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Item 2. Management’s Discussion and Analysis

2025-05-15 compared with 2025-02-10 · 177 added, 104 removed, 67 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, 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.

An additional risk factor can be found within this Form 10-Q under Item 1A under the heading “Risk Factors.” 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, tariffs, results of operations and financial condition.

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

9 unchanged sentences

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.

Management believes there have been no significant changes for the three months ended March 31, 2025 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 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.

As of March 31, 2025, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict have not had a direct significant impact on revenue as we do not have any significant recurring customers in either region.

However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of both conflicts and geopolitical tensions related to such conflicts could adversely affect our business, financial condition and results of operations, by among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets.

1 unchanged sentence

Results of Operations

Overview of the three months ended December 31, 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

Overview of the three months ended March 31, 2025

Our sales decreased by $0.6 million, or 4%, to $13.1 million for the three months ended March 31, 2025 compared to $13.7 million for the three months ended March 31, 2024.

Our gross margin percentage decreased to 32% for the three months ended March 31, 2025 compared to 47% for the three months ended March 31, 2024.

For the three months ended March 31, 2025 there was an operating loss of $1.0 million compared to operating income of $1.2 million for the three months ended March 31, 2024.

Other income, net decreased $0.3 million to $0.2 million for the three months ended March 31, 2025 compared to $0.5 million for the same prior year period.

An income tax benefit of $0.7 million was recorded for the three months ended March 31, 2025 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, 2025 and 2024:

March 31, 2025

March 31, 2024

(Dollar amounts in thousands)

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Total costs and expenses

Operating loss

Operating (loss) income

Other income, net

Income (loss) before income taxes

(Loss) income before income taxes

Income tax (benefit) expense

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:

Net (loss) income

Our sales decreased by approximately $0.6 million, or 4%, to $13.1 million for the three months ended March 31, 2025 compared to $13.7 million for the same prior year period.

The decrease in sales is the result of a decrease of $1.9 million in our HPP segment, partially offset by a $1.3 million increase in our TS segment.

TS segment sales change was as follows for the three months ended March 31, 2025 and 2024:

Increase (decrease)

(Dollar amounts in thousands)

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)

The increase in TS segment product sales of $1.9 million is due to increased sales to several existing major customers in the US division of $1.5 million and the UK division of $0.4 million.

Service sales for the three months ended March 31, 2025 decreased $0.6 million from the same prior year period, which was attributable to the US division.

The decrease in service sales included decreased third-party maintenance sales of $0.9 million, partially offset by increased managed services sales of $0.2 million and increased internal and third-party services of $0.1 million.

HPP segment sales change was as follows for the three months ended March 31, 2025 and 2024:

(Dollar amounts in thousands)

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:

The HPP product sales decreased $1.8 million for the three months ended March 31, 2025 compared to the same prior year period as a result of one decreased sale of ARIA Zero Trust Gateway to one major customer of $2.0 million in the prior year not recurring in the current year period, partially offset by increased ARIA Zero Trust Gateway sales to new customers of $0.2 million.

The HPP service sales decreased $0.1 million due to decreased royalties of $0.2 million, partially offset by $0.1 million increased ARIA AZT customer support revenue.

Our sales by geographic area, which are based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended March 31, 2025 and 2024:

Increase (decrease)

(Dollar amounts in thousands)

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.

APAC and Africa

The $1.2 million decrease in sales to the Americas was primarily the result of a $2.0 million decrease in the HPP segment, partially offset by an increase in the TS segment’s US division of $0.8 million.

The $0.5 million increase in sales to Europe was primarily the result of increased sales by our TS segment’s UK division of $0.4 million and the US division of $0.1 million.

The sales to APAC and Africa increased $0.1 million for the three months ended March 31, 2025 compared to the same prior year period due to an increase in the HPP segment expanding its ARIA AZT sales in the region.

Gross Margins

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%.

Our gross margin ("GM") decreased $2.3 million for the three months ended March 31, 2025 as compared to the same prior year period.

The GM as a percentage of sales decreased to 32% for the three months ended March 31, 2025 compared to the same prior year period of 47%.

