged sentences

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, 2021, 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.

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, 2021, and in this Form 10-Q, included under Item 1A “Risk Factors.” 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, 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.

Tax laws, continued disruptions in the supply chain and inflationary pressures, the impact of the Ukraine-Russian military conflict on global trade and financial markets, 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.

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, 2021.

6 unchanged sentences

A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 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

Management believes there have been no significant changes for the six months ended March 31, 2022 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

Observations on effects of novel coronavirus and Russia/Ukraine Conflict

On March 11, 2020, the World Health Organization characterized the novel coronavirus outbreak as a pandemic.

12 unchanged sentences

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.

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.

As of March 31, 2022, the Russian/Ukrainian military conflict has not had a significant impact on revenue as we do not have any recurring customers in either country.

However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of the Russian-Ukraine military conflict and geopolitical tensions related to such military conflict could adversely affect our business, financial condition and results of operations, by among other things, cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets.

It is not possible at this time to predict the size of the impact or consequences of the conflict to the Company and our customers and suppliers.

Results of Operations

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

Overview of the three months ended March 31, 2022

Our sales decreased by approximately $2.1 million, or 15%, to $12.0 million for the three months ended March 31, 2022 as compared to $14.1 million for the three months ended March 31, 2021.

The decrease in sales is the result of a decrease of $2.4 million in our TS segment, partially offset by a $0.3 million increase in our HPP segment.

Our gross margin percentage increased to 35% of sales for the three months ended March 31, 2022 as compared to 31% for the three months ended March 31, 2021.

For the three months ended March 31, 2022 there was an operating loss of $24 thousand compared to an operating loss of $0.1 million for the three months ended March 31, 2021, primarily as a result of increased services revenue, which has much larger margins than product revenue, despite total decreased revenue.

Other income, (expense) net increased $0.2 million for the three months ended to March 31, 2022 as compared to the three months ended March 31, 2021.

This is primarily due to a net increase in foreign exchange gain of $0.3 million from the prior year, partially offset by a decrease in other income (expense), net of $0.1 million which was related to a one-time gain from an overpayment of a rebate received in the prior year.

The income tax expense of $5 thousand for the three months ended March 31, 2022 is primarily driven by minimum state tax expenses, as the Company continues to maintain a full valuation allowance on their operations.

The income tax expense of $723 thousand for the three months ended March 31, 2021 was primarily driven by an increase in the valuation allowance against deferred tax assets in the period offset by a benefit recorded for the change in tax law, allowing for the immediate deduction of covered expense 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 March 31, 2022 and 2021:

March 31, 2022

March 31, 2021

(Dollar amounts in thousands)

9 unchanged sentences

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:

Our sales decreased by approximately $2.1 million to $12.0 million for the three months ended March 31, 2022 as compared to $14.1 million for the prior year period.

The decrease in sales was the result of a decrease of $2.4 million in our TS segment, partially offset by a $0.3 million increase in our HPP segment.

TS segment sales change was as follows for the three months ended March 31, 2022 and 2021:

Increase (decrease)

(Dollar amounts in thousands)

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.

The decrease in TS segment product sales of $3.0 million during the period is attributable to a decrease in the U.S.

division due to decreased sales to several major customers and delays in obtaining product due to supply chain shortages.

Service sales for the three months ended March 31, 2022 increased $0.6 million from the prior year period, which is attributable to the U.S.

The changes in service sales included increased managed services sales of $0.5 million and increased internal and third party service sales of $0.4 million, partially offset by a $0.3 million decrease in third party maintenance.

HPP segment sales change was as follows for the three months ended March 31, 2022 and 2021:

(Dollar amounts in thousands)

The HPP product sales increased by $0.2 million for the three months ended March 31, 2022 as compared to the prior year period, primarily as a result of a $0.3 million increased Myricom sales, partially offset by decreased parts sales of $0.1 million.

