What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-14 compared with 2023-08-09 · 121 added, 217 removed, 54 unchanged (86% 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, changes in the U.S.

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 continuing impact of the novel coronavirus (COVID-19) on our business, results of operations and financial condition.

federal government, intense competition in the market segments in which we operate, changes in the U.S.

Tax laws, the impact of the Ukrainian-Russian military and Israeli-Hamas conflict on global trade and financial markets, and the impact of pandemics on our business, results of operations and financial condition.

Given these uncertainties, you should not place undue reliance on these forward-looking statements.

5 unchanged sentences

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, impairment assessment of intangibles, income taxes, deferred compensation and retirement plans, as well as estimated selling prices used for revenue recognition and contingencies.

On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses for accounts receivable and financing receivables, inventory valuation, impairment assessment of intangibles, income taxes, deferred compensation and retirement plans, as well as estimated selling prices used for revenue recognition and contingencies.

We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

1 unchanged sentence

A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management believes there have been no significant changes for the nine months ended June 30, 2023 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, 2022.

Management believes there have been no significant changes for the three months

ended December 31, 2023 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, 2023 except for the estimation for credit losses.

See Note 1 Basis of presentation in Item 1 to this Quarterly Report on Form 10-Q for details of the new policy.

Recent trends affecting our financial performance

COVID-19 has adversely affected the distribution channel leading to 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.

However, as time passes lead times have significantly improved.

The TS segment has many vendors it transacts with and supply shortages only remain with a few of our vendors.

The HPP segment has and continues to experience shortages with some 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 2022, but due to the delays by manufacturers the sale was recognized fully in revenue in the first quarter of fiscal year 2023 when we obtained 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.

As of June 30, 2023, 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 on the Company and our customers and suppliers.

As of December 31, 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, cyberattacks, 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.

Results of Operations.

Overview of the three months ended June 30, 2023

Our sales increased by approximately $4.4 million, or 33%, to $17.7 million for the three months ended June 30, 2023 compared to $13.3 million for the three months ended June 30, 2022.

Our gross margin percentage decreased to 33% of sales for the three months ended June 30, 2023 compared to 37% for the three months ended June 30, 2022.

For the three months ended June 30, 2023 there was operating income of $575 thousand compared to operating income of $19 thousand for the three months ended June 30, 2022.

Other income, net decreased $0.5 million to $0.2 million for the three months ended June 30, 2023 compared to $0.7 million for the same prior year period An income tax benefit of $1.7 million was recorded for the three months ended June 30, 2023 compared to an income tax expense of $11 thousand in the same period in the prior year.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended June 30, 2023 and 2022:

June 30, 2023

June 30, 2022

Overview of the three months ended December 31, 2023

Our sales decreased by approximately $2.9 million, or 16%, to $15.4 million for the three months ended December 31, 2023 as compared to $18.3 million for the three months ended December 31, 2022.

The decrease in sales is the result of a decrease of $1.2 million in our TS segment combined with approximately a $1.7 million decrease in our HPP segment.

Our gross margin percentage as a percentage of sales decreased to 27% for the three months ended December 31, 2023 as compared to 32% for the three months ended December 31, 2022.

For the three months ended December 31, 2023 there was an operating loss of $(0.3) million compared to operating income of $1.4 million for the three months ended December 31, 2022.

Other income (expense), net increased $0.6 million for the three months ended to December 31, 2023 as compared to the three months ended December 31, 2022.

An income tax expense of $13 thousand was recorded for the three months ended December 31, 2023 compared to an income tax expense of $133 thousand in the same period of fiscal year 2023.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2023 and 2022:

December 31, 2023

December 31, 2022

(Dollar amounts in thousands)

5 unchanged sentences

Operating income

Other income, net

Income before income taxes

Income tax (benefit) expense

Our sales increased by approximately $4.4 million, or 33%, to $17.7 million for the three months ended June 30, 2023 compared to $13.3 million for the same prior year period.

The increase in sales is the result of an increase of $3.8 million in our TS segment combined with a $0.6 million increase in our HPP segment.