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2025 and 2024 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

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:

The overall TS segment GM as a percentage of sales decreased to 31% for the three month period ended March 31, 2025 compared to 39% 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 10% from the prior year due to decreased third-party maintenance sales, which are recorded “net” meaning the revenue, net of the associated cost, is recorded in the Services revenue financial statement 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, 2025 and 2024 was as follows:

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales decreased to 57% for the three months ended March 31, 2025 from 86% for the three months ended March 31, 2024.

The 27% decrease in product GM as a percentage of product revenue for the three months ended March 31, 2025 compared to the same prior year period is due to one large ARIA Zero Trust Gateway order in the prior year period, which did not recur in the current period.

The large ARIA Zero Trust Gateway order in the prior year was nearly all GM.

The service GM as a percentage of services revenue from the same prior year period decreased 19% to 53% for the three months ended March 31, 2025 compared to 72% for the three months ended March 31, 2024 due to decreased royalty sales, which are nearly all GM.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment remained relatively flat for the three months ended March 31, 2025 compared to the prior year period without any significant changes in the expense mix.

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, 2025 and 2024:

Three months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

SG&A expenses decreased $0.1 million to $4.4 million for the three months ended March 31, 2025 compared to the same prior year period.

The $0.1 million decrease in TS segment SG&A expenses compared to the same prior year period is primarily the result of decreased variable compensation.

The HPP segment SG&A expenses remained relatively flat at $1.2 million the three months ended March 31, 2025 as compared to the prior year period due to increased salaries of $0.1 million, which was offset by decreased commissions of $0.1 million.

Other Income/Expenses

The following table details other income, net for the three months ended March 31, 2025 and 2024:

Three months ended

March 31, 2025

March 31, 2024

(Amounts in thousands)

Foreign exchange gain (loss)

Interest expense

Interest income

Other income, net

Total other income, net

Total other income, net for the three months ended March 31, 2025 was $0.2 million compared to $0.5 million for the three months ended March 31, 2024.

The $0.2 million decreased foreign exchange loss for the three months ended March 31, 2025 was primarily due to the US Dollar weakening relative to the British Pound compared to the same prior year period.

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

This non-cash remeasurement is included in the foreign exchange gain (loss) in the Consolidated Statements of Operations.

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

Interest income decreased $64 thousand for the three months ended March 31, 2025 compared to the same prior year period primarily due to decreased 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 2024 and 2025, this is more than offset by lower interest income recognized from a larger number of prior agreements because interest income decreases from each agreement as time elapses due to principal payments being received.

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

The interest expense increase of $31 thousand for the three months ended March 31, 2025 compared to the same prior year period was related to the TS US division entering into additional multi-year vendor contracts related to sales agreements that have payment terms in excess of one year during fiscal years 2024 and 2025.

Interest expense increased while interest income decreased because many of the Company’s financing sales prior to fiscal year 2024 did not have vendor financing, but in fiscal years 2024 and 2025 vendor financing became more prevalent.

The Company recorded an income tax benefit of $683 thousand and income tax expense of $135 thousand for the three months ended March 31, 2025 and 2024, respectively.

The income tax benefit for the three months ended March 31, 2025 was primarily driven by the impact of tax credits that we expect to be able to utilize against federal and state taxes and the excess tax benefits on restricted stock awards vested during the period.

The income tax expense for the three months ended March 31, 2024 was primarily driven by income earned in the United States.

Overview of the six months ended March 31, 2025

Our sales decreased by $0.3 million, or 1%, to $28.8 million for the six months ended March 31, 2025 as compared to $29.1 million for the six months ended March 31, 2024.

The decrease in sales is the result of a decrease of approximately $2.2 million in our HPP segment, partially offset by an increase of $1.9 million in the TS segment.

Our gross margin percentage decreased 6% to 30% of sales for the six months ended March 31, 2025 compared to 36% for the six months ended March 31, 2024.

For the six months ended March 31, 2025 operating loss was $1.3 million compared to operating income of $0.9 million for the six months ended March 31, 2024.

Other income, net increased $0.1 million for the six months ended March 31, 2025 compared to the six months ended March 31, 2024.

tax benefit of $0.8 million was recorded for the six months ended March 31, 2025 compared to an income tax expense of $0.1 million in the same prior year period.

The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2025 and 2024:

March 31, 2025

March 31, 2024

(Dollar amounts in thousands)

Costs and expenses:

Cost of sales

Engineering and development

Selling, general and administrative

Total costs and expenses

Operating (loss) income

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Our sales decreased by approximately $0.3 million, or 1%, to $28.8 million for the six months ended March 31, 2025 as compared to $29.1 million for the six months ended March 31, 2024.

The decrease in sales is the result of a decrease of approximately $2.2 million in our HPP segment, partially offset by an increase of $1.9 million in the TS segment.

TS segment sales change was as follows for the six months ended March 31, 2025 and 2024:

(Dollar amounts in thousands)

The increase in TS segment product sales of $1.9 million during the period as compared to the prior year period is attributable to increased sales of $1.7 million to several existing major customers in the US division combined with an increase in sales of $0.2 million in the UK division to existing customers.

Service sales for the six months ended March 31, 2025 remained relatively flat from the prior year period with changes in the mix of revenue including an increase of $0.2 million from internal and third-party services and an increase in managed services of $0.1 million, offset by a decrease in third-party services of $0.3 million.

All of these service sales changes occurred in the US division.

HPP segment sales change was as follows for the six months ended March 31, 2025 and 2024:

Increase (decrease)

(Dollar amounts in thousands)

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:

The HPP product sales decreased by $2.2 million for the six months ended March 31, 2025 as compared to the prior year period primarily as a result of one large ARIA AZT order of $2.0 million which occurred in the prior year period

and did not recur in the current year combined with a $0.5 million decrease in Myricom sales, which was partially offset by increased ARIA AZT revenue to new customers of $0.3 million.

The HPP service sales remained flat for the six months ended March 31, 2025 compared to the prior year period with changes in the mix of revenue including increased ARIA AZT customer support revenue of $0.2 million, which was offset by decreased revenue from royalties on high-speed processing boards related to the E2D program.

Our sales by geographic area, which are based on the customer location to which the products were shipped or services rendered, were as follows for the six months ended March 31, 2025 and 2024:

Increase (decrease)

(Dollar amounts in thousands)

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.

APAC and Africa

The $0.3 million decrease in sales to the Americas was the result of a decrease in the HPP segment of $2.3 million, which was partially offset by the TS segment’s US division increase of $2.0 million.

The sales to Europe increased $0.2 million due to increased sales in the TS US division of $0.1 million and the TS UK division of $0.1 million.

The sales to APAC and Africa decreased $0.2 million as a result of decreased sales in the TS segment’s US division of $0.3 million, partially offset by increased sales in the HPP segment of $0.1 million.

Gross Margins

Our gross margin ("GM") decreased $1.8 million for the six months ended March 31, 2025 compared to the same prior year period.

The GM as a percentage of total sales decreased to 30% for the six months ended March 31, 2025 as compared to the same prior year period of 36%.

Increase (decrease)

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margin for the six months ended March 31, 2025 and 2024 was as follows:

Increase (decrease)

(Dollar amounts in thousands)

The overall TS segment GM as a percentage of total sales decreased to 30% for the six month period ended March 31, 2025 compared to 31% from the prior year period.

Product GM as a percentage of revenue for the six months ended March 31, 2025 decreased 1% from the prior year period due to product mix.

Service GM as a percentage of total sales decreased to 57% for the six months ended March 31, 2025 compared to 58% from the prior year period.

This was primarily due to decreased third-party maintenance sales, which are recorded “net” meaning the revenue, net of the associated cost, is recorded in the Services revenue financial statement 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 six months ended March 31, 2025 and 2024 was as follows:

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of sales decreased to 54% for the six months ended March 31, 2025 from 78% for the six months ended March 31, 2024.

The 18% decrease 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 prior year period, which was nearly all GM and did not recur in the current period.

The 7% decrease in service GM as a percentage of service revenue for the six months ended March 31, 2025 compared to the same prior year period was due to decreased royalty sales, which are nearly all GM, partially offset by more AZT customer support GM.

Engineering and Development Expenses

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.