The HPP services sales remained relatively flat for the three months ended March 31, 2022 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 March 31, 2022 and 2021:

(Dollar amounts in thousands)

The $1.6 million decrease in sales to the Americas was primarily the result of a decrease in the TS segment’s U.S.

division of $2.2 million, partially offset by increased sales by our HPP segment of $0.6 million.

The $0.3 million decrease in sales to Europe was primarily the result of decreased sales by our TS Segment’s U.S.

division of $0.2 million combined with a decrease in our HPP segment of $0.1 million.

The sales to Asia decreased by $0.2 million primarily due to a decrease in the HPP segment.

Gross Margins

Our gross margin ("GM") decreased $0.2 million for the three months ended March 31, 2022 as compared to the prior year period.

The GM as a percentage of sales increased to 35% for the three months ended March 31, 2022 as compared to the prior year period of 31%.

This is primarily due to increased service revenue and decreased product revenue as service revenue has significantly higher GM as a percentage of sales.

Increase (decrease)

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2022 and 2021 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of sales increased to 34% for the three month period ended March 31, 2022 compared to 29% for the prior year period.

This was primarily due to increased GM from services revenue, which is relatively higher margin, compared to product revenue from the prior year.

Product GM as a percentage of product sales increased to 22% for the three months ended March 31, 2022 from 20% for the prior year period.

This was primarily due higher margin products being sold to several customers.

Service GM as a percentage of service sales decreased to 59% for the three months ended March 31, 2022 from 61% 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 March 31, 2022 and 2021 was as follows:

Increase (Decrease)

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales decreased to 45% for the three months ended March 31, 2022 from 54% for the three months ended March 31, 2021.

The 6% decrease in product GM as a percentage of product revenue for the three months ended March 31, 2022 compared to the same prior year period is due to product mix.

The 15% decrease in service GM as a percentage of services revenue from prior year was due to increased manufacturing overhead expenses including payroll.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment decreased $45 thousand for the three months ended March 31, 2022 to $0.7 million when compared to the prior year period due to decreased headcount related expenses, partially offset with increased consulting 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 March 31, 2022 and 2021:

Three months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

SG&A expenses of $3.5 million for the three months ended March 31, 2022 decreased $0.2 million as compared to the prior year period.

The TS segment G&A expenses decreased by approximately $0.1 million due to a reversal of previous bad debt expense as the account receivable expensed was recovered.

The HPP segment SG&A expenses decreased approximately $0.1 million for the three months ended March 31, 2022 as compared to the prior year period due to a gain on a life insurance policy of $0.1 million.

The individual the life insurance policy covered was not a current employee at time of expiration.

Other Income/Expenses

The following table details other income (expense) for the three months ended March 31, 2022 and 2021:

Three months ended

March 31, 2022

March 31, 2021

(Amounts in thousands)

Foreign exchange gain (loss)

Interest expense

Interest income

Other income (expense), net

Total other income (expense), net

The $0.2 million increase in total other income (expense), net for the three months ended March 31, 2022 as compared to the prior year period is primarily due to a net increase in foreign exchange gain of $0.3 million, partially offset by an decrease in other income (expense), net of $0.1 million, which was related to a one-time gain from an overpayment of a rebate received in the prior year.

The rebate was several years old, which is the reason it was recorded in other income (expense), net.

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 strengthened relative to the British Pound for the three months ended March 31, 2022 causing a foreign exchange gain, which was partially offset with the Euro weakening relative to the British Pound for the same period.

The interest income decrease of $7 thousand for the three months ended March 31, 2022 as compared to the prior year period is primarily due to more principal payments and the receivables accruing less interest, partially offset with 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 $26 thousand for the three months ended March 31, 2022 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 only incurred interest expense for one month in the second fiscal quarter of the prior year.

Additionally agreements were entered into subsequent to the first quarter of the prior year causing more interest expense to be recognized.

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 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 March 31, 2022 because we have 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 six months ended March 31, 2022

Our sales decreased by approximately $1.1 million, or 4%, to $24.4 million for the six months ended March 31, 2022 as compared to $25.5 million for the six months ended March 31, 2021.