TS segment sales change was as follows for the three months ended June 30, 2023 and 2022:

Increase (decrease)

(Dollar amounts in thousands)

The increase in TS segment product sales of $3.9 million during the period was attributable to the U.S.

division due to increased sales to several major customers.

Service sales for the three months ended June 30, 2023 decreased $0.1 million from the same prior year period, which was attributable to the U.S.

The decrease in service sales included decreased internal and third party service sales of $0.5 million and decreased third party maintenance sales of $0.1 million, partially offset by increased managed services sales of $0.5 million.

HPP segment sales change was as follows for the three months ended June 30, 2023 and 2022:

(Dollar amounts in thousands)

The HPP product sales increased $0.6 million for the three months ended June 30, 2023 compared to the same prior year period as a result of increased sales to one major customer of $0.8 million, partially offset by a $0.2 million decrease to several customers of Myricom product.

The HPP service sales remained relatively flat at $0.3 million for the three months ended June 30, 2023 compared to the same prior year period as a result of decreased royalties on high-speed processing boards related to the E2D program of $0.1 million offset with increased ARIA revenue 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 three months ended June 30, 2023 and 2022:

Increase (decrease)

(Dollar amounts in thousands)

The $4.3 million increase in sales to the Americas was primarily the result of an increase in the TS segment’s U.S.

division of $3.7 million combined with an increase in the HPP segment of $0.6 million.

The $0.1 million increase in sales to Europe was primarily the result of increased sales by our TS segment’s U.S.

The sales to Asia remained relatively flat for the three months ended June 30, 2023 compared to the same prior year period without any significant changes in any division.

Gross Margins

Our gross margin ("GM") increased $1.0 million for the three months ended June 30, 2023 as compared to the same prior year period.

The GM as a percentage of sales decreased to 33% for the three months ended June 30, 2023 compared to the same prior year period of 37%.

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, 2023 and 2022 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of sales decreased to 31% for the three month period ended June 30, 2023 compared to 37% for the same prior year period.

Product GM as a percentage of revenue decreased 3% due to a few large sales with lower margins.

The service GM as a percentage of revenue remained flat due to no significant changes in the margins for any type of service revenue.

The impact of product mix within our HPP segment on gross margin for the three months ended June 30, 2023 and 2022 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales increased to 65% for the three months ended June 30, 2023 from 49% for the three months ended June 30, 2022.

The 37% increase in product GM as a percentage of product revenue for the three months ended June 30, 2023 compared to the same prior year period is due to higher margin Myricom products being sold than the same prior year period as the Myricom products have a wide range of GM as a percentage of revenue.

The 23% decrease in service GM as a percentage of services revenue from the same prior year period was due to decreased royalties, which are nearly all gross margin.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment decreased $0.1 million for the three months ended June 30, 2023 to $0.7 million compared to the same prior year period due to decreased labor expenses.

current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway 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, 2023 and 2022:

Three months ended June 30,

(Dollar amounts in thousands)

By Operating Segment:

SG&A expenses of $4.6 million for the three months ended June 30, 2023 increased $0.5 million compared to the same prior year period.

The TS segment SG&A expenses increased by approximately $0.4 million due to increased variable compensation from higher sales and increased payroll.

The HPP segment SG&A expenses increased approximately $0.1 million for the three months ended June 30, 2023 as compared to the prior year period due to increased variable compensation.

Other Income/Expenses

The following table details other income, net for the three months ended June 30, 2023 and 2022:

Three months ended

June 30, 2023

June 30, 2022

(Amounts in thousands)

Foreign exchange (loss) gain

Interest expense

Interest income

Other income (expense), net

Total other income, net

Total other income (expense), net for the three months ended June 30, 2023 decreased $0.4 million compared to the three months ended June 30, 2022.

The $0.7 million increased foreign exchange loss for the three months ended June 30, 2023 was due to the U.S.

Dollar and Euro weakening relative to the British Pound compared to the same prior year period.

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 (loss) gain on the income statement.

The foreign exchange loss was primarily from U.S.

Dollar and Euro bank accounts in our TS U.K.

Interest income increased $243 thousand for the three months ended June 30, 2023 compared to the same prior year period primarily due to additional interest income from 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) entered into subsequent to the fiscal third quarter of 2022, which were partially offset with lower interest income recognized from prior agreements as interest income decreases as time elapses due to principal payments being received.

