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 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
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Condition and Results of Operations. Management believes there have been no significant changes for the nine months ended June 30, 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 June 30, 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 June 30, 2024
Our sales decreased by approximately $4.6 million, or 26%, to $13.1 million for the three months ended June 30, 2024 compared to $17.7 million for the three months ended June 30, 2023. Our gross margin percentage increased to 35% for the three months ended June 30, 2024 compared to 33% for the three months ended June 30, 2023. For the three months ended June 30, 2024 there was an operating loss of $0.7 million compared to operating income of $0.6 million for the three months ended June 30, 2023. Other income, net increased approximately $0.3 million to $0.5 million for the three months ended June 30, 2024 compared to $0.2 million for the same prior year period. An income tax benefit of $0.1 million was recorded for the three months ended June 30, 2024 compared to an income tax benefit of $1.7 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 June 30, 2024 and 2023:
%
%
June 30, 2024
of sales
June 30, 2023
of sales
(Dollar amounts in thousands)
Sales
$
13,105
100
%
$
17,708
100
%
Costs and expenses:
Cost of sales
8,523
65
%
11,781
67
%
Engineering and development
737
6
%
741
4
%
Selling, general and administrative
4,565
35
%
4,611
26
%
Total costs and expenses
13,825
106
%
17,133
97
%
Operating (loss) income
(720)
(5)
%
575
3
%
Other income, net
460
4
%
247
1
%
(Loss) income before income taxes
(260)
(1)
%
822
4
%
Income tax (benefit) expense
(75)
(1)
%
(1,692)
(10)
%
Net (loss) income
$
(185)
(1)
%
$
2,514
14
%
Sales
Our sales decreased by approximately $4.6 million, or 26%, to $13.1 million for the three months ended June 30, 2024 compared to $17.7 million for the same prior year period. The decrease in sales is the result of a decrease of $3.8 million in our TS segment combined with a $0.8 million decrease in our HPP segment.
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TS segment sales change was as follows for the three months ended June 30, 2024 and 2023:
June 30,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
7,825
$
11,938
$
(4,113)
(34)
%
Services
4,701
4,435
266
6
%
Total
$
12,526
$
16,373
$
(3,847)
(23)
%
The decrease in TS segment product sales of $4.1 million is due to decreased sales to several major customers in the US division. Service sales for the three months ended June 30, 2024 increased $0.3 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 $0.2 million and increased managed services sales of $0.1 million.
HPP segment sales change was as follows for the three months ended June 30, 2024 and 2023:
June 30,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
20
$
996
$
(976)
(98)
%
Services
559
339
220
65
%
Total
$
579
$
1,335
$
(756)
(57)
%
The HPP product sales decreased $1.0 million for the three months ended June 30, 2024 compared to the same prior year period as a result of decreased sales to one major customer of $0.8 million and decreased Myricom sales of $0.2 million to several other customers. The HPP service sales increased $0.2 million due to increased repair revenue of $0.2 million combined with increased customer support revenue for ARIA Zero Trust Gateway of $0.1 million, partially offset by decreased royalties 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, 2024 and 2023:
June 30,
Increase (decrease)
2024
%
2023
%
$
%
(Dollar amounts in thousands)
Americas
$
12,443
95
%
$
17,359
98
%
$
(4,916)
(28)
%
Europe
362
3
%
266
2
%
96
36
%
Asia
300
2
%
83
—
%
217
261
%
Totals
$
13,105
100
%
$
17,708
100
%
$
(4,603)
(26)
%
The $4.9 million decrease in sales to the Americas was primarily the result of a $3.9 million decrease in the TS segment’s US division combined with a decrease in the HPP segment of $1.0 million. The $0.1 million increase in sales to Europe was primarily the result of increased sales by our TS segment’s US division. The sales to Asia increased $0.2 million for the three months ended June 30, 2024 compared to the same prior year period due to an increase in the HPP segment.
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Gross Margins
Our gross margin ("GM") decreased $1.3 million for the three months ended June 30, 2024 as compared to the same prior year period. The GM as a percentage of sales increased to 35% for the three months ended June 30, 2024 compared to the same prior year period of 33%.
June 30,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
TS
$
4,319
34
%
$
5,059
31
%
$
(740)
3
%
HPP
263
45
%
868
65
%
(605)
(20)
%
Total
$
4,582
35
%
$
5,927
33
%
$
(1,345)
2
%
The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2024 and 2023 was as follows:
June 30,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,396
18
%
$
2,266
19
%
$
(870)
(1)
%
Services
2,923
62
%
2,793
63
%
130
(1)
%
Total
$
4,319
34
%
$
5,059
31
%
$
(740)
3
%
The overall TS segment GM as a percentage of sales increased to 34% for the three month period ended June 30, 2024 compared to 31% for the same prior year period. Product GM as a percentage of revenue decreased 1% due to a different product mix without any significant changes from the prior year period. The service GM as a percentage of revenue decreased 1% from the prior year due to a higher proportion of fixed costs compared to the prior year despite the increase in revenue.
The impact of product mix within our HPP segment on gross margin for the three months ended June 30, 2024 and 2023 was as follows:
June 30,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
(74)
(370)
%
$
708
71
%
$
(782)
(441)
%
Services
337
60
%
160
47
%
177
13
%
Total
$
263
45
%
$
868
65
%
$
(605)
(20)
%
The overall HPP segment GM as a percentage of sales decreased to 45% for the three months ended June 30, 2024 from 65% for the three months ended June 30, 2023. The 441% decrease in product GM as a percentage of product revenue for the three months ended June 30, 2024 compared to the same prior year period is due to significantly lower sales during the current period with fixed costs still being incurred which caused the significant change. The service GM as a percentage of services revenue from the same prior year period increased 13% to 60% for the three months ended June 30, 2024 compared to 47% for the three months ended June 30, 2023 due to increased ARIA GM.
Engineering and Development Expenses
The engineering and development expenses incurred by our HPP segment remained relatively flat at $0.7 million for the three months ended June 30, 2024 without any significant changes in category of 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.
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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, 2024 and 2023:
Three months ended June 30,
$
%
% of
% of
Increase
Increase
2024
Total
2023
Total
(Decrease)
(Decrease)
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
3,412
75
%
$
3,634
79
%
$
(222)
(6)
%
HPP segment
1,153
25
%
977
21
%
176
18
%
Total
$
4,565
100
%
$
4,611
100
%
$
(46)
(1)
%
SG&A expenses remained relatively flat at $4.6 million for the three months ended June 30, 2024 compared to the same prior year period. The $0.2 million decrease in TS segment SG&A expenses compared to the same prior year period is primarily the result of decreased variable compensation and accrued bonuses. The HPP segment SG&A expenses increased $0.2 million for the three months ended June 30, 2024 as compared to the prior year period due to increased consulting expenses.
Other Income/Expenses
The following table details other income, net for the three months ended June 30, 2024 and 2023:
Three months ended
June 30, 2024
June 30, 2023
$ Change
(Amounts in thousands)
Foreign exchange loss
$
(10)
$
(93)
$
83
Interest expense
(55)
(82)
27
Interest income
523
401
122
Other income, net
2
21
(19)
Total other income, net
$
460
$
247
$
213
Total other income, net for the three months ended June 30, 2024 increased $0.2 million to $0.5 million compared to $0.2 million for the three months ended June 30, 2023.
The $0.1 million decreased foreign exchange loss for the three months ended June 30, 2024 was primarily 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 the foreign exchange gain (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 $0.1 million for the three months ended June 30, 2024 compared to the same prior year period primarily due to increased interest rates from the same prior year period, which has resulted in increased interest income from money market accounts in both the US and UK. There was a 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 by 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 $27 thousand for the three months ended June 30, 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
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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 by an increase of interest expense from several subsequent multi-year vendor agreements entered into in the third quarter of fiscal year 2023 and fiscal year 2024.
Income Taxes
An income tax benefit of $75 thousand was recorded for the three months ended June 30, 2024 compared to an income tax benefit of $1.7 million in the same period of 2023. The estimated annualized effective income tax rate for the three months ended June 30, 2024 was 19.2%, excluding the impacts of the UK entity which continues to experience losses and maintains a full valuation allowance, compared to the estimated annualized effective income tax rate of 51.7% for the same period of 2023. The difference between our effective income tax rate and the U.S. federal statutory rate for the three months ending June 30, 2024 are the impact of state taxes and tax credits that we expect to be able to utilize against federal and state taxes. During the 3 months ending June 30, 2023, we released a significant portion of the valuation allowance against our U.S. deferred tax assets and switched from using the discrete effective tax rate method to calculate income taxes to the annualized effective tax rate method, resulting in the shift in the effective tax rate during the period.
The effective tax rate for the three months ended June 30, 2024 was (29.3)%, excluding the UK as previously mentioned, driven by excess tax benefits on restricted stock awards vesting during the period. The effective tax rate for the three months ended June 30, 2023 was (201.9)%, excluding the UK, which was primarily driven by the release of a significant portion of the valuation allowance against our deferred tax assets in the U.S.
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 June 30, 2024.
Overview of the nine months ended June 30, 2024
Our sales decreased by $7.1 million, or 14%, to $42.2 million for the nine months ended June 30, 2024 as compared to $49.3 million for the nine months ended June 30, 2023. The decrease in sales is the result of a decrease of $5.6 million in our TS segment and a decrease of $1.5 million in our HPP segment. Our gross margin percentage increased 2% to 36% of sales for the nine months ended June 30, 2024 compared to 34% for the nine months ended June 30, 2023. For the nine months ended June 30, 2024 operating income was $0.2 million compared to operating income of $2.2 million for the nine months ended June 30, 2023. Other income, net increased approximately $1.2 million for the nine months ended June 30, 2024 to income of $1.3 million compared to income of $0.1 million for the nine months ended June 30, 2023. An income tax expense of $0.1 million was recorded for the nine months ended June 30, 2024 compared to an income tax benefit of $1.5 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 nine months ended June 30, 2024 and 2023:
%
%
June 30, 2024
of sales
June 30, 2023
of sales
(Dollar amounts in thousands)
Sales
$
42,186
100
%
$
49,321
100
%
Costs and expenses:
Cost of sales
27,031
64
%
32,587
66
%
Engineering and development
2,163
5
%
2,435
5
%
Selling, general and administrative
12,821
30
%
12,123
25
%
Total costs and expenses
42,015
99
%
47,145
96
%
Operating income
171
-
%
2,176
4
%
Other income, net
1,232
3
%
132
—
%
Income before income taxes
1,403
3
%
2,308
5
%
Income tax expense (benefit)
73
—
%
(1,488)
(3)
%
Net income
$
1,330
3
%
$
3,796
8
%
Sales
Our sales decreased by approximately $7.1 million, or 14%, to $42.2 million for the nine months ended June 30, 2024 as compared to $49.3 million for the nine months ended June 30, 2023. The decrease in sales is the result of a decrease of $5.6 million in our TS segment and a decrease of approximately $1.5 million in our HPP segment.
TS segment sales change was as follows for the nine months ended June 30, 2024 and 2023:
June 30,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
25,175
$
32,013
$
(6,838)
(21)
%
Services
13,218
12,008
1,210
10
%
Total
$
38,393
$
44,021
$
(5,628)
(13)
%
The decrease in TS segment product sales of $6.8 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 nine months ended June 30, 2024 increased $1.2 million from the prior year period, which consists of a $1.3 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 third party maintenance sales of $1.0 million and increased managed services sales of $0.5 million, partially offset by decreased internal and third party service sales of $0.3 million.
HPP segment sales change was as follows for the nine months ended June 30, 2024 and 2023:
June 30,
Increase (decrease)
2024
2023
$
%
(Dollar amounts in thousands)
Products
$
2,535
$
4,130
$
(1,595)
(39)
%
Services
1,258
1,170
88
8
%
Total
$
3,793
$
5,300
$
(1,507)
(28)
%
The HPP product sales decreased by $1.6 million for the nine months ended June 30, 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 a decrease of $1.8 million from several major customers, which was partially offset during the current period by one large ARIA Zero Trust Gateway order of $2.0 million which did not occur in the prior year period. The HPP service sales increased $0.1 million for the nine months ended June 30, 2024 compared to the prior year period due to increased ARIA Trust Zero Gateway customer support revenue of $0.2 million and increased
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revenue from other ARIA revenue of $0.1 million, partially offset by decreased royalties on high-speed processing boards related to the E2D program 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 nine months ended June 30, 2024 and 2023:
June 30,
Increase (decrease)
2024
%
2023
%
$
%
(Dollar amounts in thousands)
Americas
$
40,525
96
%
$
47,957
97
%
$
(7,432)
(15)
%
Europe
967
2
%
935
2
%
32
3
%
Asia
694
2
%
429
1
%
265
62
%
Totals
$
42,186
100
%
$
49,321
100
%
$
(7,135)
(14)
%
The $7.4 million decrease in sales to the Americas was the result of a decrease in the TS segment’s US division of $5.9 million and UK division of $0.1 million combined with a decrease in the HPP segment of $1.4 million. The sales to Europe remained relatively flat due to an increase in the TS segment’s US division of $0.1 million, offset by a $0.1 million decrease in the HPP segment. The sales to Asia increased $0.3 million as a result of increased sales in the TS segment’s US division.
Gross Margins
Our gross margin ("GM") decreased $1.6 million for the nine months ended June 30, 2024 as compared to the same prior year period. The GM as a percentage of total sales increased to 36% for the nine months ended June 30, 2024 as compared to the same prior year period of 34%.
June 30,
2024
2023
Increase (decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
12,390
32
%
$
13,218
30
%
$
(828)
2
%
HPP
2,765
73
%
3,516
66
%
(751)
7
%
Total
$
15,155
36
%
$
16,734
34
%
$
(1,579)
2
%
The impact of product mix within our TS segment on gross margin for the nine months ended June 30, 2024 and 2023 was as follows:
June 30,
2024
2023
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
4,503
18
%
$
6,070
19
%
$
(1,567)
(1)
%
Services
7,887
60
%
7,148
60
%
739
—
%
Total
$
12,390
32
%
$
13,218
30
%
$
(828)
2
%
The overall TS segment GM as a percentage of total sales increased to 32% for the nine month period ended June 30, 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 services type while there was a slight decrease in product GM as a percentage of revenue 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 nine months ended June 30, 2024 and 2023 was as follows:
June 30,
2024
2023
Increase (decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
2,040
80
%
$
2,762
67
%
$
(722)
13
%
Services
725
58
%
754
64
%
(29)
(6)
%
Total
$
2,765
73
%
$
3,516
66
%
$
(751)
7
%
The overall HPP segment GM as a percentage of sales increased to 73% for the nine months ended June 30, 2024 from 66% for the nine months ended June 30, 2023. The 13% 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 nine months ended June 30, 2024, which was nearly all GM. The 6% decrease in service GM as a percentage of service revenue for the nine months ended June 30, 2024 compared to the same prior year period 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 decreased to $2.2 million for the nine months ended June 30, 2024 when compared to the same prior year period of $2.4 million due to lower consulting and decreased labor expenses of $0.2 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 nine months ended June 30, 2024 and 2023:
Nine months ended June 30,
% of
% of
$
%
2024
Total
2023
Total
Increase
Increase
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
9,512
74
%
$
9,401
78
%
$
111
1
%
HPP segment
3,309
26
%
2,722
22
%
587
22
%
Total
$
12,821
100
%
$
12,123
100
%
$
698
6
%
SG&A expenses increased $0.7 million for the nine months ended June 30, 2024 compared to the same prior year period. The $0.1 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of increased stock compensation expense. The HPP segment SG&A expenses increased $0.6 million for the nine months ended June 30, 2024 as compared to the prior year period due to increased consulting expenses of $0.2 million, increased stock compensation of $0.2 million, increased costs related to tradeshows and traveling of $0.1 million, and increased recruiting costs of $0.1 million.
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Other Income/Expenses
The following table details other income, net for the nine months ended June 30, 2024 and 2023:
Nine months ended
June 30, 2024
June 30, 2023
$ Change
(Amounts in thousands)
Foreign exchange loss
$
(152)
$
(709)
$
557
Interest expense
(150)
(208)
58
Interest income
1,497
987
510
Other income, net
37
62
(25)
Total other income, net
$
1,232
$
132
$
1,100
Total other income, net for the nine months ended June 30, 2024 increased approximately $1.2 million to income of $1.3 million compared to income of $0.1 million in the same prior year period.
The $0.6 million decreased foreign exchange loss for the nine months ended June 30, 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 the 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 $0.5 million for the nine months ended June 30, 2024 compared to the same prior year period primarily due to increased interest rates from the same prior year period, which has resulted in increased interest income from money market accounts in 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 with higher interest rates have been entered into during fiscal year 2023 and 2024, this is more than offset by 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 $58 thousand for the nine months ended June 30, 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 by an increase from several subsequent multi-year vendor agreement in the third quarter of fiscal year 2023 and fiscal year 2024. 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 $73 thousand was recorded for the nine months ended June 30, 2024 compared to an income tax benefit of $1.5 million in the same period of 2023. The estimated annualized effective income tax rate for the nine months ended June 30, 2024 was 19.2%, excluding the impacts of the UK entity which continues to experience losses and maintains a full valuation allowance, compared to the estimated annualized effective income tax rate of 22.0% for the nine months ended June 30, 2023. The difference between our effective income tax rate and the U.S. federal statutory rate for the three months ending June 30, 2024 and the same period of 2023 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 nine months ended June 30, 2024 was 4.9%, excluding the UK as previously mentioned, driven by excess tax benefits on restricted stock awards vesting during the period. The effective tax rate for
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the nine months ended June 30, 2023 was (51.4)%, excluding the UK, which was primarily driven by the release of a significant portion of the valuation allowance against our deferred tax assets in the U.S.
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 nine months ended June 30, 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 $3.7 million to $28.9 million as of June 30, 2024 from $25.2 million as of September 30, 2023.
The following is a summary of our cash flows for the nine months ended June 30, 2024 and 2023:
Nine months ended
(Dollar amounts in thousands)
2024
2023
(Dollar amounts in thousands)
Net cash provided by (used in):
Operating activities
$
5,721
$
(4,948)
Investing activities
(238)
(2,681)
Financing activities
(1,824)
(2,600)
Effect of exchange rate changes on cash
15
95
Increase (decrease) in cash and cash equivalents
$
3,674
$
(10,134)
Operating Activities
Cash provided by operating activities was $5.7 million for the nine months ended June 30, 2024 compared to $4.9 million used in operating activities in the prior year. The increase from the prior year is primarily related to an increase in accounts payable and accrued expenses of $9.1 million, decreased accounts receivable of $4.8 million and decreased other long-term liabilities of $1.7 million. These items were partially offset by decreased net income of $2.5 million, decreased other assets of $2.3 million, increased financing receivables of $0.8 million, and increased inventory of $0.1 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 nine months ended June 30, 2024 compared to $2.7 million 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 and proceeds of held-to-maturity investments of $1.2 million, which occurred in the prior year and did not reoccur in the nine months ended June 30, 2024.
Financing Activities
Cash used in financing activities was $1.8 million for the nine months ended June 30, 2024 compared to $2.6 million for the prior year period. The decrease was due to the timing in the net borrowing on our line-of-credit, which for the nine months ended June 30, 2024 we had a net payment of $0.7 million compared to a net payment of $1.8 million in the prior year period. This decrease in cash used in the current period was partially offset by increased cash dividends paid of $0.2 million from the prior year and $0.1 million of increased purchases of common stock.
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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 June 30, 2024 and consisted of 0.2 million Euros, 0.2 million British Pounds, and 4.6 million US Dollars. This cash is included in our total cash and cash equivalents reported on the Condensed Consolidated Balance Sheets.
As of June 30, 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 $14.2 million and $13.5 million were available as of June 30, 2024 and September 30, 2023, respectively. As of June 30, 2024 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 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.