What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2024-02-14 · 191 added, 103 removed, 72 unchanged (80% of the section changed)

5 unchanged sentences

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, 2023.

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.

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 US 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 US Tax laws, inflationary pressures, and the impact of the Ukraine-Russian military and Israeli-Hamas conflict on global trade and financial markets.

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

8 unchanged sentences

Actual results may differ from these estimates under different assumptions or conditions.

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

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 six months ended March 31, 2024 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 and New Significant Accounting Policy in Item 1 to this Quarterly Report on Form 10-Q for details of the new policy.

Recent trends affecting our financial performance

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.

As of March 31, 2024, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict have not had a direct significant impact on revenue as we do not have any significant 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.

1 unchanged sentence

Results of Operations

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

Overview of the three months ended March 31, 2024

Our sales increased by approximately $0.4 million, or 3%, to $13.7 million for the three months ended March 31, 2024 compared to $13.3 million for the three months ended March 31, 2023.

Our gross margin percentage increased to 47% of sales for the three months ended March 31, 2024 compared to 38% for the three months ended March 31, 2023.

For the three months ended March 31, 2024 there was operating income of $1.2 million compared to operating income of $0.2 million for the three months ended March 31, 2023.

Other income, net increased approximately $0.3 million to $0.5 million for the three months ended March 31, 2024 compared to $0.2 million for the same prior year period.

An income tax expense of $0.1 million was recorded for the three months ended March 31, 2024 compared to an income tax expense of $0.1 million 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 March 31, 2024 and 2023:

March 31, 2024

March 31, 2023

(Dollar amounts in thousands)

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Operating income

Other income (expense), net

Other income, net

Income before income taxes

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:

Our sales increased by approximately $0.4 million, or 3%, to $13.7 million for the three months ended March 31, 2024 compared to $13.3 million for the same prior year period.

The increase in sales is the result of an increase of $1.0 million in our HPP segment, partially offset with a $0.6 million decrease in our TS segment.

TS segment sales change was as follows for the three months ended March 31, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

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:

The decrease in TS segment product sales of $1.6 million consists of a $1.5 million decrease in the US division due to decreased sales to several major customers and a decrease of $0.1 million in the UK division from one major customer.

Service sales for the three months ended March 31, 2024 increased $1.0 million from the same prior year period, which was attributable to the US division.

The increase in service sales included increased third party maintenance sales of $1.2 million and increased managed services sales of $0.2 million, partially offset by decreased internal and third party service sales of $0.4 million.

HPP segment sales change was as follows for the three months ended March 31, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

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:

The HPP product sales increased $1.1 million for the three months ended March 31, 2024 compared to the same prior year period as a result of increased sales of ARIA Zero Trust Gateway to one major customer of $2.0 million, partially offset by $0.9 million of decreased Myricom sales to several major customers.

The HPP service sales remained relatively flat at $0.5 million for the three months ended March 31, 2024 compared to the same prior year period as a result of decreased repair revenue 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 March 31, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

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.

The $0.9 million increase in sales to the Americas was primarily the result of an increase in the HPP segment of $1.2 million, partially offset by a decrease in the TS segment’s US division of $0.3 million.

The $0.2 million decrease in sales to Europe was primarily the result of decreased sales by our TS segment’s US division of $0.1 million and UK division of $0.1 million.

The sales to Asia decreased $0.2 million for the three months ended March 31, 2024 compared to the same prior year period due to a decrease in the HPP division.

Gross Margins

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%.

Our gross margin ("GM") increased $1.5 million for the three months ended March 31, 2024 as compared to the same prior year period.

The GM as a percentage of sales increased to 47% for the three months ended March 31, 2024 compared to the same prior year period of 38%.

(Dollar amounts in thousands)

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:

The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2024 and 2023 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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:

The overall TS segment GM as a percentage of sales increased to 39% for the three month period ended March 31, 2024 compared to 34% for the same prior year period.

Product GM as a percentage of revenue decreased 3% due to a few large sales in the current period with lower margins when compared to the same prior year period.

The service GM as a percentage of revenue increased 6% from prior year due to increased third party maintenance revenues, which are recorded “net” meaning the revenue, net of the associated cost, is recorded in the Services revenue line item causing an increase in GM as a percentage of sales.

The impact of product mix within our HPP segment on gross margin for the three months ended March 31, 2024 and 2023 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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.

