What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-12-13 compared with 2022-12-08 · 132 added, 144 removed, 151 unchanged (65% of the section changed)

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The following discussion should be read in conjunction with our financial statements and the related notes included elsewhere in this filing.

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.

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 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 and continues to experience shortages with their vendors as well.

If we are unable to successfully resolve these disruptions and shortages, the timing and amount of our future results may be materially impacted.

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 2021, but due to the delays by manufacturers the sale is anticipated to be recognized fully in revenue in fiscal year 2023 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.

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.

As of September 30, 2022, the Russian/Ukrainian military conflict has not had a direct 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.

Recent trends affecting our financial performance

As of September 30, 2023, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict has not had a direct significant impact on revenue as we do not have any recurring customers in either region.

However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of both conflicts and geopolitical tensions related to such conflicts 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 conflicts on the Company and our customers or suppliers.

Overview of Fiscal 2023 Results of Operations

Revenue increased by approximately $10.2 million, or 19%, to $64.6 million for the fiscal year ended September 30, 2023 versus $54.4 million for the fiscal year ended September 30, 2022.

Gross profit margin percentage increased, from 33% of revenues for the fiscal year ended September 30, 2021 to 35% for the fiscal year ended September 30, 2022.

We generated an operating loss of $40 thousand for the fiscal year ended September 30, 2022 as compared to an operating loss of approximately $1.4 million for the fiscal year ended September 30, 2021.

Other income, (expense) net was $2.0 million for the fiscal year ended September 30, 2022 as compared to $2.0 million for the prior year.

A one-time gain of $465k occurred in fiscal year 2021, which was a purchase price adjustment of a subsidiary (Modcomp GmbH) that was sold in fiscal year 2018.

This is classified as discontinued operations.

There are no further amounts to be received in connection with the purchase agreement from the original sale.

The Company recorded an income tax provision of approximately $50 thousand for the fiscal year ended September 30, 2022, which reflected an effective tax rate of 3% for the year ended September 30, 2022.

The provision is primarily driven by the state tax expense.

For the fiscal year ended September 30, 2021, the income tax provision was $444 thousand, which reflected an effective tax rate of 39%.

The provision is primarily driven by the recording of a partial valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.

Gross profit margin percentage decreased slightly to 34% for the fiscal year ended September 30, 2023 from 35% of revenues for the fiscal year ended September 30, 2022.

We generated an operating income of $1.8 million for the fiscal year ended September 30, 2023 as compared to an operating loss of $(40) thousand for the fiscal year ended September 30, 2022.

Other income, net was $2.9 million for the fiscal year ended September 30, 2023 as compared to $2.0 million for the prior year.

The Company recorded an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)%, for the fiscal year ended September 30, 2023 compared to an income tax provision of $50 thousand, which reflected an effective tax rate of 2.6% for the fiscal year ended September 30, 2022.

The following table details our results of operations in dollars and as a percentage of sales for the fiscal years ended:

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Total costs and expenses

Operating loss

Other income, (expense) net

Operating income (loss)

Other income, net

Income before income taxes

Income tax expense

Net income from continuing operations

Gain on sale of discontinued operations

Income tax (benefit) expense

Revenue increased by approximately $10.2 million, or approximately 19%, to $64.6 million for the fiscal year ended September 30, 2023 versus $54.4 million for the fiscal year ended September 30, 2022.

Our TS segment revenue increased by approximately $5.9 million consisting of an increase of $7.1 million in our U.S.

division, partially offset by a decrease of $1.2 million in our U.K.

Our HPP segment revenue decreased by approximately $0.8 million or 17%.

TS segment revenue changes by products and services for the fiscal years ended September 30 were as follows:

TS segment revenue changes by products and services for the fiscal years ended September 30 2023 and 2022 were as follows:

September 30,

Increase (decrease)

(Dollar amounts in thousands)

Our TS segment revenue increased by approximately $7.3 million consisting of an increase of $7.1 million in our U.S.

division combined with an increase of $0.2 million in our U.K.

The increase in TS segment product revenue of $7.5 million during the period was the result of a $7.3 million increase in the U.S.

division, partially offset by a decrease of approximately $1.0 million in the U.K.

division combined with an increase of $0.2 million in the U.K.