The engineering and development expenses incurred by our HPP segment increased to $1.5 million for the six months ended March 31, 2025 compared to the same prior year period of $1.4 million due to increased consulting as the quantity of sales opportunities increased.

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

Selling, General and Administrative Expenses

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

Three months ended December 31,

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the six months ended March 31, 2025 and 2024:

Six months ended March 31,

(Dollar amounts in thousands)

By Operating Segment:

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.

SG&A expenses increased $0.3 million for the six months ended March 31, 2025 compared to the same prior year period.

The $0.2 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 $0.1 million for the six months ended March 31, 2025 as compared to the prior year period primarily due to increased stock compensation expense.

Other Income/Expenses

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

Three months ended

December 31, 2024

December 31, 2023

The following table details other income, net for the six months ended March 31, 2025 and 2024:

Six months ended

March 31, 2025

March 31, 2024

(Amounts in thousands)

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Total other income, net

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 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.

Total other income, net for the six months ended March 31, 2025 increased $0.1 million to income of $0.9 million compared to income of $0.8 million in the same prior year period.

The $0.3 million increased foreign exchange gain for the six months ended March 31, 2025 was due to the US Dollar strengthening relative to the British Pound compared to the same prior year period.

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

This non-cash remeasurement is included in the Foreign exchange gain (loss) in the Consolidated Statements of Operations.

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

Interest income decreased $71 thousand for the six months ended March 31, 2025 compared to the same prior year period primarily due to decreased 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 years 2024 and 2025, this is more than offset by lower interest income recognized from a larger number of prior agreements because interest income decreases from each agreement as time elapses due to principal payments being received.

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

The interest expense increase of $59 thousand for the three months ended March 31, 2025 compared to the same prior year period was primarily related to the TS US division entering into additional multi-year vendor contracts related to sales agreements in fiscal year 2025 that have payment terms in excess of one year.

The Company recorded an income tax benefit of $798 thousand and income tax expense of $148 thousand for the six months ended March 31, 2025 and 2024, respectively.

The income tax benefit for the six months ended March 31, 2025 was primarily driven by the impact of tax credits that we expect to be able to utilize against federal and state taxes and the excess tax benefits on restricted stock awards vested during the period.

The income tax expense for the six months ended March 31, 2024 was primarily 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 $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)

Cash and cash equivalents decreased by $1.1 million to $29.5 million as of March 31, 2025 from $30.6 million as of September 30, 2024.

The following is a summary of our cash flows for the six months ended March 31, 2025 and 2024:

Six months ended March 31,

(Dollar amounts in thousands)

Net cash provided by (used in):

Net cash (used in) provided by:

Operating activities

2 unchanged sentences

Effect of exchange rate changes on cash

Increase in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Operating Activities

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.

Cash provided by operating activities was $3.7 million for the six months ended March 31, 2025 compared to $3.3 million provided by operating activities in the prior year.

The significant changes from the prior period include increased collections of Accounts receivable of $0.7 million, decreased payments in Accounts payable and accrued expenses of $1.2 million, partially offset by decreased collections of Financing receivables of $0.7 million and a decreased inventory change of $0.8 million.

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

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.

Investing Activities

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.

Cash used in investing activities was $0.1 million for the six months ended March 31, 2025 compared to $0.2 million used in investing activities for the prior year period.

The decrease in cash used from the prior year is due to decreased purchases of property, equipment, and improvements.

Financing Activities

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.

Cash used in financing activities increased approximately $3.4 million from the prior year to $4.6 million for the six months ended March 31, 2025 compared to $1.2 million for the prior year period.

The increase from the prior year was primarily due to increased net borrowing on our line-of-credit of approximately $3.2 million from the prior year, increased cash dividend payments of $0.2 million, repurchases of common stock of $0.4 million, partially offset by a decrease of a note payable of $0.4 million.

Other Liquidity and Capital Resources Items

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.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.6 million as of March 31, 2025 and consisted of 0.3 million Euros, 0.5 million British Pounds, and 3.6 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, 2025 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 availability of a limited cash withdrawal of up to $1.0 million.

An amount of $14.6 million and $10.8 million were available as of March 31, 2025 and September 30, 2024, respectively.

As of March 31, 2025 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.

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.

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.

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