The overall HPP segment GM as a percentage of sales increased to 86% for the three months ended March 31, 2024 from 67% for the three months ended March 31, 2023.

The 25% increase in product GM as a percentage of product revenue for the three months ended March 31, 2024 compared to the same prior year period is due to one large ARIA Zero Trust Gateway order in the current period, which is nearly all GM and did not occur in the prior year.

The service GM as a percentage of services revenue from the same prior year period remained flat at 72% without any significant changes in services mix.

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, 2023 to $0.7 million when compared to the prior year period due to decreased consulting and labor expenses.

The engineering and development expenses incurred by our HPP segment decreased $0.2 million for the three months ended March 31, 2024 to $0.7 million compared to the same 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 three months ended December 31, 2023 and 2022:

Three months ended December 31,

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

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.

SG&A expenses increased $0.6 million compared to the same prior year period to $4.5 million for the three months ended March 31, 2024.

The $0.3 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of $0.2 million increased variable compensation and $0.1 million increased salaries and benefits.

The HPP segment SG&A expenses increased $0.3 million for the three months ended March 31, 2024 as compared to the prior year period due to increased consulting expenses of $0.2 million and increased commissions of $0.1 million.

Other Income/Expenses

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

The following table details other income, net for the three months ended March 31, 2024 and 2023:

Three months ended

December 31, 2023

December 31, 2022

March 31, 2024

March 31, 2023

(Amounts in thousands)

Foreign exchange income (loss)

Interest expense

Interest income

Other income, net

Total other income, net

Total other income, net for the three months ended March 31, 2024 increased $0.3 million to $0.5 million compared to the three months ended March 31, 2023.

The $0.1 million increased foreign exchange income for the three months ended March 31, 2024 was primarily due to the US Dollar strengthening relative to the British Pound compared to the same prior year period.

In consolidation, US dollars and Euros are remeasured into the functional currency, British Pounds, of our UK subsidiary.

This non-cash remeasurement is included in foreign exchange gain (loss) on the income statement.

The foreign exchange gain was primarily from the US Dollar bank account in our TS UK division.

Interest income increased $153 thousand for the three months ended March 31, 2024 compared to the same prior year period primarily due to significantly increased interest rates from the same prior year period, which has resulted in increased interest income from money market accounts from both the US and UK.

There was a slight decrease in interest income from agreements that have payment terms in excess of one year (see Note 5 Financing receivables, net in Item 1 to this Quarterly Report on Form 10-Q for details).

Although new agreements with higher interest rates have been entered into during fiscal year 2023 and 2024, this is more than 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 $16 thousand for the three months ended March 31, 2024 compared to the same prior year period was related to the TS US 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.

See Note 8 Accounts payable and line of credit in Item 1 to this Quarterly Report on Form 10-Q for details.

Additionally, there was no interest expense incurred in the current period for a note payable compared to the prior year as the note was paid in full the first day of fiscal year 2024.

These decreases were partially offset with an increase of interest expense from one subsequent multi-year vendor agreement in the third quarter of fiscal year 2023.

An income tax expense of $135 thousand was recorded for the three months ended March 31, 2024 compared to an income tax expense of $71 thousand in the same period of 2023.

The estimated annualized effective income tax rate for the three months ended March 31, 2024 was 18%, 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 are 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 March 31, 2024 was 8%, excluding the UK as previously mentioned, driven by excess tax benefits on restricted stock awards vesting during the period.

The income tax expense for the three months ended March 31, 2023 was primarily driven by minimum state tax expenses and the change in valuation allowance for the period.

For the three months ended March 31, 2023, 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 three months ending March 31, 2024.

Overview of the six months ended March 31, 2024

Our sales decreased by $2.5 million, or 8%, to $29.1 million for the six months ended March 31, 2024 as compared to $31.6 million for the six months ended March 31, 2023.

The decrease in sales is the result of a decrease of $1.8 million in our TS segment and a decrease of approximately $0.7 million in our HPP segment.

Our gross margin percentage increased 2% to 36% of sales for the six months ended March 31, 2024 compared to 34% for the six months ended March 31, 2023.

For the six months ended March 31, 2024 there was operating income of $0.9 million compared to operating income of $1.6 million for the six months ended March 31, 2023.

Other income (expense), net increased $0.9 million for the six months ended March 31, 2024 to income of $0.8 million compared to expense of $0.1 million for the six months ended March 31, 2023.