As the economic environment returns to pre-pandemic levels it has led to customers’ budgets not being as constrained as prior year leading to increased sales in the U.S.

division and U.K.

Additionally, there have been less shortages with suppliers causing less delays and our backlog has significantly decreased from the prior year.

The increase in our U.S.

division product revenue year over year was primarily associated with several major customers, partially offset by a decrease with several other customers.

The decrease in the U.K.

division year over year was primarily associated with a decrease with one major customer.

The increase in TS segment service revenue of $3.9 million as compared to the prior year was due to a $4.0 million increase in the U.S.

division, partially offset with a $0.1 million decrease in the U.K.

The increase in the U.K.

division year over year was primarily associated with an increase with one major customer.

The decrease in TS segment service revenue of $0.2 million as compared to the prior year was in the U.S.

In fiscal year 2023 as compared to the prior year, the U.S.

division had an increase of $1.5 million in managed services, an increase of $1.3 million in services provided by the Company and third party services, and an increase of $1.2 million in third party maintenance revenue.

HPP segment revenue changes by product and services for the fiscal years ended September 30 were as follows:

division had a decrease of $0.9 million in internal services and a decrease of $0.7 million in third party maintenance revenue, partially offset by an increase of $1.4 million in managed services.

HPP segment revenue changes by product and services for the fiscal years ended September 30 2023 and 2022 were as follows:

September 30,

(Dollar amounts in thousands)

The decrease in HPP product revenue of $0.6 million in the fiscal year ended September 30, 2022 was primarily the result of an approximately $0.6 million decrease in Multicomputer product line shipments for the fiscal year ended September 30, 2022 as compared to the fiscal year ended September 30, 2021.

The decrease in HPP service revenue of approximately $0.2 million for the fiscal year ended September 30, 2022 period was primarily the result of a $0.4 million decrease in royalty revenues on high-speed processing boards related to the E2D program, partially offset with higher ARIA sales of $0.2 million as compared to the fiscal year ended September 30, 2021.

Our HPP segment revenue increased by approximately $3.0 million or 79%.

The increase in HPP product revenue of $3.0 million in the fiscal year ended September 30, 2023 was primarily the result of two major non-recurring transactions of $1.8 million and $1.2 million for the fiscal year ended September 30, 2023 as compared to the fiscal year ended September 30, 2022.

The increase in HPP service revenue of approximately $0.1 million for the fiscal year ended September 30, 2023 was primarily the result of a $0.4 million increase in AIRA revenue, partially offset with a decrease of $0.3 million in royalty revenues on high-speed processing boards related to the E2D program as compared to the fiscal year ended September 30, 2022.

Our total revenues by geographic area based on the location to which the products were shipped or services rendered were as follows:

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(Dollar amounts in thousands)

The $7.2 million increase in the Americas revenue for the fiscal year ended September 30, 2022 as compared to the fiscal year ended September 30, 2021 was primarily due to increased revenue by our TS-US division of approximately $7.7 million, partially offset with a decrease of $0.2 million attributable to the TS-UK division combined with decreased sales by our HPP segment of approximately $0.3 million.

The $1.8 million decrease in Europe revenue for the fiscal year ended September 30, 2022 as compared to the prior year period was primarily due to decreased sales by our TS-UK division of approximately $1.0 million, a decrease in sales by our TS-US division of approximately $0.5 million, and a decrease of $0.3 million in our HPP segment.

The $0.2 million decrease in Asia revenue for the fiscal year ended September 30, 2022 as compared to the prior year period was the result of decreased revenue by our HPP segment of $0.1 million combined with a $0.1 million decrease in our TS-U.S.

The $10.3 million increase in the Americas revenue for the fiscal year ended September 30, 2023 as compared to the fiscal year ended September 30, 2022 was primarily due to increased revenue by our TS-US division of approximately $7.3 million combined with an increase of $3.0 million attributable to the HPP segment.

Sales to Europe remained relatively flat with an increase of $0.1 million in the TS-US division, offset with a decrease in the TS-UK division of $0.1 million.

Sales to Asia remained relatively flat with no significant changes in any division.

