Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The discussion below contains certain forward-looking statements including, but not limited to, among others, statements concerning future revenues and future business plans. Forward-looking statements include statements in which we use words such as “expect”, “believe”, “anticipate”, “intend”, “project”, “estimate”, “should”, “could”, “may”, “plan”, “potential”, “predict”, “project”, “will”, “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus we cannot assure you that these expectations will prove to have been correct, and actual results may vary from those contained in such forward-looking statements. We discuss many of these risks and uncertainties in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10 K for the fiscal year ended September 30, 2023. 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. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. Except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. 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. Actual results may differ from these estimates under different assumptions or conditions. A description of our
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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 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. 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 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
of sales
March 31, 2023
of sales
(Dollar amounts in thousands)
Sales
$
13,706
100
%
$
13,269
100
%
Costs and expenses:
Cost of sales
7,228
53
%
8,279
62
%
Engineering and development
726
5
%
858
6
%
Selling, general and administrative
4,518
33
%
3,895
29
%
Total costs and expenses
12,472
91
%
13,032
97
%
Operating income
1,234
9
%
237
2
%
Other income, net
489
4
%
155
1
%
Income before income taxes
1,723
13
%
392
3
%
Income tax expense
135
1
%
71
1
%
Net income
$
1,588
12
%
$
321
2
%
Sales
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.
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TS segment sales change was as follows for the three months ended March 31, 2024 and 2023:
March 31,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
6,415
$
8,016
$
(1,601)
(20)
%
Services
4,789
3,777
1,012
27
%
Total
$
11,204
$
11,793
$
(589)
(5)
%
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:
March 31,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
2,043
$
972
$
1,071
110
%
Services
459
504
(45)
(9)
%
Total
$
2,502
$
1,476
$
1,026
70
%
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:
March 31,
Increase (decrease)
2024
%
2023
%
$
%
(Dollar amounts in thousands)
Americas
$
13,530
99
%
$
12,658
95
%
$
872
7
%
Europe
154
1
%
381
3
%
(227)
(60)
%
Asia
22
—
%
230
2
%
(208)
(90)
%
Totals
$
13,706
100
%
$
13,269
100
%
$
437
3
%
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.
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Gross Margins
Our gross margin ("GM") increased $1.5 million for the three months ended March 31, 2024 as compared to the same prior year period. The GM as a percentage of sales increased to 47% for the three months ended March 31, 2024 compared to the same prior year period of 38%.
March 31,
2024
2023
Increase
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
TS
$
4,314
39
%
$
3,995
34
%
$
319
5
%
HPP
2,164
86
%
995
67
%
1,169
19
%
Total
$
6,478
47
%
$
4,990
38
%
$
1,488
9
%
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:
March 31,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,210
19
%
$
1,775
22
%
$
(565)
(3)
%
Services
3,104
65
%
2,220
59
%
884
6
%
Total
$
4,314
39
%
$
3,995
34
%
$
319
5
%
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:
March 31,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,832
90
%
$
633
65
%
$
1,199
25
%
Services
332
72
%
362
72
%
(30)
—
%
Total
$
2,164
86
%
$
995
67
%
$
1,169
19
%
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 $0.2 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
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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 March 31, 2024 and 2023:
Three months ended March 31,
% of
% of
$
%
2024
Total
2023
Total
Increase
Increase
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
3,345
74
%
$
3,064
79
%
$
281
9
%
HPP segment
1,173
26
%
831
21
%
342
41
%
Total
$
4,518
100
%
$
3,895
100
%
$
623
16
%
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 other income, net for the three months ended March 31, 2024 and 2023:
Three months ended
March 31, 2024
March 31, 2023
Increase
(Amounts in thousands)
Foreign exchange income (loss)
$
32
$
(115)
$
147
Interest expense
(46)
(62)
16
Interest income
478
325
153
Other income, net
25
7
18
Total other income, net
$
489
$
155
$
334
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
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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.
Income Taxes
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.
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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
of sales
March 31, 2023
of sales
(Dollar amounts in thousands)
Sales
$
29,081
100
%
$
31,613
100
%
Costs and expenses:
Cost of sales
18,508
64
%
20,806
66
%
Engineering and development
1,426
5
%
1,694
5
%
Selling, general and administrative
8,256
28
%
7,512
24
%
Total costs and expenses
28,190
97
%
30,012
95
%
Operating income
891
3
%
1,601
5
%
Other income (expense), net
772
3
%
(115)
—
%
Income before income taxes
1,663
6
%
1,486
5
%
Income tax expense
148
1
%
204
1
%
Net income
$
1,515
5
%
$
1,282
4
%
Sales
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:
March 31,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
17,350
$
20,075
$
(2,725)
(14)
%
Services
8,517
7,573
944
12
%
Total
$
25,867
$
27,648
$
(1,781)
(6)
%
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:
March 31,
Decrease
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
2,515
$
3,134
$
(619)
(20)
%
Services
699
831
(132)
(16)
%
Total
$
3,214
$
3,965
$
(751)
(19)
%
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
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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:
March 31,
Increase (decrease)
2024
%
2023
%
$
%
(Dollar amounts in thousands)
Americas
$
28,082
97
%
$
30,598
97
%
$
(2,516)
(8)
%
Europe
605
2
%
669
2
%
(64)
(10)
%
Asia
394
1
%
346
1
%
48
14
%
Totals
$
29,081
100
%
$
31,613
100
%
$
(2,532)
(8)
%
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 $0.2 million for the six months ended March 31, 2024 as compared to the same prior year period. The GM as a percentage of total sales increased to 36% for the six months ended March 31, 2024 as compared to the same prior year period of 34%.
March 31,
2024
2023
Increase (decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
8,071
31
%
$
8,159
30
%
$
(88)
1
%
HPP
2,502
78
%
2,648
67
%
(146)
11
%
Total
$
10,573
36
%
$
10,807
34
%
$
(234)
2
%
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:
March 31,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
3,107
18
%
$
3,804
19
%
$
(697)
(1)
%
Services
4,964
58
%
4,355
58
%
609
—
%
Total
$
8,071
31
%
$
8,159
30
%
$
(88)
1
%
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.
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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:
March 31,
2024
2023
Increase (decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
2,114
84
%
$
2,054
66
%
$
60
18
%
Services
388
56
%
594
71
%
(206)
(15)
%
Total
$
2,502
78
%
$
2,648
67
%
$
(146)
11
%
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,
% of
% of
$
%
2024
Total
2023
Total
Increase
Increase
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
6,100
74
%
$
5,767
77
%
$
333
6
%
HPP segment
2,156
26
%
1,745
23
%
411
24
%
Total
$
8,256
100
%
$
7,512
100
%
$
744
10
%
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.
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Other Income/Expenses
The following table details other income, net for the six months ended March 31, 2024 and 2023:
Six months ended
Increase
March 31, 2024
March 31, 2023
(Decrease)
(Amounts in thousands)
Foreign exchange loss
$
(142)
$
(616)
$
474
Interest expense
(95)
(126)
31
Interest income
974
586
388
Other income, net
35
41
(6)
Total other income (expense), net
$
772
$
(115)
$
887
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.
Income Taxes
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.
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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 and six months ended March 31, 2024.
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 $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)
2024
2023
(Dollar amounts in thousands)
Net cash provided by (used in):
Operating activities
$
3,324
$
(4,525)
Investing activities
(193)
(3,829)
Financing activities
(1,246)
(2,375)
Effect of exchange rate changes on cash
17
59
Increase (decrease) in cash and cash equivalents
$
1,902
$
(10,670)
Operating Activities
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. 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 $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 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.
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Other Liquidity and Capital Resources Items
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. 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. 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 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.