The decrease in sales is the result of a decrease of $0.9 million in our TS segment and a decrease of $0.2 million in our HPP segment.

Our gross margin percentage increased to 32% of sales for the six months ended March 31, 2022 as compared to 30% for the six months ended March 31, 2021.

For the six months ended March 31, 2022 there was an operating loss of $0.4 million compared to an operating loss of $0.7 million for the six months ended March 31, 2021, primarily as a result of improved margins in the TS segment.

Other income, (expense) net decreased $1.6 million for the six months ended to March 31, 2022 as compared to the six months ended March 31, 2021.

The largest items contributing to this change are the forgiveness of the Payroll Protection Program loans in the prior year in the amount of $2.2 million causing a gain which did not occur in the current period, partially offset with a net increase in foreign exchange gain of $0.8 million from the prior year.

The income tax expense of $17 thousand for the six months ended March 31, 2022 is primarily driven by minimum state tax expenses, as the Company continues to maintain a full valuation allowance on their operations.

The income tax expense of $833 thousand for the six months ended March 31, 2021 was primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for the change in tax law, allowing for the immediate deduction of covered expense incurred through the Paycheck Protection Program.

The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2022 and 2021:

March 31, 2022

March 31, 2021

(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

(Loss) income before income taxes

Income tax expense

Net (loss) income

Our sales decreased by approximately $1.1 million to $24.4 million for the six months ended March 31, 2022 as compared to $25.5 million for the prior year period.

The decrease in sales is the result of a decrease of $0.9 million in our TS segment and a decrease of $0.2 million decrease in our HPP segment.

TS segment sales change was as follows for the six months ended March 31, 2022 and 2021:

Increase (decrease)

(Dollar amounts in thousands)

The decrease in TS segment product sales of $2.2 million during the period is attributable to a decrease in the U.S.

division of $0.9 million due to decreased sales to several major customers and delays in obtaining product due to supply chain shortages, combined 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:

Service sales for the six months ended March 31, 2022 increased $1.3 million from the prior year period, which is attributable to the U.S.

The changes in service sales included increased managed services sales of $0.8 million and increased internal and third party service sales of $0.7 million, partially offset with a decrease of $0.2 million in third party maintenance.

HPP segment sales change was as follows for the six months ended March 31, 2022 and 2021:

(Dollar amounts in thousands)

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:

The HPP product sales decreased by $0.2 million for the six months ended March 31, 2022 as compared to the prior year period, primarily as a result of a $0.6 million decrease in E2D part sales, partially offset with an increase of Myricom sales of $0.4 million.

The HPP services sales remained relatively flat for the six months ended March 31, 2022 compared to the prior year period with increased royalties on high-speed processing boards related to the E2D program of $0.1 million, offset by decreased repairs of $0.1 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 six months ended March 31, 2022 and 2021:

Increase (decrease)

1 unchanged sentence

The $0.4 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 $0.4 million and an increase in the HPP segment of $0.1 million, partially offset by decreased sales by our TS segment’s U.K.

division of $0.1 million.

The $1.3 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.

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 combined with a decrease in the HPP segment of $0.1 million.

The sales to Asia decreased by $0.2 million due to a decrease in the HPP segment of $0.3 million, partially offset by an increase in the TS segment’s U.S.

division of $0.1 million.

Gross Margins

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.

Our gross margin ("GM") increased $0.1 million for the six months ended March 31, 2022 as compared to the prior year period.

The GM as a percentage of total sales increased to 32% for the six months ended March 31, 2022 as compared to the prior year period of 30%.

The GM as a percentage of total sales increased in the TS segment, but was partially 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 December 31, 2021 and 2020 was as follows:

The impact of product mix within our TS segment on gross margin for the six months ended March 31, 2022 and 2021 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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.

The TS segment GM as a percentage of total sales increased to 30% for the six month period ended March 31, 2022 compared to 27% for the prior year period.

This was primarily due to significantly increased GM from services compared to the prior year period combined with product GM decreasing compared to the prior year period.

Product GM as a percentage of product sales increased to 18% for the six months ended March 31, 2022 from 17% 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.

Service GM as a percentage of service sales decreased to 57% for the six months ended March 31, 2022 from 60% for the prior year period due to 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:

The impact of product mix within our HPP segment on gross margin for the six months ended March 31, 2022 and 2021 was as follows:

(Dollar amounts in thousands)

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.

The overall HPP segment GM as a percentage of sales decreased to 52% for the six months ended March 31, 2022 from 58% for the six months ended March 31, 2021.

The 7% decrease in product GM was primarily attributed to lower margin product sold for the six months ended March 31, 2022 compared to the same prior year period.

The 7% decrease in service GM as a percentage of services revenue was due to increased manufacturing overhead expenses including payroll.

Operating Expenses

Engineering and Development Expenses

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 engineering and development expenses incurred by our HPP segment decreased approximately $0.2 million for the six months ended March 31, 2022 to $1.3 million when compared to the prior year period due to decreased headcount related expenses, partially offset with higher consulting 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 December 31, 2021 and 2020:

For the three months ended December 31,

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the six months ended March 31, 2022 and 2021:

Six months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

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.

SG&A expenses of $6.9 million for the six months ended March 31, 2022 remained relatively flat compared to the prior year period.

The $0.2 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of increased payroll and recruiting expenses.

The HPP segment SG&A expenses decreased approximately $0.2 million for the six months ended March 31, 2022 as compared to the prior year period due to decreased headcount related expenses of $0.1 million and a gain on a life insurance policy of $0.1 million.

The individual the life insurance policy covered was not a current employee at time of expiration.

Other Income/Expenses

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

For the three months ended

December 31, 2021

December 31, 2020

The following table details other income (expense) for the six months ended March 31, 2022 and 2021:

Six months ended

March 31, 2022

March 31, 2021

(Amounts in thousands)

Foreign exchange loss

Foreign exchange gain (loss)

Interest expense

1 unchanged sentence

Gain on debt forgiveness

Other income (expense), net

Other income, net

Total other income (expense), net

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.

The $1.6 million decrease in total other income (expense), net for the six months ended March 31, 2022 as compared to the prior year period is primarily due to forgiveness of the Payroll Protection Program loans in the prior year for a gain of $2.2 million, partially offset with a net change of foreign exchange gain of approximately $0.8 million in the current period.

In consolidation, U.S.

2 unchanged sentences

Dollar bank account.

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.

The US dollar strengthened relative to the British Pound for the six months ended March 31, 2022 which caused the foreign exchange gain, partially offset by the Euro weakening relative to the British Pound for the same period.

The interest income increase of $40 thousand for the six months ended March 31, 2022 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) in the TS-US segment subsequent to the prior year period.

The interest expense increase of $94 thousand for the six months ended March 31, 2022 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 causing fiscal year 2022 to increase due to a full six months of interest expense incurred.

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.

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.

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 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 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.

Our primary source of liquidity is our cash and cash equivalents, which increased by $0.3 million to $20.3 million as of March 31, 2022 from $20.0 million as of September 30, 2021.

Our significant sources of cash for the six months ended March 31, 2022 included a decrease of $3.9 million in accounts receivable and long-term receivable, an increase in deferred revenue of $0.8 million, and a decrease in other assets of $1.0 million.

Our significant uses of cash for the six months ended March 31, 2022 were primarily related to a decrease in accounts payable and accrued expenses of $3.7 million, research development expenses of approximately $0.7 million, repayments of debt of $0.6 million, and a decrease of other long-term liabilities of $0.4 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $8.6 million as of March 31, 2022 and consisted of 0.3 million Euros, 0.3 million British Pounds, and 8.0 million U.S.

This cash is included in our total cash and cash equivalents reported within our financial statements.

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.

As of March 31, 2022 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 $13.9 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.

An amount of $14.1 million and $14.1 million were available as of March 31, 2022 and September 30, 2021, respectively.

As of March 31, 2022 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 .”

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What changed 10-Q

Item 2. Management’s Discussion and Analysis