Gross Margins

Our gross margin ("GM") increased by $3.1 million to $21.9 million for fiscal year 2023 as compared to GM of approximately $18.8 million for fiscal year 2022.

The total GM as a percentage of revenue increased to 35% for fiscal

year 2022 from 33% for fiscal year 2021.

The increase in total GM as a percentage of revenue was primarily attributed to a significantly higher increase in service revenue, which has a higher GM as a percentage of revenue, versus product revenue.

The improved product GM as a percentage of revenue has been a focus in fiscal year 2022, particularly in the TS segment.

The 8% decrease in HPP GM as a percentage of revenue from prior year was due to decreased royalty sales, which are nearly all margin.

The total GM as a percentage of revenue decreased to 34% for fiscal year 2023 from 35% for fiscal year 2022.

The following table summarizes GM changes by segment for fiscal years ended September 30:

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September 30,

Increase (decrease)

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of revenue increased to 33% in fiscal year 2022 from 30% in fiscal year 2021.

The increase in GM as a percentage of revenue was primarily attributed to increased GM as a percentage of revenue for both product and service revenue than in fiscal year 2021.

The $0.9 million increase in our TS segment product GM in fiscal year 2022 as compared to the prior year resulted from an increase in GM in the U.S.

The $2.6 million increase in the TS segment service GM in fiscal year 2022 as compared to the prior year primarily resulted from increased service GM of $2.7 million in the U.S.

division, partially offset by a decrease of $0.1 million in the U.K.

The overall TS segment GM as a percentage of revenue decreased to 31% in fiscal year 2023 from 33% in fiscal year 2022.

The $1.4 million GM increase in our TS segment product GM in fiscal year 2023 as compared to the prior year resulted from an increase in the U.S.

Product GM as a percentage of revenue remained relatively flat for fiscal year 2023 compared to fiscal year 2022 with no significant changes in any specific type of product.

The $0.6 million decrease in our TS segment service GM in fiscal year 2023 as compared to the prior year resulted from a decrease in GM in the U.S.

Service GM as a percentage of revenue decreased to 59% in fiscal year 2023 from 62% in fiscal year 2022 due to decreased third party maintenance revenue as discussed above, which is recorded as net sales meaning all the gross margin is recorded in the services revenue financial statement line item causing increased GM as a percentage of revenue.

The impact of product mix on gross margins within our HPP segment for the fiscal years ended September 30 was as follows:

September 30,

Increase (decrease)

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of revenue decreased to 51% in fiscal year 2022 from 59% in fiscal year 2021.

The 8% decrease in GM as a percentage of sales in the HPP segment was primarily attributed to the impact of a decrease of $0.4 million in high margin Multicomputer royalty revenues, which is nearly all GM and recorded as service revenue.

The GM as a percentage of sales from products decreased primarily due to product mix in fiscal year 2022 as compared to the prior year.

The overall HPP segment GM as a percentage of revenue increased to 62% in fiscal year 2023 from 51% in fiscal year 2022.

The GM as a percentage of sales from products increased 28% primarily due to two major non-recurring transactions in fiscal year 2023 when compared to fiscal year 2022 as discussed above.

The GM as a percentage of sales from services decreased 21% primarily due to a relatively significant decrease of high margin Multicomputer royalty revenues, which is nearly all GM and recorded as service revenue.

Engineering and Development Expenses

Our engineering and development expenses are only in our HPP segment.

These expenses had an increase of $0.2 million, primarily due to increased consulting costs, from $2.9 million in fiscal year 2021 to $3.1 million for fiscal year 2022.

These expenses remained relatively flat at $3.1 million for fiscal year 2023 and $3.1 million for fiscal year 2022.

There were increased consulting expenses of $0.4 million, offset by decreased labor expenses of $0.4 million of labor expenses in fiscal year 2023 when compared to fiscal year 2022.

Fiscal year 2023 and 2022 expenses were primarily for product engineering expenses incurred in connection with the development of the ARIA SDS cyber security products and ARIA Zero Trust (AZT).

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The following table details our selling, general and administrative (“SG&A”) expenses by operating segment for the years ended September 30, 2023 and 2022:

Year ended September 30,

(Dollar amounts in thousands)

By Operating Segment:

The TS segment SG&A spending increase of approximately $1.8 million for the fiscal year ended September 30, 2022 when compared to the prior year was primarily due to an increase in variable compensation of $1.5 million and an increase in salaries and other expenses of $0.3 million.

The HPP segment SG&A spending decrease of $0.7 million for the fiscal year ended September 30, 2022 when compared to the prior year was primarily attributed to decreased headcount and consulting expenses.

The TS segment SG&A spending increase of approximately $1.1 million for the fiscal year ended September 30, 2023 when compared to the prior year was primarily due to an increase in salaries of $0.6 million, an increase in variable compensation of $0.3 million, and an increase in travel expenses of $0.2 million.

The HPP segment SG&A spending increase of $0.1 million for the fiscal year ended September 30, 2023 when compared to the prior year was primarily attributed to increased variable compensation.

Other Income/Expenses

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(Amounts in thousands)

Foreign exchange gain (loss)

Foreign exchange (loss) gain

Interest expense

Interest income

Gain on debt forgiveness

Employee Retention Tax Credit, net of costs to collect

Other income (expense), net

Total other income (expense), net

For the year ended September 30, 2022 the largest change was the foreign exchange gain increase of $2.2 million due to the U.S.

dollar significantly strengthening against the British Pound and the largest change for the year ended September 30, 2021 was a gain on debt forgiveness of $2.2 million for the Payroll Protection Program loans.

These two items had a net effect of nearly zero.

The $0.1 million decrease to total other income (expense), net for the year ended September 30, 2022 as compared to the prior year period is due to a nonrecurring rebate we received in the prior year that originated several years ago, which we did not anticipate receiving.

division has significant bank accounts with U.S.

Total other income, net

For the year ended September 30, 2023 the foreign exchange loss decreased $2.3 million primarily due to the U.S.

dollar significantly weakening against the British pound in fiscal year 2023 compared to the prior year where it significantly strengthened.

division has bank accounts with U.S.

dollars and Euros.

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Dollar and Euro bank account.

The US dollar and Euro strengthened relative to the British Pound when comparing the exchange rate as of September 30, 2022 to September 30, 2021, which caused the foreign exchange gain.

Interest income is primarily related to agreements that have payment terms in excess of one year (see Note 3 Accounts and Long-Term Receivable in Item 1 to this Annual Report on Form 10-K for details) from the TS-US segment as interest income recognized in each agreement decreases as principal payments are made.

There were three new agreements in fiscal year 2022, which caused an increase in interest income.

The interest expense increase of $10 thousand for the year ended September 30, 2022 as compared to the prior year period is related to three total new multi-year agreements with vendors in the TS U.S.

division in the second and fourth quarters of fiscal year 2021.

Dollar bank account consists of approximately 95% of the non-British Pound currency held in the U.K.

Interest expense decreased $98 thousand for the year ended September 30, 2023 as compared to the prior year period is due to less interest expense on loans on whole life insurance policies on officers as $0.9 million was paid back in fiscal year 2022 causing less interest to be incurred in fiscal year 2023.

Additionally, there was decreased interest expense related to multi-year agreements with vendors in the TS U.S.

Payments on these agreements contain both principal and interest expense.

In fiscal year 2022 there was a full year of interest expense compared to less than three full quarters in the prior year.

As principal payments are made the interest expense decreases and this was slightly offset by the full year of interest expense from these agreements.

As principal payments are made the interest expense decreases.

See Note 8 Accounts payable and accrued expenses, and Other noncurrent liabilities in Item 1 to this Annual Report on Form 10-K.

The other income decrease of $110 thousand for the year ended September 30, 2022 as compared to the prior year period is primarily related to a nonrecurring rebate we received in the prior year that originated several years ago, which we did not anticipate receiving.

The Company recorded an income tax provision of approximately $50 thousand for the fiscal year ended September 30, 2022, which reflected an effective tax rate of 2.6% for the year ended September 30, 2022.

Interest income increased $0.8 million for the year ended September 30, 2023 when compared to the prior year.

Interest income is primarily related to agreements that have payment terms in excess of one year (see Note 2 Accounts and Long-Term Receivable in Item 1 to this Annual Report on Form 10-K for details) from the TS-US segment.

There were three new agreements in fiscal year 2023, which caused an increase in interest income.

Additionally, interest income from

cash and cash equivalents increased significantly from prior year due to substantially increased interest rates during fiscal year 2023.

The Employee Retention Tax Credit, net of costs to collect of $2.1 million was recognized in the fourth quarter of fiscal year 2023.

The Coronavirus Aid, Relief, and Economic Security Act provided an Employee Retention Credit (“ERC”) which is a refundable tax credit against certain employment taxes.

The Consolidated Appropriations Act, 2021 extended and expanded the availability of the employee retention credit through December 31, 2021 including amending the employee retention credit to be equal to 70% of qualified wages paid to employees during the 2021 calendar year.

Both the TS-US division and HPP segment qualified for the ERC beginning in March 2021 for qualified wages through September 2021.

There are no other amounts that will be received related to this credit.

The other income increase of $115 thousand for the year ended September 30, 2023 as compared to the prior year period is primarily related to a vendor settlement related to one specific agreement.

The Company recorded an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)%, for the fiscal year ended September 30, 2023.

The provision is primarily driven by the benefit recognized as a result of the release of the valuation allowance against the majority of the Company's deferred tax assets.

The benefit recorded during the fiscal year equaled $1.8 million for valuation allowances released on deferred tax assets related to prior years.

The Company also claimed and received the Employee Retention Credit.

For the fiscal year ended September 30, 2022, the income tax provision was approximately $50 thousand, which reflected an effective tax rate of 2.6%.

The provision is primarily driven by the state tax expense.

For the fiscal year ended September 30, 2021, the income tax provision was $444 thousand, which reflected an effective tax rate of 38.8%.

During the period ended September 30, 2022, management assessed the positive and negative evidence in the U.S.

operations and concluded that it is more likely than not that the deferred tax assets as of September 30, 2022 will not be realized in light of recent results, the ongoing impacts of the coronavirus (“COVID-19”) pandemic, and the resulting economic fallout.

In assessing the realizability of deferred tax assets, we consider taxable income in prior carryback years, as permitted under the tax law, our forecasted taxable earnings, tax planning strategies, and the expected timing of the reversal of temporary differences.

This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information and is performed on a jurisdiction-by-jurisdiction basis.

We also continue to maintain a full valuation allowance against our U.K.

deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards.

To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.

Gain on Discontinued Operations

CSPi sold all stock of Modcomp GmbH to Reply AG on July 31, 2018 for $14.4 million cash and a gain of $18.1 million.

This sale was recorded in fiscal year 2018.

An additional €400 thousand was included in escrow as part of the Share Purchase and Assignment Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021.

This amount was received in July 2021 and recorded as a gain from discontinued operations in the Consolidated Statements of Operations.

No income taxes were provided as the transaction was a tax-free exchange in the U.K.

There are no other amounts that will be received as part of the agreement.

The Company undertakes a review of its valuation allowance at each financial statement period, reviewing the positive and negative evidence to help determine whether it is more likely than not that the Company will realize the future tax benefits from its deferred tax balances.

In the year ended September 30, 2020, the Company established a partial valuation allowance against its deferred tax assets in light of results at the time, the COVID-19 pandemic, and the resulting economic fallout, and established a full valuation during the year ended September 30, 2021.

Since that time, the COVID-19 pandemic has ended, and the Company’s Technology Solutions business has grown its revenue and operating income in fiscal years 2023 and 2022.

As a result, the Company has determined that it is more likely than not that substantially all of its net deferred tax assets in the U.S.

jurisdiction will be utilized and that associated valuation allowances should be reversed during year ended September 30, 2023.

The valuation reversed during the period resulted in a $1.8 million benefit.

The Company separately analyzed the realizability of its federal and state credits and determined $710 thousand (net of federal benefit) of state credits are expected to expire unutilized and kept a valuation allowance against these credits.

The Company will continue to maintain a valuation allowance against certain state tax credits in the U.S.

and a full valuation allowance against the net deferred tax assets in the U.K.

jurisdiction.

Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which increased by $4.0 million to $24.0 million as of September 30, 2022 from $20.0 million as of September 30, 2021.

Our significant source of cash for the year ended September 30, 2022 is primarily related to the $2.9 million net change between an increase in accounts receivable and long-term receivable of $4.1 million netted with an increase of $7.0 million in accounts payable and accrued expenses, and other-long-term liabilities.

We have multi-year agreements on both the receivables (including long-term) and payables (long-term portion in other long-term liabilities).

During the fourth quarter of fiscal year 2022 we entered into a $12.8 million sales agreement with a financing component, which includes receiving three payments with the final payment due in fiscal year 2024.

We received the first payment in the fourth quarter of fiscal year 2022 of approximately $4.3 million.

Our cost of sale for this agreement was paid in full in the first quarter of fiscal year 2023 and significantly decreased our cash balance.

This is the largest driver for the increase in accounts payable.

The revenue for this transaction was recorded net during the fourth quarter of fiscal year 2022.

The other significant sources of cash were net borrowings of $2.2 million on our line of credit, tax refunds of approximately $0.6 million, and life insurance proceeds received of $0.3 million.

Other significant uses of cash for the year ended September 30, 2022 included paying $0.9 million of insurance policy loans back, payments for leases of $0.8 million, repayments on debt of $0.7 million, contributions to the pension and defined contribution plans of $0.5 million, purchases of common stock of $0.2 million, purchases of property, equipment, and improvements of $0.2 million, and dividends of $0.1 million.

Our primary source of liquidity and capital resources is our cash from operations and our line of credit.

Cash and cash equivalents increased by $1.2 million to $25.2 million as of September 30, 2023 from $24.0 million as of September 30, 2022.

The following is a summary of our cash flows for the fiscal year ended September 30, 2023 and 2022:

For the Year ended September 30,

(Dollar amounts in thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Increase in cash and cash equivalents

Operating Activities

Cash provided by operating activities was $3.9 million for the year ended September 30, 2023 compared to $2.7 million for the prior year.

The increase from prior year is primarily related to increased net income including recognizing $2.1 million from the Employee Retention Tax Credit, net of costs to collect in fiscal year 2023.

Additionally, an amount of $0.9 million was paid back on insurance policy loans in the prior year, but did not recur this year.

The remaining differences are primarily related to timing differences in operating assets and liabilities.

Investing Activities

Cash used in investing activities was $341 thousand for the year ended September 30, 2023 compared to $20 thousand provided by investing activities for the prior year.

The decrease from the prior year is primarily related to $322 thousand we received in the prior year for proceeds from a corporate life insurance policy.

Financing Activities

Cash used in financing activities was $2.4 million for the year ended September 30, 2023 compared to $1.3 million provided by financing activities for the prior year.

The primary difference was the timing in the net borrowing on the line-of-credit, which for the year ended September 30, 2023 we had a net payment of $1.6 million compared to a net borrowing of $2.2 million in the prior year.

We paid dividends of $0.7 million for the year ended September 30, 2023 compared to $0.1 million in the prior year.

The dividend was suspended during fiscal year 2020 due to uncertainty from COVID-19 but was reinstated during the fourth quarter of fiscal year 2022 at $0.03 per share.

The dividend was increased to $0.04 per share in the third quarter of fiscal year 2023.

Repayments on notes payable for the year ended September 30, 2023 were $0.4 million compared to $0.7 million in the prior year.

There was only one note payable outstanding during fiscal year 2023 compared to two in fiscal year 2022.

Other Liquidity and Capital Resources Items

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.8 million as of September 30, 2023, which consisted of 0.2 million Euros, 0.3 million British Pounds, and 4.3 million U.S.

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

Due to the pension obligation in the U.K., we maintain a large balance of cash in the U.K., most of the cash is from the sale of Modcomp GmbH in fiscal year 2018.

Subsequent to September 30, 2022 approximately 3.5 million U.S.

Dollars was transferred from the foreign subsidiary in the U.K.

to Modcomp, Inc.

(TS-US) to use in operations.

Due to the pension obligation in the U.K., we maintain a large balance of cash in the U.K.