All of these agreements are in the TS-US division.

Additionally, interest rates have significantly increased from the same prior year period, which has resulted in increased interest income from money market accounts and investments from both the U.S.

The interest expense decrease of $2 thousand for the three months ended June 30, 2023 compared to the same prior year period was related to the TS U.S.

division making principal payments on multi-year vendor contracts that started in the second quarter of fiscal year 2021 related to sales agreements that have payment terms in excess of one year as the Company incurs less interest expense over time as principal payments are made.

This was partially offset with interest expense incurred during the three months ended June 30, 2023 for a new multi-year vendor contract with payment terms in excess of one year.

This is the only new multi-year vendor agreement since the third quarter of fiscal year 2022.

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

An income tax benefit of $1.7 million was recorded for the three months ended June 30, 2023 compared to an income tax expense of $11 thousand in the same prior year period.

The income tax benefit for the three months ended June 30, 2023 was primarily driven by the release of the full valuation allowance against the Company’s deferred tax assets that was established in fiscal year 2021.

Since that time, the COVID-19 pandemic has ended, and the Company’s Technology Solutions business has grown in fiscal years 2022 and 2023, which provided strong financial results including growth in product and software sales, third party maintenance sales, and recurring managed services and cloud software sales.

The backlog continues to be strong as of June 30, 2023.

The income tax provision for each quarter is generally determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period.

To determine the annual effective income tax rate, we must estimate both the total income (loss) before income tax for the full year and the jurisdictions in which that income (loss) is subject to tax.

The actual effective income tax rate for the full year may differ from these estimates if income (loss) before income tax is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

While the Company had maintained a full valuation allowance, we had been using the discrete effective tax rate method to calculate income taxes for the purposes of quarterly reporting.

Now that the valuation allowance has been reduced, the Company has resumed using the annualized effective tax rate method to calculate income taxes as prescribed under ASC 740 for the three months ended June 30, 2023.

Overview of the nine months ended June 30, 2023

Our sales increased by $11.6 million, or 31%, to $49.3 million for the nine months ended June 30, 2023 as compared to $37.7 million for the nine months ended June 30, 2022.

The increase in sales is the result of an increase of $9.3 million in our TS segment and an increase of approximately $2.3 million in our HPP segment.

Our gross margin percentage remained consistent at 34% of sales for the nine months ended June 30, 2023 compared to 34% for the nine months ended June 30, 2022.

For the nine months ended June 30, 2023 there was operating income of $2.2 million compared to operating loss of $0.4 million for the nine months ended June 30, 2022.

Other income, net decreased $0.8 million for the nine months ended June 30, 2023 to income of $0.1 million compared to income of $0.9 million for the nine months ended June 30, 2022.

An income tax benefit of $1.5 million was recorded for the nine months ended June 30, 2023 compared to an income tax expense of $28 thousand in the same prior year period.

The following table details our results of operations in dollars and as a percentage of sales for the nine months ended June 30, 2023 and 2022:

June 30, 2023

June 30, 2022

(Dollar amounts in thousands)

Costs and expenses:

Cost of sales

Engineering and development

Selling, general and administrative

Total costs and expenses

Operating income (loss)

Other income, net

Income before income taxes

Income tax (benefit) expense

Our sales increased by approximately $11.6 million, or 31%, to $49.3 million for the nine months ended June 30, 2023 as compared to $37.7 million for the nine months ended June 30, 2022.

The increase in sales is the result of an increase of $9.3 million in our TS segment and an increase of approximately $2.3 million in our HPP segment.

TS segment sales change was as follows for the nine months ended June 30, 2023 and 2022:

Income tax expense

Net (loss) income

Our sales decreased by approximately $2.9 million to $15.4 million for the three months ended December 31, 2023 as compared to $18.3 million for the same prior year period.

TS segment sales change was as follows for the three months ended December 31, 2023 and 2022:

(Dollar amounts in thousands)

The increase in TS segment product sales of $8.7 million during the period as compared to the prior year period is attributable to an increase in the U.S.

division of $8.6 million due to increased sales to several major customers combined with an increase in the U.K.

division of $0.1 million due to one large order with a major customer.