An income tax expense of $0.1 million was recorded for the six months ended March 31, 2024 compared to an income tax expense of $0.2 million in the same prior year period.

The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2024 and 2023:

March 31, 2024

March 31, 2023

(Dollar amounts in thousands)

Costs and expenses:

Cost of sales

Engineering and development

Selling, general and administrative

Total costs and expenses

Operating income

Other income (expense), net

Income before income taxes

Income tax expense

Our sales decreased by approximately $2.5 million, or 8%, to $29.1 million for the six months ended March 31, 2024 as compared to $31.6 million for the six months ended March 31, 2023.

The decrease in sales is the result of a decrease of $1.8 million in our TS segment and a decrease of approximately $0.7 million in our HPP segment.

TS segment sales change was as follows for the six months ended March 31, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

The decrease in TS segment product sales of $2.7 million during the period as compared to the prior year period is attributable to decreased sales with several major customers in the US division.

Service sales for the six months ended March 31, 2024 increased $0.9 million from the prior year period, which consists of a $1.0 million increase in the US division, partially offset by a $0.1 million decrease in the UK division.

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

HPP segment sales change was as follows for the six months ended March 31, 2024 and 2023:

(Dollar amounts in thousands)

The HPP product sales decreased by $0.6 million for the six months ended March 31, 2024 as compared to the prior year period, primarily as a result of one large Myricom product order of $1.8 million in the prior year which did not reoccur in the current year combined with several major customers having a decrease of $0.8 million, which was partially offset during the current period for one large ARIA Zero Trust Gateway order of $2.0 million which did not occur in the prior year period.

The HPP service sales decreased $0.1 million for the six months ended March 31, 2024 compared to the prior year period due to decreased royalties on high-speed processing boards related to the E2D program of $0.2 million

combined with decreased revenue from repairs of $0.1 million, partially offset by increased revenue from ARIA of $0.2 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, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

The $2.5 million decrease in sales to the Americas was the result of a decrease in the TS segment’s US division of $2.0 million and UK division of $0.1 million combined with a decrease in the HPP segment of $0.4 million.

The $0.1 million decrease in sales to Europe was the result of decreased sales by our HPP Segment.

The sales to Asia remained relatively flat when compared to the prior year with increased sales of $0.2 million in the TS segment’s division offset by a decrease in the HPP division of $0.2 million.

Gross Margins

Our gross margin ("GM") decreased $0.2 million for the six months ended March 31, 2024 as compared to the same prior year period.

The GM as a percentage of total sales increased to 36% for the six months ended March 31, 2024 as compared to the same prior year period of 34%.

Increase (decrease)

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the six months ended March 31, 2024 and 2023 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of total sales increased to 31% for the six month period ended March 31, 2024 compared to 30% from the prior year period.

This is due to an increase in GM from services relative to products since services GM as a percentage of revenue is significantly higher than product GM as a percentage of revenue.

Service GM as a percentage revenue remained relatively flat from the prior year without any significant changes in service line GM as a percentage of revenue while there was a slight decrease in product GM from the prior year due to product mix.

The impact of product mix within our HPP segment on gross margin for the six months ended March 31, 2024 and 2023 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales increased to 78% for the six months ended March 31, 2024 from 67% for the six months ended March 31, 2023.

The 18% increase in product GM as a percentage of product revenue compared to the same prior year period was primarily attributed to one large ARIA Zero Trust Gateway order in the six months ended March 31, 2024, which is nearly all gross margin.

The 15% decrease in service GM as a percentage of service revenue for the six months ended March 31, 2024 compared to the same prior year period was due to decreased royalty sales, which are nearly all margin.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment decreased to $1.4 million for the six months ended March 31, 2024 when compared to the same prior year period of $1.7 million due to lower consulting and decreased labor expenses of $0.3 million.

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 six months ended March 31, 2024 and 2023:

Six months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

SG&A expenses increased $0.7 million for the six months ended March 31, 2024 compared to the same prior year period.

The $0.3 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of approximately $0.2 million increased variable compensation and $0.1 million of increased salaries and benefits.

Each salesperson has his or her own commission rate on gross margin and related quota, which is why, despite overall gross margin slightly decreasing, commissions increased.

The HPP segment SG&A expenses increased $0.4 million for the six months ended March 31, 2024 as compared to the prior year period due to increased consulting expenses of $0.2 million, increased stock compensation of $0.1 million, and increased variable compensation of $0.1 million.