As of September 30, 2023 and September 30, 2022, 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.

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Amounts of $13.5 million and $11.9 million were available as of September 30, 2023 and September 30, 2022, respectively.

As of September 30, 2022 and September 30, 2021 there were no cash withdrawals outstanding.

As of September 30, 2023 and September 30, 2022 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 11 Line of Credit.

On April 17, 2021, 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.

We have multi-year agreements on both the receivables (including long-term) and payables (long-term portion in other noncurrent liabilities).

Not all multi-year receivable agreements have a corresponding payable multi-year agreement.

In fiscal year 2024 we are scheduled to receive $7.7 million related to the multi-year receivables and pay $1.7 million related to the payables.

Our last payment on the note payable as of September 30, 2023 is scheduled for payment of $0.4 million in fiscal year 2024.

A subsequent review of qualified wages for the Employee Retention Credit was performed during the preparation of the tax provision for fiscal year 2023 and it was determined $0.6 million of the money received did not qualify and needs to be paid back to the Internal Revenue Service (IRS).

This $0.6 million was included in Cash and cash equivalents as of September 30, 2023.

However, this amount was not recognized in net income in the Consolidated statements of operations for the fiscal year ended September 30, 2023.

The Company may be subject to interest and penalties related to this cash.

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.

Critical Accounting Estimates and Policies

11 unchanged sentences

A financing component exists when at contract inception the period between the transfer of a promised good and/or service to the customer differs from when the customer pays for the good and/or service.

As a practical expedient, we have elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and the subsequent payment will be one year or less.

As a practical expedient,

we have elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and the subsequent payment will be one year or less.

Certain contracts contain a financing component including managed services contracts with financing of hardware and software.

13 unchanged sentences

Gross versus Net Revenue

We recognize revenue from third-party service contracts as either gross sales or net sales depending on whether we are acting as a principal party to the transaction or acting as an agent or broker based on control and timing.

We are a principal if we control the good or service before that good or service is transferred to the customer.

We record revenue as gross when we are a principal party to the arrangement and net of cost when we are acting as a broker or agent for a third party.

We recognize revenue from third-party service contracts as either gross sales or net sales depending on whether we are acting as the principal party to the transaction or acting as an agent or broker based on control and timing.

We are the principal if we control the good or service before that good or service is transferred to the customer.

We record revenue as gross when we are the principal party to the arrangement and net of cost when we are acting as a broker or agent for a third party.

Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded in cost of sales.

3 unchanged sentences

When we are the principal, revenue is recognized over the contract term.

We have concluded we are the agent in sales of third-party maintenance, software or hardware support, and certain security software that is sold with integral third-party delivered software maintenance that include critical updates.

Product Warranty Accrual

Our product sales generally include a 90-day to three-year hardware warranty.

At time of product shipment, we accrue for the estimated cost to repair or replace potentially defective products.

Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.

Engineering and Development Expenses

5 unchanged sentences

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We also reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

We also reduce deferred tax assets by a valuation allowance if, based on the weight of

available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.

6 unchanged sentences

These estimated tax liabilities include the provision for taxes that may become payable in the future.

Intangible Assets

Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired.

We did not have intangible assets with indefinite lives at any time during the two years ended September 30, 2022.

Intangible assets subject to amortization are amortized over their estimated useful lives, generally three to ten years, and are carried at net book value.

The remaining useful lives of intangible assets are evaluated on an annual basis.

If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value, then an impairment charge is recorded to write down that asset to its fair value.

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method.

23 unchanged sentences

Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense.

Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit.

Discount rates are selected based upon

rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit.

A decrease in the discount rate would result in greater pension expense while an increase in the discount rate would decrease pension expense.

1 unchanged sentence

Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.

Inflation and Changing Prices

Management does not believe that inflation and changing prices had significant impact on sales, revenues or income during fiscal years 2022 or 2021.

However, we have seen a trend of significantly increasing prices, specifically with integrated circuit vendors.

We try to pass these price increases to our customers, but certain economic factors and technological advances have placed downward pressure on pricing.

There is no assurance that the Company’s business will not be materially and adversely affected by inflation and changing prices in the future.

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-K

Item 7. Management’s Discussion and Analysis