Service sales for the nine months ended June 30, 2023 increased $0.5 million from the prior year period, which is attributable to the U.S.

The changes in service sales included increased managed services sales of $0.9 million and increased third party maintenance sales of $0.4 million, partially offset by decreased internal and third party service sales of $0.8 million.

HPP segment sales change was as follows for the nine months ended June 30, 2023 and 2022:

The decrease in TS segment product sales of $1.1 million during the period is primarily attributable to the U.S.

division due to decreased sales to several major customers.

Service sales for the three months ended December 31, 2023 decreased $0.1 million from the prior year period, which is attributable to the U.S.

The decrease in service sales included decreased third party maintenance sales of $0.3 million, partially offset by increased managed services sales of $0.2 million.

HPP segment sales change was as follows for the three months ended December 31, 2023 and 2022:

(Dollar amounts in thousands)

The HPP product sales increased by $2.0 million for the nine months ended June 30, 2023 as compared to the prior year period, primarily as a result of one large Myricom product order of $1.8 million placed in the first quarter of fiscal year 2022, but due to supply chain delays was not fully fulfilled until the first quarter of fiscal year 2023.

Additionally, increased volume to a major customer of $0.8 million occurred during the nine months ended June 30, 2023, which was offset with a $0.6 million decrease in Myricom product from other customers.

The HPP service sales increased $0.3 million for the nine months ended June 30, 2023 compared to the prior year period from increased ARIA revenue of

$0.3 million and increased repair revenue of $0.1 million, partially offset with decreased royalties on high-speed processing boards related to the E2D program 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 nine months ended June 30, 2023 and 2022:

The HPP product sales decreased by $1.7 million for the three months ended December 31, 2023 as compared to the same prior year period primarily as a result of one large Myricom product order in the first quarter of fiscal year 2023 which did not reoccur in fiscal year 2024.

The HPP services sales decreased $0.1 million for the three months ended December 31, 2023 compared to the prior year period as a result of 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 December 31, 2023 and 2022:

Increase (decrease)

(Dollar amounts in thousands)

The $11.8 million increase in sales to the Americas was primarily the result of an increase in the TS segment’s U.S.

division of $9.5 million combined with an increase in the HPP segment of $2.3 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 due to a large volume from one customer in the same prior year period which did not reoccur in the current period combined with a decrease in the HPP segment of $0.2 million, partially offset by an increase in the TS UK division of $0.1 million.

The sales to Asia increased by $0.1 million due to an increase in the HPP segment of $0.2 million, partially offset by the TS U.S.

The $3.4 million decrease in sales to the Americas was primarily the result of a decrease in the TS segment’s U.S.

division of $1.7 million, a decrease in the TS segment’s U.K.

division of $0.1 million, and a decrease in the HPP segment of $1.6 million.

The $0.2 million increase in sales to Europe was primarily the result of increased sales by our TS segment’s U.K.

division of $0.2 million and U.S.

division of $0.1 million, partially offset with a $0.1 million decrease in the HPP segment.

The sales to Asia increased $0.3 million due to an increase of sales in the TS segment’s U.S.

division of $0.4 million, partially offset with a decrease in the U.K.

division of $0.1 million.

Gross Margins

Our gross margin ("GM") increased $3.9 million for the nine months ended June 30, 2023 as compared to the same prior year period.

The GM as a percentage of total sales remained relatively flat at 34% for the nine months ended June 30, 2023 as compared to the same prior year period of 34%.

Increase (decrease)

Our gross margin ("GM") decreased $1.7 million for the three months ended December 31, 2023 as compared to the same prior year period.

The GM as a percentage of sales decreased to 27% for the three months ended December 31, 2023 as compared to the prior year period of 32%.

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the nine months ended June 30, 2023 and 2022 was as follows:

Increase (decrease)

The impact of product mix within our TS segment on gross margin for the three months ended December 31, 2023 and 2022 was as follows:

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of total sales decreased to 30% for the nine month period ended June 30, 2023 compared to 32% from the prior year period.

This is due to a disproportionate increase in GM from products when compared to services since services GM as a percentage of revenue is significantly higher than products.