Other Income/Expenses

The following table details other income, net for the six months ended March 31, 2024 and 2023:

Six months ended

March 31, 2024

March 31, 2023

(Amounts in thousands)

Foreign exchange loss

3 unchanged sentences

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 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.

Total other income (expense), net for the six months ended March 31, 2024 increased $0.9 million to income of $0.8 million compared to expense of $0.1 million in the same prior year period.

The $0.5 million decreased foreign exchange loss for the six months ended March 31, 2024 was due to the US Dollar and Euro weakening less relative to the British Pound compared to the same prior year period.

In consolidation, US dollars and Euros are remeasured into the functional currency, British Pounds, of our UK subsidiary.

This non-cash remeasurement is included in foreign exchange loss on the income statement.

The foreign exchange loss was primarily from the US Dollar bank account in our TS UK division.

Interest income increased $388 thousand for the six months ended March 31, 2024 compared to the same prior year period primarily due to significantly increased interest rates from the same prior year period, which has resulted in increased interest income from money market accounts from both the US and UK There was a slight decrease in interest income from agreements that have payment terms in excess of one year (see Note 5 Financing receivables, net in Item 1 to this Quarterly Report on Form 10-Q for details).

Although new agreements that have payment terms in excess of one year (see Note 5 Financing receivables, net in Item 1 to this Quarterly Report on Form 10-Q for details) with higher interest rates have been entered into during fiscal year 2023 and 2024, this is more than 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 $31 thousand for the six months ended March 31, 2024 compared to the same prior year period was related to the TS US 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.

Additionally, there was no interest expense incurred in the current period for the note payable compared to the prior year as the note was paid in full the first day of fiscal year 2024.

These decreases were partially offset with an increase from one subsequent multi-year vendor agreement in the third quarter of fiscal year 2023.

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

An income tax expense of $148 thousand was recorded for the six months ended March 31, 2024 compared to an income tax expense of $204 thousand in the same period of 2023.

The effective tax rate for the six months ended March 31, 2024 was 8%, excluding the UK as previously mentioned, driven by excess tax benefits on restricted stock awards vesting during the period.

The income tax expense for the six months ended March 31, 2023 was primarily driven by minimum state tax expenses and the change in valuation allowance for the period.

For the six months ended March 31, 2023, 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.

Liquidity and Capital Resources

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,

Cash and cash equivalents increased by $1.9 million to $27.1 million as of March 31, 2024 from $25.2 million as of September 30, 2023.

The following is a summary of our cash flows for the six months ended March 31, 2024 and 2023:

Six months ended

(Dollar amounts in thousands)

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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.

Cash provided by operating activities was $3.3 million for the six months ended March 31, 2024 compared to $4.5 million used in operating activities in the prior year.

The increase from the prior year is primarily related to decreased accounts payable and accrued expenses of $7.3 million combined with decreased financing receivables of $0.6 million and decreased taxes payable of $1.0 million, partially offset with decreased inventory of $3.0 million.

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

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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.

Cash used in investing activities was $0.2 million for the six months ended March 31, 2024 compared to $3.8 million used in investing activities for the prior year.

The decrease in cash used from the prior year is primarily related to purchases of $3.5 million in held-to-maturity investments.

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.

Cash used in financing activities was $1.2 million for the six months ended March 31, 2024 compared to $2.4 million for the prior year period.

The primary difference was the timing in the net borrowing on our line-of-credit, which for the six months ended March 31, 2024 we had a net payment of $0.5 million compared to a net payment of $1.8 million in the prior year period.

Additionally, cash dividends paid increased $0.1 million from 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.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $5.0 million as of March 31, 2024 and consisted of 0.2 million Euros, 0.3 million British Pounds, and 4.4 million US Dollars.

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

As of March 31, 2024 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.

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.

An amount of $14.0 million and $13.5 million were available as of March 31, 2024 and September 30, 2023, respectively.

As of March 31, 2024 and September 30, 2023 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 9 Notes Payable and Line of Credit.

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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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.

Two-for-one stock split

On February 21, 2024, the Company announced its Board of Directors approved and declared a two-for-one stock split to be effected in the form of a 100% stock dividend.

The stock dividend was paid on March 20, 2024 to shareholders of record as of the close of business on March 6, 2024.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis