What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-02-10 compared with 2024-08-19 · 100 added, 199 removed, 71 unchanged (81% 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, 2024.

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.

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

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

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

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 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.

A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 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, 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, 2024.

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.

As of December 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 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

June 30, 2023

Overview of the three months ended December 31, 2024

Our sales increased by $0.3 million, or 2%, to $15.7 million for the three months ended December 31, 2024 as compared to $15.4 million for the three months ended December 31, 2023.

The increase in sales is the result of an increase of $0.6 million in our TS segment, partially offset with a $0.3 million decrease in our HPP segment.

Our gross margin percentage as a percentage of sales increased to 29% for the three months ended December 31, 2024 as compared to 27% for the three months ended December 31, 2023.

For the three months ended December 31, 2024 there was an operating loss of $(0.4) million compared to an operating loss of $(0.3) million for the three months ended December 31, 2023.

Other income, net was $0.7 million for the three months ended to December 31, 2024 as compared to $0.3 million for the three months ended December 31, 2023.

An income tax benefit of $(115) thousand was recorded for the three months ended December 31, 2024 compared to an income tax expense of $13 thousand in the same period of fiscal year 2024.

Net income for the three months ended December 31, 2024 was $472 thousand as compared to a net loss of $(73) thousands for the same prior year period.

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

December 31, 2024

December 31, 2023

(Dollar amounts in thousands)

4 unchanged sentences

Total costs and expenses

Operating (loss) income

Operating loss

Other income, net

(Loss) income before income taxes

Income (loss) before income taxes

Income tax (benefit) expense

Net (loss) income

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.

TS segment sales change was as follows for the three months ended June 30, 2024 and 2023:

Net income (loss)

Our sales increased by approximately $0.3 million to $15.7 million for the three months ended December 31, 2024 as compared to $15.4 million for the same prior year period.

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

Increase (decrease)

(Dollar amounts in thousands)

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:

TS segment product sales remained flat for the three months ended December 31, 2024 when compared to the same period in prior year.

division product sales increased by $0.2 million, but was offset with the U.K.

division decreased sales of $0.2 million.

Service sales for the three months ended December 31, 2024 increased $0.6 million from the prior year period, which is attributable to the U.S.

The increase in service sales was due to increased third party maintenance sales of $0.6 million.

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

Increase (decrease)

(Dollar amounts in thousands)

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:

The HPP product sales decreased by $0.4 million for the three months ended December 31, 2024 as compared to the same prior year period primarily as a result of a $0.5 million decrease in Myricom product sales, partially offset with increased ARIA Zero Trust Protect (AZT PROTECT TM ) sales of $0.1 million.

The AZT PROTECT TM software license is recognized at a point in time and recorded in product revenue.

The software license is the large majority of the revenue in an AZT PROTECT TM sale with the other portion of revenue coming from the post-contract customer support, which is recorded over time in the services revenue financial statement line item.

The HPP services sales increased $0.1 million for the three months ended December 31, 2024 compared to the prior year period as a result of increased ARIA sales, which includes our ARIA ADR cybersecurity solution and post-contract customer support (PCS) for our AZT PROTECT TM software.

These items are both recognized ratably over the contract term.

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, 2024 and 2023:

Increase (decrease)

(Dollar amounts in thousands)

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.

The $0.9 million increase in sales to the Americas was primarily the result of an increase in the TS segment’s U.S.

division of $1.2 million, partially offset with a decrease in the HPP segment of $0.3 million.

The $0.3 million decrease in sales to Europe was primarily the result of decreased sales by our TS segment’s U.K.

The sales to Asia-Pacific decreased $0.4 million due to a decrease of sales in the TS segment’s U.S.

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%.

Our gross margin ("GM") increased $0.5 million for the three months ended December 31, 2024 as compared to the same prior year period.

The GM as a percentage of sales increased to 29% for the three months ended December 31, 2024 as compared to the same prior year period of 27%.

Increase (decrease)

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2024 and 2023 was as follows:

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

Increase (decrease)

(Dollar amounts in thousands)

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:

The overall TS segment GM as a percentage of sales increased to 29% for the three month period ended December 31, 2024 compared to the prior year period of 26%.

Product GM as a percentage of product sales remained flat at 17% for the three months ended December 31, 2024 compared to 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 increased to 58% for the three months ended December 31, 2024 compared to the prior year period of 50% due to increased 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, 2024 and 2023 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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.

The overall HPP segment GM as a percentage of sales increased to 50% for the three months ended December 31, 2024 from 47% for the three months ended December 31, 2023.

The 13% increase in product GM as a percentage of product revenue for the three months ended December 31, 2024 compared to the same prior year period is primarily due to recognition of the software license of AZT PROTECT TM , which is nearly all profit.

The 22% increase in service GM as a percentage of services revenue from the prior year was due to increased ARIA ADR revenue and PCS for AZT PROTECT TM , which have fixed costs meaning more revenue will result in increased GM as a percentage of sales.

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.

The engineering and development expenses incurred by our HPP segment increased $0.1 million for the three months ended December 31, 2024 to $0.8 million when compared to the prior year period due to increased consulting and stock compensation expense.

The current period expenses were primarily for engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway cyber security products.

Selling, General and Administrative Expenses

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended June 30, 2024 and 2023:

Three months ended June 30,

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

Three months ended December 31,

(Dollar amounts in thousands)

By Operating Segment:

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.

SG&A expenses of $4.1 million for the three months ended December 31, 2024 increased $0.4 million as compared to the prior year period.

The TS segment G&A expenses increased by $0.3 million primarily due to increased commissions as a result of higher gross margin and stock compensation expense when compared to the prior year period.

The HPP segment SG&A expenses increased $0.1 million for the three months ended December 31, 2024 as compared to the prior year period primarily due to trade show attendance and related time and travel as well as increased stock compensation expense.

Other Income/Expenses

The following table details other income, net for the three months ended June 30, 2024 and 2023:

The following table details Total other income (expense), net for the three months ended December 31, 2024 and 2023:

Three months ended

June 30, 2024

June 30, 2023

(Amounts in thousands)

Foreign exchange loss

Interest expense

Interest income

Other income, net

Total other income, net

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

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.

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.

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

June 30, 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, net

Income before income taxes

Income tax expense (benefit)

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:

Increase (decrease)

(Dollar amounts in thousands)

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:

Increase (decrease)

(Dollar amounts in thousands)

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

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:

Increase (decrease)

(Dollar amounts in thousands)

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%.

Increase (decrease)

(Dollar amounts in thousands)

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:

Increase (decrease)

(Dollar amounts in thousands)

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.

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:

Increase (decrease)

(Dollar amounts in thousands)

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,

(Dollar amounts in thousands)

By Operating Segment:

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.

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

December 31, 2024

December 31, 2023

(Amounts in thousands)

Foreign exchange loss

Foreign exchange gain (loss)

Interest expense

2 unchanged sentences

Total other income, net

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.

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 $0.4 million increase in Total other income, net for the three months ended December 31, 2024 as compared to the same prior year period is primarily due to a net increase in Foreign exchange gain.

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 strengthened relative to the British Pound for the three months ended December 31, 2024 causing a foreign exchange gain.

The interest income decrease of $7 thousand for the three months ended December 31, 2024 as compared to the prior year period is primarily due to higher interest income of $59 thousand from our Cash and cash equivalents from an increased average cash balance when compared to the prior year despite a decrease in interest rates, partially offset with a decrease of $52 thousand from interest income with financing sales in our TS U.S.

The Interest expense decrease of $28 thousand for the three months ended December 31, 2024 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.

An income tax benefit of $115 thousand was recorded for the three months ended December 31, 2024 compared to an income tax expense of $13 thousand in 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 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

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.

federal statutory rate are the impact of tax credits that we expect to be able to utilize against federal and state taxes and the change in valuation allowance maintained against certain state tax credits.

The income tax expense for the three months ended December 31, 2023 was primary driven by income earned in the United States.

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

Cash and cash equivalents increased by $0.1 million to $30.7 million as of December 31, 2024 from $30.6 million as of September 30, 2024.

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

Three months ended December 31,

(Dollar amounts in thousands)

5 unchanged sentences

Effect of exchange rate changes on cash

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents

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.

Cash provided by operating activities remained flat at $1.7 million for the three months ended December 31, 2024 and 2023.

The changes from the prior year are primarily related to increased collections from Financing receivables of $0.8 million, decreased Inventory of $4.8 million, partially offset with decreased Accounts payable and accrued expenses of $4.3 million, and a decrease in pension liabilities of $0.7 million.

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

1 unchanged sentence

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.

Cash used in investing activities was $47 thousand for the three months ended December 31, 2024 compared to $126 thousand used in investing activities for the prior year.

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

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.

Cash used in financing activities was $1.6 million for the three months ended December 31, 2024 compared to $1.2 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, 2024 we had a net payment of $1.6 million compared to a net payment of $0.8 million in the prior year.

There was also a repayment of a note of $0.4 million in the prior year, which was the final payment.

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.

After foreign currency remeasurement and translation, our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.5 million as of December 31, 2024, which consisted of 0.2 million Euros, 0.3 million British Pounds, and 4.1 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.

However, we have entered a buy-in agreement for the U.K.

As of December 31, 2024 and September 30, 2024, 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 the availability of a limited cash withdrawal of up to $1.0 million.

Amounts of $12.4 million and $10.8 million were available as of December 31, 2024 and September 30, 2024, respectively.

As of December 31, 2024 and September 30, 2024 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 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 2025 we are scheduled to receive $2.4 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 2025 we are scheduled to pay $2.6 million related to the payables.

This number is higher than the amount to be received because the majority of vendor financing agreements include favorable negotiated terms in which the vendor payment terms extended beyond the customer receiable terms.

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

1 unchanged sentence

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