However, product and service GM as a percentage of each type of revenue remained relatively flat from the prior year.

The impact of product mix within our HPP segment on gross margin for the nine months ended June 30, 2023 and 2022 was as follows:

Increase (decrease)

The overall TS segment GM as a percentage of sales remained flat at 26% for the three month period ended December 31, 2023 compared to the prior year period.

Product GM as a percentage of product sales remained flat at 17% for the three months ended December 31, 2023 compared to 17% for the prior year period.

There were not any significant changes in GM for any individual products sold.

Service GM as a percentage of service sales decreased to 50% for the three months ended December 31, 2023 compared to the prior year period of 56% due to decreased third party maintenance sales in which the sale is recorded “net” meaning gross profit is recorded in the services sales financial statement line item.

This “net” recording increases GM as a percentage of sales.

The impact of product mix within our HPP segment on gross margin for the three months ended December 31, 2023 and 2022 was as follows:

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales increased to 66% for the nine months ended June 30, 2023 from 51% for the nine months ended June 30, 2022.

The 28% increase in product GM as a percentage of product revenue was primarily attributed to the higher margin Myricom products we sold for the nine months ended June 30, 2023 compared to the same prior year period.

The Myricom products have a wide range of gross margin percentage.

The 17% decrease in service GM as a percentage of service revenue for the nine months ended June 30, 2023 compared to the same prior year period was due to decreased royalty sales, which are nearly all margin, partially offset with increased repair GM that has lower margins than the royalty sales.

The overall HPP segment GM as a percentage of sales decreased to 47% for the three months ended December 31, 2023 from 66% for the three months ended December 31, 2022.

The 6% decrease in product GM as a percentage of product revenue for the three months ended December 31, 2023 compared to the same prior year period is primarily due to one major order, which had relatively high GM as a percentage of sales, which did not reoccur in the current year period.

The 48% decrease in service GM as a percentage of services revenue from the prior year was due to decreased royalty sales, which are nearly all GM.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment increased to $2.4 million for the nine months ended June 30, 2023 when compared to the same prior year period of $2.2 million due to higher consulting expenses of $0.4 million, partially offset by decreased labor expenses of $0.2 million.

The engineering and development expenses incurred by our HPP segment decreased $0.1 million for the three months ended December 31, 2023 to $0.7 million when compared to the prior year period due to decreased consulting and labor expenses.

The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway 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, 2023 and 2022:

Nine 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, 2023 and 2022:

Three months ended December 31,

(Dollar amounts in thousands)

By Operating Segment:

SG&A expenses increased $1.2 million for the nine months ended June 30, 2023 compared to the same prior year period.

The $1.2 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of approximately $0.5 million increased variable compensation, $0.4 million increased salaries and benefits, $0.2 million increased travel expenses, and $0.1 million of decreased provision for losses on accounts receivable.

The HPP segment SG&A expenses remained relatively flat at approximately $2.7 million for the nine months ended June 30, 2023 as compared to the prior year period with variable compensation increasing by $0.3 million and labor decreasing by $0.3 million.

SG&A expenses of $3.7 million for the three months ended December 31, 2023 increased $0.1 million as compared to the prior year period.

The TS segment G&A expenses increased by approximately $0.1 million due to increased salaries and stock compensation expense when compared to the prior year period.

The HPP segment SG&A expenses increased approximately $0.1 million for the three months ended December 31, 2023 as compared to the prior year period due to increased consulting expenses.

Other Income/Expenses

The following table details other income, net for the nine months ended June 30, 2023 and 2022:

Nine months ended

June 30, 2023

June 30, 2022

The following table details Total other income (expense), net for the three months ended December 31, 2023 and 2022:

Three months ended

December 31, 2023

December 31, 2022

(Amounts in thousands)

Foreign exchange (loss) gain

Foreign exchange loss

Interest expense

Interest income

Other income (expense), net

Total other income, net

Total other income (expense), net for the nine months ended June 30, 2023 decreased $0.8 million to income of $0.1 million compared to income of $0.9 million in the same prior year period.

The $1.5 million increased foreign exchange loss for the nine months ended June 30, 2023 was due to the U.S.

Dollar and Euro weakening relative to the British Pound compared to the same prior year period.

Other income, net

Total other income (expense), net

The approximately $0.6 million increase in total other income (expense), net for the three months ended December 31, 2023 as compared to the same prior year period is primarily due to a net decrease in foreign exchange loss of $0.3 million combined with an increase in interest income of $0.2 million.

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 (loss) gain on the income statement.

The foreign exchange loss was primarily from U.S.

Dollar and Euro bank accounts in our TS U.K.

Interest income increased $558 thousand for the nine months ended June 30, 2023 compared to the same prior year period primarily due to additional interest income from 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) entered into subsequent to the fiscal third quarter of 2022, which were partially offset with lower interest income recognized from prior agreements as interest income decreases as time elapses due to principal payments being received.

All of these agreements are in the TS-US division.

The interest expense decrease of $78 thousand for the nine months ended June 30, 2023 compared to the same prior year period was related to the TS U.S.

This decrease was partially offset with an increase from one subsequent multi-year vendor agreement in the third quarter of fiscal year 2023.

This is the only new agreement from the third quarter of fiscal year 2022.

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

An income tax benefit of $1.5 million was recorded for the nine months ended June 30, 2023 compared to an income tax expense of $28 thousand in the same prior year period.

Since that time, the COVID-19 pandemic has ended, the Company’s Technology Solutions business has grown in fiscal years 2022 and 2023, which provided strong financial results including growth in product and software sales, third party maintenance sales, and recurring managed services and cloud software sales.

The backlog continues to be strong as of June 30, 2023.

The actual effective income tax rate for the full year may

differ from these estimates if income (loss) before income tax is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

This non-cash remeasurement is included in foreign exchange gain (loss) on the income statement and the foreign exchange gain is primarily from the U.S.

Dollar bank account.

The US dollar weakened relative to the British Pound for the three months ended December 31, 2023 causing a foreign exchange loss, but to a much lesser extent than the same prior year period.

The interest income increase of $235 thousand for the three months ended December 31, 2023 as compared to the prior year period is primarily due to higher interest income from our cash and cash equivalents from increased interest rates.

The interest expense decrease of $15 thousand for the three months ended December 31, 2023 as compared to the prior year period is related to the TS U.S.

division entering into multi-year contracts in prior years, which incur less interest expense as time elapses due to principal payments being made.

Payments on these agreements contain both principal and interest expense.

See Note 8 Accounts payable and accrued expenses, and Other noncurrent liabilities in Item 1 to this Quarterly Report on Form 10-Q for details.

Additionally, the last payment on the only note payable outstanding as of September 30, 2023 was made the first day of the quarter and no interest expense was incurred during the first three months of December 31, 2023.

An income tax expense of $13 thousand was recorded for the three months ended December 31, 2023 compared to an income tax expense of $133 thousand in the same period of 2022.

The estimated annualized effective income tax rate for the three months ended December 31, 2023 was 23%, excluding the impacts of the UK entity which continues to experience losses and maintains a full valuation allowance.

The difference between our effective income tax rate and the U.S.

federal statutory rate is the impact of state taxes and tax credits that we expect to be able to utilize against federal and state taxes.

The effective tax rate for the three months ended December 31, 2023 was also 23%, excluding the UK as previously mentioned, as there were no discrete tax items recorded during the period.

The income tax expense for the three months ended December 31, 2022 was primarily driven by minimum state tax expenses and the required capitalization of R&D expenses under IRC Section 174, offset by the use of federal NOL and R&D credits.

For the three months ended December 31, 2022, we used the discrete method to arrive at tax expense due to the full valuation allowance against our deferred tax assets and cumulative loss position.

While the Company had maintained a full valuation allowance, we had been using the discrete effective tax rate method to calculate income taxes for the purposes of quarterly reporting.

Now that the valuation allowance has been reduced, the Company has resumed using the annualized effective tax rate method to calculate income taxes as prescribed under ASC 740 and has done so for the period ending December 31, 2023.

Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which decreased by approximately $10.2 million to $13.8 million as of June 30, 2023 from $24.0 million as of September 30, 2022.

Our significant sources of cash for the nine months ended June 30, 2023 included a decrease in other assets of $2.6 million and a decrease in refundable income taxes of $0.5 million.

Within Accounts receivable there is $8.2 million due reflecting sales whose payment terms exceed one year.

We are scheduled to receive payments of $5.9 million in the fourth quarter of fiscal year 2023 from these agreements.

Our significant uses of cash for the nine months ended June 30, 2023 were primarily related to a decrease in accounts payable and accrued expenses and other long-term liabilities of $8.4 million, net purchases of held-to-maturity investments of $2.4 million, net payments under the line-of-credit agreement of $1.8 million, and dividends paid to shareholders of $0.5 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.8 million as of June 30, 2023 and consisted of 0.2 million Euros, 0.2 million British Pounds, and 4.2 million U.S.

This cash is included in our total cash and cash equivalents reported on the Condensed Consolidated Balance Sheets.

Approximately 3.5 million U.S.

Dollars was transferred tax-free during the first quarter of fiscal year 2023 from the foreign subsidiary in the U.K.

(TS-UK) to Modcomp, Inc.

(TS-US) to use in operations.

As of June 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.

Our primary source of liquidity is our cash and cash equivalents and our line of credit.

Cash and cash equivalents increased by $0.4 million to $25.6 million as of December 31, 2023 from $25.2 million as of September 30, 2023.

The following is a summary of our cash flows for the three months ended December 31, 2023 and 2022:

For the Three months ended December 31,

(Dollar amounts in thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Increase (decrease) in cash and cash equivalents

Operating Activities

Cash provided by operating activities was $1.7 million for the three months ended December 31, 2023 compared to $4.2 million used in operating activities in the prior year.

The increase from the prior year is primarily related to

increased accounts payable and accrued expenses of $10.4 million, partially offset with increased purchases of inventory of $4.7 million.

Inventory fluctuations are dependent on when orders are received and shipped.

Accounts payable and accrued expenses fluctuations are dependent on when vendor invoices are received as well as the related timing of the payments.

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

Investing Activities

Cash used in investing activities was $126 thousand for the three months ended December 31, 2023 compared to $95 thousand used in investing activities for the prior year.

The increase in cash used from the prior year is primarily related to an increase in purchases of property, equipment, and improvements.

Financing Activities

Cash used in financing activities was $1.2 million for the three months ended December 31, 2023 compared to $0.1 million for the prior year.

The primary difference was the timing in the net borrowing on the line-of-credit, which for the three months ended December 31, 2023 we had a net payment of $0.8 million compared to a net borrowing of $0.1 million in the prior year.

Other Liquidity and Capital Resources Items

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.9 million as of December 31, 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.

As of December 31, 2023 and September 30, 2023, 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 $13.7 million and $11.9 million were available as of June 30, 2023 and September 30, 2022, respectively.

As of June 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 10 “Notes Payable and Line of Credit .”

In the second quarter of fiscal year 2023 we purchased held-to-maturity investments consisting of treasury bills, which mature at different intervals with the last maturity date in August of 2023.

These investments are stated at amortized cost.

We’ve ensured we have enough working capital for operations during this time in making this investment decision.

The decision was made to get higher returns but continue to have high liquidity.

Amounts of $14.2 million and $13.5 million were available as of December 31, 2023 and September 30, 2023, respectively.

As of December 31, 2023 and September 30, 2023 there were no cash withdrawals outstanding.

For further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 9 Note Payable and Line of Credit.

We have multi-year agreements in which we sell certain customers goods and services with financing.

This is on the Consolidated Balance Sheets as Financing receivables, net of allowances and Financing receivables due after one year, net of allowances.

In the remainer of fiscal year 2024 we are scheduled to receive $5.7 million related to the financing receivables.

We also have multi-year agreements with vendors related to some of the financing agreements we have for customers, which are on the Consolidated Balance Sheets in Accounts payable and accrued expenses and Other noncurrent liabilities payables (long-term portion in other noncurrent liabilities).

In the remainder of fiscal year 2024 we are scheduled to pay $1.5 million related to the payables.

Our last payment on the only note payable outstanding as of September 30, 2023 was made in the first fiscal quarter and we no longer have any note payable outstanding as of December 31, 2023.

If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis